Chances are you’ve used an ACH transfer, even if you’re not familiar with the term. In short, an ACH transfer is a common way to send and receive money digitally. Here’s a closer look at what ACH transfers are and how they work.
What Are ACH Transfers?
An ACH transfer is one that uses an Automated Clearing House — a network organized by the National Automated Clearing House Association. It is essentially just a transfer of funds between two banks that use the ACH network to process the transaction.
How Does an ACH Transfer Work?
In an ACH transfer, an originator initiates a direct transaction by submitting the necessary information to a financial institution. The originator can be an individual or a corporation.
That financial institution then inputs the ACH entry along with all of its other ACH requests as part of a batch entry at a specific time of day. The ACH network receives the information and makes it available to the receiving financial institution.
Finally, the funds are transferred. Typically, the whole process clears in three to five days, but the type of transaction can impact that.
Say, for example, your employer offers to pay you through direct deposit instead of by check. Here’s how the money moves from your employer into your bank account:
ACH Transfer Steps
- You provide your bank account information to your employer.
- Your employer sends an electronic payment file to its bank.
- Your employer’s bank sends the payment to what is known as an “ACH Operator.”
- The ACH Operator sends your money to your bank
- You receive your money in your checking or savings account, or each account can receive a share of the deposit.
It is important to note that there are certain limitations on ACH transfers. Depending on your financial institution, there are cutoff times for when batch transfers can occur, for example. Check with your bank about its ACH rules and how long you should expect a transfer to take to process.
What Is Needed for an ACH Transfer?
Here’s what you need to receive money from an ACH transfer:
- A checking account, savings account, payroll card or prepaid card to receive ACH deposits
- Account information
The originator likely will request a voided check or have you complete a form to collect your account information.
Types of ACH Transfers
ACH transfers fall into two primary categories: deposits and receipts.
- Direct deposit: Used for payroll, expense reimbursement, and pension and dividend payments
- Cross-border: Used to send payments to Canada, Mexico, Panama and select European countries
- Trade: Used to pay suppliers through CCD+ and CTX formats
- Taxes: Used to make local, state and federal tax payments
- Consumer debit: Used for accepting one-time or recurring payments from consumers
- eCheck: Used to convert paper checks into ACH debits that can be processed electronically
- Corporate collection: Used to collect payments through CCD+ and CTX formats
- Concentration: Used to consolidate funds into a single account
Fees for ACH processing vary. All financial institutions that send or receive ACH transfers must pay an annual fee plus nominal fees for each transaction. ACH network fees for 2019 were $0.000185 per entry and $264 for the annual fee.
Pros and Cons of ACH Transfers
The ACH network is used for a large portion of fund transfers in the U.S. This includes items such as direct deposit, tax refunds and payment services such as PayPal or Venmo. Here are some benefits of using ACH transfers:
- Payments are easier to track, can’t get lost and are delivered sooner than if they were sent by mail.
- You don’t have to remember to make payments and are less likely to get hit with late fees if you make recurring payments.
- Your personal information is hidden from someone who might intercept a check.
- The ACH transfer amount limit is $100,000 per day.
ACH is convenient, but that convenience comes at a price. Here are a few drawbacks of ACH transfers:
- It may be easier to overdraw an account when payments are automatically deducted.
- It’s easy to forget when bills are paid, leading to double payments and continued payment for services you don’t want.
- Payments must be received by the transaction cutoff: 10:30 a.m. EST for morning submissions and 2:45 p.m. EST for afternoon submissions.
Alternatives to an ACH Transfer
The ACH network is not the only method for settling payments electronically. You can opt to use a more traditional wire transfer if you’re interested in getting it there as fast as possible.
Wire transfers usually execute faster than ACH transfers. They are also final, whereas an ACH transfer can be reversed, or pulled back, from your account since they take longer to settle.
However, perhaps the most relevant difference is cost. ACH transfers have very low fees associated with them. Most consumers never see these fees.
Wire transfers can be very costly in comparison. Wells Fargo, for instance, charges $30 for outgoing wire transfers. Bank of America charges $30 for domestic transfers and $45 for international wire transfers.
Some payment apps, such as PayPal and Venmo, use the ACH network for sending and receiving payments through their platforms. Note that these apps are the closest thing there is to an ACH transfer app.
A more recent option, Zelle, is a bank-to-bank platform. Unlike PayPal or Venmo, which rely on the ACH network, a Zelle money transfer between banks that are both in the network uses Zelle’s own system. As a result, it is faster than the ACH transfer time.
ACH Transfers: The Bottom Line
Whether you’re sending or receiving money, it’s hard to beat the convenience of ACH transfers. It’s faster than mailed payments and cheaper than wire transfers. Understanding how ACH transfers work — and your banks’ policies for sending funds — helps you make the most of this service.
This article has been updated with additional reporting since its original publication.