If you want to send or receive money electronically, you might’ve considered the two popular ways: ACH and wire transfers.
ACH payments are cheaper, but it might take a couple of days to transfer the funds. Wire transfers, on the other hand, are a faster but costlier alternative.
Both payment methods are convenient, easy to use, and don’t require any cards. But, if you’re choosing one of the methods, you need to carefully compare ACH vs wire transfers.
This article elaborates on ACH and wire transfers, as well as their key similarities and differences, and also helps you learn how to choose between the two.
TL;DR
- An Automated Clearing House (ACH) payment is a digital transfer between different banks and is processed through the ACH network. Each ACH transfer takes around one to three business days to process.
- Wire transfers are direct transactions between two banks. There’s no network of financial institutions to act as a middleman. Instead, the sending and the receiving banks directly clear the transactions for a processing fees.
- Both transaction types have their benefits and limitations. However, considering factors like cost, time, and security can help you determine the best payment method for your business.
What is an ACH Payment?
ACH, or Automated Clearing House payments, is a digital transfer between different banks and is processed through the Automated Clearing House network. This network is run by the National Automated Clearing House Association (NACHA) and comprises of over 10,000 financial institutions — including banks and credit unions.
Each ACH transfer takes around one to three business days to process. That’s why most people use ACH transactions for smaller payment amounts that don’t require immediate transfers.
Understanding ACH Payments
ACH can be used for many types of transactions, such as paycheck deposits, bill payments, and even international payments. Peer-to-peer (P2P) payment apps like Venmo and PayPal also use ACH to transfer funds.
Due to its ease of use and little to no fees, ACH has become one of the most popular payment methods, with over 8.2 billion payments in the first quarter of 2024 alone.
While ACH payments might look simple, they actually involve a long process with several entities.
Process of ACH payment
An ACH payment facilitates the transfer of funds between the Originator (person who sends the money) and the Receiver (person who receives the money). These transfers involve three main entities:
- Originating Depository Financial Institution (ODFI)
- Receiving Depository Financial Institutions (RDFI)
- ACH Operator
An ACH transfer can be initiated in two ways. Either the Originator requests funds to be transferred from their account to the Receiver’s account, as in the case of P2P payments. Or, the Receiver sends a request to collect a certain amount from the Originator’s bank account, as in preapproved recurring bill payments.
In both the cases, the process of ACH payment is similar:
- The Originator authorizes a transaction through a processing partner.
- The processing partner submits the transaction files to the Originator’s bank (ODFI).
- The ODFI collects files from various transactions and sends them to the ACH operator in batches multiple times a day.
- The ACH processes these transactions and sends the files to the Receiver’s bank (RDFI).
- The RDFI debits funds from the Originator’s account and deposits them into the Receiver’s account, completing the payment.
Since the ODFI sends the files in batches in fixed intervals, ACH transfers cannot be processed instantly. Usually, such transactions take one to three days to process.
However, if the transaction is initiated early in the day, same-day ACH payments are also sometimes possible.
Examples and use cases
A good example of an ACH transfer is how you use everyday payment apps like Venmo and Zelle.
When you initiate a payment to a friend, the app becomes the Originator. The linked bank account becomes the ODFI, which collects the transaction details and forwards it to the ACH operator, which, in this case, is the Electronic Payments Network (EPN).
The EPN processes the transaction and forwards the details to your friend’s bank (RDFI) linked to the app. The bank debits the funds from your account and sends it to the friend’s account, which ultimately reflects in their app.
Other use cases of ACH payments include:
- Payroll processing
- Business-to-business (B2B) payments
- Automated credit card bill payments
- Money transfers between personal accounts
- Managing recurring subscription billings
Advantages and limitations of ACH payments
The biggest advantage of ACH transfers is the small fees for processing the transaction. Many banks charge a flat fee of around $3 or a percentage-based fee of around 0.5% – 1.5%, which is much lower than card processing fees.
For example, QuickBooks, an accounting and financial services software, charges a 1% fee for all ACH transactions.
Some banks also charge zero fees for the initial transactions or if the payments are made by the same bank.
ACH payments are also highly secure as they are automated and require minimal human interference. The chance of reversal is also low as ACH payments are usually sent back only because of insufficient funds or unauthorized requests.
However, ACH payments are slow. This can be a major disadvantage for people who are used to instant payment options like cards and cash.
What is a Wire Transfer?
Wire transfers are direct transactions between two banks. Unlike ACH transactions, there’s no network of financial institutions to act as a middleman. Instead, the sending and the receiving banks directly clear the transactions for a processing fees.
Due to this, wire transfers are almost instant and are usually used to send larger amounts of funds. Comparing ACH vs. wire transfers, the former relies on a network of US-only financial institutions, while wire transfers can be both domestic and international.
Understanding Wire Transfers
In 2023, more than 193 million wire transfers originated through Fedwire, a wire transfer service in the US. This makes it one of the popular electronic funds transfer services, along with ACH payments.
However, it’s essential to understand how wire transfers work and learn how they are different from ACH transfers.
Process of wire transfer
The process of wire transfer is quite straightforward due to the lack of a mediator network between the two transaction points. There are only two entities involved in a wire transfer: the sender’s bank and the recipient’s bank.
When a person wants to send money through wire, they need to submit the following details to their bank:
- The account number of the sender and the amount they wish to send.
- The recipient’s account details, which include the name and account number.
- For domestic wire transfers, the routing number of the receiver’s bank is required. In the case of international wire transfers, they need to give the SWIFT code.
Once this information is verified, the amount is debited from the sender’s account and sent to the receiver’s account.
As the communication is direct between the two banks, wire transfers clear within 24 hours and usually on the same day. However, international wire transfers may take anywhere between two to five business days depending on the location of the transfer.
Examples and use cases
A wire transfer can be used for transactions involving large amounts of money, such as a down payment for a house, large investments, and international payments.
Consider that you are purchasing a high-end car worth $70,000. The merchant asks you to wire the amount to complete the purchase.
You go to the bank and request for a wire transfer of $70,000 to be made from your account to the retailer’s account. You give the required details such as the account number, receiver’s name, and the routing number as it is a domestic transfer.
The bank charges you a $40 fee and transfers the required amount to the retailer’s account.
Other use cases of wire transfer include:
- Real estate transactions
- Emergency fund transfers
- Overseas tuition fees
- Large business payment
Advantages and limitations of wire transfer
Wire transfers are faster and more convenient compared to other transaction types. This advantage makes it a preferred choice for transferring funds that are time-sensitive.
Another major benefit of wire transfers is they are quite secure due to the lack of middlemen. The chances of a wire transfer getting rejected are also lower, and this may only be due to a lack of funds.
However, with more speed and security comes higher costs. Banks and other financial institutions charge anywhere between $30-$50 to process a wire transfer. If it’s an international transaction, the charges might be even higher.
Differences Between ACH Payment and Wire Transfer
| Feature | ACH Payment | Wire Transfer |
| Transaction Speed | Processed in batches; usually completed in 1-3 days; same-day possible for some transactions. | Typically completed within a few hours; up to 24 hours; international transfers may take 3-5 days. |
| Cost | Lower processing fee; often free or 0.5%-1.5% of the amount; additional fees may apply. | Higher cost; domestic transfers: $30-$50; similar or higher for international transfers. |
| Security | Generally secure but susceptible to fraud through account and routing number access; delayed fraud detection. | Secure but vulnerable to fraud via false pretenses; immediate detection of fraudulent transactions. |
| International vs. Domestic | Primarily domestic within the U.S.; some international options available but not popular. | Available for both domestic and international transfers, with few exceptions. |
| Accessibility | Accessible via bank visits, online banking, or P2P apps; easy process for the sender. | Accessible only through banks; requires bank visit, online banking, or phone assistance with extra fees. |
Now that the meaning of ACH payments and wire transfers are clear let’s compare ACH vs wire transfers to understand the key differences between the two money transfer methods.
Transaction speed
Wire transfers are usually faster compared to ACH transfers.
ACH transfers are processed in batches and are usually completed the next day or between one to three days. However, same day ACH is also possible for some transactions.
Wire transfers may take a maximum of a few hours in most cases, although the given time is 24 hours. However, international wire transfers may take three to five days.
Cost
ACH transfers have a lower processing fee compared to wire transfers.
ACH transfers may be free in several cases. When fees are charged, they are usually negligible and range between 0.5%-1.5% of the total amount. However, you need to be wary of other fees such as a service fee for ACH payment assistance or a penalty for attempting a transfer with insufficient funds.
On the other hand, wire transfers are usually more expensive. A domestic wire transfer can have a fee of $30-$50, even if the transaction amount is small. A similar or higher price maybe charged for an international transfer.
Security
Both ACH and wire transfers are generally secure but still susceptible to fraud.
An ACH fraud is carried out by gaining access to the victim’s account number and bank routing number. The fraudsters can later transfer money from the victim’s account to their account. Due to the time delay in ACH payments, the fraudulent transactions are noticed much later than when they actually occur.
In contrast, wire transfer frauds happen through false pretenses. Fraudsters either pose as some famous person or offer something nonexistent while persisting the victim to make a payment through a wire transfer.
If the payee takes sufficient precautions to not divulge their financial details and to verify the details of the receiver, both ACH and wire transfers have minimal risks.
International vs. domestic transfers
ACH transfers are usually limited to the U.S. and the U.S. governed regions as they depend on the U.S.-only ACH network. While some financial institutes have started international ACH transfers, they aren’t the most popular method for international transactions.
Wire transfers can be carried out both domestically and internationally, except for a few countries.
Accessibility
ACH transfers are easily accessible through various methods including visiting a bank, using online banking, or by just using a P2P app on your phone. Sending an ACH payment is also easy as the process on the sender’s end is short.
However, wire transfers are only accessible through banks. You’ll either need to visit a bank or use online banking to submit a wire transfer form. Some banks also provide a phone assistance facility but with extra fees.
Similarities Between ACH Payment and Wire Transfer
When comparing ACH vs wire transfers, we need to also look at some of their similarities.
Electronic transactions
Both ACH and wire transfers are electronic fund transfers. They don’t require paper checks or cash and can directly transfer funds from your account to another account. Even if a wire transfer may require you to visit the bank in person, the funds transferred do not involve any physical money.
Use in business and personal transactions
Wire transfers and ACH transfers are both used in business and personal transactions. Wire transfers have use cases ranging from sending money overseas to a relative or paying the first installment to a vendor as a business owner.
Similarly, ACH transfers can be used to send money to peers and also to process your employees’ payrolls.
How to Choose the Best Payment Method
ACH and wire transfers have their own advantages and disadvantages. Since there are several differences between the two, consider the below factors when choosing between ACH vs wire transfers.
Consider transaction urgency
Wire transactions have a better transfer speed compared to ACH payments. If the transaction is urgent or time sensitive, consider making the payment through a wire transfer. Otherwise, choose ACH payments.
Evaluate costs
If timely payment isn’t a requirement, consider the costs involved in both types of payments. ACH transfers are usually cost-effective compared to wire transfers. If the transaction amount is small, use ACH payments to avoid high processing fees.
Assess security needs
A fraud through a wire transfer can be quickly detected and prevented, while an ACH fraud may take time to come to light. However, an ACH transaction has a better chance of reversal in case a fraud actually occurs.
Determine transfer destination (domestic or international)
The ACH network works well in the U.S. but has limitations in the case of international transactions. If the destination of the payment is domestic, an ACH transfer is the best option. However, for international transactions, wire transfers are the most reliable.
Consider accessibility and convenience
If you want a quick and easy transaction, ACH might be the best choice. You can conveniently send money through your phone or computer and won’t have to visit the bank.
Choosing wire transfers might require you to physically visit a bank and authorize the transaction. If you want to avoid this, choose the ACH payment method.
Conclusion
ACH and wire transfers are two popular payment methods in the U.S. The detailed comparison above might help you determine the best method for your use case.
However, only choosing the right method isn’t enough. You also need a reliable payment processing tool, like Stax Bill, especially if you bill businesses for recurring subscriptions
Stax Bill is a solution that helps you automate repetitive payments such as monthly subscriptions or installments. By using the platform, you can send invoices, collect payments, and manage recurring billing with minimal manual intervention.
Ready to switch to better payments? Check out Stax Bill.
