There are a lot of options available for sending and receiving money these days. Long gone are the days of mailing cash or even checks to take care of our everyday expenses. After all, when is the last time you mailed a birthday card with actual bills in it? Alternatively, one of the most common ways to send money now is electronically through an ACH transfer.
In fact, this technology is behind many payment types we take advantage of each day, from using PayPal to pay for goods online, or receive government benefits like Social Security. You can also initiate ACH transfers to send and receive money through your bank.
Before you do, though, learn the details about everything these transfers entail. From timing to fees, an ACH transfer takes much more than a simple click of a button. You also might wonder what the difference is between an ACH and a wire transfer. We’ll walk you through the pros and cons of each so you can figure out which is the best to use.
You’ll also learn restrictions on ACH transfers, and how to keep your money safe during these transactions. An ACH transfer is a great way to send and receive money, but it’s helpful to know a few pertinent details before you get started.
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What exactly is an ACH transfer?
ACH stands for the Automated Clearing House, which is responsible for electronically transferring funds between banks. Many third parties like PayPal use ACH transfers, as do government benefits such as Social Security. Other everyday ACH transfers you might be familiar with include automatic bill pay, direct deposits, and transferring funds between different bank accounts. From a consumer’s perspective, there are essentially two types of ACH transfers.
The first is a debit transaction, which entails an external party withdrawing (or debiting) money from your account. Auto bill pay is a great example of an ACH debit transaction: the company you owe takes the money out of your account. The other type is a credit transaction, which puts money into your account. Your bi-weekly salary that you receive from your employer via direct deposit is a prime example of a credit transaction.
It can take a few days for the recipient to receive funds from an ACH transfer. ACH credits must be processed within one to two business days. An ACH debit must be processed within a single business day. However, the receiving financial institution may institute a holding period, so it could potentially take up to a few days for the transfer to be finalized.
However, new regulations are moving towards same-day delivery by requiring three network processing times each day, rather than just one. Many institutions do this already, and it should be fully implemented nationwide by 2018; however, some banks may charge an extra fee for this premium service. Still, it will shorten funding times so that you can send and receive money through ACH transfers much more quickly than you could before.
What’s the difference between an ACH transfer and a wire transfer?
If an ACH transfer sounds a lot like a wire transfer, you’re right: they do share some similarities. However, there are also some stark differences to consider before choosing which one to use. Most notable is the price difference. An ACH transfer is usually free to receive and typically costs less than a dollar to send or could even be free (of course, always check with your bank for specific charges).
Wire transfers generally cost between $10 and $35 for domestic transfers and up to $50 for international transfers. On the flip side, ACH transfers take extra time to process, while wire transfers are extremely quick. A wire transfer in the U.S., for example, can be received within hours, and often even within minutes of the funds being sent.
While international wire transfers may take a bit more time than a domestic one, you probably won’t be permitted to send an ACH transfer outside the country. So if you need to send money abroad, a wire transfer is your best bet. Despite the additional cost, it’s still a fast and safe option to use for this purpose. ACH and wire transfers also differ in how they’re processed.
With a wire transfer, the funds are cleared before the money appears in the recipient’s account. The process isn’t entirely automated because a bank employee is needed to finalize the funding, but it’s still a quick process overall. ACH transfers are handled in batches as they come in, which is why there’s a slower turnaround time. These two types of transfers differ quite significantly, so it’s important to analyze your priorities before picking which one to use.
Which one should you use?
Choosing between an ACH transfer and a wire transfer really comes down to two variables: cost versus speed. If you have a large, one-time transfer you need to make, especially if it needs to be done in a hurry, then a wire transfer is probably a good choice. A common example would be making a down payment on a piece of real estate. The wire transfer provides quick funding that’s validated before being accepted, so the bank is assured that the transfer is fully complete.
Wire transfers are also ideal for international transactions. Whether you have family living abroad or a college-age student studying in a foreign country, a wire transfer can get them the money they need — and quickly. Yes, a wire transfer is pricier, but for speed of use, you certainly get a lot of value if you’re in a time-sensitive situation.
But for regular, small transfers that aren’t incredibly time sensitive, you can stick with an ACH transfer in most instances. Your employer could set up ACH direct deposits, which are free of charge to you. It’s also generally free to sign up for automatic bill pay, whether through your bank or directly with each individual company you owe. ACH transfers are also easy (and usually free) when you need to transfer money to and from different bank accounts.
So if you have a high-yield savings account with one bank, and a checking account with another, you can easily transfer funds between them. It may take a few days, but the process is simple. Evaluate your needs for each transaction to figure out if you’re better off with a wire transfer or an ACH transfer.
Are there any restrictions on ACH transfers?
ACH transfers do come with a few restrictions when you move money around from your bank account. First, you may encounter daily or monthly limits to the amount you are allowed to transfer from each account. If this might impact you on a regular basis, you should check with your bank on their specific policy before relying on that account. Next, federal law limits the number of monthly transactions to six a month from savings accounts.
You can be charged a fee if you surpass this limit so keep track of your transfer habits for each account. You should also monitor the money in your account. If your funds are insufficient to cover the ACH transfer amount, you risk not only incurring a fee from your bank, but also having the transfer stopped. That could cause you to incur additional late fees if you’re trying to pay a bill.
Finally, pay attention to your timing of your ACH transfer. Since they’re only processed three times per business day, you might miss the last one if you initiate the transfer too late in the day. Consider if this happens on a Friday: you’ll have to wait until Monday morning for the ACH transfer to actually be processed. Then, you’ll have to wait for the receiving bank’s holding period.
Try to plan ahead as much as possible so you don’t run into any timing issues. Otherwise, you may have to spring for a wire transfer, and even those have time cut-offs each business day.
What do you need to complete an ACH transfer?
When you decide to send or receive an ACH transfer, the process is fairly simple. To send one, you’ll need to provide the name of the bank you’re sending money to, the relevant account number, and the ABA routing number. This information can be found on the bottom of the recipient’s check. In the lower left hand corner, there will be a string of numbers that contain this information. The first nine digits are the routing number, while the next 12 digits are the account number.
The final four numbers are the check number, which aren’t relevant for an ACH transfer. Once you have this information, you can initiate the ACH transfer with your bank. If you’re sending money to an institution as opposed to an individual, you an initiate automate transfers through your bank, as long as the recipient is eligible to receive them.
To receive an ACH transfer, you’ll need to provide the sender with the same information as above: your bank account number and routing number. Some places, such as your employer setting up direct deposit, may simply request a voided check to retrieve that information directly. Another option is to send and receive money through a third party like PayPal. It’s quick and easy, although you may experience processing times between three and five days when you transfer funds to your bank.
Sending money to friends and family in the U.S. is free. Sending money abroad costs a percentage of the amount you’re sending, which varies based on the country of the recipient and how the transfer is funded. To receive payment for goods or services, PayPal charges 2.9% of the transaction amount, plus $0.30. You can compare costs of similar services, but these fees are fairly standard.
Are ACH transfers safe?
Generally speaking, ACH transfers are safe and secure to use, especially when you’re sending money. And overall, ACH fraud is extremely rare. To receive funds, however, you do have to turn over your bank account numbers, which is sensitive information. Make sure you trust the recipient, otherwise they could potentially use your bank information to withdraw funds from your account. If you do encounter a fraudulent withdrawal, be prepared to pay a fee. You’re liable for $50 if you report the incident within two days, and $500 if you report it within 60 days.
So it’s important to check your bank account regularly to make sure all of your debits are accurate. If you notice anything out of the ordinary, report it to your bank immediately to prevent any major liability. After all, you definitely don’t want to be out $500 because of ACH fraud!
A final issue to consider when receiving funds through an ACH transfer is that, in limited circumstances, the sender can actually reverse the transaction. Check with your bank about how they handle this process, because it differs from place to place. Though rare, this could happen, for instance, if your employer deposits the wrong amount into your bank account.
Rather than asking you to manually return the funds, they could simply reverse the funds to come back to them. If there aren’t any mistakes or you’re not a victim of fraud, however, you typically don’t need to worry about this happening with your ACH credits. Still, it’s something to be aware of, particularly if you receive direct deposits from your employer.