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If you’ve ever received a direct deposit from an employer or sent cash to a friend using a peer-to-peer payment platform like Venmo, you’ve probably participated in an ACH transfer.
In the not-too-distant past, making payments to your utility provider or settling a restaurant bill with friends required writing checks or having paper money on hand. But nowadays, these types of payments are usually made online. When you send money to, or receive money from, a person or business digitally, the payment is often made through an ACH transfer, an electronic payment made through the Automated Clearing House (ACH) network.
And ACH payments are becoming more common. “Last year, the ACH network processed 26.8 billion payments,” says Victoria Day, director of communications at Nacha, administrator of the ACH network. That’s an 8.2% increase from the previous year.
ACH payments are fast, secure, and can be a more convenient way to send and receive money. Here’s what you need to know about how they work, along with other options for money transfers.
What is an ACH transfer?
ACH is an electronic service that allows people and businesses to transfer money between bank accounts, says Lindsey Grossman, product manager for Wise, a global payments platform. Here are some instances where you may have used ACH transfers to send or receive money:
- Receive a paycheck from your employer via direct deposit into your bank account
- Pay a utility bill using your servicer’s online payment system
- Send or receive money from friends through peer-to-peer payment apps like Venmo or Zelle
- Transfer money from your checking account at one bank to a savings account at another
Simply put, ACH transfers are “a general framework for paying and receiving payments,” says Marwan Forzley, CEO of Veem, a global payment network platform.
How do ACH transfers and payments work?
When you authorize an ACH transfer, you are allowing the ACH network to process an electronic money transfer using your bank account and routing number. For example, let’s say your credit card bill is due. There are a few ways you can use ACH to make your payment:
- Use your bank or credit union’s bill payment system to send the amount you owe to your credit card issuer
- Use your credit card issuer’s site to initiate the transfer from your bank or credit union
- Set up an automatic, recurring payment that authorizes the transfer to your credit card issuer on an ongoing basis
Cost of ACH transfers
In most cases, ACH payments are free to consumers, although different platforms may have different fee models. Some charge a flat fee, while others charge a variable fee. You’ll typically see these fees assessed on same-day ACH transfers. For example, Venmo charges fees for instant transfers, but if you can wait 1-3 business days for the transfer, it’s free.
Types of ACH transfers
There are two types of ACH transfers: debits and credits. “I like to think of ACH as a payment rail between two banks,” says Grossman. “On that payment rail, you can send payments, which we call ACH credit transfers, as well as withdraw money from those bank accounts, and that’s called ACH direct debit.”
When you wake up on payday and see that your payment has been automatically deposited into your bank or credit union account, that’s an example of an ACH credit, says Day. On the other hand, you’ll make an ACH debit, “when you pay a bill online and save yourself the hassle of writing and mailing a check, or schedule your home or car loan to be paid automatically on the day of the month you choose. ”
Basically, when money goes from another bank account to yours, it’s a credit. When you send money from your bank account to someone else’s, it’s a debit.
Pros and cons of ACH transfers
Cheap: ACH transfers may have lower costs and fees compared to other payment methods, such as wire transfers or even credit or debit cards. In most cases, ACH transfers cost consumers nothing.
Sure: ACH payments are secure, but even if an unauthorized electronic fund transfer is made from your account, you can avoid payment liability by notifying your bank or credit union within 60 days.
Convenient: It’s easy to set up an ACH transfer online or from your mobile phone. And you can avoid having to mail your payment several days before the due date.
Slow: Transfers can be slower than other payment options, especially if you want to avoid the potential costs of same-day transfers. In general, transfers can be made the next day, but can sometimes be slower depending on the platform.
Limitations: Some platforms have limitations on how often you can transfer funds electronically or restrictions on the amount of money you can transfer in any given day or month.
Not international: Some platforms do not allow you to send money directly from a US bank account to an international bank account.
Other ways to send money
ACH transfers are commonly used by consumers and businesses, but there are other options for transferring money to individuals or businesses.
- Wire transfers: Bank transfers are done in real time, so they’re usually faster than ACH transfers if you’re short on time. But they can be expensive, sometimes charging upwards of $20 depending on your bank, and even more for international transfers.
- Credit and debit cards: While you won’t pay a fee at most major retailers for paying by credit or debit card, small businesses and other vendors, like your utility provider, may charge you a fee to use this payment method.
- Google Pay and Apple Pay: These are fast and secure mobile payment systems, but may not be common among in-store or online retailers, depending on where you shop.
- Bank drafts or cashier’s checks: These are guaranteed checks that you can buy at a bank if you need to send money. They are generally less expensive than wire transfers, but can be an even slower way to send cash than ACH transfers.
- Payment orders: Money orders can be purchased inexpensively at a post office or grocery store and mailed to a recipient.
- Personal check: If you have a checkbook associated with your checking account, you can send someone a check. It’s safe, but not guaranteed, especially since the personal banking information on your check will pass through the hands of multiple people before being cashed by the recipient. The check may also bounce if you do not have sufficient funds in your account when it is cashed.
- Cash: Sending cash through the mail is an insecure way to transfer money, but it’s convenient. If you frequently have cash on hand, you can also hand cash to someone in person if you need to make a payment.