ACH vs Wire vs Electronic Transfer? What is the difference?

[ 0 ] May 8, 2014 |

Long ago were the days of writing checks! Now days, we pay nearly all or most of our bills online. Payroll checks get deposited automatically. Loan payments are paid automatically with a one-time setup request. Dad wires money to his daughter for the second time (while on spring break in another state)….We even buy shoes with an online app, and pay with our smart phone!

But how are all these processed without writing a check?

The most widely used form of sending money today is the Electronic Fund Transfer (EFT). This is a general term for transferring money not by check. It is done electronically and utilizes computer networks to transfer funds from one member/institution to another as form of payment. It includes all types of transfers: credit and debit cards, payroll deposits of employees, direct debit payments of utility bills, online banking, and wire transfers.

There are several ways to remit or send money…but what is the difference? There are three main electronic methods of transferring money: ACH transfers, wire transfers, and electronic transfers via third-party systems.

ACH Transfers

The most popular method of transferring money would be ACH. ACH stands for Automated Clearing House, which is an electronic network used by financial institutions to process transactions in batches. The typical ACH transfer takes a couple days to process and to clear the receiving financial institution. This is because it requires setup and confirmation by the receiving party. Financial Institutions that can originate will offer next-day settlement and a more recent option (but less common) Same-Day Settlement.

Examples of ACH transfers include payroll direct deposit, automatic loan payment withdrawals, online bill pay, distribution of Social Security benefits, and person-to-person payments. Because most ACH transfers are automated, they are rather inexpensive for credit unions & members. ACH payments can be setup as reoccurring or one-time transactions.


Wire Transfers

Unlike the batch-processing nature of ACH transfers, wire transfers are designed for individual transactions. The biggest benefit of wire transfers is speed or availability of funds. You can send money to a person located across the country or halfway around the world typically within the same day. Wire transfers involve more interaction between the institution that sends and the institution that receives the money.  At IAA Credit Union, if a request to wire funds out is received before 2 pm, the funds would be wired the same day and typically confirmed by the receiving institution.  Due to the fund availability and speed of the transaction, wire transfer fees are typically more expensive than ACH transfers. Incoming wire fees may be charged by the receiving institution as well.

Electronic Transfers

Other portals to send money electronically include e-commerce entities like PayPal &  Dwolla. These companies allow users to send and receive money, possibly without fees associated with ACH and wire transfers. However, consumers may not use them because of the time and effort to set up accounts. PayPal, the most common system, doesn’t impose a fee when a customer sends money to another PayPal user through a linked banking system.

As part of the electronic transfer system, there is a subset of e-commerce transaction types that have emerged and are gaining acceptance. These new EFT transactions are called ACH check conversions. Businesses of all sizes are converting paper checks to ACH debits to decrease their processing costs and increase their operational efficiencies. When a customer writes a check that is converted into an electronic payment processed through the ACH network, information such as the customer’s bank routing number, the customer’s account number and the check serial number are captured. The transaction is then processed through the ACH Network and a one-time debit is made to the customer’s account. The customer’s payment experience has not changed, merely the way the payment is processed and more importantly, the speed of the transaction.

The best example is when a check is written at Walmart®, an electronic message is sent to the banking institution regarding member fund availability. If accepted, the funds will be automatically processed and transferred from the customer’s banking account to “Walmart, Inc”. This ACH check conversion process is known as a point of sale conversion (POS).  This conversion has several advantages to the business owner, it reduces administrative burden of processing payments and costs associated with the transaction. It also provides the business with an immediate response if the funds are available. These systems can be costly for businesses to implement, but often outweigh the processing costs and customer nonsufficient fund (NSF) problems.

In summary all forms of EFT’s are acceptable. Depending on price and fund availability, the cheapest option to send money would be ACH transfer, especially if it is a reoccurring payment. Wire transfers would be better if the transaction is urgent, and PayPal services would be wise if you and the recipient have user accounts. And the next time you are at a retail outlet, don’t fear the new way of processing your payment (do, however, make sure you have the available funds to cover your purchase!).



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Category: Money Tips

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