If you’ve ever received a direct deposit from an employer, or sent a friend cash using a peer-to-peer payment platform like Venmo, you’ve probably taken part in an ACH transfer.
In the not-so-distant past, making payments to your utility provider or settling a restaurant bill with friends required writing checks or having paper cash on hand. But today, these types of payments usually happen online. When you send money to a person or a business digitally, or receive money from them, the payment often occurs via ACH transfer — an e-payment made through the Automated Clearing House (ACH) network.
And ACH payments are only growing more common. “Last year, the ACH Network processed 26.8 billion payments,” says Victoria Day, chief communications officer at Nacha, the administrator of the ACH network. That’s an increase of 8.2% over 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, director of product at Wise, a global payments platform. Here are a few instances in which you may have used ACH transfers to send or receive money:
- Receiving a paycheck from your employer via direct deposit to your bank account
- Paying a utility bill using your servicer’s online payment system
- Sending or receiving money from friends via peer-to-peer payment apps like Venmo or Zelle
- Transferring money from your checking account with one bank to a savings account with another
Put simply, ACH transfers are “a general framework for paying and getting paid,” says Marwan Forzley, CEO of Veem, a global payments network platform.
How Do ACH Transfers and Payments Work?
When you authorize an ACH transfer, you’re allowing the ACH network to process an electronic money transfer using your bank account and routing number. For example, say your credit card bill is due. There are a few ways you could use ACH to make your payment:
- Use your bank or credit union’s bill pay system to the send the amount you owe to your credit card issuer
- Use your credit card issuer’s site initiate the transfer from your bank or credit union
- Set up an automatic, recurring payment, which authorizes the transfer to your credit card issuer on an ongoing basis
Cost of ACH transfers
In most cases, ACH payments are free for consumers, though different platforms may have different fee models. Some charge a flat fee, while others charge a variable fee. Usually, you’ll see these fees imposed 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 both push payments — what we call ACH credit transfers — as well as pull money from those bank accounts — and that’s called ACH direct debit.”
When you wake up on payday and see your pay was automatically deposited into your bank or credit union account, that’s an example of an ACH credit, Day says. You’ll make an ACH debit, on the other hand, “When you pay a bill online and save the hassle of writing and mailing a check, or schedule your mortgage or car loan to pay automatically on the day of the month you choose.”
Basically, when money goes from another bank account into 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 can have lower costs and fees compared to other payment methods, like wire transfers or even credit or debit cards. In most cases, ACH transfers cost consumers nothing.
Secure: ACH payments are secure, but even if an unauthorized electronic funds transfer is made from your account, you can avoid liability for the payment if you notify 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 in advance of your due date.
Slow: Transfers can be slower than some other payment options, especially if you want to avoid potential costs of same-day transfers. Generally, transfers can happen by the next day, but can sometimes be slower depending on the platform.
Limitations: Some platforms have limitations on how often you can electronically transfer funds, or restrictions on how much money you can transfer in a given day or month.
Not International: Some platforms don’t allow you to send money directly from a U.S. 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 people or businesses.
- Wire transfers: Wire transfers happen in real time, so they’re often faster than ACH transfer if you’re short on time. But they can be costly, 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 in most major retail stores for paying via credit or debit card, small businesses and other vendors, like your utility provider, might charge you a fee for using this payment method.
- Google Pay and Apple Pay: These are fast, 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 you can purchase at a bank if you need to send money. They’re usually less costly than wire transfers, but can be an even slower way to send cash than ACH transfers.
- Money orders: Money orders can be bought 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 mail someone a check. It’s secure, but not guaranteed — especially since the personal banking information on your check will pass through several individual’s hands before being cashed by the recipient. The check could also bounce if you have insufficient funds in your account when it’s cashed.
- Cash: Mailing cash is an insecure way to transfer money, but it is convenient. If you keep cash on hand often, you can also deliver cash to someone in-person if you need to make a payment.