You may have used an ACH transfer without even knowing it. To briefly summarize, an ACH transfer is a method to coordinate electronic payments and automated money transfers. Continue reading on this post to learn what ACH transfers are and how they work!

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What Are ACH Transfers?

An ACH transfer uses an Automated Clearing House, a network organized by the National Automated Clearing House Association for transferring funds between two banks.

How Does an ACH Transfer Work?

An individual or corporation must initiate a direct transaction by providing the necessary information to a financial institution. Then, the financial institution inputs the ACH entry along with all of its other ACH requests at a specific time of day. Finally, the funds are transferred. This process may take three to five days, depending on the type of transaction.

For example, if your employer pays you through direct deposit, this is how the money would move:

You provide your bank account information to your employer.
Your employer sends an electronic payment file to its bank.
Your employer’s bank sends the payment to an “ACH Operator.”
The ACH Operator sends your money to your bank
You receive your money in your checking or savings account, or each account can receive a share of the deposit.

Keep in mind that there are some limitations on ACH transfers. Depending on your bank, there are cutoff times for when batch transfers. Check with your bank about the ACH rules and how long you should expect a transfer to take.

What Is Needed for an ACH Transfer?

This is what you to receive money from an ACH transfer:

A checking account, savings account, payroll card or prepaid card to receive ACH deposits
Account information

The originator will request a voided check or make you fill out a form to get your account information.

Types of ACH Transfers

ACH transfers can be broken down into deposits and receipts.

Deposits

Direct deposit: Used for payroll, expense reimbursement, and pension and dividend payments
Cross-border: Used to send payments to Canada, Mexico, Panama and select European countries
Trade: Used to pay suppliers through CCD+ and CTX formats
Taxes: Used to make local, state and federal tax payments

Receipts

Consumer debit: Used for accepting one-time or recurring payments from consumers
eCheck: Used to convert paper checks into ACH debits that can be processed electronically
Corporate collection: Used to collect payments through CCD+ and CTX formats
Concentration: Used to consolidate funds into a single account

Fees for ACH processing vary. All banks must pay an annual fee and nominal fees for each transaction.

Pros and Cons of ACH Transfers

The ACH network is used for a majority of fund transfers in the U.S., such as direct deposit, tax refunds and payment services like PayPal or Venmo. Here are some pros and cons of using ACH transfers:

Pros

Payments are easier to track, can’t get lost and are delivered sooner than if they were sent by mail.
You don’t have to remember to make payments and are less likely to get hit with late fees if you make recurring payments.
Your personal information is hidden from someone who might intercept a check.
The ACH transfer amount limit is $100,000 per day.

Cons

It may be easier to overdraw an account when payments are automatically deducted.
It’s easy to forget when bills are paid, leading to double payments and continued payment for services you don’t want.
Payments must be received by the transaction cutoff: 10:30 a.m. EST for morning submissions and 2:45 p.m. EST for afternoon submissions.

Alternatives to an ACH Transfer

There are multiple options for making payments electronically such as the traditional wire transfer or using payment apps.

Wire Transfer

Similar to an electronic check, wire transfers directly moves funds from one bank account to another through routing numbers. Wire transfers are usually faster than ACH transfers. Unlike ACH transfers, wire transfers are final. Because ACH transfers take longer to settle, they can be reversed or pulled back.

However, the costs may differ since ACH transfers have very low fees associated with them. Wire transfers can be quite costly. Wells Fargo will charge $30 for outgoing wire transfers while Bank of America charges $30 for domestic transfers and $45 for international wire transfers.

Payment Apps

Payment apps such as PayPal and Venmo use the ACH network through their platforms. These apps are the closest thing to an ACH transfer app.

Zelle is a bank-to-bank platform that does not rely on the ACH network. Zelle money transfers uses it’s own system resulting in a faster transfer time.

Bottom Line

Whether you’re sending or receiving money, ACH transfers might be the way for you. Not only is it convenient for the user, but it’s also faster than mailed payments and cheaper than wire transfers.

It is important to understand how ACH transfers works and the different aspects to it. Check out HMB’s in-depth list on Best Bank Promotions!