What is an ACH transfer?

In a nutshell

ACH transfers are electronic transfers of funds between banks and credit unions across a network known as the Automated Clearing House, or ACH. If you've ever received a direct deposit, or sent or paid a bill online, you've used an ACH transfer.

• The ACH was developed in the 1970s as banks moved from transferring funds in cash to wire transfers.
• Money transfers through apps like Venmo and Zelle happen through ACH transfers.
• Wire transfers between banks are different and are processed through the Federal Reserve Wire Network, CHIPS (Clearing House Interbank Payments System), and SWIFT (Society for Worldwide Interbank Financial Telecommunications).

How do ACH transfers work?

The Automated Clearing House (ACH) is a network that batch-processes transactions and moves funds between accounts.

Nacha, originally the National Automated Clearinghouse Association, manages the ACH network and is responsible for deciding how funds are distributed and settled among banks and credit unions. The ACH network was established in the 1970s and processes billions of transactions annually.

Here's an example of how an ACH transfer works: Let's say you opt for direct deposit at your workplace. The payroll company uses your banking account and routing numbers.

Then, your payroll and your fellow employees' payroll information is bundled into a file. Every time you get paid, the ACH processes the file and sends it through its network. Once your bank receives the file, your bank credits your account, and you receive the funds.

How long do ACH transfers take?

Typically, an ACH transfer takes one to three business days to complete. According to Nacha, 80% of ACH payments settle in one banking day or less.

Debits are usually completed the same day or the following day. ACH credits can settle anywhere from the same day to two banking days.

How much do ACH transfers cost?

ACH transfers are often free. If a financial institution does charge for an ACH transfer, it's usually a few dollars. For businesses, it can typically cost between $0.26 to $0.50 per transfer.

Types of ACH transfers

The two main types of ACH transfers are direct deposits and direct payments.

Direct deposits

Because of the direct deposit service, you don't have to wait for your paycheck to arrive in the mail. Other payments that utilize direct deposit include:

• Tax refunds.
• Peer-to-peer payment apps.
• Government benefits.
• Bonuses and commissions.
• Travel and employee reimbursements.

Direct payments

You're using an ACH direct payment when you pay a bill online or send money through a payment platform, such as Venmo or Zelle.

With an ACH direct payment transfer, when you send money, you'll see an ACH debit pop up in your bank account. It shows the recipient of the cash and the amount. For example, suppose you send ABC Utility company a payment of $50. ABC utility company will see the transaction appear in their bank account as an ACH credit.

ACH vs. wire transfer

While an ACH transfer is an electronic transfer handled in batches and processed over the ACH network, a wire transfer refers to the process of moving funds between accounts from your bank to an external bank. These transfers are conducted through the Federal Reserve Wire Network, CHIPS (Clearing House Interbank Payments System), and SWIFT (Society for Worldwide Interbank Financial Telecommunications).

Domestic wire transfers refer to transfers within the U.S. When only one bank is located outside the U.S., this is called an international wire transfer.

Wire transfers are usually used to transfer large sums of money — for example, to put a down payment on a house or car. They're usually quicker than ACH transfers; cash can sometimes be sent within an hour.

While wire transfers have speedier processing times, they also are more expensive. On average, a domestic wire transfer can cost anywhere from $25 to $30 per transaction. An international wire transfer is more steep: These can cost between $35 to $50 per transaction.

ACH transfers pros and cons

Here are some of the advantages and disadvantages of of ACH transfers:

ACH transfers are common in our everyday financial lives, and they're an inexpensive, easy way to send or receive payments. Be sure to research your bank's policies and ACH transfer fees.