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A Guide to ACH: How Money Moves Around Without Checks | Banking Advice

The automated clearing house network, or ACH, is used by consumers and businesses to conduct payments via e-checks, such as making online payments for auto loans or credit card bills.

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The ACH is the preferred method since it transfers money through a data network and avoids using paper checks. E-checks are an electronic version of paper checks and commonly are used to make payments online. Many businesses use ACH to pay employee salaries by direct deposit and pay bills to vendors.

ACH transfers are conducted in batches three times a day, avoiding the hassle of losing and reissuing checks.

Since 2000, the ACH network has grown exponentially, from processing $12 trillion in payments to more than $55.8 trillion in 2019. Nacha, which governs the ACH network, said 93% of Americans are paid using ACH.

What Are Common Types of ACH Transfers?

One of the most common uses of ACH transfers is the direct deposit of paychecks or government payments such as Social Security funds. Using the ACH guarantees that the money will arrive in a consumer or business account at the same time each week or month.

Employees can sign up for ACH by giving their employer the routing and account numbers of their checking or savings account. This method eliminates the need for a paper check to be mailed or issued, and you can also skip a trip to the bank to deposit the check.

Some employers also use ACH to pay for work-related expenses such as mileage or travel. Consumers can sign up for ACH payments for other purposes, such as receiving government benefits – Social Security payments or refunds from the IRS, for example.

“Choosing ACH payments can also mean earlier access to your paychecks at some banks, which can be helpful for budgeting purposes,” says Leslie H. Tayne, a Melville, New York, attorney specializing in debt relief. “If your employer or government agency provides an ACH option of receiving funds, it can be an excellent idea to take advantage of it. There’s also no wait time for the funds to clear in the bank account.”

An ACH transfer is one of the easiest ways to send and receive payments, says Bob Castaneda, program director for Walden University’s accounting, finance and management degree programs.

“It is a fast, safe and reliable method for electronic transactions,” he says. “It can be set up as a one-time payment or recurring transfers. If an ACH payment was sent to the wrong recipient, it can be reversed.”

Your investment payments, such as the interest and dividends from a certificate of deposit, 401(k) plan or individual retirement account, can also be directly deposited into your checking or savings account via ACH.

Another common form of ACH is when you use a bank’s online bill pay function or if you’ve set up autopay. The bank is most likely using ACH transfers to make payments to a business or creditor, although sometimes bill pay will send an actual check if the payee hasn’t provided bank information.

What Are the Pros and Cons of ACH Transfers?

Workers and employers generally prefer using ACH because the process eliminates potential problems such as having to write a check, waiting for a check to arrive by mail and enduring delays before the money is cleared by the bank.

“Money is available immediately – there’s no need to go to the bank, deposit a check with your bank’s app or wait for the check to clear,” Tayne says.

ACH transfers are much more environmentally friendly than paper checks and help reduce greenhouse gas emissions, plus they also save businesses money on paper costs and postage.

Many financial institutions have an early direct deposit feature, meaning they provide customers access to paychecks as soon as they receive the notification instead of waiting until your official payday, Tayne says.

ACH transfers are typically free to send and receive for consumers. Person-to-person money transfers, including Zelle and Venmo, use ACH for their standard bank transfer and take one to three days to reach your bank account once a transfer is initiated.

One drawback to ACH is you must provide your bank account details to an employer, leaving such information vulnerable to data breaches. There are also limits on how much money can be transferred by ACH daily, depending on your bank or credit union.

Services like Venmo process ACH transfers in batches, which is why it isn’t a faster process, Tayne says. Venmo and Zelle use existing ACH technology and have changed the way we send and receive money with one another.

“ACH transfers can cost money for businesses to send, depending on the financial institution,” she says. “Some banks charge setup fees, as well as fees per transaction. The ACH network is also only available in the U.S., making it an impractical choice when dealing with international transactions.”

Another disadvantage is that ACH transfers can be declined due to insufficient funds, incorrect information or if one of the parties suffers a loss or bankruptcy, Castaneda says.

ACH vs. Wire Transfers

While wire transfers mean you receive the money immediately, banks typically charge a fee to both the sender and receiver. The transaction is a different process from ACH and occurs between two banks without a clearing house, so it moves faster.

When you receive a wire transfer, 100% of the funds becomes available to you, unlike checks or some large deposits that can take several days to clear.

“The best part of wire transfers is that once the funds transfer, there is no reversing it or dishonoring it,” Tayne says.

When sending or receiving an international wire, be aware of exchange rates in addition to the fees you are paying for the transfer.

“Unlike ACH payments, wire transfers aren’t processed by regulated clearing houses, so scammers will often use wire transfers, as they cannot be reversed,” she says.

You might use a wire transfer to close on a mortgage or make a deposit into a brokerage account. A client who does not have a U.S. bank account might also use a wire transfer to make a payment to you. And you might use it to send money to a family member in another country.

“Money can be sent internationally with wire transfers, while ACH transfers are limited to U.S. banks,” Castaneda says. “Wire transfers can also be delivered within 24 hours, while ACH transfers may take a few days to be finalized.”

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