Aside from credit card payments, the two most common types of electronic payments are ACH transfers and wire transfers. By understanding the core differences between these two forms of electronic payments, you can get a sense of which option is best for particular use cases and business needs.
What’s a wire transfer?
A wire transfer is a form of electronic payment in which a “sending institution” (e.g., the bank of the individual or business sending payment) sends money to a “receiving institution” (e.g., the bank of the individual or business receiving payment). Wire transfers are usually initiated by the individual making payment, and rely on the secure transfer of information between institutions through systems like SWIFT (international) or Fedwire (U.S. only).
Wire transfers are typically used to send large payments between two people or organizations in different geographic locations, and funds can be transferred between financial institutions in the same country, or in different countries.
What’s an ACH transfer?
ACH transfers are another form of electronic money transfer between financial institutions in the U.S. ACH stands for “Automated Clearing House” — the network responsible for processing these types of transactions.
ACH transfers are used in a variety of electronic money transfers, such as direct deposits of paychecks into an employee’s bank account, online bill payments, deposits into a brokerage account, or recurring deposits into a retirement account. Many payments apps, including Zelle and Venmo, use the ACH network to send payment between parties.
What are the main differences between ACH and a wire transfer?
ACH and wire transfers are both electronic forms of payment between financial institutions — but the similarities stop there. To help decide which is the right form of electronic payment for your business, here’s a rundown of the key differences between ACH and wire transfers.
Wire transfers typically disburse funds more quickly than ACH transfers.
Wire transfers clear (i.e., transaction details are shared between the two financial institutions) as soon as the receiving institution signs off on the payment instruction from the sending institution, which is usually within a few minutes. Depending on when the wire is sent, the transaction could be settled (i.e., payment received) and the funds disbursed (i.e., deposited in the receiver’s account) on the same business day, or the following business day. If the sender pays extra to wire the funds via Fedwire (a premium wire service operated by the Federal Reserve), the funds are disbursed immediately.
ACH transfers, on the other hand, usually take at least one business day to clear for debit payments, or 2–3 business days for a credit payment. Each financial institution sends payments in batches and can have different cut-off times, so timing varies accordingly. Submitting a transaction to the ACH network and having an ACH operator send the transaction to the receiving institution can each take a full business day to complete. The receiving institution may also take up to two additional business days to process the transaction and disburse funds (some financial institutions hold funds for a period of time before disbursing them into the receiving account to ensure the debited account has sufficient funds).
Note, senders have the option to pay an extra fee for same-day processing on the ACH network.
Settlement, or the exchange of money, is permanent for wire transfers after clearance, but not for ACH transfers. Once the receiving institution clears the wire transfer, the funds cannot be recovered by the sending institution.
ACH transfers, on the other hand, can be recalled or disputed after clearance, it just requires that the sender reach out to their financial institution to resolve the issue. A reversal of credit funds can be requested within five business days in the event of sender error (e.g., they input the wrong account number). Debit payments can be disputed for up to 60 days after the date of the transaction. Debit payments can also be reversed in the event of insufficient funds.
ACH transfers are generally free for the sender and receiver, while wire transfers typically cost a fee. The wire transfer fee varies by the financial institution, but can range up to $35 for outgoing domestic wires, and up to $65 for outgoing international wires. Receivers also pay an incoming wire fee of up to $20 (for domestic) or $25 (for international). The wire fee is typically deducted from the amount sent.
With ACH transfers, the financial institution sending payment will typically be charged a payment processing fee, but this is rarely passed on to the sender or receiver. The processing fee is typically quite nominal — a few tenths of a percent per transaction. Since ACH transfers are processed in bulk, admin costs are usually quite low.
Traditional wire transfers can only be used to send money, while ACH transfers can also “pull” money, meaning the receiver can initiate a transaction. Pulling money via ACH transfer is commonly used for recurring payments, like utilities or subscription services. One exception to this difference in direction between a wire and an ACH transfer is in the case of a “reverse wire.” Common for things like processing payroll through a third-party software, a reverse wire occurs when a B2B instant wire transfer is initiated by the receiving company, not the sender.
Wire transfers are one-off transactions, while ACH transfers can be automated to run on a recurring basis. Recurring transfers is one of the reasons billing services and employers use ACH to send and receive money.
Wire transfers are usually used to send large payments, while ACH transfers are generally used for smaller-sized payments.
Per Nacha (the organization that maintains the ACH network), there were more than 29B payments made via ACH in 2021, with a total payment volume of $72.6T, which averages out to roughly $2.5K per transaction. According to Fedwire, there were only roughly 204M wire transfers in 2021, but with a total payment volume of $991T — or roughly $4.85M per transaction.
Wire transfers can be used to send payment around the world, whereas ACH transfers are primarily used in the U.S. As of 2020, 33 additional countries accept cross-border ACH transfers.
When to use an ACH transfer v. a wire transfer
There are marked differences between ACH and wire transfers that make each suitable in different business situations. Here are some recommendations on when to use each form of electronic payment:
When to use ACH transfers
- You need to run a high volume of transactions
- You need to bill customers
- You need to send recurring payments / receive recurring payments
- You don’t need to receive same-day payment
When to use wire transfers
- You need to send a large amount of money
- You need to send money internationally
- You need money to be received same-day
- You’re willing to pay per transaction
Generally, ACH transfers have more use cases for businesses, but wire transfers are often necessary for large payments.
Innovations in fintech will likely continue to improve both wire transfers and ACH transfers for consumers. As it stands, both are valuable services for electronic payments that business owners should not hesitate to leverage as needed.