If you’ve sent or received money online before, odds are that an Automated Clearing House transfer was involved.
Although you might not be familiar with that name, these ACH transfers account for the online bill payments you make and the direct deposits you receive, along with other transfers. Here’s a guide to how they work.
An ACH transfer refers to any electronic movement of money between different banks that goes through the Automated Clearing House network, one of the biggest U.S. payment systems. The types of transfers include external funds transfers, person-to-person payments, bill payments and direct deposits from employers and government benefit programs. For sending money to friends and family, many transfer providers — including banks and third-party apps like PayPal and Venmo — use the ACH network.
ACH transfers get processed in two ways, which vary in delivery speed and cost:
Delivery of ACH transfers can take several business days, meaning days that banks are open. Unlike the real-time processing that wire transfers have, ACH network operators process transfers in batches only three times a day.
Financial institutions can choose to have ACH credits processed and delivered either within a business day or in one to two days. In contrast, ACH debit transactions must be processed by the next business day. These timelines are based on the new rules from the National Automated Clearing House Association, the trade group that oversees the network. Upon receiving the money, the other bank or credit union might also keep transferred funds for a holding period, so the total delivery time varies.
ACH debit transfers, including payroll direct deposits and most bill payments, are typically free. If you need expedited bill payments, there can be fees. For ACH credit transfers, banks might charge a fee of around $3 for sending money between accounts that you have at different banks, but many offer these so-called external funds transfers for free. There’s usually no fee to receive them. Person-to-person payments that you initiate through your bank or third-party apps like PayPal can cost small fees, depending on the platform and payment method.
While ACH transfers cost a few bucks at most, sending a bank wire transfer within the U.S. tends to be between $20 and $30, and there’s usually a fee to receive one. However, the wire network processes transactions in real time, so you can generally expect U.S. wire transfers to be delivered within hours, if not minutes. Because of its cost and speed, a wire transfer is best for large-sum and time-sensitive transfers, either in the U.S. or abroad.
» MORE: How wire transfers work
A new rule by the National Automated Clearing House Association that went into effect this September starts the move toward three ACH network processing times daily instead of just one. This will occur in three phases and will make widespread use of same-day delivery possible by March 2018.
The rule doesn’t determine whether this faster service will cost extra, though. “There are definitely going to be some banks that will charge a premium for processing same-day transactions,” says Linda Coven, senior analyst at Aite Group, a consulting firm in Boston.
Sending money via ACH between banks can be convenient, but there are some limitations, including:
ACH transfers can be a cheap way to move money, but if you’re the one sending funds, check out your bank’s policy first. This will help you avoid any fees, unexpected processing delays and potential limits so you can make the most out of this service.
Updated Nov. 2, 2016.