What Is an ACH Transfer? How It Works

An ACH transfer is an electronic, bank-to-bank money transfer processed through the Automated Clearing House (ACH) Network. The ACH network is a batch processing system that banks and other financial institutions use to aggregate these transactions for processing.

What Is ACH?

The ACH Network, or Automated Clearing House network, is a system in which funds are electronically transferred from one party to another. ACH transfers allow for safe money transfers online, such as for direct deposits or bill paying.

What are ACH transfers?

ACH transfers are transfers of funds using the ACH Network to move money from an account at one financial institution to another. Examples of ACH transfers include getting your pay through direct deposit or paying your bills online through your bank accounts.

You can also use an ACH transfer to make single or recurring deposits into an individual retirement account (IRA), a taxable brokerage account, or a college savings account. Business owners can use an ACH transfer to pay vendors or receive payments from clients and customers.

Automatic payments through the ACH system are increasing in popularity. Nacha reported that there were 7.8 billion payments in Q3 2023. That's an increase of 3% from the same quarter previous year.

Types of ACH Transfers

ACH transfers can make life easier for both the sender and recipient. They allow you to send and receive money conveniently and securely without ever having to leave your home. The ACH Network processes two kinds of ACH transactions: direct deposits and direct payments.

ACH Direct Deposits

An ACH direct deposit is any kind of electronic transfer made from a business or government entity to a consumer. The kinds of payments that fit in this category include direct deposits of:

• Paychecks
• Employer-Reimbursed Expenses
• Government Benefits
• Tax Refunds
• Annuity Payments
• Interest Payments

With ACH direct deposits, you receive money. When you send one, you make an ACH direct payment.

ACH Direct Payments

Direct payments can be used by individuals, businesses, and other organizations to send money. For example, if you’re paying a bill online with your bank account, that’s an ACH direct payment. Social payment apps such as Venmo and Zelle also use the network when you send money to friends and family.

In an ACH direct-payment transaction, the person sending the money sees an ACH debit appear in their bank account. This debit shows to whom the money was paid and for what amount. The person or entity receiving the money registers it in their bank account as an ACH credit.

Benefits of an ACH Transfer

Using an ACH transfer to pay bills or make person-to-person payments offers several advantages, starting with convenience.

Paying your mortgage, utility bill, or another recurring monthly expense using an electronic ACH payment may be easier and less time-consuming than writing and mailing a check. In addition, an ACH payment can be more secure than other forms of payment.

Sending and receiving ACH payments is usually quick. The settlement of a transaction, or the transfer of funds from one bank to another via the ACH Network, generally happens the next day after it is initiated. Nacha operating rules require that credits settle in one to two business days and debits settle the next business day.

Another benefit is that an ACH transfer is often free, depending on where you bank and the type of transfer involved. For example, your bank may charge you nothing to move money from your checking account to an account at a different bank. And if it does charge a fee, it may be a nominal cost of just a few dollars.

ACH transfers are much more cost-efficient when compared to wire transfers, which can range between $25 to $75 for international outbound transfers. Wire transfers are known for their speed and are often used for same-day service, but they can sometimes take longer to complete.

With an international wire transfer, for instance, it may take several business days for the money to move from one account to another, then another few days for the transfer to clear.

Downsides to an ACH Transfer

ACH transfers are convenient, but not necessarily perfect. There are some potential drawbacks to keep in mind when using them to move money from one bank to another, send payments, or pay bills.

ACH transfer transaction limits

Many banks impose limits on how much money you can send via an ACH transfer. There may be per-transaction limits, daily limits, and monthly or weekly limits.

There might be one limit for bill payments and another for transfers to other banks. Or one type of ACH transaction may be unlimited but another may not. Banks can also impose limits on transfer destinations. For example, they may prohibit international transfers.

Penalty for frequent transfers from savings

Savings accounts are governed by Federal Reserve Regulation D, which may limit certain types of withdrawals/transfers to six per month. If you go over that limit with multiple ACH transfers from savings to another bank, you could be hit with an excess withdrawal penalty. And if frequent transfers from savings become routine, the bank may convert your savings account to a checking account.

Timing matters for ACH transfers

When you send an ACH transfer, the time frame matters. That's because not every bank sends them for bank processing at the same time. There may be a cutoff time by which you need to get your transfer in to have it processed for the next business day.

Initiating an ACH transfer after the cutoff could result in a delay, which may be an issue if you’re trying to hit a due date for one of your bills to avoid a late fee. ACH takes an average of one to three business days to complete and is considered slow in the era of fintech and instant payments.

Same-day ACH processing is growing in order to solve the slow service of the standard ACH system. Same-day ACH volume rose by 15.5% in 2022 from 2021, with a total of 697.49 million payments made.

Other Ways To Send Money Online

If you need a faster way to send money online, a social payment money transfer app can help. These apps allow you to send money to people using their email addresses or phone numbers. The money you send can come from your bank account, credit card, or an in-app balance.

There are, of course, traditional money transfer services, such as MoneyGram and Western Union. These services allow you to send money online and pay bills by setting up an account and linking it up to your credit or debit card. Keep in mind, though, that these companies often charge a fee.

The biggest advantage of these apps, aside from being easy to use, is the speed they can offer for transfers. Depending on which one you’re using, you may be able to complete a money transfer in just a few minutes. That gives them an edge over ACH transfers.

The Bottom Line

ACH transfers can be a relatively hassle-free way to send money or receive it. Either way, make sure you understand your bank’s policies for ACH direct deposits and direct payments. Also, be vigilant for ACH transfer scams.

A common scam, for instance, involves someone sending you an email telling you that you’re owed money, and all you need to do to receive it is provide your bank account number and routing number. If something sounds too good to be true, it probably is.