ACH vs Wire vs Electronic Transfer? What is the difference?
Updated as of: May 26, 2020
We are now living in the 21st century and long ago were the days of writing checks! With the rise of more efficient forms of payment, fewer and fewer checks are being written. We still use checks for personal services, piano lessons, and sending money for graduations, birthdays, etc. while most businesses use checks for their payment operations. Nevertheless, paper checks are still highly regarded and won’t phase out entirely, but personal check writing continues to decline.
Electronic payments are the expectation of today’s world. The act of payment for goods and services continues to transform before our eyes. In 2018, ninety-six percent of Americans are paid electronically via direct deposit.1 Loan payments are paid automatically with a one-time setup request. Tax refunds process more securely with quicker turnaround. Dad wires money to his daughter for the second time while on spring break. We even buy shoes with an online app while we wait in line for our mocha, BOTH paid with our smart phone!
But how are all these processed without writing a check?
The most widely used form of sending money today is the Electronic Fund Transfer (EFT). This is a general term for transferring money not by check. It is done electronically and utilizes computer networks to transfer funds from one member/institution to another as a form of payment. It includes all types of transfers: credit and debit cards, payroll deposits of employees, online bill pay, online banking, wire transfers, and ACH processing.
There are several ways to remit or send money…but what is the difference? There are three main electronic methods of transferring money: ACH transfers, wire transfers, and electronic transfers via third-party systems. People also ask about digital wallets and bitcoin, those too can be categorized as electronic money (eMoney).
Electronic Fund Transfers (EFT)
In simplest of terms, EFT’s are any transfer of funds from one account to another that occurs electronically. EFTs include both ACH and Wire Transfer services. ACH transfers are sometimes referred to as an EFT transfer, because EFT is a term that covers several different types of financial transactions. In other words, the only difference between an EFT and an ACH transfer is the degree of specificity. Electronic Transfers includes ACH under its umbrella, and an ACH is always an EFT. EFT also includes transfer methods such as eChecks, ATM transactions, and some point of sale (POS) transactions.
The most popular method of transferring money is through an ACH. ACH stands for Automated Clearing House, which is an electronic network used by financial institutions to process transactions in batches. The typical ACH transfer takes a couple days to process and to clear the receiving financial institution. This is because it requires setup and confirmation by the receiving party. Examples of ACH transfers include payroll direct deposit, automatic loan payment withdrawals, online bill pay, distribution of Social Security benefits, and person-to-person payments. Because most ACH transfers are automated, they are rather inexpensive for credit unions and members. ACH payments can be setup as one-time or reoccurring transactions. Additionally, same-day ACH processing has emerged to accommodate faster payments. Same day processing costs more due to the timing factor.
ACH payment processing works where an originator (typically banks, credit unions, corporations, or other business entities) transact direct deposit or direct payment transactions using the National Automated Clearing House Association (NACHA). NACHA manages the development, administration, and governance of the ACH Network. For example, IAACU originates ACH loan payment transfers.
How much risk? An ACH is a secured way of transferring of the money from one account to another account only after the verification of the user details on the other end. It is assured by every individual because it avoids the risk of information leak. It connects different financial institutions or banks.
Real Time Payments RTP® Transfers
Similar to ACH payment processing, a new payment network emerged in 2017 and was built to support real-time payments in the U.S. for “credits” only. Real-Time Payments RTP® is owned and operated by The Clearing House® It has been the first major upgrade in electronic payments since the Automated Clearing House (ACH) was created 40 years ago and Check 21 launched in 2001. This network provides Real-Time Payment processing for depository institutions. Real-Time Payments are becoming the new norm among businesses and consumers. Real-time payments take seconds for payments to be sent and received regardless of day or time.
While this network is convenient for businesses and consumers, not all business or financial institutions will be abandoning or have the option to leave their old processing systems. Changes of this magnitude take time and money to convert processing operations. However, as changes are made and time passes – systems will too, and real-time processing will most likely become standard.
Third-party payment processors (TPPPs)
As a subset of ACH processors, there are also countless intermediary TPPPs who have entered in the playing field in the past few years. They provide payment processing services to merchant or business clients and group these payments together to take advantage of economies of scale. Below is a simplified example of merchants using TPPPs to collect payments/receipts for the goods their customers have purchased. TPPPs typically offer both debit and credit payment processing. On the payment side, financial institutions often use ‘Bill Pay’ payment providers as their TPPPs to facilitate customer payments and transactions. TPPPs process through ACH and RTP®.
There are also EFT transactions created from ACH check conversions. Businesses of all sizes are converting paper checks to ACH debits to decrease their processing costs and increase their operational efficiencies. When a customer writes a check that is converted into an electronic payment processed through the ACH network, information such as the customer’s bank routing number, the customer’s account number, and the check serial number are captured. The transaction is then processed through the ACH Network and a one-time debit is made to the customer’s account. The customer’s payment experience has not changed, merely the way the payment is processed and more importantly, the speed of the transaction. This ACH check conversion process is known as a point of sale conversion (POS).
Other portals to send money electronically include e-commerce entities like PayPal, Dwolla, Amazon Pay, and many other alternatives. These companies allow users to send and receive money, possibly without fees associated with ACH and wire transfers. However, consumers may not use them because of the time and effort to set up accounts. PayPal, the most common system, does not impose a fee when a customer sends money to another PayPal user through a linked banking system. These systems emerged when both sellers and buyers were concerned about fraudulent activity, providing a safer option than many of the other alternatives.2
Unlike the batch-processing nature of ACH transfers, wire transfers are designed for individual transactions. The biggest benefit of wire transfers is speed or availability of funds. You can send money to a person located across the country or halfway around the world typically within the same day. Wire transfers involve more interaction between the institution that sends and the institution that receives the money. At IAA Credit Union, if a request to wire funds out is received before 2 pm, the funds would be wired the same day and typically confirmed by the receiving institution. Due to the fund availability and speed of the transaction, wire transfer fees are typically more expensive than ACH transfers, an incoming wire fees may be charged by the receiving institution as well.
While $$ CASH $$ will not vanish from counter services any time soon, many restaurants make it simple to pay with our watches and/or phones. …Crazy, right?! Digital Wallets (also sometimes called an e-wallet) transform the way you pay for things. Electronic money (e-money) is broadly defined as an electronic store of monetary value on a technical device that may be used for making payments. Many digital wallet services work through apps on your smartphone. While buying coffee, for instance, you might simply tap your phone to a compatible check-out register to pay instantly. E-Wallet allows you to store multiple credit card and bank account numbers in a secure environment and eliminate the need to enter in account information when making your payment. Once you have registered and created E-Wallet profiles, you can make payments faster and limit the need to carry your physical wallet.
Venmo provides digital wallet services that lets you make and share payments with friends.3 You can split a bill, cab fare, etc., the money will be transferred from the venmo balance, an associated debit or credit card, or a linked bank account.
How much risk? Whereas, EFT is the fastest form of transfer using the electronic gadgets. But there is a risk of hacking of the credit card information or the account details of the person who is a customer of that financial institution. But it is an instant process when compared to that of ACH. But these days, people prefer quicker, cashless, and paperless transfers.
In the case of Bitcoin
Bitcoin is digital currency that represents electronic money (e-money). Digital currency denominated in its own units of value is considered a virtual currency, and was designed to work in peer-to-peer transactions as a currency. It is legal to use bitcoin in the United States, and payments are subject to the same taxes and reporting requirements as any other currency. However, there is no physical bitcoin currency the way there is a dollar.
Pros and Cons
In summary all forms of EFT’s are acceptable. If you are concerned about security, electronic transfers are a safe way to pay. You only need to expose your bank account information once, when you sign up for electronic payments. Please note, check writing is not immune from fraud. There are rules and regulations in place to keep you protected with both options.
Depending on price and fund availability, the cheapest option to send money would be an ACH transfer, especially if it is a reoccurring payment. Wire transfers are better if the transaction is urgent, and TPPPs services would be wise if you and the recipient have user accounts. However, the next time you are at a retail outlet, don’t fear the new way of processing your payment – just make sure you have the available funds to cover your purchase!
- My HR Professionals – 96% of Americans paid electronically via direct deposit: https://myhrprofessionals.com/2013/09/25/96-percent-of-americans-paid-electronically-via-direct-deposit/
- Top 18 PayPal Competitors - PayPal Alternatives explained: https://www.marketing91.com/top-paypal-competitors/
- Venmo: https://www.tomsguide.com/us/what-is-venmo,review-5574.html
Digital currency - Wikipedia