ACH Transfer vs. Wire Transfer: What’s the Difference?

ACH Transfers vs. Wire Transfers: An Overview

Electronic payments are becoming increasingly popular as more people choose to pay bills or send money online because doing so has become more convenient, easy, and cheap. Two of the easiest ways to send money directly from a bank account are automated clearing house (ACH) transfers and wire transfers. So what is the difference between them? While both make it convenient to send money electronically, they aren’t exactly the same when it comes to speed and cost.

ACH Transfers

An ACH transaction involves the transfer of funds between banks, credit unions, or other financial institutions through an electronic network. This type of transfer can be used for a variety of purposes, including processing:

• Paycheck direct deposit
• Direct deposit of government benefits or tax refunds
• Recurring debits (such as automatic bill payments)
• One-time bill payments
• International payments
• Healthcare claim payments
• Person-to-person (P2P) payments
• Business-to-business (B2B) payments

Approximately 7.5 billion ACH payments totaling $19.6 trillion were processed in the second quarter of 2022. Since 2012, the use of ACH transfers has increased 8.7% year over year, with steady increases in the number of direct deposit and bill payments being processed electronically.

ACH has been embedded in many high-profile fintech payment apps that used only credit cards before such as Stripe. It is also used as a main means of the transfer for rising B2B fintech apps such as Tipalti, Checkout, Fiserv, Affirm, and Bill.com.

It is also possible for people to send money to friends and family over the ACH network. Banks offer this service as do various third-party apps such as PayPal, Venmo, and Zelle.

How ACH transfers work

An automated clearing house transaction has several moving parts. How ACH transfers work can depend on whether the transaction involves a direct payment or a debit. Here are some key terminologies you need to know to understand how the process takes place.

• Originator: The entity that’s authorized to request a payment or transfer from someone else
• Originating depository financial institution (ODFI): The originator’s bank
• ACH operator: the clearing house that processes the transaction
• Receiver: The entity that completes an ACH transaction
• Receiving depository financial institution (RDFI): The receiver’s bank

In simple terms, the first bank initiates an ACH transfer, which is grouped together with other ACH transfers. Those transactions are processed through the clearing house. Once transfers are processed for the day, they’re sent in batches to the receiving bank. The receiving bank then credits or debits the appropriate accounts accordingly.

ACH transfer example

Assume that you have a recurring bill that needs to be paid each month, such as a credit card bill. Rather than logging in to your credit card company’s website each month, you decide to schedule a recurring payment through your bank. You log in to your online bank account or mobile banking app and authorize the payment to your credit card company. The credit card company becomes the originator in the transaction.

The credit card company sends a file to its bank that includes the details of the payment. Its bank is the originating depository financial institution. The payment is processed through the clearing house or ACH operator. The ACH operator sends a file with the payment request information back to your bank, which is the receiving depository financial institution.

Your bank makes the payment to the credit card company as scheduled. In this transaction, you are the receiver, as you’re on the receiving end of a request for payment.

Wire Transfers

A wire transfer is a transaction that’s initiated through a bank and allows for the movement of funds from one account to another. When both banks are located in the U.S., this is called a domestic wire transfer. When one bank is outside the U.S., this is referred to as an international wire transfer or a remittance transfer.

Wire transfers are typically used when it’s necessary to send large amounts of money quickly. For example, if you’re buying a home, you may be asked to send your down payment funds via wire transfer. You can also use wire transfers to send money to individuals.

How wire transfers work

Wire transfers allow banks to communicate with one another to move funds between accounts. The person sending a payment provides the bank with specific details, including:

• The amount to be transferred
• The account number that will be used to complete the transfer
• The name, address, and phone number of the recipient
• The routing number for the recipient’s bank (or SWIFT code for international wire transfers)
• The bank account number for the recipient

Once the bank has this information, it can process the wire transfer to deduct the requested amount from the sender’s account. This amount is then credited to the recipient’s account. Meanwhile, the person sending a wire transfer pays a fee. The person receiving the transfer may also pay a fee. The amount of the fee can vary by bank, but generally, international wire transfers carry higher fees than domestic transfers.

Wire transfer example

Say that you’re buying a home and the amount due at closing is $42,000. The closing attorney asks that you initiate a wire transfer to make the payment. You go to your bank and provide it with the recipient’s name and account information. The bank deducts $42,000 from your money market savings account and wires it to the recipient’s bank. The bank charges you a $35 fee for the transfer. Meanwhile, the money is credited to the recipient’s account within a couple of hours.

ACH vs. Wire Transfer: Which Is Better?

Whether it makes sense to use an ACH or a wire transfer can depend on the situation. If you’re making bill payments or scheduling direct deposits for your paycheck, government benefits, or tax refund, those transactions will be processed via the ACH network. On the other hand, if you need to send someone a large amount of money, then you may choose to do that using either an ACH transfer or a wire transfer.

In terms of differences, speed and cost are what distinguish ACH payments and wire transfers from one another. ACH transfers are typically free, but they can take a couple of business days to process. A wire transfer can be processed the same day, sometimes in as little as a few hours. The trade-off is that your bank may charge you fees for this convenience. Wire transfer fees are generally between $25 and $30 for domestic wire transfers and between $45 and $50 for international wire transfers.

Both ACH and wire transfers are secure, though the latter is frequently used by scammers to target unsuspecting victims for wire fraud. For example, you may receive an email telling you that you’ve won a contest, but in order to claim the money, you must first pay a processing fee using a wire transfer. You wire the money, only to receive nothing in return because the contest never existed.

The Bottom Line

Both the ACH and wire transfer methods have merits. Determining which one is best depends on your particular needs and the type of payment you’re making.

The main difference between them is speed and cost. Wire transfers work on individual requests and so are quicker than ACH transfers, which are handled in batches. However, this extra speed comes at a cost—ACH transfers are normally free, whereas wire transfers can cost anywhere from $25 to $50. Another important distinction is where the money is sent: Wire transfers can be sent internationally, whereas ACH transfers are for domestic use only.

In other words, if you need to make an urgent payment or transfer money overseas, a wire transfer is your best option. Conversely, for domestic payments that can wait a few days, ACH transfers usually make more sense.