ACH transfers are a way to move money between accounts at different banks electronically. They enable you to send or receive money conveniently and securely. This article will show you how ACH transfers work.

You may be using ACH transfers without even realizing it. If you’re paid via direct deposit, for example, that’s a form of ACH transfer. Paying bills online through your bank account is another. You can also use ACH transfers to make single or recurring deposits into an individual retirement account, a taxable brokerage account, or a college savings account. Business owners can also use ACH to pay vendors or receive payments from clients and customers.

Payments made through the system are growing. According to the National Automated Clearing House Association (NACHA), more than two billion transfers were initiated through the internet in 2020. That's an increase of 15.2% from the previous year. Person-two-person and business-to-business transactions also increased to 62 million (44%) and 1.2 billion (15%), respectively, for the same period.

ACH transfers have many uses and can be more cost-efficient and user-friendly than writing checks or paying with a credit or debit card. If you’re curious about how ACH transfers work, here’s everything you need to know.

What Are ACH Transfers?

An ACH transfer is an electronic, bank-to-bank money transfer processed through the Automated Clearing House Network. According to the National Automated Clearing House Association (NACHA), the ACH network is a batch processing system that banks and other financial institutions use to aggregate ACH transactions for processing, which typically happens three times each business day. The ACH network processes two kinds of ACH transactions: Direct deposits and direct payments.

ACH transfers are usually quick, often free, and can be more user-friendly than writing a check or paying a bill with a credit or debit card.

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:

With ACH direct deposits, you receiving 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 ACH 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 in what amount. The person or entity receiving the money registers it in their bank account as an ACH credit. The former “pulls” money from an account while the latter “pushes” it to another account.

Advantages of ACH Transfers

Using ACH transfers to pay bills—or make person-to-person payments—offers several advantages, starting with convenience. Paying your mortgage, utility bill, or other recurring monthly expenses using an electronic ACH payment may be easier and less time-consuming than writing and mailing a check. Not to mention you can save yourself a few bucks by not having to spend money on stamps. In addition, an ACH payment can be more secure than other forms of payment.

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

Another benefit is that ACH transfers are 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.

Compared to a wire transfer, which can have an average fee ranging from just under $14 to as high as $75 for international outbound transfers, ACH transfers are much more cost-efficient. 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 money to move from one account to another, then another few days for the transfer to clear.

Are There Any Downsides to ACH Transfers?

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 where you can send money to. For example, they may prohibit international transfers.

Transferring Too Frequently From Savings Could Trigger a Penalty

Savings accounts are governed by Federal Reserve Regulation D, which limits certain types of withdrawals 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 choose to 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. On average, ACH takes 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 35.7%, with a total of 96.7 million payments made in the fourth quarter of 2020.

ACH Transfer Alternatives: 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 address or phone number. The money you send can come from your bank account, credit card, or an in-app balance.

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.

Check the Fees

Most of the time money transfer apps don’t charge a fee to send money to friends and family, but some can charge a processing fee of nearly 3% when you pay with a credit card, so read the fine print.

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.