Are you tired of hearing “The check is in the mail”? You’re not alone, which is why a majority of businesses now opt for electronic payments over checks, according to the Association for Finance Professionals (AFP). The advantages are clear: electronic payments are safer, faster, and less expensive.
Such payments generally fall into two categories: automated clearing house (ACH) payments and wire transfers. Which is better for your company? Let’s take a look at each method, along with its advantages and disadvantages.
Often referred to as direct deposit or direct payment, an ACH payment happens when one bank sends funds to another using the Automated Clearing House (ACH) Network, which connects all U.S. financial institutions. Businesses use ACH to pay supplier invoices, bills, and other expenses, as well as to receive payments from customers.
Managed by the nonprofit National Automated Clearing House Association (Nacha), the ACH network automatically “batches” and distributes daily payments to banks, which then log them to the proper account.
ACH transfers are becoming increasingly common. In 2000, the ACH Network processed 4.8 billion payments worth around $12 billion, but within two decades, those numbers had skyrocketed: in 2019, the ACH Network processed 24.7 billion payments worth $55.8 trillion, the fifth consecutive year in which it added more than 1 billion new payments.
ACH Payments: The Pros and Cons
The benefits of ACH payments are numerous, but there are some disadvantages. Let’s look at both.
Making or accepting ACH payments is typically much less expensive than wire transfers or credit cards. For businesses, transaction charges are usually less than $1 per payment. The AFP found that the median internal cost for sending and receiving ACH payments is $0.29. Moreover, the more transactions you process, the lower the cost to your business.
Because they pass through clearinghouses that enforce rules and regulations, ACH transactions are more secure than wire transfers. And unlike a paper check that passes through several hands, ACH transactions transfer money directly between accounts, keeping account numbers confidential. If there’s fraud or a mistake, most payment processors will reverse the charges. A wire transfer can’t be reversed.
Efficient for High Transaction Volumes
If your business processes a high volume of B2B payments, ACH transactions are the best choice, because you’ll pay less per transaction. That’s why ACH is less expensive and more efficient than wire transfers for costs such as salaries, bills, and supplier invoices.
One major drawback of ACH transactions is that the ACH network is only available in the United States. There’s no “global” ACH standard. If you want to send funds to a non-U.S. supplier but don’t want to incur high wire transfer fees, you’ll have to use an “ACH-like” network in that country, such as the Single Euro Payments Area (SEPA) in Europe.
ACH transfers are automatic, but they’re not instantaneous: they may not reach a vendor for one to three business days. This is because banks and clearinghouses process ACH payments in batches at set times of the day. However, Nacha passed an operating rule in September 2019 that makes some payments eligible for same-day funds availability (known as “same-day ACH”).
Wire Transfer Overview
Think about a wire transfer as an electronic cashier’s check that immediately—and securely--transfers funds from the sender’s bank account to the recipient’s. Wire transfers are often required for large transactions like the purchase of commercial real estate or for sending money internationally.
Wire transfer speeds are generally much faster than ACH payments; depending on the originating bank’s cut-off time for same-business-day wires, funds must be immediately available within 24 hours once they arrive in the recipient’s account. Banks remove money from the sender’s account while they process the request, and recipients can withdraw the funds as soon as they’re credited to their account.
U.S. businesses can use wire transfers to banks outside the United States, although international transfers may take a day or two longer than domestic wires. Also, wire transfers generally aren’t subject to the cross-border payment limitations that ACH transactions are.
Wire transfers are more secure than paper checks, because the sender must already have funds to cover the payment in their account, but they aren’t as safe as ACH transactions. If you’re sending a wire transfer, make sure you’ve verified the recipient and their banking details, because wire transfers can’t be reversed. Fraudsters have posed as legitimate recipients to get unsuspecting AP departments to transfer funds to the scammer’s bank account.
Wire transfers are much more expensive than ACH payments, making them impractical for high volumes of transactions. Banks often charge fees of between $25 and $30 for domestic wire transfers, and between $45 and $50 for international transfers. Your bank might not charge you to receive a wire transfer, but some charge as much as $20.
How to Choose Between ACH and Wire Transfers
ACH payments are the right choice for most B2B payments, especially periodic or recurring payments. Their batch processing and low fees make ACH transactions highly efficient and cost-effective. The advent of same-day ACH payments is making this form of payment even more attractive.
However, you might consider using—or in some situations, be required to use—wire transfers when you need to ensure that the fast delivery of a single large payment for domestic transactions such as commercial real estate or M&A payments, or for sizable international payments.
Simplifying ACH Transactions
If your business wants to use ACH to send B2B payments to vendors, suppliers, or employees within the United States, automated payment solutions such as Routable can simplify the process, allowing you to receive bills or invoices electronically by email, manual PDF uploads, or batch processing from another system, then get them approved and paid quickly.
Routable gives you the flexibility to set your ACH transaction limits (up to predetermined amounts). Routable also supports same-day ACH transactions up to the U.S. federal government’s current limit of $25,000, as well as next day transfers.