Making effective use of the different payments available for businesses can lead to more efficient cash management, better security, and more opportunities to take advantage of trade discounts. A common question we get in Treasury Management is, “Should I pay by an Automated Clearing House (ACH) payment or a wire transfer?”
The answer is: it depends. Both ACH and wire transfers have advantages and disadvantages. Let’s look at them across six key categories.
Direction and Destination
Wire transfers are one-way payments to any bank in the world. One party is the originator and they contract with their bank to send money to an account holder at another bank. While ACH payments are domestic only, they can go both ways: in addition to sending funds, the originator can originate a debit transaction by ACH that will take money from another party and simultaneously move the funds into the originator’s bank account. Transactions such as health club dues and collecting accounts receivable are common ACH debit transactions.
Transactional speed is a major differentiating factor between ACH payments and wire transfers. ACH transactions are processed through a clearing house and are known as batch transactions, due to the bundling of payment orders. Although there are a growing number of same-day transactions, most ACH payments are settled in a different business day than they are originated. In contrast, wire transfers are individual transactions and occur in real-time. When wire transfers are sent between U.S. domestic banks during business hours, the receiving bank is immediately credited. This is why wire transfers are the best payment method for funds that need to be sent and received immediately.
Finality refers to the guarantee that party receiving the payments can keep the funds. Wires are again the better option when immediate finality is required. The Federal Reserve’s wire service guarantees that the receiving bank has no credit risk when they receive a wire, so most banks treat wire proceeds as they would a cash deposit and make the funds available without delay. Both credit and debit ACH transactions are subject to reversals under the rules of the ACH system, and although there are strict guidelines that need to be followed, ACH transactions do not have the real-time certainty of wire transfers. This guarantee makes wire transfers the payment of choice for transactions that are not easily unwound, such as a real estate closing.
Both domestic wire transfers and ACH transactions are extremely safe when all parties and the participating banks follow procedures. Both transaction types use the Federal Reserve system and require FDIC-insured banks to send and receive the payments. However, despite the high level of security in the Fed’s payment system, hackers and other criminals are sometimes able to use their “social engineering” skills to convince authorized users at businesses to change payment instructions and send money under false pretenses – money that is often withdrawn from the receiving bank before the fraud is detected. Anyone using ACH or wire transfers should talk to us about how our fraud mitigation tools can reduce the chance of a compromised transaction.
Both wire transfers and ACH payments can be originated by multiple methods, and we’re always striving to provide our business clients a convenient way to make payments with the highest degree of security. In many cases, our business clients originate both types of payments using our secure online banking website. However, the single-payment method of wire transfers requires that each wire is processed and verified as a separate order, and the Federal Reserve sends each wire individually. While we learned above that the batching of ACH transactions makes them a little slower than wires, it also allows multiple ACH transactions to be included in one file and processed once. This means that a payroll file crediting the accounts of, say, 500 employees can be processed as quickly as a file with one employee’s payroll instructions.
Because of the immediate finality and the requirement to send every transaction separately, the Federal Reserve charges banks much more for a wire transfer than an ACH item. Naturally, banks need to recover these costs from the clients who choose to use the more expensive payment methods. For example, the marginal cost of adding an item to an ACH batch file is only $0.05, while a single outgoing domestic wire costs $25, no matter how many are sent. In addition to this significant cost difference in originating a payment, there is also a similar impact on the receiving party. While most banks do not assess a separate fee to a customer who receives a paycheck by direct deposit, for example, the party receiving a wire transfer will be assessed an incoming wire fee, usually $20 and up. Therefore, while a business’s trading partner might appreciate a speedy and guaranteed payment, unless the payment amount is very large, they might prefer to receive an ACH payment rather than a wire transfer.
Please send me an email or contact the Treasury Management department at (855) 256-7328 to discuss your specific payment situation. We would welcome the opportunity to work with you to determine the payment type that best meets your needs.