With more than one billion Same Day ACH transfers expected in 2024 and billions of EFT transfers expected annually, electronic money transfers show no signs of slowing down. For businesses, electronically sending and receiving money is essential to maintain operations. Whether receiving payment for services or sending money to a vendor to order stock, it's essential to have cost-effective and efficient payment options available to your company.
If you're researching electronic payment options, you've likely encountered the terms ACH transfers, EFTs, and wire transfers. These terms refer to various electronic money transfer options.
This guide explores EFTs, ACH transfers, wire transfers, how they differ, which options are best for your business, and a range of related topics. Read ahead to uncover all the details you need to know about electronic money transfers!
What is an Electronic Funds Transfer (EFT)?
An electronic funds transfer (EFT) refers to any type of electronic money transfer. EFTs are processed through electronic networks, ensuring secure and efficient transfers without needing physical money exchange. Examples include ACH transfers, wire transfers, debit card payments, peer-to-peer money transfers, and more. As cash payments grow rarer and cross-border transactions increase in frequency, the need for electronic money transfers is ever-present for modern businesses. We'll explore each type of EFT in more detail later in this guide.
How do EFTs Work?
How EFTs work varies depending on the type of EFT. For example, ACH payments work by electronically transferring funds between bank accounts through the National Automated Clearing House Association. The process involves the sender initiating a transaction, which is then batched and processed by an ACH operator who forwards it to the recipient's bank for completion. The recipient's bank credits the funds to the recipient's account, typically within one to three business days.
On the other hand, peer-to-peer money transfers, such as Venmo or Cash App, allow users to transfer funds directly to another person's account via a mobile app. Users link their bank accounts or credit cards to the app, enter the recipient's information, and specify the payment amount, which is then transferred instantly or within a few minutes. The recipient can either keep the funds in the app's balance for future transactions or transfer them to their bank account.
Types of EFTs
With various EFTs available to consumers and businesses, it's essential to understand the different options. Let's explore the five primary types below:
- Wire Transfer: A wire transfer is an electronic method of transferring money between banks or credit unions. The sender's bank transmits the payment details to the recipient's bank, ensuring funds are transferred accurately and efficiently, typically within one business day. The method for wire transfers can vary. For example, domestic wire transfers usually use the Fedwire platform to transfer money, while international wire transfers use other platforms (such as SWIFT).
- ACH Transfer: An ACH transfer is a money transfer using the NACHA network. This is a common type of domestic money transfer in the United States (it's not available for international transactions). While traditional ACH transfers take one to three days, the Same Day ACH network now offers on-the-day transactions. With ACH payments, transfers are grouped into batches and settled at various times throughout the day.
- Peer-to-Peer Money Transfers: Peer-to-peer money transfers are third-party money transfer services that allow individuals to transfer money between each other or to businesses. Examples of peer-to-peer money transfer services include PayPal, Venmo, Cash App, and more.
- Debit Card Transactions: When people hear the term "EFT," they usually think of wire transfers, ACH transfers, and peer-to-peer transfers, but debit card transactions also fall into this category. When you spend money with a debit card, your bank electronically deducts it from your bank account and sends it to the recipient.
- ATM Transactions: Lastly, another type of EFT payment is ATM withdrawals. When you withdraw cash from an ATM, money is electronically deducted from your bank account and dispersed to you as cash.
What is an Automated Clearing House (ACH) Transfer?
Automated Clearing House transfers, or ACH transfers, are a popular form of electronic money transfer for domestic payments in the United States. Despite challenges from other money transfer platforms, the ACH network continues to experience significant growth. In 2000, the network was responsible for less than $20 trillion in payments annually, and by 2021, the figure had grown to over $100 trillion. ACH transfers use the National Automated Clearing House Association, or NACHA, to process payments. NACHA groups payments together in batches, which keeps costs low for banks involved in the money transfer process.
One drawback of ACH payments was that they took one to three business days to enter the recipient's account. However, with the introduction of the Same Day ACH program in 2016, businesses and individuals can now access same-day money transfers via the ACH network.
How do ACH Transfers Work?
Understanding how ACH transfers work makes it easier to decide if it's a viable option for your business. But first, it's essential to overview the two types of ACH transfers:
- ACH Debits: With ACH debits, funds are removed from an account. For example, if you sign up for a business's subscription service, the business may initiate an ACH debit each month when your recurring subscription fees are due.
- ACH Credits: With ACH credits, funds are pushed into an account. For example, if you send an invoice to a customer and they pay using an ACH transfer, an ACH credit will appear in your business bank account.
Now that we understand the two types of ACH transfers, it's time to explore the ACH transfer process in more detail:
- Step 1: A sender initiates an ACH transfer. This initiation process may be a one-time payment or a recurring payment (such as payroll, automatic bill, etc.).
- Step 2: The sender's bank sends the transfer to the National Automated Clearing House Association (NACHA).
- Step 3: NACHA groups transfers together in batches and prepares to send them to recipient banks at a pre-determined processing time. The batching process makes ACH transfer costs cheaper than sending individual transactions.
- Step 4: The recipient's bank receives the transfer and credits the recipient's account with the funds.
What is a Wire Transfer?
A wire transfer is an EFT designed to send money domestically and internationally. Unlike ACH transfers, which group payments together in batches, wire transfers send money directly from the sender's bank account to the recipient's bank account. The intermediary for wire transfers varies depending on the type of transfer. For example, domestic wire transfers typically use Fedwire to process payments, while overseas wire transfers often use the SWIFT payment network.
How Do Wire Transfers Work?
To initiate a wire transfer, the sender uses their bank or a third-party money-wiring service to set up a transaction. The sender will need to enter the following details to send the funds:
- The payment amount
- The sender's bank account number
- The receiver's contact details, such as name, phone number, and address
- The receiver's routing number and bank account number
With speed being a critical factor in digital payments, you may wonder: How long do wire transfers take? The answer depends on whether the transfer is domestic or international. Most domestic wire transfers settle within one business day (however, if you process a wire transfer on a Friday evening, it may not clear until the following week). However, international wire transfers take anywhere between one and five business days, so expect to wait a bit longer if you're receiving a transfer from overseas.
Wire vs Electronic Transfers: How are They Different?
Since wire transfers are a type of electronic funds transfer, there is no difference between the two. However, while all wire transfers are electronic funds transfers, not all electronic funds transfers are wire transfers. Other electronic funds transfers include ACH payments, peer-to-peer payments, debit card payments, and ATM withdrawals.
ACH vs Wire Transfers: Key Differences
Before you decide whether to use ACH or wire transfers within your business, it's critical to understand the major differences. Let's explore the five primary distinctions:
Network
The first major difference between ACH transfers and wire transfers is the network used for the transactions. ACH transfers use the National Automated Clearing House Association (NACHA) network, while wire transfers use Fedwire and other platforms.
Geographic Restrictions
ACH transfers are popular for domestic transfers but don't work if you need to send money overseas. On the other hand, wire transfers work for domestic and international transfers, making them a more versatile payment option if your business has overseas customers or vendors.
Speed
Traditionally, wire transfers are quicker than ACH transfers. In many cases, wire transfers settle within one business day. However, in 2016, the National Automated Clearing House Association introduced the Same Day ACH network, which batches payments for same-day transfers. This means there's now a much quicker ACH option available to businesses (for a premium).
Batching
ACH transfers operate by grouping multiple payments into batches. These batches are processed and cleared at scheduled intervals throughout the day rather than individually. This means that payments initiated through ACH are not handled in real time but are accumulated and processed together at specific times. In contrast, wire transfers are processed individually and in real-time, allowing for quicker settlement without waiting for a batch processing schedule.
Cost
Traditionally, wire transfers are much more expensive than ACH transfers. Domestically, wire transfers may cost up to $35, and this price can reach $50 for some international transfers. On the other hand, many ACH transfers are free or extremely low-cost, so they're a much more affordable option.
Closing Thoughts
Effective payment systems are the backbone of your business's cash flow. Now that you understand EFTs, ACH transfers, wire transfers, and other electronic transfer options, it's time to decide which options are best for your business's needs. There's no reason you can't use multiple EFTs within your business. For example, many businesses use ACH transfers for payroll and wire transfers to send money to overseas vendors.
However, it's also critical to accept credit card payments and other types of digital money transfers. By working with a reputable payment processor, you can access a full stack of payment tools for your business. It's never been easier to access quick, affordable payments for your business!
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