Here’s a scenario: You’re at the coffee shop and you need to pay for your order, so you reach for…what, exactly? More and more consumers opt for non-cash transactions / electronic payments and just wave their phones with Apple Pay, Google Pay, PayPal, Venmo, or some other e-wallet. Credit cards and debit cards are losing ground, cash is definitely no longer king (at the cash register, anyway), and as for checks, well, do you even know where your checkbook is, or if you even have one?
Even though real-time electronic payments are growing exponentially in the consumer world for retail, services, and other bill payments, too many businesses are still mired in cutting and mailing checks for B2B payments. This is surprising considering that two electronic funds transfer (EFT) options have been around a long time – ACH and wire transfers. In this age of digital transformation and an increasingly paperless accounts payable process, it’s worth exploring the differences and benefits of ACH (automated clearing house) and wire transfers a little deeper.
What is Electronic Funds Transfer (EFT)?
Electronic Funds Transfer (EFT) is a blanket term that encompasses financial processes related to the transfer of funds from the payer’s bank to the recipient’s bank (or credit union or other financial institution) without the need for paper checks or cashier’s checks.
These money transfer services are all done electronically, and include a range of different payment options: ACH transactions, direct deposit (such as payroll), domestic wire and international wire transfers, corporate credit and debit cards, echecks, online bill pay, online banking, etc.
Importantly, electronic transfers are critical for an optimized accounts payable (AP) process. That’s because manual payments are not only inefficient, but costly, error prone, slow, and a source of risk in an interconnected global economy where a wide range of payment systems, regulatory frameworks, and security issues exist.
As AP departments — and enterprises as a whole — digitize processes, integrated electronic payment options like EFT transactions will replace traditional paper-based components like bill statements, invoicing, receipts, and checks. Leveraging global digital networks and EFT options makes complete sense because of their convenience, efficiency, and security.
Let’s look at two in more detail — ACH processing and wire transfers.
Source: Levvel Research 2019 Electronic Payments and Working Capital Insight Report
Two common options for EFT payments
Automated Clearing House (ACH) Payment Transfer
The ACH, or automated clearing house, banking network is a payment system between banks, the Federal Reserve, Credit Unions, and other financial institutions governed by the National Automated Clearing House Association, or Nacha. The ACH Network payment system enables safe, fast direct deposits and direct payments with the capability to reach all bank and credit union accounts within the U.S. using bank routing numbers (International payments are generally routed through wire transfers or SWIFT, the international financial network).
Simply put, ACH bank transfers are a fast, efficient, and cost-effective (free or a small fee) way to move funds between a sender’s bank account (the “originator”) and a recipient’s bank account number (the “receiver”), and a popular choice for mid-market and small businesses. Banks / financial institutions use batch processing for funds transfer, grouping ACH transactions together and transferring them three times each business day.
Basic ACH Process:
- The initial approval for an ACH transfer starts at the sender’s bank
- Funds are then sent to the central Automated Clearing House network
- If the transaction is approved, the funds are then posted to the receiving bank and deposited in the appropriate bank account
The ability to make and accept automated clearing house payments is best practice at any time, but the capability is critical during periods of business disruption. After all, if workforces are remote, getting vendor payments out through the banks and through the ACH system is not only safer and faster, it may be the only option when there is no office access, check writing ability, or mailroom.
Wire transfers and automated clearing house transfers are two completely different payment types, despite the terms being confused or even interchanged quite often. Wire transfers have been around since the days of the Pony Express — the first wire transfer service was started by Western Union in 1872. The biggest difference between the two transactions is that while ACH transfers work through an intermediary service — hence the term “clearing house,” wire transfers do not.
Because wires work directly between different banks, transfer speeds are faster than ACH debits — normally one business day — and can be used for international payments. The downside is that wire transfer fees are more expensive, which is why they are most often used for significant one-time transactions rather than recurring payments, such as the down payment on a real estate purchase. Here’s a comparison:
ACH vs. Wire Transfers:
- ACH transfers are often free or have a small fee; wire transfers run $10 to $50 depending on where the payment is going — international transfers cost more
- ACH transfers can be reversed, but wire transfers are an immediate form of verified payment and can’t be reversed (which is why they’re used for scams)
- ACH and wire transfers are both fast, but bank wires are usually quicker — anywhere from immediate payment to a few days for international
The upshot is, wire transfers are a quick, convenient way to transfer money between financial institutions (as well as non-bank services), and are ideal for making large payments and international transactions.
When should I use a wire transfer and when should I use an ACH payment service?
Because there are differences between ACH and wire transfers — even though both move funds between financial providers — deciding which is the best option to use depends on the amount, frequency, destination, and other particulars of each payment. Let’s examine some criteria:
Payment Transfer Speed
Generally, when making payments, time is of the essence. ACH transfers have traditionally taken one to three days to process because of the need for batch transfers and reviews, but ACH services are starting to accelerate to make funds available more quickly. Some transfers are integrating same-day or next-day ACH processing. For accounts payable and finance departments, this is a very positive development in optimizing cash flow.
Wire transfer processing is nearly instantaneous, and funds are available in the receiving account the same or next day, though some international transfers take longer. This super-fast processing speed comes at a price, however, so reserving wire transfers for out-of-the-ordinary high amounts or urgent transactions is a prudent strategy.
Payment Processing Safety
It stands to reason that the more oversight involved in a process, the more security there is. In that regard, ACH is ahead of wire transfers because of transactions pass through clearing houses, and have to run a bigger gauntlet of reviews, regulations, and oversight. In short, there are more opportunities to catch errors. In addition, if there is some sort of error or perception of fraud, ACH transfers can be reversed.
That’s not to say wire transfers aren’t secure; they definitely are, and much safer than paper checks, like cashier’s checks. Anything involving paper manual processes can be considered susceptible to fraud or misuse. Wire transfers between banking institutions must confirm the sender’s and recipient’s banking details — the routing and account numbers, making them secure.
Banks often put limits on how much can be moved out of (or in to) accounts on a per-day and per-month basis. That means ACH transfers have to adhere to those – often strict – amounts. This is something that AP, Treasury, and Finance teams need to be aware of in payment planning in order to avoid late payment penalties, missed early payment discounts, and other contract and payment terms. Individual financial institutions also set different fee schedules and cut-off times in addition to transfer amounts for ACH and wire transfers, which should be factored into the choice of which method is used.
Initiating ACH payments and wire transfers is a process that generally is specific to each bank. Some financial institutions enable payments to be set up online, others require form submission, and some have a verbal acknowledgement policy which involves a phone call recording to capture the sender’s consent to transfer funds. This last is usually only used for wire transfers, but again, it’s critical to know the exact process so you don’t run into unnecessary delays.
Source: Levvel Research 2019 Electronic Payments and Working Capital Insight Report
How EFT and ePayment solutions can help improve your business
Electronic funds transfer / EFT, whether automated clearing house (ACH), wire transfer, or other method, provides a host of advantages over manual and paper-based payments processes in terms of speed, cost, security, and visibility. They also go a long way toward eliminating payment fraud and other risks from paper-based methods. As discussed in other articles, paying third parties faster and more accurately leads to better relationships, can capture savings opportunities from early payments, and helps manage cash flow.
To truly transform and leverage a digital payments process, organizations have to integrate advanced ePayments solution technology that centralizes payables processes and methods. A plus for AP, Finance and IT departments is that ePayments technology adoption is higher than most other types of solutions because it’s easier and less complicated to shift processes. Just as EFT payments replace all the downsides of manual processes, an advanced ePayment software solution automates much of the payments process while consolidating and streamlining vendor payment and cash management, increases data integrity, and provides capabilities to maximize risk management and compliance.
By offering access to a variety of EFT payment types to suit the specific needs of an enterprise — especially ACH and wire transfers — ePayments improves the efficiency and effectiveness of AP processes to maintain optimized cash flow and control costs. In other words, ePayments solutions tools simplify payment processing and improve working capital management to improve bottom line results.
See how much faster and easier your payments can be when you eliminate manual processes, contact us.