ACH Payments vs. Wire Transfers - Learn What They Are, and When To Use Each

July 2, 2021

In business, the little things matter. In fact, little things can sometimes turn out to be the biggest factors in your success. Take how you move money around. Making sure your funds circulate smoothly and efficiently will keep your small business operating at its highest level.

In business, the little things matter. In fact, little things can sometimes turn out to be the biggest factors in your success.

This dynamic adds weight to a very specific question: should you use ACH payments or wire transfers?

Setting an appropriate policy can make a tangible difference to your operations. As a small business owner, you need to move money around cheaply and efficiently. Customers, vendors, and employees all count on your ability to get cash to the right account at the right time. Meanwhile, your bottom line depends on being able to complete your necessary financial transactions at the lowest possible cost.

There is no single answer to the question. ACH payments and wire transfers both exist because each method suits specific situations.

That’s why it’s important to learn the pros and cons for each method for processing transactions. Here, we'll give you the details you need to set your payments policy. You'll learn which payment types are right for which transactions.

What is an ACH payment?

ACH stands for "Automated Clearing House." These electronic payments automatically move funds from your checking account to another bank account. However, to accomplish this, the money moves through a clearing house, rather than directly between accounts.

ACH represents a popular way to send money. According to Nacha, the ACH network saw a volume of 7.1 billion payments in the first quarter of 2021, valued at $17.3 trillion.

What is a wire transfer?

In a wire transfer, your bank connects directly with the bank of the party on the other side of the transaction. Consider a direct connection, moving money from your account to theirs.

The total amount of money moved around via wire transfer counts in the quadrillions of dollars each year. Just to give you a taste of the numbers involved, the Fedwire system, a secure gross settlement system operated by the Federal Reserve, showed a volume of more than $840 trillion in 2020. And that's just one of the systems used around the world.

What is the difference between an ACH payment and a wire transfer?

From a technical point of view, an ACH payment travels through a clearing house (hence the name). Meanwhile, wire transfers move directly from bank to bank.

Imagine you're trying to send a package to someone. If you use a delivery service - like UPS, the Post Office, or FedEx - you'll hand your package to a company employee and they will throw it together with a bunch of other merchandise going to roughly the same place. The package will travel via plane or truck to a distribution point, packed together with other items. Eventually, it will end up at its specific destination, but it travels most of the distance in a big bundle with other, unrelated deliveries.

Now picture the process without a delivery service involved. You decide to hand-deliver your package. You put it on your lap while you travel to your destination personally. There, you give it to the other party yourself.

The first scenario approximates an ACH transfer. The second version is more like a wire transfer.

The ACH process bundles your transfer with a bunch of others and delivers them all as a group. Then, they are individuated and sent to the particular bank accounts.

A wire transfer is a one-to-one event. The banks specially create the transaction to send your funds and your funds alone.

What are the principal uses of ACH payments and wire transfers?

To understand which payment method makes the most sense in a given situation, let's look at some of the pros and cons of each system. By comparing ACH to wire transfers, you can see what circumstances lend themselves to a particular payment type.

ACH payments are cheaper.

Because of the way the transactions operate, the ACH method costs much less. Let's return to the package-delivery metaphor. Think how much cheaper it is to ship via the Post Office, compared to hand-delivering every package you send. This same dynamic makes ACH the more economical choice.

Wire transfer costs usually exist as a flat fee. As a result, using this technique for small amounts will lead to a large percentage expense. Because of this structure, wire transfers make more sense for large payments.

Wire transfers take less time.

Once the wire transfer happens, it happens instantaneously. It may take a little time to set up, but the transaction itself happens immediately.

Meanwhile, ACH transfers can take a little time, typically 1-3 days. Also, the amount of time is variable, depending on the particular situation. A payment that took a day this month could take three days next month, for reasons that have nothing to do with you.

As a result, wire transfers are better if you're facing a deadline. If money has to get to a party before a particular time (to fulfill a contract provision or avoid a penalty, for instance), you'll have more peace of mind paying a little extra for the wire transfer.

Wire transfers are slightly safer for the recipient.

Wire transfers can't be reversed. That's good news for the recipient. If you get a wire transfer, you have absolute confidence that the transaction has closed. You've got your money.

On the other hand, an ACH payment can bounce, much like a check. It can seem like you've received your money, only to have the transfer reversed for insufficient funds. Also, in some cases, the sender can reverse the transaction.

Don't use wire transfers if you don't know or don't trust the recipient.

Because wire transfers can't be reversed, it can open the door to problems for the sender. If you become the victim of fraud, you don't have much leverage to get your money back. That makes the wire transfer an inferior choice if you don't know the party receiving the funds.

Which payment types are best for which transactions?

Now that you've learned some of the pros and cons, we can summarize the best uses of ACH versus a wire transfer. Here are the main strengths and weaknesses of each:

When to use ACH payments

ACH provides the perfect method for small, routine transactions. It's cheap, easy, and convenient. This makes it the go-to selection for most day-to-day payments.

The time lag can cause a problem, though, so it might not work when you have a specific looming deadline. Also, it isn't ideal when you are receiving payments from a party you don't know or don't trust.

When to use a wire transfer

Because of the cost and hassle of sending a wire, you probably want to skip this method for most mundane transfers. However, it represents the perfect choice for large amounts or in cases where the money absolutely has to get there by a deadline.

Similarly, if you want the highest level of security when receiving funds, turn to a wire transfer. However, if someone you don't know insists on a wire transfer, it may be a red flag. You won't have much recourse once you send the wire.

Know Your Transfer Options

Choosing between ACH and a wire transfer may seem like a humdrum decision. However, it can make a big difference over time. By understanding the right choice for a particular circumstance, you can maximize your financial resources and optimize your security.

By understanding the right [payment method] for a particular circumstance, you can maximize your financial resources and optimize your security.

There are pros and cons to both methods. Using this guide, you'll have a head start learning when to process money via ACH payments and when to turn to wire transfers.