To put it simply, an ACH transfer moves funds electronically from one bank account to another. The three letters ACH stand for Automated Clearing House, which is a centralized system. You might think of it as Grand Central Station for the electronic distributions of funds. The ACH network could be how your paycheck appears right on schedule in your bank account thanks to direct deposit, and it may be how you send online payments to, say, your WiFi provider.
ACH transfers play an important role in finance today, so here’s a closer look at:
• What ACH transfers are and how they were created
• The pros and cons of ACH transfers
• How secure ACH payments are
• How ACH payments compare to wire transfers.
What Is an ACH Payment?
An ACH transfer is a convenient way to move money around, without using checks, credit cards, or other methods. It enables direct deposits from employers and government benefit programs, bill payments, and external fund transfers. What’s more, ACH transfers fuel person-to-person payments. Such providers as PayPal and Venmo use the ACH network.
As mentioned above, ACH stands for Automated Clearing House. But it’s not a bricks and mortar location. It is a network that financial institutions use to aggregate transactions for processing. This processing is then typically completed three times a day on every business day.
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How Do ACH Payments Work?
Here, you’ll learn a little more about what is ACH, the history of ACH payments, and how they work.
History of ACH
The ACH network began in the late 1960s, when a group of U.S. bankers worried about the increasing number of checks being issued and cashed. They feared that rising numbers of checks would overwhelm the banking system, and they began to explore technological solutions.
• In 1972, an ACH association formed in California to manage electronic banking transactions, with other regional ACH networks forming soon after that.
• In 1974, these regional networks formed NACHA (the nonprofit National Automated Clearing House Association) to oversee and administer the ACH network. This organization creates and enforces how this network works, while the Federal Reserve and The Clearing House actually process the transactions.
• In 1975, the Social Security Administration began testing direct deposit, which led to today’s widespread adoption. Approximately 99% of SSA’s payments are currently completed via direct deposit.
• In 2001, online and phone payments via ACH became available, a key step forward to accelerating and automating banking transactions.
• In the most recent year studied, ACH payments numbered more than 30 billion, and the total dollars transferred exceeded $77 trillion. These figures indicate how big a role ACH transfers play in global finance.
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Categories of ACH
The ACH network processes bank transfers for both direct deposits and direct payments. Direct deposits usually include:
• Paychecks
• Government benefits
• Tax refunds
• Expenses that an employer is reimbursing an employee for
• Annuity payments
• Interest payments.
In terms of direct payments, the ACH network may process other transactions. What is an ach transfer can include:
• Online bill payments from your bank account
• Zelle
• PayPal, Venmo, and other P2P services.
Types of ACH
As you’ve already learned, ACH works both ways: incoming and outgoing payments can be processed via the ACH network.
ACH Credit
An ACH credit occurs when one party sends funds to another entity. A very familiar instance of this would be the way (if you are among the millions who have direct deposit) arrives in your designated bank account on payday. Your employer sent instructions, their bank transmitted funds to yours, and you received your money.
ACH Debit
An ACH debit, as you might expect, moves in the opposite direction. In this case, funds are pulled from one account and processed in batches to get to their destination. In the situation of a direct deposit paycheck, while the employee receives the ACH credit, the employer’s account gets debited.
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What Is an Example of an ACH Payment?
You’ve just gotten the scoop on ACH credits vs. debits, but what is a specific example of an ACH payment? When Social Security payments get deposited in millions of Americans’ bank accounts monthly, that’s the ACH system at work.
Also, if you’ve set up an automated payment of a utility or other recurring bill, that may also be an example of an ACH payment in action.
Benefits of ACH Payments
So now you know what ACH transactions are and how they became so popular. Let’s look at their benefits to your daily life and banking.
• Speed. They are quick and save you time running around with checks and the like. Plus, the transactions themselves can be fast. The transfers are typically completed within one day. There may be ways offered to speed up your payment, often for a fee (such as when PayPal or Venmo offers an instant transfer).
• Convenience. It can be very convenient to have mortgage payments, utility bills, and other payments automatically deducted from a bank account. Or send money to someone via a P2P service. With ACH payments, as we noted, there’s no need to travel to the financial institution to pay the bills or to write a paper check and mail it in.
• Low cost. ACH transfers are typically free and may even actually save you money. For example, a bank may offer a lower rate on a mortgage loan or student loan if you set up an automatic ACH funds transfer for your payments. (An exception may be when a financial institution charges a nominal fee to transfer funds to another bank.)
Downsides of ACH Transfers
There are a few potential disadvantages when it comes to using ACH transfers. Specifically:
• Transaction limits. Some banks will limit how much money you can send by ACH transfer in a specific time period, or they might not accept international ACH transfers.
• Penalties for too many transactions. If you are completing ACH payments from your savings account and that account has a cap on how many withdrawals you can complete per month, you could be penalized.
• Timing matters. Not all banks send ACH transfers at the same time of day — meaning they may have a cut-off time for a transfer to be processed on the next business day. This might cause problems for people needing to pay a bill by a certain due date and/or time.
Security of ACH Transfers
You may wonder whether these electronic transactions are secure. An ACH transfer can in fact be more secure than many other payment methods.
• The reality is that paper checks can always be lost or stolen. With ACH deposits or payments, you only need to provide bank information once, when the automated transaction is set up. Contrast that with writing a check every month and mailing it.
• Regulations exist that protect consumers in the rare case of an electronic funds transfer negatively impacting their bank accounts because of fraud or error.
• ACH payments are very safe because they go through a clearing house that has strict rules about confidentiality of information. In addition, ACH transfers typically have an extremely low rate of error.
ACH Transfers vs. Wire Transfers
When thinking about these kinds of transactions, you may wonder, “What’s the difference between ACH transfers vs. wire transfers?” A wire transfer is another method of electronically transferring funds, which means this system comes with many of the same benefits as ACH transfers bring.
Consider a couple of scenarios that highlight the potential differences:
• Wire transfers may occur within one business day, with funds often available for use the same day. In many cases, though, a bank employee needs to review this largely automated process, so the funds may not be immediately visible in the recipient’s account — and international wire transfers may take more than a day.
• ACH transfers, however, are processed in clearinghouses and banks in batches. The ACH system may sometimes provide same-day transfers and is increasingly moving towards this same-day benefit being available more often.
• In general, a wire transfer cannot be reversed.
• An ACH transfer, though, can be reversed in some situations.
• A last but important point: ACH transfers are often free, while wire transfer fees can cost the person sending it up to $35 or more, and the recipient might have to pay a small fee, too.
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The Takeaway
ACH transfers can speed and smooth your financial life, automatically depositing and withdrawing funds so you don’t have to deal with checks, cards, or the time it takes for money to clear. That’s why they are such a popular way to transfer funds, such as receiving one’s paycheck by direct deposit.
In addition to ACH payments, another way to ensure a smoothly functioning financial life is to partner with a bank account that offers convenient access and the tools you need most.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How long does an ACH transfer take?
ACH transfers typically take a day, but they may take as long as three days.
What is needed for an ACH transfer?
To complete an ACH transfer, the following are needed: the name, routing number, and account number of the destination, whether the account is a business or personal account, and the amount of money to be sent.
How do I set up an ACH payment?
An ACH payment can be set up in a variety of ways. As a consumer vs. a business, you might use a payment app or see what forms of money transfers your bank uses. For instance, many use Zelle. Or you could see if the prospective recipient of your funds (say, a utility company) offers an automated payment system, which might use the ACH network.
Can you send an ACH to a personal account?
Yes, you can send an ACH payment to a personal account. For example, if you use a payment app to send a friend money for your share of a dinner out that they paid for, you would likely be sending an ACH payment.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
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