Electronic Money Movement, Part 1 – ACH vs. Wire Transfer

Electronic Money Movement (or EMM) is a hot topic in today’s tech-savvy world. It can be used for personal and business purposes; there are apps and even currencies that dive into this world. We can go down different rabbit holes at any point. But, for the purpose of this article, we are going to keep it high-level and focus on the major EMM options for small businesses.

Today we are going to look at ACH payments vs. wire transfers.  We will look at electronic ways to pay bills through electronic bill payment vs. credit card payments in Part Two. 

Automated Clearing House (ACH)

ACH stands for Automated Clearing House and it is the most common type of EMM used by small businesses today. ACH allows you to transfer funds directly from one account to another within a specific time frame (generally 24 to 48 hours). You can also use ACH transfers as a payment method, allowing customers to pay you directly through your bank account instead of with cash or check.

Some common situations when a business may use ACH payments include:

• Replacing the use of checks
  
• Paying a vendor (especially on a regular basis)
  
• Paying employees (very similar to Direct Deposit)
  
• Sending smaller amounts of money than what you may use a wire for
  
• Tax payments

Some of the benefits of ACH are:

• An Audit Trail
  • You can track the money movement and research information such as who sent the money, when it was sent and when it was received.
    
• Reducing Check Fraud
  • Since a check is not being cut, you are reducing the risk of checks being stolen or forged, as well as exposing your bank account information.
    
• Cash Flow
  • Money is deducted from your account at the time it is sent, so you know exactly how much money you have in your bank account.
    
  • Bills can be scheduled to go out at a certain time and are paid when they are due vs. sending a paper check and balancing the outstanding funds while you wait for the vendor to deposit the check (talk to us about how this can help your company).
    
• ACH payments can be easier to recall than a wire.
  
• Typically, there is no cost to the recipient to receive the funds via ACH (as there may be with a wire) – but check with your bank.

Wire Transfers

A wire transfer allows you to send funds directly from one bank account to another. Wires are typically used when larger amounts of money need to be transferred quickly between two accounts – such as international wire transfers or business-to-business transfers that require immediate access to funds. While wires are typically faster than ACH payments, they also have higher fees. Wire transfers also have a cut-off time in order to be sent and received on the same day; if you miss the cut-off time, the wire typically goes out the next business day.

Some common situations when a business may use wire transfers:

• Immediate need for funds transfer
  
• Large payment
  
• International payment, or sending money in a different currency
  
• One-time, or infrequent, payment

A few of the benefits of wire transfers are similar to ACH payments – wires also have the same core benefits (audit, fraud, and cash flow), as well as a few additional ones:

• An Audit Trail
  • If sending a wire via your bank, access to send wires is typically limited to Signers on the account or specific access.
    
• Reduction In Check Fraud Risk
  • Wires are usually used for large amounts of money; exposing a large check can be a security issue.
    
• Cash Flow
  • Money is available quickly to the Recipient (person receiving the funds).
    
  • The Sender has money deducted almost immediately.

• Wire can be the quickest way to transfer funds.
  
• Some banks have a limit of free or discounted wires (depending on the account and bank – speak to your bank).

An important side note about wires (coming from an ex-banker): It is important for the Sender to be comfortable with sending the funds to the Recipient. Once funds are sent, it can be very difficult to recall or withdraw the wire. Inputting incorrect account information could send a wire into the wrong account.

Also, because of the difficulty with wire recall, this form of funds transfer has become a preferred way for fraudsters to receive money. So, while businesses should still utilize wires as a way to send money, be sure to have a policy around sending wires.  Best practices include calling to confirm the account information of the recipient (instead of only using email to provide the account info) or having an internal wire verification process to confirm and send wires. Regardless, be vigilant.

Overall, using electronic forms of payment allows a company to have more control of their money coming in and going out.  You can collect faster, and pay quicker.  ACH payments are typically more forgiving and while wires used to be the only way to send funds electronically, the world has opened up to other options.  Ideally, you will want to encourage your vendors and customers to allow payments via ACH Payments whenever possible. 

Check out our Part 2 for more on how you can pay bills electronically. 

Have more questions or want to brainstorm? We can help!