Banking 101: How ACH Transfers Work

ACH transfers let you send or receive money via your bank accounts. Whether you’re paying bills online, receiving your paycheck via direct deposit or using Venmo to pay back a friend from your checking account, money is moving from one bank account to another via ACH transfer.

ACH transfers are generally available within one to two business days and are facilitated by a payment system called the Automated Clearinghouse system. This electronic funds transfer network is one of the key components of the U.S. banking system.

What is an ACH transfer and how does it work?

An ACH transfer is exactly what it sounds like — a transfer of money between two different U.S. bank accounts. The system eliminates the need for paper checks, and makes funds available relatively quickly. It’s a popular service that streamlines everything from online bill pay to receiving money that’s owed to you.

ACH transfers fall into one of two categories: debit transactions and credit transactions. If, for instance, you put your car payment on auto-pay, you’re participating in a recurring ACH debit transaction where the lender pulls money directly from your bank account on a monthly basis. ACH credit transactions, on the other hand, allow you to receive money from another bank account; like when your employer drops your paycheck into your checking account each pay period.

Not to get too in the weeds with the technical stuff, here’s a glimpse into how an ACH transfer actually works in real life. Let’s pretend you’re paying your student loan using an ACH debit transaction.

1. After you finalize your online bill payment, your bank logs the transfer and sends payment to an ACH operator. This is the clearing house that settles up these types of transactions.
2. Your student loan servicer’s bank account is then credited and the transaction is settled, usually within one business day. (FYI, it can take up to two business days to wrap up a credit transaction.)

What are ACH transfers used for?

ACH transfers come in handy for a number of uses, such as:

• Paying bills
• Receiving direct deposits from your employer
• Bank-to-bank transfers

The last one may not be the first thing that comes to mind, but it’s worth your attention. Bank-to-bank transfers are critical for those using online banks. It’s the primary way of making deposits and withdrawals to and from online savings accounts. In other words, you want it to be relatively easy to transfer funds between your online accounts and traditional checking or savings accounts opened at a brick-and-mortar bank.

But not all online banks are created equal. When opening an online account, be sure to get clarification on how ACH-friendly they are. Do they charge a fee for this service? And how long does it generally take to complete a transfer?

Initiating ACH transfers with an online bank also requires you to connect your external accounts so that you can move money in and out freely, in a process known as linking. You’ll need the bank routing number and account number for the external account you wish to link to your online accounts.

From there, trial deposits are sent to that external account, which you then have to verify. It’s a roundabout way of proving to the internet bank that the external account is indeed yours.

How long does an ACH transfer take?

It depends on whether you’re moving money out of your account or receiving money into it. Debit transactions typically take one business day to settle, while credit transactions generally take one to two business days.

This is because money doesn’t move directly from one account to another. Instead, clearing houses act as the middle men that facilitate transactions. The Clearing House and the Federal Reserve are the two main ACH processors, and they stick to a schedule for processing debit and credit transmissions. Banks follow this schedule, batching up ACH transactions and transmitting them to the clearing houses at prearranged times throughout the business day.

If, say, your ACH transfer comes in right after one of these transmittal period ends, your transaction will be delayed until the next one. Same-day ACH transfers may also be possible, but financial institutions usually charge a fee for this. (More on this in a moment.)

How much does an ACH transfer cost?

It depends on the financial institution, but ACH debit transactions are typically free. You can, however, expect to be hit with a fee if you’re expediting the process and opting for a same-day transfer. Fees and protocols range depending on your bank. For example, First Citizens Bank does not charge extra if you’re receiving a same-day ACH transaction, but does tack on a $1 fee for each transaction you originate.

One other scenario that may cost you is setting up external transfers — such as moving money from one bank account to an account at another bank, which is sometimes called an external transfer. The fee will depend on your bank. U.S. Bank, for instance, says they do charge for outbound external transfers, but doesn’t specify how much. This isn’t necessarily the norm, though: banks like Ally Bank charge nothing for external transfers.

How businesses, government agencies utilize ACH transfers

ACH transfers come in handy if you receive any type of government or Social Security benefits, which can be directly deposited into your checking account. The IRS also uses ACH transfers to dole out income tax refunds.

Many businesses find ACH transfers convenient for a number of reasons. Not only do they streamline the payroll process, making for easy record keeping when paying employees — ACH transfers also make it simple to pay vendors for business-related expenses. No paper, no postage.

On the receiving end, ACH transfers provide customers with a no-fuss option for making payments. This is especially true for those who set up auto-pay: set it, and forget it.

Wire transfers vs. ACH transfers

Both wire transfers and ACH transfers have their pros and cons. Perhaps the greatest advantage of a wire transfer is that funds are available in a matter of hours, and sometimes even sooner. This eliminates the lag time you’ll typically experience with ACH transfers — but they don’t always come cheap. How much you’ll pay depends on your bank, but typical rates range anywhere from $15 to $35.

ACH transfers come with drawbacks of their own. In addition to having to wait one to two days for the transfer to settle, you may also be limited when it comes to how much money you can transfer (this does depend on your financial institution). NACHA, which runs ACH transfers, caps individual transactions at $25,000 per day.

One other restriction has to do with withdrawals from savings accounts. Legally speaking, banks are not allowed to process more than six ACH debit transfers from a single savings account per month, so exceeding this limit may trigger additional fees.

If you’re torn between a wire transfer and an ACH transfer, weigh the advantages and downsides of each before settling on the best one for your situation.

ACH transfer alternatives

ACH transfers make a lot of sense for businesses, consumers and government agencies, but they aren’t the only option. There are a number of alternatives out there that allow you to easily move money to and from other bank accounts; ideal for paying friends and family (or receiving funds from them). These intermediaries are super quick, settling transactions almost in real time.

Zelle

Many banks — including Chase, Citi and Bank of America — have partnered with Zelle to enable near-instant money transfers, often through the bank’s app. This makes it incredibly easy to pay everyone from the babysitter to the dog walker. Zelle makes the funds available now, then finalizes the transfer later via the ACH network. The kicker is that it’s generally free, unless your bank charges for it.

PayPal

Chances are you’re already using PayPal. The platform boasts 286 million active accounts worldwide. You accumulate funds in your PayPal digital wallet, and when you’re ready to transfer them out to your bank account, a few quick clicks will start the ACH transfer process.

The funds take one to two business days to become available, but the service is free — though you could opt for same-day availability. PayPal charges a 1 percent fee per transfer up to $10. You can also pay other people and businesses directly from your PayPal wallet. Warning: PayPal does charge for some of its services.

Venmo (owned by PayPal) uses the same idea, but integrates a social feed where users can like and share purchases and payments.

The bottom line on ACH transfers

An ACH transfer is a convenient and relatively quick way to move money from one bank account to another. This streamlines everything from paying bills to receiving your paycheck. There are a lot of options at your fingertips, and not all of them are free, so be sure to do your homework — especially where bank-to-bank transfers are concerned.