What is an ACH Transfer and How Does It Work?

Banking Basics

What is an ACH Transfer and How Does It Work?

Moving your money with one tap

Check the apps on your smartphone. If you have installed Venmo, PayPal, or Zelle, you have used ACH transfers, the primary way to move money online in the US. Read on to learn more about it. 

ACH stands for Automated Clearing House, an online network for processing transactions between banks and other financial institutions. Every time your salary is deposited or your mortgage payment is debited from your account, ACH transfers are involved.

Imagine a large meeting room where banks gather twice a day to exchange checks. So Bank A would tell Bank B, "Here are some of your checks deposited in my accounts, I need you to cash them." Bank A would then take that money and deposit it into its clients' individual accounts. 

Although the total volume of operations may be significant, ACH transfers are commonly applied to small amounts of money exchanged in everyday transactions. For example, paying your bills, your gym membership, or when you "Venmo" a friend who paid for last night's drinks. 

ACH credits and debits

Depending on the amount and nature of the transaction, the recipient can have the money in their account almost immediately. If it is a large amount or if the person who initiated the operation made a special request, it may take longer. 

Usually, ACH transfers are processed in batches three times a day. Back to our example, the banks gather in the large meeting room every eight hours approximately. The availability of funds might depend on how close to one of those "meetings" the transaction was made. 

If you take a look at your bank balance, you will see two columns: credits and debits. ACH transfers follow the same logic. ACH credit is when you order money to be sent to somebody else's account. An ACH debit is when you request cash to be taken from your account. 

The main difference between ACH transfers and wire transfers is the price. While your bank may charge $20 to $30 for transferring funds to another bank via wire transfer, an ACH transfer is usually free, or just a tiny percentage of the transaction.

Advantages of ACH transfers

One of the main advantages of ACH transfers is that they save time, money, and even the paper and the ink we use to write checks. This is one of the reasons why they are often free to make.

Bear in mind that to receive ACH transfers, you will have to provide your Account and Routing Number. Nevertheless, this type of transaction is considered safe, as ACH fraud is very unusual. 

Finally, when making an ACH transfer, make sure you have sufficient funds in your account to avoid penalties. Also, check your bank's policy on transfers as it may vary between different institutions. 

Bottomline–ACH transfers are quick, free, and more convenient than writing a check or paying a bill with a credit or debit card.

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