In a recent Gallup survey, more than 60% of job seekers cite salary as the most important factor they use when choosing an employer. But how do workers want to receive their wages when payday comes around? The American Payroll Association reports that direct deposit — a form of ACH payment — is the top choice for over 90% of employees, though some staffers still prefer receiving a paper check. And while a wire transfer is not a payment method most people request, it is another option employers have at their disposal.
Furthermore, both ACH and wire transfers are also ways to pay vendors or purchase supplies. But which makes the most sense for your business?
Let’s take a closer look at ACH and wire transfer methodologies and some differences between them, so you can make a more informed decision about which makes the most sense for your business when it comes time to make payments.
What is an ACH transfer and how does it work?
First and foremost, ACH stands for Automated Clearing House, which is a system of over 10,000 banks and financial institutions that use a “batch” system to transfer funds electronically from one bank to another. A batch refers to a bundle of ACH transactions and is at the core of how the system works. Banks and clearing houses typically wait until ACH transactions are grouped in a bundle and process them in batches for verification. The process occurs multiple times each business day but not on Saturdays or Sundays when the clearing house is closed.
So, on a business day, when the sender initiates a transaction:
- Funds transfer from the original bank to the Automated Clearing House network (that’s the system of financial institutions we mention above) and are included in a larger batch of transactions — waiting for their turn in line to be approved
- Once the clearing house approves the transaction, the waiting period ends, and the monies “pass” to the destination bank
- These “cleared” funds become an available deposit for the recipient on the other side of the transaction
Because of how the process of batching works — and due to the fact that the Automated Clearing House must clear all transfers — sometimes ACH transactions are processed immediately, while others may take a few days.
In addition, ACH payments are typically grouped into two categories: direct deposit and direct payment, with different use cases.
- Many employers use direct deposit to pay employees or independent contractors
- State and federal governments process tax refunds with direct deposit
- Direct payment uses a debit and credit system, debiting the sender’s account, and in turn, crediting the recipient’s account. Chances are good you’ve completed a direct payment transaction — or received one — using your mobile device with digital wallets like Venmo or Zelle.
Now that we have discussed the basics of ACH, let’s learn more about how some companies use them in their day-to-day operations.
ACH payments: when are they used?
ACH payments are fairly common and are frequently used in businesses for a variety of reasons:
- As mentioned above, employers often use direct deposit to pay their employees
- Business owners schedule automatic recurring bill payments for services such as internet access or online tools
- One-time payment of a bill online (such as a utility bill or an IRS payment)
- Pay a vendor for services they completed
- Pay taxes to federal or state agencies
Before you can make an ACH payment, you’ll first need to have the following information:
- Name of the bank or financial institution
- Account type (checking or savings)
- The routing number, which is also known as the ABA number
- The bank account number of the recipient
Advantages and drawbacks of using ACH transfers
- There are a lot of benefits to using ACH transfers, starting with cost. For example, if you use ACH transfers to pay bills, you may be charged a fee of around $.25 to $.50 per transaction. And while your bank may charge you a setup fee for direct deposit, the cost of direct depositing paychecks for your employees is usually $0. In addition, ACH transfers are also secure and offer a way to reverse a transfer should it be made in error.
- On the other hand, a significant drawback of ACH transfers is the processing time, which ranges from two to five days. Furthermore, you are unable to use third-party payment methods such as credit or debit cards and will use your bank account when transferring funds. Finally, some banking institutions limit ACH transfers to US banks, so if you’re in a situation where you need to transfer money abroad, a wire transfer may be a better option.
Let’s move on to another payment option that’s available to employers.
What is a wire transfer and how does it work?
A wire transfer is a method of moving money between bank accounts that can be used to transmit funds domestically or internationally. A wire transfer, unlike an ACH transfer, is completed without the need for a clearing house. Banks are frequently the “middleman” in these transactions and manage moving funds from the sender’s account to the recipient on the opposite side of the transaction.
Many people use wire transfers to send larger amounts of money because they are designed for infrequent transactions — and usually have higher costs. Fees range from $10 to $30 for each wire transfer, so costs can add up quickly if you’re running multiple per day or week. Unlike an ACH transfer, initiating a wire transfer with a bank transfer, debit, or credit card is possible.
Wire transfers: when are they used?
Wire transfers can be a great payment option for business owners with specific needs, including:
- Needing to make a transaction quickly and securely
- Moving a large sum of money to another party
- Needing to send money internationally in a short amount of time
- Directly, quickly paying vendors or suppliers
Before you send a domestic wire transfer in the US, most banks will require to have some basic information ready:
- Recipient’s name and address
- Bank account number
- ABA number (also known as routing number)
International wires require a bit more information before the process starts.
- Receiver’s full name, physical address, bank name and address
- Bank account number and type (e.g., checking, savings, etc.) for the recipient
- Bank routing number (and the amount of money being transferred)
- Reason you’re transferring the funds
- If applicable, the bank BIC (Business Identifier Code) or SWIFT code
- If applicable, the bank IBAN (International Bank Account Number)
Advantages and drawbacks of wire transfers
Wire transfers do have some advantages, particularly if you have to move a large amount of money quickly, since the transaction can typically be processed on the same day you place the request. Wire transfers may also be a better option if you’re transferring money abroad. They also give you more flexibility to use other payment methods to fund the transfer.
But there can be some drawbacks to using a wire transfer, specifically when it comes to the price tag. Each wire transfer can cost between $10 to $30, and there’s no option to reverse a wire transfer once it’s initiated, which can end up costing businesses a lot of money.
Though these money-moving distribution methods both have fees, other characteristics define them.
Key differences between ACH and wire transfers
Though both ACH transfers and wire transfers are electronic, they do vary in a lot of ways. To get the bigger picture, see our table below that provides a side-by-side comparison of the differences between the two options:
|Depends on bank
|2 – 5 days depending on bank
|$.25 to $.50 per transaction (on average)
|$10 – $30 per transaction (on average)
Now that we have a better understanding of what each payment method brings to the table, let’s dive into some more specific considerations to keep in mind when it comes to paying your employees.
ACH transfers to pay employees and vendors
ACH transfers offer a variety of payment options, including direct deposit, direct payments, electronic checks, and electronic funds transfer. And ACH transfer costs are minimal, making them a great option for businesses on a budget. But it’s important to remember that, unlike a wire transfer, ACH transfers and direct deposits have a processing time between 2-5 days, making it important to adhere to cut-off times. And since banks and financial institutions are federally regulated, ACH transfers are extremely secure.
Wire transfers to pay employees and vendors
There are a lot of reasons to use a wire transfer, but using a wire to pay your employees is not typically one of them. A payment via wire transfer may be in order on occasion, particularly if you need to meet a tight deadline or move a large volume of funds quickly. But generally speaking, it’s best to pay your employees by ACH direct deposit. Wires can also be handy if you’re transferring money overseas, since many international financial institutions still only support domestic ACH transfers.
Paying employees is painless
“OnPay makes paying our employees simple and takes the stress out of tax filing and generating W2’s and 1099s from my mind and to-do list.”
— Bethany Carlson, CEG Life Insurance Services LLC
Verdict: The best payment method comes down to the circumstances
When it comes down to it, there may be occasions when you use both ACH transfers and wire transfers for business purposes. ACH transfers such as direct deposit are the better solution for frequent payments such as paying your employees or making regular vendor and supplier payments.
On the other hand, wire transfers are the better bet when sending a large amount of money that needs to be processed quickly or if you’re sending money overseas. Cost is also a consideration, with ACH transfers including direct deposit typically charging pennies on the dollar, while a single wire transfer can cost up to $30.
Unless a payment needs to arrive immediately, most businesses will find that ACH transfers and direct deposit are the most economical method to pay employees and vendors alike.
This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.