Choosing the Best Electronic Payment Type for Your Business

BY: Sam Huntington


One of the most frequent questions we in Treasury Management hear from our business clients is, “Should I pay by an Automated Clearing House (ACH) payment or a wire transfer?” After all, choosing correctly can translate to enhanced security, sounder cash management, and a better position to capitalize on trade discounts. But the short answer is, it depends on the situation, as both methods have their pros and cons.

Let’s break them out across six key categories:

  • Convenience: Lots of times, our business clients originate both types of payments using our secure online banking website. However, the single payment method of wire transfers requires that each wire be processed and verified as a separate order. While ACH transactions are a little slower than wires, multiple ACH transactions can be included in one file and processed once. This means that a payroll file crediting the accounts of, say, 500 employees can be processed as quickly as a file with one employee’s payroll instructions.
  • Cost: The Fed charges banks much more for a wire transfer than an ACH transaction. Case in point: the marginal cost of adding an item to an ACH batch file is only $0.05, while a single outgoing domestic wire costs $25, no matter how many are sent. In addition to this significant cost difference in payment origination, there's a similar impact on the receiving party. While most banks don't assess a separate fee to a customer receiving a paycheck by direct deposit, for example, the party receiving a wire transfer is assessed an incoming wire fee, usually $20 and up. Therefore, while a business’s trading partner might appreciate a speedy and guaranteed payment, unless the payment amount is very large, they might prefer to receive an ACH payment. 
  • Direction & Destination: Wire transfers are one-way payments to any bank in the world. ACH payments are domestic-only, and can go both ways: in addition to sending funds, the originator can originate a debit transaction by ACH that will take money from another party and simultaneously move the funds into the originator’s account. Transactions such as health club dues and collecting accounts receivable are common ACH debit transactions. 
  • Finality: This is the guarantee that the party receiving payment can keep the funds. Wires are again the better option when immediate finality is required. The Fed’s wire service guarantees that the receiving bank has no credit risk when they receive a wire, so most banks treat wire proceeds as they would a cash deposit and make the funds available without delay. Credit and debit ACH transactions are both subject to reversals under the rules of the ACH system, and although there are strict guidelines that need to be followed, ACH transactions don't have the real-time certainty of wire transfers. This guarantee makes wire transfers the payment of choice for transactions that aren't easily unwound, like real estate closings.
  • Security: Both domestic wire transfers and ACH transactions are extremely safe when all parties follow procedures. Both use the Federal Reserve system and require FDIC-insured banks to send and receive the payments. However, despite the high level of security in the Fed’s payment system, hackers and other criminals are sometimes able to use their “social engineering” skills to convince authorized users at businesses to change payment instructions and send money under false pretenses -- money that's often withdrawn from the receiving bank before the fraud is detected. Anyone using ACH or wire transfers should talk to us about how our fraud mitigation tools can reduce the chance of a compromised transaction.
  • Speed: Transactional speed is major differentiating factor between ACH payments and wire transfers. ACH transactions are processed through a clearing house and are known as batch transactions, due to the bundling of payment orders. Although there are a growing number of same-day transactions, most ACH payments are settled on a different business day than the one on which they're originated. By contrast, wire transfers are individual transactions and occur in real time. When wire transfers are sent between U.S. domestic banks during business hours, the receiving bank is immediately credited. This is why wire transfers are the best payment method for funds that need to be sent and received immediately.

Interested in discussing your specific payment situation? Please contact me at (608) 826-3516. I would welcome the opportunity to work with you to determine the payment type that best meets your needs.

Author:

Sam Huntington

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