Automated clearing house vs wire transfer

Over the years, payroll payments have well earned their reputation as the most complicated form of payment there is.

With heavy regulatory requirements, iron-clad deadlines, and complex tax deductions and contributions to think about, payroll teams are constantly faced with the challenge of figuring out the best ways to pay their workers.

But each payroll scenario may call for a different type of payment method. It’s important to be able to accurately evaluate the situation to know what form of transaction to choose.

Automated clearing house (ACH) and wire transfers are both types of electronic funds transfers (EFTs) commonly used for employee payments. Here’s a quick summary of what each of these payments mean:

  • ACH is a form of payment often used for domestic, low-value transactions.
  • A wire transfer is an electronic fund transfer usually made between one bank and another. It’s often used for high-value, international payments.

These different forms of payment each have their optimal use cases. Knowing which one to choose can be difficult.

In this blog post we weigh the differences between wire and ACH transfers and what that means for your payroll payments.

What are the differences between ACH and wire transfers?

Below is a table illustrating the differences you can expect between ACH and wire.

ACH Wire transfer
Payment processing timeUsually around three days – there may also be options for same-day processing but that will depend on a specific bank’s policiesDomestic transfers are usually within the same day and international transfers usually take a few days
Costs$0.20- $1.50$15-$50
Security featuresProtection against fraud under federal law, in-depth verification process, easier to revoke or reverseTwo-factor authentication, subject to regulatory requirements, secure communication channels
AccessibilitySpecific to transfers in the USRelevant to all transfers
ComplianceNACHA operating rules – essential for any company or FI involved in ACH processingRequired to adhere to strict anti-money laundering regulations and due diligence procedures
ConvenienceCheaper and more easily reversableFaster and more accessible for employee payment in different countries
Record keepingRecords of the transactions must be kept for at least six years following the date the entry was submittedWire transfers over $10,000 are subject to the Bank Secrecy Act
RiskHigher chance of delayed payments, generally less risky than wire transfers, but can still be subject to being used for unauthorized debitLack of verification and higher than average risk for fraud

What are the pros and cons of using wire transfer payments?

Wire transfers are a form of transaction often turned to for large, time-sensitive, international payments. But high costs and risk of fraud are just a couple of factors companies need to consider when paying their employees with this method.

Pros of wire transfers

Speed: Generally, wire transfers won’t take more than a few days and can even take as little as a few hours. That’s because there often aren’t any intermediaries involved in this form of payment, allowing for less friction in the process.

Secure: In a lot of ways, wiring payroll payments can be more secure in terms of making sure the employee gets their salary on time. This may have to do with the widespread use of wire transfers, in that banks are likely to have solid protocols for processing these transactions.

Good for international transfers: Wire transfers are largely accepted by a network of banks and financial institutions all over the world, making them a go-to for paying employees who are based abroad.

Good for large payments: For a lot of other forms of payment, the larger a transaction is, the longer it will take to process. But because wire transfers are done through a substantial network of international financial institutions, the process ends up being both smoother and faster.

Cons of wire transfers

Cost: Wire transfers tend to be expensive. In addition to the flat fees that banks are already charging for the service, there is the lump of other costs companies need to consider – including those concerning cross-currency transactions and infrastructure. The price becomes even heavier when you take into account that salary payments are a regular occurrence.

Delays: Factors like high transaction volumes, time zone differences, and public holidays can all impact the delivery date of wire transfers, meaning, of course, you risk your employees not getting paid on time.

Fraud: Lack of payment reversibility, a light verification process, and all the additional complexity that may come along (especially when it comes to international transfers) increase wire transfer’s susceptibility to fraud.

Need for a local bank account: To enable wire transfers, you need to go through the process of opening a local bank account, which can take a lot of resources and time.

What are the pros and cons of ACH deposits for business owners?

ACH transactions often come into play with transfers made within the US that require strong security protocols. While ACH is often the cheaper option compared to wire transfers, it is more limited in terms of availability and capacity.

Pros of ACH deposits

Cost effectiveness: Because ACH concerns domestic transactions, it tends to be a much cheaper method for paying employees.

Convenient set up: Another benefit of ACH is that you can easily sign up for the service through your US bank.

Reliability: With an established infrastructure and a trusted verification process, ACH is seen as a strong and reliable option for making payment to your employees.

Possibility for recurring payments: ACH deposits offer the option to make recurring payments. This comes in handy for payroll payments, which tend to be repeated occurrences.

Cons of ACH deposits

Limited transactions: ACH transactions are limited to the US. That means if you have a global workforce, you won’t be able to use the payment method to get money to employees based outside the US.

Limited availability: Factors like cut-off times or financial institutions’ own ACH policies (which usually have to do with cost and risk management) tend to lead to limited availability for ACH deposits.

Delays: On top of creating limited availability, these circumstances can also lead to delays, and ACH transfers are often processed in batches. That means when transferring funds to your employees, you need to consider not only the regular factors like time zone and business days but also processing windows.

Need for a local bank account: While companies outside the US can use ACH transfers, they will still need to have a local bank account, which takes time to open.

What factors need to be considered when choosing a payment method?

Ultimately, choosing how to pay your employees comes down to considering the relevant factors. We’ve narrowed the list down to the following main points:

Transfer size: How much money are you transferring? Large sums are more complicated and usually require a lengthier process. It’s important to take this into account when choosing a payment method.

Processing time: Deadlines for all payments are important, but for payroll, they’re even more so. Not making payroll on time can lead to an array of fees and penalties. All this to say, measuring processing time should be a big part of your decision making.

Cost: There are lots of fees companies need to consider when choosing a payment method, including flat fees, service fees, and foreign exchange fees – to name a few. You will need to take these costs into consideration, especially when looking at how big your transaction is or where your employees are based.

Location: Speaking of where your employees are based, location is in itself a factor you need to think about. Different countries may involve different transaction processes. This should influence your choice regarding the type of payment you choose.

Security: Payroll involves managing all your employees’ sensitive data. Different forms of payments may come with different risks, depending on circumstance. Wire transfers, for example, often require emailing details or sharing an Excel sheet – leaving data at risk of being breached.

Securing Your Business Against Excessive Payment Expenses

As a quick recap, ACH can be seen as the more secure, payroll-relevant payment method, while wire tends to be the preferred method for bigger, more urgent payments. While ACH is primarily relevant in the US, wire transfer is used among a network of financial institutions all over the world.

While each of these payments have their pros and cons, your main goal needs to be to evaluate your payroll circumstances and particular needs and choose according to those.

In short, context is everything.

A payroll and payments platform like Papaya OS allows for tailored payments for each situation – without the need for opening a local bank account. Schedule a demo to learn more.

 

FAQs

Is a wire transfer the same as ACH?

No, wire transfer and ACH aren’t the same. ACH is a US-specific batch processing system for EFTs often used for recurring transactions. Wire transfer, meanwhile, is another type of EFT that tends to take place between two banks and is often used for cross-border payments.

What is the difference between ACH and EFT?

EFT stands for electronic funds transfer and basically refers to any electronic system used for transferring money. ACH, meanwhile, is a form of EFT. Other examples include wire transfers and debit card transactions.

Can ACH payments be reversed?

Yes, it’s possible to reverse ACH payments. You can usually request a reversal if there’s been any fraud or error. Keep in mind that there are time limits for making these requests, and they tend to vary from FI to FI.

How long does it take for a wire transfer to go through?

Wire transfers tend to be pretty fast compared to other forms of payment. They may even take as little as one day. With that being said, there isn’t an exact timeframe, since it may vary depending on things like time zones, cut-off times, and the relevant banks’ policies.

Are there any limits on the amount that can be transferred using ACH or wire transfer?

Yes, there tend to be limits set for both forms of payments. This will often have to do with the banks’ policies on the matter and the reason for the transfer.

What is the cutoff time for sending a wire transfer?

Cutoff times vary from bank to bank but as a general rule it tends to be during business hours, often at or towards the end of a workday.

How do I track my ACH or wire transfer transactions?

You can usually track your transactions through your bank’s online system.