ACH, Wire, RTP^® and FedNow^®: A Guide to Today’s Payment Transfer Types

Businesses are most interested in increasing the speed of their digital transactions, according to a research survey¹ of small business banking decision makers commissioned by Alkami in 2023. Among the top features small businesses want from their financial institution, speed ranked very high. But, their satisfaction for the current speed of their banking options is low. It’s crystal clear: Businesses want more speed in their payments. But what type of speedy transactions do they need? Quick funds transfers aren’t all created equal.

Currently, wire transfers, Automated Clearing House transfers (ACH) and instant transfers are dominating the payments market. What’s the difference among those options?

Below we will highlight the three types of electronic funds transfers, breaking down their fees, limits, speed, and typical use cases.

Wire Transfers

Wire transfers are payment sent by a business to credit a receiving party. Domestic wire transfers, those that are settled to US-based financial institutions sent in United States dollars (USD), are processed via the Federal Reserve Bank (FRB). International wire transfers, sent in both USD and/or foreign currencies are processed through a few international networks with the most prominent being the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Both types of wire transfers facilitate the fast and secure transfer of funds from one financial institution to another. Wire transfers are a preferred method for large dollar value transactions because of their traceability (financial institutions can track wire transfers efficiently), security, credibility, and finality of settlement as wire transfers are non-reversible once they are sent. A business account must have the available funds to initiate a wire, which assures the credibility of the payment. 

• Fees. With wire transfers, both sender and recipient may incur fees. Because of this, wire transfers are not generally the best choice for smaller transactions, recurring payments like employee payroll, or non-urgent funds transfer.
• Speed. Domestic wire transfers are usually faster than ACH transfers, delivering same day delivery of funds. Similar to ACH, wire transfers are processed during business days only. While you can initiate a wire transfer during a non-business day, it will not be available to process until the next business day.
• Limits. Wire transfers typically have higher limits than other forms of funds transfer, and are therefore ideal for larger transaction amounts. Larger limits are commensurate with the need for greater security protocols for both the business and financial institution.
  
• Use Cases. Typically wire transfers are used for high-value transactions like real estate transactions, payments to other businesses, and transferring funds during an emergency. Because wire payments are fast and secure, it makes them an ideal way to find these types of high-value transactions.

Standard Transfers (ACH)

An ACH is an electronic transaction to collect funds, make payments, or move money primarily between U.S.based bank accounts. Governed by the National Automated Clearing House Association (Nacha), Regulation E, and the Uniform Commercial Code, these transactions move funds between financial institutions in a time-tested, secure, and automated process. Common terms for ACH transfers include direct deposit (e.g. payroll), direct debit, electronic fund(s) transfer (EFT), and eCheck.

Developed in the 1970s as an alternative to processing paper checks and wire transfers, ACH transactions are ubiquitous in the financial industry. According to Nacha, the ACH Network processed 30 billion payments valued at $76.7 trillion in 2022, including person-to-person, business-to-employee, business-to-consumer, and business-to-business. It was the tenth consecutive year the total value of ACH transactions increased by at least $1 trillion. ACH transactions are reliable, safe, and cost-effective, benefits for both financial institutions and the account holders they serve.

Among the many benefits of ACH, transactions have the ability to push and pull funds between accounts. With ACH credit origination, funds are pushed from the originator’s account to the receiver’s account, like a direct deposit. Funds can also be pulled from receivers’ accounts via debit origination, which results in a debit to the receiver’s account. A common use of this feature is a one-time or recurring utility, mortgage, loan payment, or insurance payment. The payment amount may be fixed or vary with each transaction.

• Fees. For a financial institution’s business account holders, originating ACH is cost-effective, often with lower transaction fees than other payment rail types.
• Speed. ACH is batch-based and not instant. Nacha reports most transactions are settled the next business day, although some, which are eligible, are completed the same day. Nacha reported 86% growth in dollars originated via Same Day ACH from 2021 to 2022. However, settlement timing is crucial especially for business banking account holders. Many financial institutions have a cutoff time by which they need to arrange for the transaction to ensure processing on the same or the next business day.
• Limits. Nearly all financial institutions in the U.S. participate in the ACH network. Financial institutions are required by Federal Reserve regulation, guidance, and Nacha Rules to have limits in place for businesses on how much money can be originated via ACH, per transaction, per day, per month, and per week. Most financial institutions do not allow origination for International ACH Transaction (IAT). ACH transactions only settle on business days.
• Use cases. ACH transactions are generally for lower-value, one-time or recurring transactions or for scheduled and authorized ahead of time like direct deposits (e.g. payroll), for bill payments conducted on a biller’s website or over the phone, or for established business trading partners.

Instant Transfers [via Real Time Payments (RTP^®) or FedNow^®]

As the name implies, instant transactions are nearly immediate methods of payment sent by a business to credit a receiving party. RTP and FedNow allow credits to be  pushed to receiving parties. Unlike ACH, RTP and FedNow do not allow for the originating party to directly debit the receiver but do allow for a request for payment to be paid by the recipient. 

The newest electronic funds transfer method, near instant transactions are used by digital payment platforms and mobile apps like Venmo, PayPal, Cash App, Apple Pay and an ever-growing host of others. Some apps are tied to banks, like Zelle, for example, but most are part of a new and growing movement of peer-to-peer funds transfers, largely bypassing their financial institutions. 

Zelle’s success has been largely attributed to its adoption by some 1,700 banks and credit unions representing nearly 619 million checking, savings and money market accounts. That’s almost 80% of the accounts in the U.S. 

Aside from the apps, RTP and FedNow are also part of the near instant transfer realm. RTP was developed by The Clearing House in 2017 and FedNow was developed by the Federal Reserve Bank in 2023.

• Fees. RTP and FedNow offer cost-effective instant payments that are comparable in fee structure to same-day ACH transfers and substantially cheaper than wire transfers. 
• Speed. Instant transfers, as the name implies, happen nearly instantly and are the most expeditious way to transfer funds between accounts. Instant transfers happen in near seconds.
  
• Limits. Both the sender’s and recipient’s financial institution need to be on the same payment rail type (e.g., RTP, FedNow) in order for the transaction to be possible. Each vendor has its own rules and limits. Some limit the amount of transactions during a specific time period (day, week, or month) and limit the amount of the individual transactions. This type of transfer isn’t well suited to large transactions.
• Use Cases. Peer-to-peer transactions, like sending money to a child away at college or splitting a bill at a restaurant, are extremely common.  Additionally, consumers are leveraging instant account-to-account (A2A) transfers more as they no longer have to wait to access their own funds when moving them between their accounts at different institutions. Businesses use these near instant transactions to pay suppliers or employees quickly.

Business account holders want more speed when it comes to funds transfers. Knowing which type of transfer to offer businesses depends on data of their habits, transactions and other key indicators. At Alkami, we can help with that. Contact us today to learn more.