ACH direct deposit is an electronic check used for monthly transactions. The system began in the 1970s and is most useful for ordinary bills. The US Federal Reserve wire transfer system is more secure but charges a fee. The decision to use either method depends on the amount of money being moved, interest rates, and bank fees.
Automated Clearing House (ACH) direct deposit is, in effect, an electronic check. ACH direct deposit can be used almost any time a paper check can be used. For example, an employer can use ACH direct deposit to deposit an employee’s pay directly into the employee’s bank account, and individuals use ACH direct deposit when they use their computer to pay for utilities, mortgages, or car payments directly from your bank accounts. Even the US Internal Revenue Service (IRS) uses ACH direct deposit when making a tax refund directly to a taxpayer’s bank account.
The ACH system began in the 1970s when a group of California banks organized a batch wire transfer system in response to the exponential growth in the number of checks they needed to process. In 1974, the California system merged with the New England, Georgia, and Upper Midwestern systems. In just four years, the system became national, and any bank in the United States could transfer funds to any other using a single set of rules.
ACH direct deposit is most useful for monthly transactions involving amounts of money the size of ordinary bills. ACH often takes three to four days to move funds. After the initial setup, the process can be started from the sender’s computer. The initiation process has its own identification steps for security. Another security measure is that each recipient account requires its own setup, which takes anywhere from two to five days, making it truly impossible for someone who only has access to your computer to drain your account.
The alternate method of transferring funds from one location to another is the US Federal Reserve (Fed) wire transfer system. When used to transfer funds from one bank to another, the Fed transfer is a bit more secure, as it requires each bank to verify the identity of the account before transferring the funds. The actual transfer is faster than ACH, but most banks require the person withdrawing funds to physically appear with identification. Once the paperwork is completed along with the identification process, the bank will likely place the order in a queue. When that queue is placed on the bank transfer, the sender’s account is debited; the recipient’s account is credited a fraction of a second later, when the information reaches the destination bank.
The bank transfer system charges a fee of $1 for the transfer. It is common for issuing and receiving banks to charge a fee as well. Although the ACH system does charge banks a fee, it is less than the cost of processing checks, so the apparent cost to the consumer is generally zero. “Apparent cost” here means that the actual cost is included in the overhead that banks consider when setting charges for maintaining a bank account. The actual bank fee varies from 2.5¢ to 25¢ per transaction.
The decision to use wire transfer or ACH direct deposit will generally depend on the amount of money being moved, the relevant interest rate, and the fees charged by individual banks. For example, if a consumer is paying their $250,000 mortgage at a 6 percent interest rate, the calculation will look like this: $250,000 X 6% = $15,000 a year; $15,000 per year divided by 365 days per year = $41.10 per day. Therefore, a four-day ACH transfer will cost the consumer about $164 in interest. A one-day wire transfer will cost $41.10 plus $20 to $40 in fees. The consumer will want to behave as much as banks behave: choose the method that costs the least when all costs are considered.
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