What is an ACH transfer and how does it work?

Individuals and businesses in the United States use the ACH network to transfer funds domestically, often for paychecks, bills, and online payments. Whilst we do not use ACH in New Zealand, it may be useful to know you can use ACH for international payments.

Here, we’ll look into ACH transfers, specifically how international ACH transfers work. We’ll then compare the pros and cons of the ACH network alongside alternative methods of international money transfer.

What does ACH stand for?

ACH stands for “automated clearing house”. It’s a generic term that describes an electronic network that processes financial transactions, usually within one country or region. Examples of ACHs include: BACS in the UK, BECS in Australia, and eGIRO in Singapore. New Zealand does not use ACHs. ACHs don’t have a global function, unlike the SWIFT network.

Here, we’ll focus on a specific ACH called the US ACH network. Established in the 1970s, the US ACH network processes financial transactions for consumers, businesses, as well as local, federal, and state branches of the government. Its primary objective was to speed up payroll transactions.

The National Automated Clearinghouse Association (Nacha) sets the rules and regulations that govern the US ACH network. Nacha has enabled international payments with ACH for more than a decade. There were more than 122 million international ACH payments in 2023, with a total dollar value of US$248 billion. In contrast, the total dollar value of domestic and international ACH payments in 2023 was US$80 trillion. International ACH payments are a small but growing pool, almost tripling in value since 2014.

What is an ACH transfer?

An ACH transfer is a type of electronic bank transaction that moves money between banks or financial institutions through the US ACH network.

How do ACH transfers work?

During an ACH transfer, the payer instructs the bank to make a transfer. This transfer won’t be instant, as the bank will hold it until they can process it in batches with other transfers. ACH transfers save time for banks, but can take longer for other systems that don’t process transfers in batches. Banks using batch processing save time with ACH transfers, but systems designed for real-time processing (e.g. wire transfers) don’t because they still have to follow the ACH batch processing schedule.

There are two types of ACH transfers:

• An ACH direct deposit occurs when an individual receives payment from a business or government entity, such as paychecks and tax reimbursements.

• An ACH direct payment occurs when individuals, businesses, and other organisations pay a business or entity, such as recurring utility bills or subscription fees.

ACH transfers can be domestic or international. An international ACH transfer, also known as a global ACH, moves money from US-based accounts to overseas accounts via local payment rails. Payments can be settled in the local currency using local bank accounts.

For international ACH transfers, always ask your bank if it supports ACH transfers to your destination country. Not all countries, for example, New Zealand, have ACH, and not all banks support ACH transfers.

How do I make an international ACH transfer?

Here’s how you make an international ACH transfer, though the steps may differ depending on the destination country:

• Get your recipient’s local US bank details: These details include their full name (as it appears on their bank account), bank account number, address, and a code that identifies the bank and branch that holds the bank account. This code may have different names in different countries, such as routing number, sort code, or transit number.

• Provide these details to the US bank for the transfer: You may be able to add a message for the recipient or an email address to notify them of the transaction.

• The bank will batch your transfer with others: Your payment will be transferred at set times.

Are ACH transfers free?

Domestic ACH transfers are usually free or come with a small fee of a few dollars, depending on the bank and type of transfer. They are a cost-effective option for routine payments and transfers within the US.

In comparison, international ACH transfers tend to be more expensive, though likely still cheaper than wire transfers. International ACH transfer fees can range from US$5 to US$50 per transaction, and may also incur currency conversion fees by banks.

How long do international ACH transfers take?

International ACH transfers typically take one to five business days, with an average of three days. This is because they’re processed in batches.

The type of payment and the receiving bank's processing time also influence the overall duration. It can take an additional day or two for the receiving bank to deposit the funds into the recipient's account.

Different countries have different regulations on ACH transfers. If your international ACH transfer takes longer than seven business days, ask your bank about the delay.

Are international ACH transfers secure?

ACH transfers are generally secure as they are governed by rules and regulations. But, unlike wire transfers, they can be reversed under certain circumstances, such as fraud or error. For instance, if an employer overpays wages or a fraudulent transaction occurs, the bank can authorise a reversal. Most other transfers are irreversible.

Note that if a payment processor credits your account through ACH, they might also be able to reverse the funds. For example, if your business accepts credit card payments through third-party services like Venmo or PayPal and a customer disputes the charge, the payment service could reverse the ACH transfer without involving you.

When should I use ACH transfers?

While ACH is not available in New Zealand, if you have a US bank account, you can use them for recurring bill payments like utilities, subscriptions, and rent, as well as for sending money to friends or family. ACH transfers also let you move funds between your own accounts at different banks or receive direct deposits for payroll, government benefits, or tax refunds. Businesses often use ACH transfers for paying suppliers and employees, especially for recurring payments.

But, while convenient and cost-effective, they might not suit all situations. Wire transfers or fintech platforms can often process larger payments faster and more cost-effectively.

What is an International ACH Transaction (IAT)?

When looking for information about international ACH transfers, you may come across the acronym IAT, which stands for International ACH Transaction. Although ACHs and IATs are easily confused, they’re not interchangeable. An IAT refers to the reporting requirements for banks and providers involved in sending money internationally. It’s not something you need to think about if you’re a business or individual looking to send money abroad.

ACH transfers vs other payment methods: What are the pros and cons?

While international ACH transfers offer a reliable way to send money across borders, they're not the only option available. Let’s look at two other methods:

SWIFT (Wire Transfers)

Wire transfers, facilitated through the SWIFT network, are a well-established method for international payments. They’re fast and secure, often reaching the recipient's account within a few business days. But, wire transfers can also be expensive due to fees levied by the sending and receiving banks, as well as any intermediary banks involved in the transaction.

Fintech Platforms

In recent years, fintech platforms have become a popular solution for international money transfers. These platforms often offer competitive interbank exchange rates, lower fees, and faster processing times compared to traditional banks. Some even provide multi-currency business accounts with local bank details, letting you send and receive money as if it were a domestic transaction.

Here’s a comparison of ACH transfer and the two alternatives mentioned:

Make fast and secure global transfers with Airwallex

Airwallex is a fintech platform that helps businesses and individuals to send money across borders quickly, securely, and cost-effectively.

Airwallex uses a wide range of local and global transfer options to provide you with the fastest and most cost-effective solutions. You can send money in over 60 currencies across more than 150 countries and regions, with full payments typically received in as little as one business day.

With an Airwallex Global Account, you can access bank-beating FX rates and avoid hidden transaction fees. You can also hold funds in multiple currencies, with local bank details for each account. This infrastructure means you can collect payments from your international customers in their preferred currency and spend them later in the same currency, for example, to pay global suppliers and employees.

Sending international payments can be expensive and time-consuming. With modern solutions, you can now bypass traditional systems and transfer money across borders in a smarter way, protecting your bottom line.