Automated clearing house (ACH) direct deposit is, in effect, an electronic check. ACH direct deposit might be used almost any time a paper check could be used. For instance, an employer might use ACH direct deposit to deposit an employee’s pay directly to the employee’s bank account, and people use ACH direct deposit when they use their computer to pay utilities, mortgages or car payments directly from their bank accounts. Even the U.S. Internal Revenue Service (IRS) uses ACH direct deposit when it makes 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 coalesced with the systems for New England, Georgia and the Upper Midwest. 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 from three to four days to move funds. After initial set-up, the process can be initiated 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 set-up, which takes from two to five days, making it effectively impossible for someone who has only passing access to your computer to drain your account.
The alternate method of wiring funds from place to place is the U.S. Federal Reserve (Fed) wire transfer system. When used to wire funds from bank to bank, the Fed wire is slightly more secure, because it requires each bank to verify the account identity before funds are transferred. 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 is likely to place the order in a queue. When that queue is placed on the Fed wire, the sender’s account is debited; the receiver’s account is credited a fraction of a second later, when the information arrives at the destination bank.
The Fed wire system charges a $1 fee for the transfer. It is common for both the sending and receiving banks to charge a fee, too. While the ACH system charges banks a fee, it is less than the cost of check processing, so the apparent cost to the consumer is usually zero. “Apparent cost” here means the actual cost is rolled into the overhead banks consider when setting charges for maintaining a banking account. The bank’s actual cost ranges from 2.5¢ to 25¢ per transaction.
The decision of whether to use the Fed wire or ACH direct deposit will usually hinge on the amount of money being moved, relevant interest rate and the fees the individual banks charge. For instance, if a consumer is paying off his $250,000 mortgage with 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. Thus, a four-day ACH transfer will cost the consumer about $164 in interest. A one-day Fed wire transfer will cost $41.10 plus $20 to $40 in fees. The consumer will want to behave much as banks behave: Choose the method that costs least when all costs are considered.