ACH vs SWIFT: Understanding the Key Differences for Business Payments
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Whether you run a small, medium business, or a large corporation, the vendors should be paid on time to ensure that business relationships are healthy. At the very same time, for freelancers, gig workers, and contractors, late payments seem to be the biggest nightmare, isn’t it?
When it comes to payment for businesses, especially in the global cross-border economy, the method you choose matters.
The two most used payment systems for businesses are the ACH payment system and SWIFT transfer. While ACH is majorly used for domestic transactions within the U.S., SWIFT is used for international transactions.
But do you know what the difference is between ACH vs SWIFT?
What is ACH?
The term ACH an acronym for Automated Clearing House. This is an electronic payment network that clears transactions flowing between two different bank accounts.
Its major use resides in the clearing of multiple batching transactions so that fund transfers between firms and financial institutes can be made safely and efficiently. The major application of ACH payment system occurs in direct deposits, bill payments, and B2B-based transactions.
Unlike wire transfers or even physical checks, ACH payment system is the automation of funds movement between account holders; it is one of the most reliable options for making payments.
Suggested Reading: A Comprehensive Guide to ACH Payments
Who uses ACH?
- Businesses: It is used by all types of businesses-small, medium, and large-whether it is payroll processing, paying vendors, tax payments, and subscription services.
- Financial Institutes: Most banks and credit unions make deposits and withdraws through ACH payment system on deposit transfers, ranging from salary to Social Security benefits, direct deposits, and the payment of bills.
How do ACH transfers work?
An ACH, or Automated Clearing House, transfer is a series of steps to make an electronic fund move from one account to another in the ACH network.
Here’s how ACH Transfer works:
Initiation
- The payer or the business owner who’s transmitting the funds authorizes the ACH transaction. That could be done online or, more commonly, when giving authorization for a recurring payment.
Bank Routing & Account Numbers
- The payer must provide the routing number of the recipient’s bank so that the system knows which bank it is paying and the account number of the recipient so that the ACH system knows which account.
Submission to the ACH Network
- It is transmitted to the ACH network by a bank of the depository’s ACH network. Periodically throughout the business day, collected credits are aggregated.
Clearing & Settlement:
- The ACH network clears the transaction; literally, debits the payer’s account, and credits the receiver’s account. This takes an average of 1-3 business days, while some ACH transfers settle on the same day.
Completion
- Once the funds had been credited to the account of the beneficiary marking the completion of the transaction.
Types of ACH Transfers
ACH Credit Transfers
- In ACH credit transfers, funds get transferred from the payer’s account to the recipient’s account. Some common examples include payroll credits, vendor credits, and tax refunds. It could be termed one way that the payers initiate payment.
ACH Debit Transactions
- Whenever a debit transaction is carried out through an ACH payment system, the pull is issued in the form of money moved away from the payer’s account with their authorization. Often recurring payments that include mortgage or utility bills fall into this category in which a business or provider automatically withdraws funds from the customer’s account.
Suggested Reading: How to Set Up ACH Payments for My Business
What is SWIFT?
SWIFT is an acronymic term used for the Society for Worldwide Interbank Financial Telecommunication. SWIFT is a network that has enabled safe communication between financial institutions in a standardized way.
Although SWIFT does not transfer any funds it provides a platform for banks and other financial institutions to send and receive instructions relating to cross-border payments.
It has managed to therefore allow international wire transfers of different currencies hence part of international trade. A SWIFT message contains all the necessary information required to carry out a transaction.
Who uses SWIFT?
- Banks: Banks rely on Swift network for processing their cross-border payments, ensuring that funds move securely between accounts elsewhere.
- Business: Multinationals and large corporations use the SWIFT system to make payments to suppliers, vendors, or subsidiaries in other borders and currencies.
- Government & Institutions: SWIFT is used by governments and international agencies to transfer funds from one country to another for trade and economic purposes.
How does a SWIFT payment work?
A SWIFT transaction has some steps that make safe instruction for payment across borders possible. Generally, the steps for SWIFT payments are:
Initiation
- It initiates a transfer, which can be a person or a company. An international wire transfer initiates when initiation is taken from the payer in his bank also called the sending bank. It also gathers pertinent information regarding the payer like the name of the beneficiary and all details pertaining to the account, amount, and currency to be transferred.
SWIFT Codes
- The SWIFT code is an 8 to 11-character identifier assigned by the sending bank for easy identification of the recipient’s bank and delivery of the transaction to the right institution.
Message Transmission
- The payer’s bank then must transmit a SWIFT message sent over the SWIFT network from the payer’s bank to the expected beneficiary’s bank which is to take the payment instructions. This message carries all the amount of currency and banking information with a recipient account number, bearing a destination bank’s SWIFT code.
Intermediate Banks (as needed)
- If the sender and recipient banks don’t know each other, then the SWIFT message would route through a few intermediary banks, which would directly route the payment from the sender bank to the recipient bank; these intermediary banks process and hand over instructions for payments.
Clearing & Settlement
- Once the recipient’s bank receives the SWIFT message, it processes the payment and credits the recipient’s account. The funds are then settled between the banks involved, typically involving currency conversion and transfer across borders.
Completion
- The transaction is considered settled when the recipient bank agrees to accept the funds into the account; this is usually within 1-5 business days following the initiation of the transaction, contingent upon the network of banks, country, and number of intermediary banks.
| Feature | ACH (Automated Clearing House) | SWIFT (Society for Worldwide Interbank Financial Telecommunication) |
|---|---|---|
| Geography | Primarily used for domestic transactions within the U.S. | Designed for international payments across countries and currencies |
| Speed | May offer same-day transfers for domestic payments | Can be faster for international payments, but depends on banks |
| Cost | Lower fees, cost-effective for domestic transactions | Higher fees due to international transfer costs and currency conversion |
| Security | Secure for domestic payments | Secure but can carry slightly more risk due to international factors |
| Processing Time | 1-3 business days | 1-5 business days, depending on intermediary banks and countries |
Conclusion
Both ACH and SWIFT serve distinct purposes depending on a business’s payment needs. ACH is best used for low-cost repetitive transactions based within the United States, which offers a secure, cost-effective process for payroll, vendor payments, and regular bills.
SWIFT is best used for transactions cross- border transactions with secure, standardized cross-border payments but at a higher fee and variable processing times.
When deciding between ACH and SWIFT, consider the geography of your payments, the urgency of the transaction, and the associated costs. For domestic payments, ACH payment system is typically the best option due to its lower costs and convenience.
For international payments, SWIFT is the go-to choice for fast, secure transfers across different currencies, although international ACH might be worth considering for lower-cost, non-urgent transfers.
Identify your business needs to pay or to accept payments, and choose the payment method that most efficiently, quickly, and economically between ACH and SWIFT, exploring modern payment solutions such as Zenwork Payments streamlining their domestic and international transfers to help make well-managed accounts payable processes easier to carry out.
FAQs
ACH is used for domestic transactions in the U.S., while SWIFT facilitates international wire transfers between banks worldwide.
No, ACH is limited to domestic payments within the U.S. For international transactions, you would use SWIFT.
SWIFT codes (or BICs) are alphanumeric identifiers for banks. They help ensure that international payments are directed to the correct institutions.
SWIFT is better suited for cross-border payments, as it is designed specifically for international transactions.
Yes, ACH transfers use encryption and secure protocols, making them a safe option for domestic payments.
SWIFT fees vary by bank but generally range from $15 to $50 or more, depending on the transaction size and the banks involved.
You can find your bank’s ACH and SWIFT codes on their website, on your bank statements, or by contacting customer service.