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ACH Transfers: Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

ACH transfers in action
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You may have come across the term ACH when looking at different banking options or making certain banking transactions.

ACH stands for Automated Clearing House, which is a network and processing system that financial institutions use to transmit funds electronically between banks and credit unions. ACH transfers help to cut down on costs and processing times.

ACH transfers can include depositing funds directly to your account (transfers in, or credits to you), or transferring money out of your account to make payments (debits to you). For example, when your employer deposits your paycheck to your bank instead of handing you a paper check, that is an ACH transfer. Other direct deposits made by ACH transfer can include income tax refunds or other types of refunds. ACH direct payments (transfers out) often are used when you pay credit card or retailers’ bills (either one-off or recurring).

How long does it take for an ACH transfer to process?

ACH debit and credit transactions tend to process pretty fast. The National Automated House Clearing Association (NACHA) has operating rules that specifically require ACH credits — when you receive money — to settle within one-to-two business days. ACH debits — when you pay money — will settle the next business day. In most cases, all ACH transfers are settled within the same business day. But that doesn’t mean that money will land in your bank account that quickly. It could take as long as a few days, depending on your bank or credit union’s rules and regulations.

ACH money transfers — rules and fine print

Most financial institutions don’t charge a fee for incoming or outgoing ACH transfers. However, you are limited to six withdrawals per month for a savings account based on the Regulation D rule. So, if you go over that limit, your bank or credit union may charge you what’s known as an excess transaction fee.

Another fee you may encounter is a non-sufficient funds (NSF) fee — when you don’t have enough funds to cover the amount you’re transferring. Whether this fee is charged at all, and its amount, depends on the financial institution, so it’s best to check with yours.

Also depending on the financial institution, the limits on transfer amounts will differ. NACHA imposes a $25,000 daily limit on individual transactions. In other words, if you make multiple transactions, each one is limited to $25,000 in a single day. If you go over that amount, then your transfer will be processed the next day.

Wire transfers vs. ACH transfers

Both wire and an ACH transfers involve one financial institution sending funds to another one. Although both are electronic transfers, wire transfers use a different network, called Fedwire, and can involve transfers within the U.S. or internationally. Wire transfers are sent directly from one physical place to another, whereas ACH transfers are sent through a network.

In addition to making a wire transfer at a bank, you may make it at a nonbank provider — companies specifically designed to help you send money domestically or abroad. These companies may not require you to give your bank information. Instead you’ll need the receiver’s name, your personal details and the cash upfront that you intend to send. With an ACH transfer, on the other hand, don’t have this option.

Free and fast ways to transfer money

ACH transfers aren’t the only way to send or receive money. There are many other options that allow you to get almost instant access to funds with no fees involved. Two of these are cited below.

Zelle

Zelle is a peer-to-peer payment service where users can receive, send or request money to and from other bank accounts by using either an email address or phone number. This works even if the sender and receiver use different banks. Zelle claims that it can send money within minutes for no fee.

Many banks already offer Zelle via their existing online platform or mobile banking app. So, you may access it that way. However, if your bank does not have Zelle embedded in its system, then you may download Zelle’s own mobile app, create an account and use it to send and receive money.

Popmoney

Similar to Zelle, Popmoney is is a payment service that may be available at your bank (via their mobile or online banking services) for free. All you need is the recipient’s email address or phone number and you can send money. If you decide to use the service via PopMoney’s website, you’ll be charged $0.95 per transaction. There is also a monthly limit of $5,000 if transfering from a bank account and $1,000 if doing so with a debit card. If you’re using PopMoney via your financial institution, you’ll need to check with them to see what their limits are.

Tips for sending money safely

When sending money online, you want to be sure that you’re sending the money to the right person and that your own personal details are protected. Sounds obvious, but for example, double check your Wi-Fi connection to make sure that it’s secured. Of course you don’t want hackers to steal your sensitive information.

You’ll also want to ensure that you are sending money to a reputable place. NACHA created a booklet to help consumers spot scams and fraudulent behavior, such as merchant impersonations — that is, when someone pretends to be a company and states that you owe money on a purchase or a bill.

If you find fraudulent activity in your account, notify your bank as soon as possible. Sometimes you can reverse your ACH transfer if you accidentally sent the wrong amount or you suspect that there’s been an error.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sarah Li Cain
Sarah Li Cain |

Sarah Li Cain is a writer at MagnifyMoney. You can email Sarah Li here

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Banking

How Do Banks and Credit Unions Make Money?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Banks and credit unions share some broad similarities: They help their customers borrow money, build savings and invest for the future. Both credit unions and banks make money by charging interest on loans and charging fees for banking services. But their business models are very different in many ways, mainly in regards to what they do with their profits.

Banks are for-profit enterprises that serve all and any customers who come to them, and distribute profits to shareholders. Credit unions are not-for-profit institutions that only serve people who become members, often by requiring them to meet certain membership criteria. Credit unions reward their members with bonus dividends or lower-cost services, rather than redistributing earnings to investors.

How banks and credit unions make money

Banks and credit unions both make money by lending out a portion of their deposits, charging interest on those loans and collecting fees and charges for various financial services, such as investing and wealth management.

Interest on loans

The most significant source of profits for banks and credit unions is charging interest on loans to consumers. Common types of loans offered by banks and credit unions include mortgages, home equity lines of credit (HELOCs), auto loans and personal loans, said Ken Tumin, founder of DepositAccounts.com, a LendingTree company.

Banks pay interest on deposits — checking accounts, savings accounts and certificates of deposit — but the interest they earn from making loans is typically higher than what they pay for deposits. In the banking business, the difference between these two types of interest is known as the “spread.”

If a bank pays out 1% interest on $200,000 worth of CDs, and receives 4.5% interest on a $200,000 mortgage, the difference — the spread — is how the bank makes money. Banks have to comply with rules on how many loans they can make relative to their asset bases.

Fees

Another way that banks and credit unions make money is by charging consumers fees for a variety of services, Tumin said. Commonly charged fees include:

  • Overdraft fees: Overdraft fees comprise 60% of the fees charged by banks, and they tend to fall disproportionately on lower-income customers. Banks and credit unions charge these fees when you don’t have enough money to cover your payment or withdrawal. Fees can run as high as $36 per overdraft transaction.
  • Interchange fees: Banks and credit unions charge merchants fees when you use your credit or debit card, which are known as interchange fees. If a consumer makes a purchase, money is withdrawn from their account — and the merchant pays a fee to both the bank and the credit card company for the transaction.
  • Checking account fees: Monthly fees may be associated with a checking account, or fees may be levied if a consumer doesn’t maintain a minimum balance in the account.
  • ATM fees: If you use another financial institution’s ATM, you typically pay a fee to do so, which goes into that bank or credit union’s pocket.
  • In-branch service fees: If you need a cashier’s check, money order, notary or lock box storage, banks charge per-use or annual fees for these services.
  • Document fees: Banks may charge a fee to pull historical bank records pre-dating a certain time period or to provide print copies of cashed checks. Banks may also charge fees for check printing or paper statements.
  • Loan origination fees: Banks charge fees to “originate” loans, including home loans and personal loans. Loan origination fees may be a one-time flat fee or a percentage of a loan. They may sound low (1%, for instance) but can actually be substantial when considering the total size of the loan.
  • Late fees: Banks charge late fees when borrowers pay credit cards, mortgage loans, personal loans and other forms of debt past the bill’s due date (or past a grace period, which is a few days past the due date). When a checking account is overdrawn, there may be additional late fees if it is not brought back to or above $0 swiftly.
  • Early withdrawal fees: Those who open CDs at banks will pay early withdrawal fees if they withdraw funds before their certificate’s term expires. These fees can cut into earnings from a CD.

Financial services

Many banks offer financial advisory and wealth management services. Institutions charge either a percentage of assets under management or per-transaction brokerage fees.

Many banks offer private banking services to high-net-worth consumers, charging an annual management fee as a percentage of the assets under management. Banks also offer access to investment products for customers in lower wealth brackets.

Credit unions cannot offer financial advisory or wealth management services directly, so they provide them by affiliating with partner registered investment advisors or registered broker-dealers. Credit unions offer these services as a benefit to consumers who want investing advice, and they may make money indirectly through referral fees or other partnerships arranged with an investment advising company.

What do banks and credit unions do with their profits?

Credit unions do not have to pay taxes since they are not-for-profit organizations, which means they avoid one major expense that banks need to pay. Additionally, because credit unions are owned by their members rather than by shareholders, they aren’t focused on generating profits for shareholders like banks are. Often, credit unions return profits to their members as dividends, or they may offer reduced fees or better interest rates on loans or deposit accounts, which can, in turn, attract new members.

Banks, on the other hand, are owned by investors and operate as for-profit institutions. They use their profits to provide returns to shareholders (especially if they’re publicly traded, as most larger banks are), and to pay state and federal taxes, which they must pay as for-profit organizations.

How online banking impacts banks and credit unions

Brick-and-mortar banks and credit unions have been facing more and more competition from online banks. Online banks tend to charge lower account fees than credit unions and pay out higher interest rates on deposits, said Tumin.

While online banks don’t have physical branch locations, they nonetheless offer a compelling proposition to consumers. In response, brick-and-mortar banks are beating them by joining them, offering online banking services of their own to address competition from apps and other tools, which threaten to reduce payment-related revenue by as much as 15% by 2025, according to a report published by Accenture, a professional services firm.

Going forward, banks’ business models will have to change to accommodate the anticipated reduction in fee income. But while these tools may not add revenue for banks, they could potentially lower branch operation costs, which are substantial. By putting more power in consumer hands, a big bank could reduce its branch count, branch hours or individual branch teller staff hours.

“For banks, these tools may be more about cutting back on expenses than adding revenue,” Tumin said.

For credit unions, providing these tools offers the conveniences that banks, which typically have larger branch networks, present. Since credit unions aren’t driven to provide returns to shareholders on Wall Street and are instead driven to manage so that their members receive benefits and favorable rates, credit unions can choose which services are for benefit versus for profit.

Are banks or credit unions better for your money?

Now that you know how banks and credit unions make money, you may be wondering which option is best for your money. As with most financial questions, the answer largely depends on what’s most important to you.

Online banks offer the most compelling savings account rates, with the average savings account interest rising from 0.79% in mid-2017 to 1.52% by the close of 2018. During that time period, traditional banks and credit unions also increased rates, but only to 0.26% and 0.23%, respectively. Pair this with their low-fee checking accounts, and online banks are a compelling option for many consumers, although a lack of branches may deter some people.

Brick-and-mortar bank networks may be more convenient, offering more branches and more sophisticated online banking and investing options. These benefits are positives for some busy consumers, but the convenience comes at a cost — especially when it comes to overdraft and other fees.

“Credit unions may be more consumer-friendly,” Tumin said, citing their low account fees and balance minimums. Because credit unions are member-owned and locally driven, they may give back to their communities and their members. However, they are not open to everyone, as a consumer generally can’t join a credit union for aerospace or military members if they’ve never worked in those fields, for example.

The bottom line

No two consumers need the same things from their bank or credit union, so it pays to research how accounts and fees are structured and which additional services are available. While credit unions and banks make money in similar ways, including through interest on loans and fees that customers pay, they don’t handle profits in the same way.

Where that money is reinvested — in discounts to consumers, or in profits for shareholders — is a key differentiator between credit unions and banks. If you’re going to entrust an institution with your money, it pays to know how that institution ultimately makes money.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jane Hodges
Jane Hodges |

Jane Hodges is a writer at MagnifyMoney. You can email Jane here

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Banking

Credit Karma Savings Account Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Credit Karma is the latest fintech company to jump on the mobile banking bandwagon. The company is now offering a free high-yield savings account, which is somewhat of a departure from the product it’s most famous for: providing consumers with access to free credit checks.

Credit Karma joins a slew of firms—including SoFi and Betterment—that have recently rolled out cash management accounts of their own. Credit Karma Savings will offer a generous 1.90%  APY, and the company says it will leverage technology to keep its rates competitive. Credit Karma is partnering with a network of banks to hold your deposits and gain Federal Deposit Insurance Corporation (FDIC) insurance.

What is Credit Karma Savings?

Expected to launch later this year, Credit Karma Savings is a high-yield savings account that will be accessible through the company’s app. Credit Karma claims it will take consumers just “four clicks” to get started.

Once signed up, deposits will collect an APY of 1.90%. That’s 22 times more than the current national average of 0.09% for savings accounts. Credit Karma says it will leverage technology to keep that rate moving competitively, so that consumers won’t have to monitor rates themselves to ensure they’re getting the most for their money.

There are no fees or minimums required to open a Credit Karma Savings account, and deposits up to $5 million are insured by the Federal Deposit Insurance Corporation (FDIC). To achieve this, Credit Karma partnered with MVB Bank to provide banking services, and it will be utilizing a network of over 800 banks to hold deposits.

However, it’s important to note that the amount that is actually insured is dependent on whether you already have a balance in a partner bank and how much that balance is: “Actual insured amounts may be lower or adversely affected based on any balances you hold at a network bank,” Credit Karma said.

Credit Karma Savings vs. other cash management accounts

Credit Karma joins the ranks of other fintech companies that have recently launched high-yield savings accounts or cash management accounts for consumers, all boasting no fees and no minimum balance requirements. Here’s how Credit Karma Savings stacks up against companies with similar products.

Bank APYNumber of partner / network banks Amount FDIC insured

Credit Karma Savings

1.90%1 partner bank with network of 800+ banks$5 million

SoFi Money

1.60%7 program banks$1.5 million

Betterment Everyday Cash Reserve

1.60%11 program banks$1 million

Wealthfront Cash Account

1.82%9 program banks$1 million

Savings accounts with higher interest rates than Credit Karma Savings

Credit Karma Savings’ 1.90%  APY is certainly nothing to sneeze at, especially when looking at other fintech companies that offer similar high-yield accounts for stashing your cash. But other savings accounts—particularly those at online banks—boast even higher rates. Vio Bank, for example, currently has an online high-yield savings account with an impressive APY of 2.07% , while HSBC Direct Savings touts a 2.05% APY.

The bottom line on Credit Karma Savings

Credit Karma Savings offers a number of attractive incentives, like a competitive APY, no fees and a high maximum amount of $5 million that’s eligible for FDIC insurance. If you already have a Credit Karma account, the convenience and ease of being able to open a Credit Karma Savings account isn’t a bad perk, either. If your main goal is to rack up as much interest as possible on your savings, though, a number of online banks offer higher-yield savings account offerings.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sarah Berger
Sarah Berger |

Sarah Berger is a writer at MagnifyMoney. You can email Sarah here