Last month, my sister-in-law Wendy had a week off from work and booked a last-minute trip to Quebec. (She earned it: she’s a night-shift nurse at Seattle’s biggest trauma hospital.)
As a family guy, I’m more than a little jealous of Wendy’s seat-of-the-pants globetrotting. So I was pleased when she took a break from cycling around a lake and eating Montreal smoked meat to email me with a financial question.
After buying her ticket, Wendy wanted to move some spending money from one bank to another. She prefers debit to credit, so she wanted to put plenty of money into the checking account whose debit card doesn’t charge any international or ATM fees.
So she used a feature of her banks that enables free interbank transfer. It goes by many names: “External Transfers” is a popular generic name; “MoneyLink” a popular brand name. (To be clear, we’re talking about ways to send money to yourself, not someone else.)
Unfortunately, it took the money much longer to arrive than she expected. So she asked me: What are these services, anyway? How well do they work? And can I trust them?
Not the Publisher’s Clearing House
All of these interbank transfer features rely on a decades-old network called the Automated Clearing House (ACH).
ACH started in the early 1970s, long before anyone had a personal computer. It was designed to be cheaper and simpler than paper checks or wire transfers for moving money between banks.
ACH is now used for all kinds of money moves: direct deposit from your employer, online bill pay, automated bill payments. Any time you supply your bank account and routing number off the bottom of a check, you’re using the ACH network.
Here’s how an external bank transfer function typically works. When I log into my credit union and click on External Transfers, I can add an account at another bank. I do this by entering the routing and account number of the external account.
Then the credit union will make those two test deposits of amounts under $1. I enter the amounts, and the account is confirmed.
In some cases, I can add an external account instantly by entering my online banking username and password for the external bank. Once the external account is validated, I can transfer money into or out of it.
And here’s where we get to the first key point about ACH: it’s slow.
See You in a Couple of Days
We’re used to instant gratification. Hear a song you like? Buy it instantly on your phone. ACH is not like that. Like me, it’s a child of the 70s. Unlike me, it hasn’t made a lot of technological progress since then.
ACH operates only on business days—not weekends or holidays—and takes at least overnight. But there are many reasons your money may take more than one business day to reach its destination when you make an ACH transfer:
Your bank uses a middleman to handle ACH transfers. So it’s at least a day to get from your bank to the middleman, and at least another day to get from the middleman to the receiving bank.
Your bank may charge a fee for faster service. My credit union offers 3-business-day transfers for free, or 1-day transfers for $2.
The bank on the receiving end may put a hold on the money for a few days a protection against fraud or insufficient funds. This is most common if you make an ACH pull transaction, which I’ll explain in a minute.
In the last couple of years, small banks and credit unions have explored the possibility of building a same-day ACH network. So far, nothing has come of it.
Push and Pull
So, the first key to using ACH transfers is to be prepared to wait. They’re like the money equivalent of the US post office’s Media Mail: cheap and reliable, but slow and (in most cases) with no guaranteed delivery date. The second key is: push money, don’t pull it. I learned this from my colleague Harry Sit at The Finance Buff blog.
When I use my credit union’s external transfer service, I can send money out from my credit union to an external account. This is a push. Or I can pull money in from the external account to my credit union.
Pulling money presents a couple of problems: The bank doing the pulling doesn’t know how much money is in the external account. You could overdraw the account and end up paying an overdraft fee, or just annoy yourself when the transaction fails.
For fraud prevention, the bank you’re pulling from has the opportunity to reverse the transaction. This is a good thing. If some crook pulls money out of my account via ACH, I want to be able to call up the bank, even after the transaction clears, and say, “Hey, someone stole my money!”
For this reason, the receiving bank will usually put a hold on the money for several days after the transaction clears, making a slow process even slower.
You can avoid both of these problems by making a push transaction. If only one of your banks has an external transfer feature, however, you might not have a choice.
Alternatives to ACH
So what if you do need to move money fast? I can think of three options.
Use a credit card or other form of payment. Skip the debit card, at least until the ACH transaction is complete.
Use a paper check. Some banks, especially small banks and credit unions, will credit a check deposit on the same business day—faster than any ACH transaction. This is true even if you deposit the check via your smartphone.
Of course, the bank can always put a hold on the check deposit, so the speed is far from guaranteed.
Make a Wire Transfer. Wire transfers are old-school. They involve direct communication between two banks. They’re very fast (same-day, and usually same-hour) and very expensive — you’ll pay on both ends, about $40 total on average.
It’s probably not worth it if you’re just trying to save on a 3% international transaction fee and a couple of ATM fees. You can also wire cash directly to a person or a bank account via Western Union, which is usually even more expensive.
Wendy eventually got all her money into the right account, had a great time in Canada, and brought me some maple candy. Next time I’m telling her my fees are going up, and I want syrup.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.