Global ACH or IAT Transactions
International ACH transfers are managed by the National Automated Clearing House Network (NACHA) and are required to follow NACHA’s rules that: gateway operators must classify payments coming to or from financial agencies outside the US, and that all necessary identifying information for each party is provided to NACHA.
What most people mean when discussing “Global ACH” is the direct deposit of funds into a cross-border bank account through that country’s basic clearing mechanism. In the United States, NACHA (National Automated Clearing House Association) manages the ACH network of transactions for all the banks in the US. The equivalent of ACH in Europe is SEPA, the Single Euro Payments Area, which consists of 35 participating countries (with specific exclusions of certain territories). In Australia, the equivalent of ACH is “Direct Entry.” So while there is no official “global ACH” system to pay suppliers via ACH in any country, mechanisms exists in each region to enable this type of payment.
Global ACH vs. Wire Transfers
The best way to describe the value of ACH functionality is to compare it to wire transfers.
The difference between an ACH-like experience and a wire transfer is that ACH-like systems are collectives across all banks in the country where wire transfers require individual banks to connect. Wire transfers are faster (because they require both banks to have an ad-hoc direct communication link to transfer funds), but they’re much more expensive (with both banks charging for the transaction because it is literally more work for both financial institutions).
As mentioned, ACH-like transfers rely on another body (e.g. NACHA, SEPA, etc.) to perform routing of funds at scale across all banks in the country, but this process can take a couple of days to clear since it must draw from one bank and submit to another. In general, you cannot pay unless funds are available and ACH systems must poll the payer bank account before clearing payment to the payee. ACH are usually not as “high priority” transactions as a wire transfer, but ACH-like services are highly reliable and better for cost-effective remittance.
For example, if you want to pay someone $200, but the international wire transfer fees are $50 (including inbound and outbound), you and the person you’re paying might not be too keen on being charged 25% just to get money there faster. By comparison, international transaction fees using ACH-like systems are usually around $5 depending on the country and service you are using. On the other hand, if you’re paying someone $20,000, $50 in wire transfer-related fees may seem inconsequential if it means they’ll get their money sooner.
If you’re sending money from the US to another country via ACH-like systems, there are several considerations.
- Bank routing information is unique to almost every country, so you need to correctly understand the syntax for routing to foreign bank accounts. This can be extremely complex and rife with error. And as mentioned, there is no “global ACH” standard. Tipalti estimates that there are over 26,000 rules for the multitude of countries, so someone on your team will need to possess the intelligence of what those rules are. In addition, they’ll need to stay updated on changes as the world is an ever-evolving place with new requirements showing up with great frequency.
- Sending money to foreign accounts needs to clear the US Treasury’s OFAC (Office of Foreign Assets Control) blacklists for anti-terror/anti-money-laundering compliance. In a recent case, the US Treasury fined PayPal millions of dollars for not complying with OFAC screening.
- It’s a best practice to have the person you’re paying manage their own account information. Specifically, they should own the data-entry effort so the onus is on them to provide the correct data (lest they will not be paid). This requires a payee portal of some type to facilitate data entry. Error rates on payments can be high. Even the most optimized operations can still see 3-5% return on international payments. This can cost the payer money and time to investigate, resolve and resubmit payments. Getting the right data in the beginning is crucial. ACH errors have been known to happen, especially when manual data entry is involved.
- With the money saved by not sending wire transfers, you may opt to offer currency conversion services to your payee. The reason is that some countries (like India) have convoluted conversion issues when dealing with foreign payments. By streamlining that step for payees, it can be a nice way to preserve good will as well as make payments more frictionless.
- Using a SaaS-based payment management system like Tipalti can help you provide “Global ACH” to your payees across the world, while helping to minimize the complexity and time required to manage this payment remittance method, limiting payment errors, and complying to regulatory requirements.
In addition, most banks do not provide individual businesses the option to send money using the country’s local ACH systems as they are not connected to those systems. Utilizing a payment management system like Tipalti, you have send to approximately 65 different countries natively using international ACH.
Word of note: One shouldn’t confuse “international ACH” with the International ACH Transactions (IAT) established by NACHA as an extension of ACH. IAT is designed for US banks (which payers must supply adequate IAT information) to monitor and report international transactions for OFAC compliance. IAT itself does not have a remittance function to directly deposit into a foreign bank account.
Learn more about ACH vs. wire transfers.