Technology has completely transformed the way consumers exchange money. No longer do you need cash, a check or a credit card to pay someone. Instead, you can move the money electronically with just a few taps on your screen. The term “electronic funds transfer” covers all digital movement of funds, from wire transfers to digital payments to Automated Clearing House (ACH) payments.
Electronic Funds Transfer Defined
Getting money from one bank account to another is easier than ever. A bank can simply input some information and remove money from the sender’s account, transferring it to the recipient’s account without anyone ever having to fill out a deposit slip or make a mobile check deposit.
The process of moving money from one account to another is known as electronic funds transfer (EFT). There are various ways to do this, but they all fall under the general heading of EFT. To initiate an EFT, you need either the bank account number of the person at the other end or an app that lets you send money to an email address or phone number.
Types of EFTs
There can be a little confusion between electronic funds transfer and Automated Clearing House payments. There are three types of EFT payments:
- Automated Clearing House payments: This service is provided by an institution called NACHA, which has operated since 1974. The ACH creates a hub that payments flow through. Typically, an ACH payment is a payroll check, a business-to-business payment or a government transaction, but it can also refer to those direct payments you make to pay your bills.
- Wire transfers: Some transactions occur directly between lenders, which means they never pass through the ACH. Those transactions are called wire transfers, and they move the funds quickly between accounts. If you’re initiating a wire transfer, it’s probably for an important purchase like a down payment on a house.
- Digital payments: This category includes peer-to-peer transfers through services like Zelle and Venmo. Many banks now provide this service for free or for a nominal fee.
There are other types of EFT-based payments, as well. When you pay for a purchase using a debit card or use your card to get money out at the ATM, the transaction is processed electronically. The money is simply going from your bank account to either the business’s account or to your wallet, rather than going directly to an individual you’re paying.
How EFT Works
If you’ve ever been paid by direct deposit, you know that in order to put money in your account, the sender needs your account information. Businesses typically use a form to request your checking account and routing number, as well as obtain the signature that authorizes them to move money to your account. You may also be asked to include a voided check or deposit slip so that the sender can verify the numbers you wrote down are accurate.
Whether you’re making a purchase at a store or your employer is paying you via ACH, the EFT payments run on the same principle. The payment request is submitted to your bank, including your account information, with the sensitive data encrypted. Your bank needs to approve the transaction for it to be final. It can take four or five days for an ACH transfer to be completed, but some bank-to-bank transfers can go through in as little as a day.
Benefits of Paper Checks
It may seem hard to believe, but EFT payments haven’t been around forever. Some of today's businesses once operated solely on paper checks. In the short-term, checks can be easier for a business since you don’t need routing and account numbers from the recipient. Simply write a check and hand it over.
But long-term, a paper-based check actually ends up costing more time and money. If you’re going to the trouble of gathering information on a recipient, it’s well worth it if you’ll be paying the person multiple times. If it’s a one-time payment, you may find a paper check is a better option.
There is an alternative, though. Apps like Venmo, PayPal, Google Pay and Apple Pay let you send money to someone electronically without the person’s banking information. The recipient needs to either already have an account with the app or be willing to set up a new one to receive the payment, but it's likely that most people have at least one of the most popular apps.
Read More: Direct Deposit vs. Paper Check
An EFT vs. an Electronic Check
A happy medium between an ACH and a paper check is an electronic check. An e-check is a form of electronic funds transfer that uses the ACH to transfer the funds. An electronic check is the same basic principle as a paper check, but the approval is immediate.
As with EFT, e-checks remain a secure way to pay someone. If you’re paying an employee, contractor or friend, you should be able to initiate an e-check through your bank or favorite payment app. With a payment app, you won’t even need bank information, since the app already has that.
Electronic Funds Transfer Regulations
EFT transactions are heavily regulated under the Electronic Funds Transfer Act, which was set up in 1978 to protect consumers. Regulation E under the EFTA sets strict requirements for financial institutions and merchants that are processing electronic financial transactions.
If a consumer finds that a financial institution has violated the EFTA in some way, legal action is an option. The protection you get if your ATM card is stolen, for instance, is regulated by this act. You also can’t be forced to use EFT, which means your employer should offer a secondary option if you’d prefer not to be paid that way.
Read More: Debit Card Fraud Procedures
An electronic funds transfer makes it easy to transfer funds from one account to another. Whether you use it for paying your bills, reimbursing your friends for concert tickets or handling your business expenses, EFT is an affordable, efficient way to move money.
- Tipalti: EFT vs. ACH – What’s the Difference Between These Two Payment Methods?
- Investopedia: Automated Clearing House (ACH)
- Abacus: How Long Do ACH Transfers Take? The Dirty Secrets on How ACH Works.
- Citizens Bank. "How to Write a Check." Accessed Jan. 30, 2020.
- Consumer Financial Protection Bureau (CFPB). "What Does It Mean for a Check to Be Endorsed 'For Deposit Only?'" Accessed Jan. 30, 2020.
- Consumer Financial Protection Bureau (CFPB). "Can I Cash a Check at Any Bank or Credit Union?" Accessed Jan. 30, 2020.
- Ally Financial. "ACH Transfers." Accessed Jan. 30, 2020.
- American Express. "ACH Payments." Accessed Jan. 30, 2020.
- Capital One. "How to Transfer Money to Another Bank Account." Accessed Jan. 30, 2020.
- Popmoney. "Search Bank." Accessed Jan. 30, 2020.
- Square. "Square Cash Is Open for Business." Accessed Jan. 30, 2020.
- Venmo. "About Fees." Accessed Jan. 30, 2020.
- Federal Deposit Insurance Commission. "Have You Bounced Yourself Out of a Checking Account?" Accessed Jan. 30, 2020.
- Consumer Financial Protection Bureau (CFPB). "Can I Close My Account Whenever I Want?" Accessed Jan. 30, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.