Cash and checks may be a convenient way to conduct personal finance at the local level, but they just don’t work for conducting business nationally or internationally. It would be extremely slow and impractical to transport a large sum of cash in order to satisfy a payment, and checks require an element of trust that doesn’t work for large enterprises.
So what’s the solution? This is where the electronic fund transfer, commonly shortened to EFT, comes in.
What is an electronic fund transfer (EFT)?
Electronic fund transfer is a catch-all term that includes a wide variety of electronic payments like ACH and wire transfers. EFTs make it easy to digitally move any amount of money from one bank account to another, whether those accounts are hosted by the same financial institution or not.
There are no human bank employees or paper documents involved to make these transfers happen. The premise behind EFTs might be fairly expressed as “a bank-approved email system for money.”
EFTs are one of the primary mechanisms for moving money around the world. They are accessible to businesses of just about any size, rather straightforward to use, and eliminate the need to send paper checks or cash anywhere.
How do EFTs work?
EFT payments are processed on a designated money network, perhaps most commonly the Automated Clearing House (ACH) network. This is the money transfer system that connects every financial institution in the US to one another, from large banks to small credit unions.
An EFT requires two parties to execute a transaction: someone must send funds, and someone else must receive them. The sender must also offer up a few important details to successfully execute the transfer, like the name of the recipient’s bank, that person’s routing and account number, and the type of account they hold.
The sender might be an employer or individual paying a contractor for some kind of service. The recipient could be an employee of that business, some kind of third-party vendor, or even a utility company—it’s quite common for utility companies to use EFTs to get paid when a customer sets up auto-pay on their account.
Once the transfer is initiated, it moves through a series of digital networks from either the internet or a payment terminal to the sender’s bank and then to the receiver’s bank. EFTs that occur on the ACH network are executed in batches—the network waits to accrue a collection of pending transfers, and then processes them later. Most of these payments are cleared within a couple of days.
This style of technology is an effective way to take payment solutions to the internet while keeping things secure and readily usable.
7 types of EFTs
As mentioned above, “EFT” is a catch-all term for money that moves on a bank-approved digital network. There are a variety of different types of ETFs out there, and some are bound to be quite familiar to you—you may even already be using EFTs without realizing it.
- Automated Clearing House payments. The Automated Clearing House is a major network for moving money between bank accounts across the US. ACH payments move through the ACH network, which is overseen by NACHA and operated partially by the Federal Reserve (as opposed to conventional credit card networks, which are owned and operated entirely by private for-profit companies). ACH payments settle in about two to three business days. ACH transactions can happen as a credit or a debit. Importantly, all ACH payments are a type of EFT, but not all EFTs are ACH payments.
- Direct deposit.When you wake up on a Monday morning and notice that you’ve automatically received your salary overnight, that’s an EFT. Direct deposit is a type of transfer designed to make it simple to pay people who work for you. This is often facilitated by a third-party service provider—tell them how much every employee should receive and how often, and the rest happens on its own.
- ATMs (automated teller machines). When you make a withdrawal or deposit at an ATM, the ATM is actively involved in using EFTs to update your bank account balance without any need for you to go inside a physical bank branch.
- Credit and debit cards. You probably use your credit or debit card regularly to move money between bank accounts, make purchases, and pay bills. These all represent a type of EFT payment for consumers paying for goods and services.
- Wire transfers. Wire transfers are a go-to EFT mechanism for moving large amounts of money. Maybe an individual is making a down payment on a house; maybe a large business is acquiring a smaller one. When people want to make payments for big-ticket items that go beyond conventional consumer spending, a wire transfer is likely how they will do it.
- Pay-by-phone systems. This is a less-common variety of EFT, but it’s still in use today—some people rely on phone-based systems in order to initiate payments for covering bills or moving money between accounts. These systems render that transfer request into something that can be interpreted and carried out by computers.
- Electronic checks. You might hear them referred to as e-checks. They function just like paper checks, but without the paper—you must input your routing number and bank account number into a payment service to successfully complete a transaction.
Our world has become increasingly digitized ever since the Federal Reserve implemented the Electronic Funds Transfer Act in 1978. Today, money has more in common with computer data than with ordinary cash. It can be represented in ones and zeroes online, and electronically travel around the world in an instant.
EFTs are an important underpinning to the global economy for their speed, security, and accessibility. If you’re looking for a strong way to modernize the way you handle payments, find the EFT solution that works best for you.