Electronic funds transfer – Forbes Advisor
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When you need to make a payment these days, there’s a good chance you’ll often use Electronic Funds Transfer, or EFT, to make those payments. EFTs transfer money over an online network, either between banks or directly from person to person, and frequently replace paper-based methods of making payments like checks and cash.
EFT speeds up money movements: Businesses can use EFT payment options to get paid faster by their customers. Friends can use EFT payments to split a tab on a take out order. With widespread uses, EFT is an essential part of how money flows in the economy and in your life.
What is electronic funds transfer?
Simply put, electronic funds transfer payments are payments made over a computer network. These payments move between people and banks to fuel commerce, pay bills, send money to friends and family, and remunerate workers every payday.
If you’ve used online banking to transfer money from your check to your savings account, you’ve used EFT technology. If you’ve used an app on your smartphone to send money to a friend for your part of a restaurant tab, so is EFT.
What is the difference between EFT and ACH?
ACH transactions occur over a specific type of electronic funds transfer network called the automated clearing house. This network deals with more than 20 billion transactions each year totaling more than 40,000 billion dollars, it is therefore a major player in the EFT space. All ACH payments are EFT payments, but not all EFT payments are ACH payments. For a payment to be an ACH payment, it must go through the automated clearinghouse network.
ACH Payments are typically used for direct payments such as direct payroll deposits and the recurring payments you make to businesses each month for your utilities and rent. Unlike EFT debit and credit card transactions which occur in real time, ACH payments are batch processed every day. Funds can take from one to four days to move from one account to another, depending on the two financial institutions involved in the transaction. Large banks can often process ACH payments faster than small banks.
How does EFT work?
EFT payments need two parties to work: a sender and a receiver. When the sender agrees to send funds to the recipient, that payment goes through the appropriate payment network and transfers the money from the sender’s account to the recipient’s account. Pretty simple, right?
Here’s a more detailed description to help you understand how money travels on payment networks: When you’re ready to pay for groceries, you swipe your debit card into the payment terminal to pay your bill. Once you enter your PIN and approve the transaction, the money is transferred in real time from your checking account to the grocery store account. You can do your shopping and go home.
In another example, your current account is most likely there because your paycheck is direct deposit on your account each payday. For this transaction, your employer is the sender and you are the recipient.
When you set up direct deposit, you provide your employer with your bank account and routing information. Your employer enters your banking information into their payroll provider’s system. The payroll provider then initiates batches of transactions each month that debit your employer’s bank account and send funds directly to their employees’ bank accounts. These transactions take place on the ACH network and take a few days. You, as the beneficiary, never see this delay and enjoy having the funds arrive in your bank account on payday as scheduled.
What are the types of EFT payments?
In 1979, the U.S. government established the Electronic Funds Transfer Act (EFTA), which described consumer protections for specific types of electronic money transfers. Here are the types of EFT payments protected by EFTA:
- Electronic checks. When you tell a supplier that you can use your checking account information to create a virtual check and submit that check for payment
- Direct deposit. When you tell your employer that you can deposit your paycheck directly into your bank account
- Payments by phone. When you tell a business over the phone that you can use your banking information to make a payment
- ATM transactions. When you withdraw or deposit money from your accounts or transfer money between accounts at an ATM
- Debit card transactions. When you use your debit card to pay for in-store or online purchases
- Internet operations. When you use your financial institution’s online banking system to do business
Wire transfers are also a type of EFT payment that allows money to be transferred quickly between financial institutions. These EFT payments do not use the ACH network and instead use specific bank-to-bank networks like the Society for Worldwide Interbank Financial Telecommunication (SWIFT) or Fedwire systems.
What are peer-to-peer electronic payments?
The ability to use technology to make payments to friends and family has grown in leaps and bounds in recent years. Apps like Cash App, PayPal, and Venmo make it easy to send money from person to person in the blink of an eye. These peer-to-peer payment systems all use EFT technology to transfer money.
When you sign up to use one of these apps, you can link your debit card, bank account, or both. Then when you want to send a payment, you log into the app with your credentials, enter the receiving party’s information, and confirm your transaction. There ! Your money is sent.
Peer-to-peer payment platforms can also act as “reservoirs” for funds received. In many underbanked communities around the world, users do not transfer funds received through these apps to their banks. Instead, they leave money in the app and then use it to pay other vendors and people directly. Some peer-to-peer payment apps also offer debit cards to their users, making it easier than ever to access funds held on the payment platform.
Are EFT payments risky?
At first glance, it might seem intimidating to share your bank account information with a business and let them debit your account every month. After all, keeping your bank account information private is one of the best security tips in the digital age. The good news is that EFT payments are protected by Electronic Funds Transfer law, which gives you legal recourse if something goes wrong with a particular transaction.
Here are some of the protections consumers enjoy under ETFA:
- Unauthorized Transactions. Consumers have 60 days to report any unauthorized transaction to their financial institutions for investigation. However, if you miss the 60-day window, your financial institution is not obligated to investigate the incident.
- Lost or stolen debit cards. If you report the loss or theft of your debit card within two days, EFTA limits your liability for unauthorized transactions to $ 50. However, if you do not report the loss or theft within 60 days, you could be held responsible for all unauthorized transactions.
- Compensation for infringements. If your bank violates the guidelines set by EFTA, you can potentially recover damages from your bank in court.
- Withdrawal limits. Your bank is required to place daily withdrawal limits on your debit card to protect you from excessive and potentially unauthorized withdrawals.
It is important to note that punctuality is a key factor in limiting your liability for unauthorized transactions. It is imperative to regularly check your bank statements to verify transactions that you do not recognize. You can also set up alerts with your bank (sent by SMS and / or email) which can help draw attention to transactions that are not authorized.
What are the benefits of EFT?
With all types of electronic funds transfers, you can transfer money faster than with a check. For all the time it would take you to send a check to a utility company and have that check processed by their billing department, you can make a near-instant payment online or over the phone using EFT. Your utility account stays up to date and you are not at the mercy of a human being and the speed at which they open envelopes and enter payment information.
EFT technology like direct deposit can also get you to your money faster. You won’t have to wait for your paycheck to clear the bank every month. You also won’t face high check cashing fees if you need your money faster than your bank can process a check.
Most importantly, EFT technology makes it easy to do business where you want to do business. You can do your shopping in your living room and tip the driver by tapping on your screen. You can put all your household bills on automatic payment every month and avoid late fees. You can also pay your friends, family and colleagues quickly and efficiently using one of the many peer-to-peer payment networks. No more counting money at the beer garden and wondering if your friend will ever give you that $ 20 for their share of lunch.
As with any technology, whenever you do an electronic financial transaction, you need to be vigilant. Be aware of your surroundings, protect your PIN code, and only use trusted apps to send money to people and entities you trust. And no matter who you send money to, be sure to check your bank and credit card statements regularly so you can quickly detect potential fraud and limit your liability.