What Is an EFT? A Broad Guide on Electronic Fund Transfer

What Is an EFT?

EFT stands for Electronic Fund Transfer which transfers the amount from one bank to another bank account or within the two accounts of the same bank. Apart from banks, it also transfers amounts between financial institutions and individuals. EFT is also known as electronic bank transfer, electronic payments, and e-checks. So, the actual EFT means transferring the amount through digital mode.

Where Is EFT Utilized?

Electronic funds Transfers have a broad scope of utilization. People can use EFT regardless of the purpose of payment transactions and amount. One can use EFT for multiple purposes, such as.

• Direct deposit payment
• Payment of bills
• Refund of tax and payments
• Donation and charity funds
• Fund transfer between two people
• Direct deposit payments
• Investment account contribution

Types of EFT Payments

There are multiple EFT payment types. Each type has a different purpose, but fast and accurate payment transactions are common attributes. Let’s dive into each EFT payment type one by one –

1. ATM Transactions

ATM transactions are common throughout the world. This is most commonly used when a person needs cash. The ATM is useful to dispense the cash by using the debit card. Once the user inserts a debit card, the information is transmitted to the bank and processed further to dispense the money.

2. Internet Transactions

Internet transactions involve card insertion or tapping on a POS machine. The system captures the card details automatically and proceeds with the payment. This makes processing fast, and a security concept is also applicable here.

3. Phone Payments

This type of transaction occurs using a phone device. It is very common for utility payments. There are multiple applications available for making payments via phone. It involves QR scanning and entering a phone number to complete the payment.

4. Direct Deposit

Fund deposit automatically into the receiver’s account. This is a popular method in the corporate and industrial areas where employers transfer salaries into employees’ accounts.

5. Credit Card & Debit Card

Credit and debit card payments are also forms of Electronic funds transfers. The card swiping and tapping make the payment transaction fast and accurate. Credit cards and debit cards are useful to pay bills using the electronic mode.

6. Wire Transfer

Wire transfer is useful for transactions of large amounts of money. The money transaction can be between person to person or a business. The receiver receives the money directly into the bank account.

EFT Payment Example

Let us understand EFT’s meaning with examples. We can take 3 electronic fund transfer examples.

Recurring Bill Payments Directly from the Bank Account

Suppose your monthly subscription is billed through a recurring method by ACH transactions. In this case, your bank will deduct the amount and make the payment from your checking account. In the same way, consumers pay their utility bills by utilizing recurring and paid electronically.

Wire Transfers

These are another example of EFT (Electronic Funds Transfer) that uses SWIFT or Fedwire to transfer funds. There are some charges applicable to international and domestic wire transfers. Some banks reject domestic wire transfer fees. On the other hand, an international wire transfer includes multiple charges applicable to the sender bank, receiver bank, and intermediary bank.

Direct Amount Crediting

Companies and other employers directly deposit salaries into employees’ accounts. This is also an example of an EFT that uses ACH where direct payment is done.

How Does EFT Banking Work?

After knowing about an EFT (Electronic Funds Transfer), Let’s understand how electronic funds transfers work. In EFT, two parties (sender and receiver) are essential to initiating the process. On initiating the transaction from the sender’s end, funds are transferred to the receiver’s account. The bank’s approval and authorization process is also applicable. This is the basic EFT banking definition and it’s working.

The sender can be anyone, an individual, a business party, or an employer. Likewise, a receiver can be an employee who receives a salary or vendors who receive payments for selling goods or services.

In the USA, an Automated Clearing House is a transfer system that unites entire banks, financial institutions, and credit unions. Banks handle EFT payments by utilizing the Automated Clearing House (ACH) network.

Following information is necessary to fill in when initiating EFT banking –

• Account type
• Recipients bank name
• Recipients account number
• Recipients routing number

What Is the Difference Between EFT and Wire Transfers?

The relationship between wire transfers and EFT is the same as between ACH transfers and electronic fund transfers. However, the difference is based on their administration. The Federal Reserve controls the wire transfers, and transmission takes place on Fedwire (Federal Reserve Wire Network). The National Automated Clearing House Association controls the ACH network.

What Is the Difference Between EFT and ACH Transfer?

ACH stands for Automated Clearing House (ACH). It is a type of transferring process that uses the ACH network and takes place between two financial institutions. It is a type of EFT, but the entire EFT is not considered an ACH transfer.

That clearly states that the ACH-oriented transfer will be called an ACH transfer whereas the general electronic bank transfer will be called a bank transfer or EFT.

Benefits of EFT for Businesses

Electronic Fund Transfer is now part of daily life in the business world. Professionals use EFT for accurate and fast transactions that simplify the transaction. There are various merits associated with EFT.

1. Security

EFT has refined its security structure, and now there are many new advancements for preventing fraud actions. For instance, there was less or no encryption, and card numbers were directly sent to the card reader through magnetic stripes earlier. But now, EMV chips and NFC payments always send encrypted codes. This keeps the fraud attempts at bay.

2. Affordability

There are different fees for different EFTs that depend upon the network. The EFT fees are low. The other reason for electronic fund transfers being cost-effective is the use of paper checks. Ultimately, there are no chances of checks being returned or lost. It lowers the cost corresponding to the traditional payment method.

3. Speed

EFT commits to offering fast fund transfers for sending and receiving purposes. Transactions related to debit cards, credit cards, and mobile payments offer instant transactions. The net banking transaction, however, takes 1 day to transfer the funds.

4. Accuracy

Electronic Fund Transfer always commits accuracy with minimum chances of errors. It works on the digital concept with less or no manual process. Thus, it is less prone to mistakes. EFT also helps in maintaining the record along with the accuracy.

Are There Any Challenges Involved In EFT?

EFT is not a 100% free concept. Some challenges in Electronic Fund Transfer are listed below –

• Electronic fund transfer offers a secured transaction but cannot prevent hacking attacks.
• EFT generally offers high accuracy, but that doesn’t mean it can correct the mistakes. Wrong information entering can lead to heavy loss.
• There is a transaction limit in most of the banks, and it blocks the transaction beyond that limit.

Wrap Up

So, we are conveying our last words about the EFT. Electronic Fund Transfer offers a fast and convenient way to transfer funds. Along with it, secured payment is also a crucial part.

However, users must be aware when performing a digital transfer. They should recheck the details before hitting the pay button. A small mistake from the user side can give rise to a big issue. Users must protect passwords and use trusted applications to prevent fraud and theft actions.

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