Understanding how money moves electronically in the US can make managing your finances smoother and less stressful. You’ll likely encounter terms like “EFT” when setting up bank accounts, paying bills, or receiving your salary. Electronic Funds Transfer (EFT) is the secure, paper-free way to move funds directly between bank accounts.
At Remitly, we know how important it is to make financial tasks straightforward, especially when you’re settling into a new country. Just as we streamline international money transfers, this guide will break down EFT to help you understand how it works, its various benefits, and how it makes your life easier.
What is EFT?
An Electronic Funds Transfer (EFT) is simply a way of moving money from one bank account to another using electronic methods instead of physical cash or paper checks. Think of it as a digital instruction telling banks to transfer funds. If you’ve ever used a debit card, paid a bill online, or received a direct deposit, you’ve already used EFT. It’s a broad term covering many ways money moves digitally.
Importance of EFT in modern transactions
EFT has transformed how we manage money, replacing slow, manual methods like checks. It’s fast, letting you pay bills or send money in minutes, and it’s accessible through apps or online banking. For immigrants, EFT is especially useful for sending remittances or receiving payments from abroad through services like Remitly, simplifying cross-border finances.
Businesses rely heavily on EFTs for payroll, paying suppliers, and receiving payments from customers. They streamline operations and reduce the costs associated with handling paper checks.
How EFT payments work
Understanding the mechanics behind EFT can help you feel more confident when using these services. Here’s a look at the process and key players involved.
The processes involved in EFT transactions
While the specifics vary depending on the type of EFT, the general process involves these steps:
- Initiation: You (or the person/company paying you) start the process by giving an instruction to transfer funds. This could be done through online banking, a mobile app, a point-of-sale terminal (like when using a debit card), or by setting up an automatic payment. This is where you provide details like the recipient’s account and routing numbers.
- Authorization: You authorize the transaction, often by entering a PIN, password, or using biometric verification. Your bank also checks if you have enough funds and verifies the provided details.
- Transmission: Your bank sends the payment instructions electronically through a secure network like the ACH network or Fedwire, to the recipient’s bank in real-time
- Processing: The banks involved verify the details and ensure funds are available. The sending bank debits the money from the originating account, and the receiving bank credits the money to the destination account.
- Settlement: The actual transfer of funds between the banks is completed. This takes time from almost instantly (like some wire transfers or P2P payments) to a few business days (like standard ACH transfers).
- Confirmation: You and the recipient get notified, often via email or app alerts
The role of financial institutions
Banks and credit unions are central to the EFT process. They act as the gatekeepers and facilitators. They ensure your money moves safely, using encryption and fraud monitoring.
The sending bank (Originating Depository Financial Institution or ODFI) initiates the transfer request, while the receiving bank (Receiving Depository Financial Institution or RDFI) accepts the request and credits the funds to the recipient’s account. They use secure networks, like the Automated Clearing House (ACH) network or the Federal Reserve’s Fedwire system, to communicate and move the funds safely.
Useful EFT terminology
You might encounter some of these terms when using EFT, so it’s useful to know what they mean in this context.
- Electronic: EFT transactions happen via networks and digital systems like computers or smartphones, not physical paper
- Funds: This refers to the money being moved
- Transfer: This is the action of moving the money from one account (like your checking account) to another (like your landlord’s account or your savings account)
- Debit: In the context of EFT, a debit means money is being taken out of an account. When you use your debit card, money is debited from your checking account. An ACH debit payment means a company is authorized to pull funds from your account (like for a recurring bill).
- Terminal: This usually refers to a device used to initiate an electronic transaction. An ATM is a type of terminal. A point-of-sale (POS) terminal is the machine where you swipe, insert, or tap your card in a store.
Types of EFT payments
EFT is an umbrella term covering various electronic payment methods. Here are some common types.
Overview of different types of EFT payment methods
- Automated clearing house (ACH) payments: These are electronic transfers processed through the ACH network, often used for recurring payments like direct deposits, bill payments, and transfers between your own accounts at different banks. They are generally cost-effective but can take one to three business days to settle, though same-day options are becoming more common.
- Wire transfers: These are usually used for larger amounts or when speed is critical, like for real estate transactions. Wire transfers are processed individually (not in batches like ACH) and often settle the same day domestically. They tend to be more expensive than ACH payments and are usually irreversible once sent. International wire transfers are also common but may take longer and involve currency exchange.
- Debit and credit card transactions: When you use your debit or credit card at a store or online, you’re initiating an EFT. The payment terminal or website sends an electronic request through the card network (e.g., Visa or Mastercard) to transfer funds.
- Direct deposit: Direct deposit is one of the most common types of EFT you’ll likely encounter, especially for receiving salary payments or government benefits. It’s an electronic transfer directly from the payer’s bank account (e.g., your employer) into the payee’s bank account (yours). It’s convenient because the funds appear in your account automatically, eliminating the need to deposit a physical check.
Detailed explanation of e-checks and ATM transactions
- Electronic checks: An e-check functions like a digital version of a paper check. When you authorize an e-check payment (often for online bill pay), you provide your bank account number and routing number. The funds are then transferred electronically from your account to the payee’s account, usually via the ACH network. They offer a way to pay directly from your bank account without needing a physical checkbook.
- Automated teller machine (ATM) transactions: Using an ATM involves EFTs. When you withdraw cash, deposit funds, or transfer money between linked accounts at an ATM, you’re using an electronic network to communicate with your bank and move funds.
Peer-to-peer payments and real-time gross settlement
- Peer-to-peer (P2P) payments: These services let you send money directly to another person using a mobile app or website. You link your bank account or card, and can then transfer funds to someone else using their email address, phone number, or username. These are very convenient for splitting bills or paying friends and family quickly. Remitly offers a similar easy system for sending money internationally.
- Real-time gross settlement (RTGS): RTGS systems process high-value transfers individually and in real-time, meaning the settlement is immediate and final. Wire transfers using systems like Fedwire in the US are a form of RTGS. While you might not interact directly with the term “RTGS” often as a consumer, it’s the backbone for urgent, large-value domestic wire transfers.
Requirements for different types of EFT
To send or receive most types of EFTs, specific information is usually required:
- For receiving funds e.g., Direct Deposit: You’ll need to provide your bank account number and your bank’s routing number, also known as the ABA number.
- For sending funds e.g., online bill pay, wire transfer: You’ll need the recipient’s name, account number, and their bank’s routing number for domestic transfers. For international wire transfers, you’ll often need the recipient’s address, their bank’s SWIFT code (or BIC), and possibly an IBAN (International Bank Account Number). Always double-check these numbers for accuracy, as incorrect information can cause delays or failed transfers.
Benefits of EFT
EFT stands out for its practical advantages, making it a go-to for modern banking.
Safety and security
While no system is 100% foolproof, EFTs are generally considered more secure than paper checks. Checks can be lost, stolen, or altered, exposing your bank account information. EFT systems use security measures like encryption (scrambling data during transmission) and authentication (verifying your identity) to protect transactions. Federal regulations like the Electronic Fund Transfer Act (EFTA) also provide consumer protections against unauthorized electronic transfers.
Cost-effective and time-saving aspects
EFT cuts costs by eliminating paper, printing, and mailing expenses. It’s faster, with many transactions processed instantly or within days, saving you trips to the bank. Businesses save on administrative costs, too. ACH transfers, for example, are ideally cheaper for businesses and often free for consumers compared to the cost of processing paper checks or the fees associated with wire transfers.
The convenience of anytime, anywhere transactions
One of the biggest benefits of EFT is convenience. You can initiate payments or transfers from your computer or smartphone at any time, without needing to visit a bank branch during business hours. This is a lifesaver for immigrants juggling time zones or busy schedules, letting you pay bills or send money home anytime.
FAQs
What are the main differences between ACH and wire transfers?
The main differences lie in speed, cost, and network. ACH payments typically use the Automated Clearing House network, are often cheaper (or free for consumers), and might take one to three business days, though faster options exist. Wire transfers using networks like Fedwire are generally faster, often offering same-day settlement domestically. They are suitable for large amounts, but usually more expensive.
Are EFT payments safe?
Generally, yes. EFT systems use multiple layers of security, such as encryption and authentication. Consumer protection laws like the EFTA also exist. However, like any financial transaction, risks exist, such as phishing scams or unauthorized access if your login details are compromised.
It’s vital to use strong, unique passwords, enable two-factor authentication when available, monitor your accounts regularly, and only send money to people or businesses you trust.
Can EFT payments be reversed?
It depends on the type. ACH payments sometimes have reversal windows (e.g., for errors or unauthorized debits), but it’s not always guaranteed and has time limits. Wire transfers are generally considered final and irreversible once processed. P2P payment policies vary by platform, but often, once sent, the money is gone unless the recipient sends it back. Always double-check details before sending funds electronically.
Is direct deposit a type of EFT?
Yes, direct deposit is an EFT used for receiving regular payments like salaries.
What are the four types of electronic funds transfer systems?
Automated clearing house (ACH) payments, wire transfers, debit/credit card transactions, and direct deposit.