Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly to another without any paper money changing hands. One of the most widely-used EFT programs is direct deposit, through which payroll is deposited straight into an employee's bank account. However, EFT refers to any transfer of funds initiated through an electronic terminal, including credit card, ATM, Fedwire and point-of-sale (POS) transactions. It is used for both credit transfers, such as payroll payments, and for debit transfers, such as mortgage payments.
How EFT works
Transactions are processed by the bank through the Automated Clearing House (ACH) network, the secure transfer system that connects all U.S. financial institutions. For payments, funds are transferred electronically from one bank account to the billing company's bank, usually less than a day after the scheduled payment date.
The ACH Network operates as a batch processing system. Financial institutions accumulate ACH transactions throughout the day, which are handled via batch processing later on. According to NACHA, which creates payment and financial messaging rules and standards, the ACH Network handles 24 billion EFTs each year, accounting for more than $41 trillion transferred. The ACH Network is one of the largest and most reliable payment systems in the world, according to the association.
To complete an EFT, the receiving party must provide the following information:
- The name of the bank receiving funds
- The type of account receiving funds (e.g., checking or savings)
- The bank’s ABA routing number
- The recipient’s account number
The growing popularity of EFT for online bill payment is paving the way for paperless transactions where checks, stamps, envelopes and paper bills are obsolete. The benefits of EFT include reduced administrative costs, increased efficiency, simplified bookkeeping, and greater security. However, the number of companies who send and receive bills through the Internet is still relatively small.
Types of EFTs
The most common types of EFTs include:
- Direct deposit: Enables businesses to pay employees. During the employee onboarding process, new employees typically specify the financial institution to receive the direct deposit payments.
- Wire transfers: Used for non-regular payments, such as the down payment on a house.
- Automated Teller Machines (ATMs): Allows cash withdrawals and deposits, fund transfers and checking of account balances at multiple locations, such as branch locations, retail stores, shopping malls and airports.
- Debit cards: Allows users to pay for transactions and have those funds deducted from the account linked to the card.
- Pay-by-phone systems: Allows users to pay bills or transfer money over the phone.
- Online banking: Available via personal computer, tablet or smartphone. Using online banking, users can access accounts to make payments, transfer funds and check balances.
The U.S. Government monitors EFT compliance through Regulation E of the Federal Reserve Board, which implements the Electronic Funds Transfer Act (EFTA). The EFTA was passed by the U.S. Congress in 1978 to protect consumers engaging in EFTs. Regulation E governs financial transactions with electronic payment services, specifically with regard to disclosure of information, consumer liability, error resolution, record retention and receipts at electronic terminals.
Consumers can sue for damages in court if financial institutions break laws established by the EFTA. For example, if ATM card is reported as stolen and the financial institution failed to prevent a transfer, the card’s owner is entitled to the money lost.
Users can’t be forced to use EFTs to make or to receive a payment, except for overdraft checking fees. When a checking account is overdrawn, the financial institution can use EFTs to deduct overdraft fees from the consumer’s account. With a few exceptions, employers can require that employees are paid by EFT. Employees can choose the financial institution to receive the funds.
If an ATM or debit card is lost or stolen and reported to the financial institution before any transactions take place, the card’s owner is not held responsible for any subsequent transactions. Depending on when the card is reported stolen or lost, the card’s owner could be liable for between $50 and an unlimited amount of charges.
EFTs usually settle on the next business day, but can take longer during bank holidays. International transactions (IATs) and high-value transactions above $25,000 are not eligible for same-day processing.