As businesses increasingly adopt electronic methods for managing their finances, Electronic Funds Transfer (EFT) has become a popular option for transferring money between accounts. EFT is a secure, efficient, and cost-effective way to move funds between banks and financial institutions.
It can also be used to pay bills or make payments on loans, and the transaction can be initiated through various means, such as an online banking portal, a mobile app, or a physical terminal.
However, if you are considering using EFTs for your financial transactions, it’s crucial to learn in-depth details about them.
Here’s what you need to know.
Electronic Funds Transfer (EFT) - How It Works?
Payment using an EFT can be carried out in a variety of ways. For example, you can give your bank account information directly to the payee, who will initiate the transfer on their end.
Alternatively, you can set up automated payments through the online bill-paying service offered by your bank. Or, if you're making a one-time payment, you can often do so directly through your bank's website or mobile app.
An electronic funds transfer (EFT) is a financial transaction in which no paper checks or currency are required. This transfer is often between two banking firms, although it can also be conducted between individuals.
EFTs are considered safe and secure because they eliminate the risk of lost or stolen checks and reduce the chances of fraud. Additionally, EFTs can often be completed more quickly than traditional paper transactions.
If you’re interested in making an electronic funds transfer, you’ll need to have the following information on hand:
The name and address of the financial institution where you have your account
The account number;
The routing number;
The name and address of the recipient’s financial institution;
The recipient’s account number;
The amount of money you want to transfer.
Benefits and Drawbacks of EFT Transactions
Electronic funds transfer has its name because of its value to the users. In recent years, more and more companies have started using EFT to make their business payments.
However, despite these potential advantages, this money transaction method has drawbacks.
So, here’s a quick overview of both the benefits and drawbacks of electronic funds transfer (EFT).
It’s much faster than traditional checks and money orders – the recipient can typically expect to receive the funds within 24 hours.
These transactions are often less expensive for both the sender and the recipient.
It can be beneficial for businesses that need to make international payments.
EFT can be used to make payments to anyone worldwide with an account with a financial institution supporting EFT.
The transactions are also more secure because they are less susceptible to fraud.
Drawbacks of EFT can include service fees charged by the financial institution, which can add up over time.
EFT transactions can be reversed, which can cause problems for the recipient if the sender changes their mind after the transaction has been processed.
Using an EFT doesn’t prevent payments from “bouncing.”
If your transaction gets canceled, no duplicate of the voided check will be sent to you.
The Types of Electronic Funds Transfer Systems
There are four major types of electronic funds transfer systems:
Debit transfers, and
Electronic Check Conversion (ECC).
ACH transfers are the most common type of electronic funds transfer and are typically used for payroll or direct deposit purposes.
Wire transfers are for one-time, high-value transactions and are often used for international transactions.
Debit transfers are used to withdraw funds from an account and are typically used at ATMs or for point-of-sale transactions.
And Electronic Check Conversion (ECC) is a system that allows checks to be processed electronically without needing a physical inspection.
Critical Differences Between EFT and ACH
While both EFT and ACH can be used to send and receive payments, some key differences make them each suited for different purposes.
For one, EFT is typically used for larger transfers between financial institutions, while ACH is better suited for small payments like utility bills or direct deposits.
In addition, EFT payments can be made online or over the phone, while ACH payments must be made through a financial institution.
How Do Electronic Funds Transfers Work for International Payments?
EFTs can be an excellent way to transact funds internationally, howbeit you'll need to make sure that the bank you are transferring your money to supports the system for international payments.
The recipient's bank account number, routing number, and bank's SWIFT code are also required. A SWIFT code belongs to the international network SWIFT, which makes it easier for money to transfer between banks abroad.
When you make an international EFT payment, the funds are first converted into the currency of the recipient's country. The SWIFT network is then used to send the money to the recipient's bank account.
The recipient of an international EFT payment will typically receive the funds within 1-2 days. However, in some circumstances, the money might be accessible right away.