Electronic funds transfer (EFT) payment meaning

An electronic funds transfer (EFT) is a digital money transfer transaction using a mobile device, computer, phone, or ATM terminal. 

Types of EFT payments

Automated Clearing House (ACH) is one type of EFT, and other forms include wire transfers, ATM transactions, electronic checks (e-checks), credit card and debit card transactions, P2P payments like PayPal and Venmo, phone payments, and ATM transactions. 

Fees associated with EFT payments vary widely, depending on the type of electronic funds transfer. 

ACH payment or ACH direct deposits

There are several types of ACH transactions:

ACH payments

An ACH payment is a domestic electronic funds transfer of money between a sender and receiver's U.S. bank accounts. 

The payment is completed through the Automated Clearing House network as an ACH debit or ACH credit transaction “pushed” or “pulled” from a sender or receiver’s bank account. Businesses create batches to send transactions into the ACH network.

An ACH deposit is an ACH credit that pushes money as a withdrawal from the payer’s bank account and transfers it to the receiver’s bank account as a deposit. This type of transaction is often used for vendor payments and other bill payments.

ACH debits, sometimes called eChecks, involve funds being withdrawn from the payer’s bank account and deposited in the payee’s bank account. Online payments are frequently completed using an ACH debit. 

An ACH debit is a pull transaction because the payee can collect funds from the payer’s account.

ACH direct deposits

ACH direct deposit is a transfer method for recurring deposits. A common example is payroll recurring payments, which leverage direct deposits to send funds to an employee's bank account. 

The employer collects bank account information, including each employee's checking account and bank routing number, for online payroll payments.

Did you know? With the Rho platform, customers enjoy fee-free Same Day ACH and wires and a seamless user experience where they can manage all their payments, banking, and spending in one place.

Global ACH and SEPA payments

Global ACH is an informal term for ACH-like money transfers using similar systems in different countries, including Single Euro Payment Area (SEPA) payments. This type of payment facilitates online banking outside the U.S.

SEPA allows customers to make cashless Euro payments via credit transfer and direct debit to anywhere in the European Union and to several non-EU countries.

Wire transfers

Wire transfer is an umbrella term for domestic or international electronic cross-border payments. Generally speaking, money transfers are faster using a wire transfer than an ACH payment.

ACH Transfers usually take 2-3 business days to settle, while Wire Transfers are within 24 hours, depending on the bank's deadline to submit wires.

Domestic wire transfers

Financial institutions, including banks and credit unions, complete same-day wire transfers domestically through the Federal Reserve’s Fedwire Funds Service.  Each transaction is processed individually and settled immediately upon receipt. Payments are credited to the receiver’s Federal Reserve Bank master account.

International wire transfers

International (cross-border) wire transfers are processed through the SWIFT payment system, a global member-owned cooperative. 

SWIFT is a financial messaging system that sends payment orders between banks using SWIFT codes. Entities can accept or send international funds using electronic or credit card payments. Institutions use SWIFT to transfer funds quickly in a secure environment.

Wire transfer fees

Wire transfers typically have much higher bank and intermediary transaction fees than ACH payments. International wire transfer fees can range up to $50 or more.

Transaction fees include fees charged to the payor and recipient by the sending and receiving banks and intermediaries. Your business may also face bank investigation fees for wire transfers not received and other miscellaneous wire transfer fees. 

ATM (automated teller machine) transactions

Customers can access their bank accounts and perform other financial transactions using an ATM card or a debit card at an ATM. Transactions include cash withdrawals, balance inquiries, and fund transfers between bank accounts.

Peer-to-peer payments

Peer-to-peer (P2P) payments are electronic money transfers between individuals using a platform like PayPal or Venmo. Individuals can send funds directly to each other using bank accounts, credit cards, and other payment methods. P2P eliminates the need for cash or paper checks.

E-commerce and point of sales (POS) transactions

Point of sale (POS) transactions are customer purchases using a debit card, credit card, or another payment method at a physical or virtual point of sale. 

Retailers, restaurants, and ecommerce businesses often accept electronic payments, which transfer funds from the customer’s account to the merchant’s account.

Credit card transactions

When a credit card transaction is processed, the cardholder agrees to repay the borrowed amount used for the purchase and any required interest or fees. The credit card agreement discloses all interest and fee amounts and when they are charged to the cardholder.

Interest is charged if the card balance is not paid in full by the due date, and international transactions may incur additional fees.

Debit card transactions

A debit card is linked to a specific checking or savings account. Funds are deducted from the account when a debit card purchase is made. Debit card transactions can be made at the point of sale or online.

Benefits of EFT payments

Businesses have a wide choice of electronic payment methods that provide fast payment processing on a secure platform. Here are some of the benefits of EFT payments:

Improved cash flow management

ACH payments—when combined with other payment methods like corporate credit cards and checks—can help businesses manage cash flow. They may be set up as recurring or one-time bank transfers. 

Payment speed

EFT transfers offer quick processing times, allowing businesses to maintain productivity. For example, using EFT transfers for payroll ensures employees are paid on time. 

International payments

Businesses can use wire transfers to make payments securely in different currencies with fast settlement.

Increased efficiency 

Automated EFT payments reduce or eliminate the need for cash and check transactions. Businesses can process more transactions in less time and avoid errors due to manual processing.

Reduced risk of fraud

EFT payments reduce the risk of fraud or theft. Using cash and checks is less secure, and uncovering fraud or a duplicate payment requires more time. Automated payments are easier to monitor, and unusual transactions can be flagged and investigated quickly.

How does EFT work?

Each form of EFT transaction requires these basic steps:

Initiation of the transaction

The individual or business sending funds provides authorization to the financial institution. Initiation requires account details (bank account number), the amount to be transferred, and other information.

To complete an international wire transfer, banks send payment orders using SWIFT codes to initiate the transaction. 

Transaction authorization

The sender’s bank verifies the authorization and ensures that the sender has sufficient funds to cover the transfer. The sender’s bank deducts funds from the account if there are adequate funds.

For an ACH deposit, the payer provides instructions on how to push money from the payer’s bank account and transfer it to the receiver’s bank account as a deposit. The payer’s bank must confirm that sufficient funds are available.

Transmitting the funds

Funds are transmitted from sender to receiver, and routing funds may involve multiple intermediaries. For example, domestic wire transfers are transmitted through the Federal Reserve’s Fedwire Funds Service. 

Settlement of funds

For example, domestic wire transfer payments are credited to the receiver’s Federal Reserve Bank master account, and the transaction is settled immediately upon receipt. 

The steps for EFT service providers and processing differ, but all transactions follow these steps.

EFT examples

Some EFT payment examples are:

PayPal and Venmo payments

Individuals can use a mobile app or computer to send money directly from a bank account to someone using PayPal or Venmo. For example, when funds are received in a Venmo wallet, the dollars can be moved into the receiver’s bank account.

Mortgage down payments

Home buyers often use an ACH transaction to transfer a down payment from a bank account when closing a home loan.

Funding payroll direct deposits

As mentioned, businesses use ACH direct deposits to send funds to an employee's bank account. 

Paying government benefits

The federal government uses ACH transactions to distribute government benefits, including Social Security payments.

Paying vendors and suppliers, customer invoices

Finally, businesses use EFT services to pay bills from vendors and suppliers and provide electronic payment options for customers to pay invoices.

EFT regulations

The Federal Trade Commission’s Consumer Financial Protection Bureau (CFPB) develops rules, investigates, enforces EFT regulations, and provides education. One important regulation is the Electronic Funds Transfer Act, which is explained below in more detail.

All financial institutions must follow Know Your Customer (KYC) requirements and Anti-Money Laundering (AML) regulations. 

Institutions must also comply with data protection laws that impose requirements on handling and transmitting personal and financial data in EFT transactions. The European Union's General Data Protection Regulation (GDPR) is an example.

There are additional EFT regulations based on the type of EFT transaction processed:

ACH Network

The National Automated Clearing House Association (NACHA), which governs the network, sets ACH regulations.

Global ACH 

Global ACH activity is regulated by different regulators, depending on the countries involved in the transaction. For example, Single Euro Payment Area (SEPA) payment regulations were created in collaboration with the European Commission. 

Global ACH payments must also comply with the regulations of the International Organization for Standardization (ISO) and the International Payments Framework Association (IPFA). 

Global transactions involve multiple countries, each with its own set of regulations. The Bank for International Settlements (BIS) and the Committee on Payments and Market Infrastructures (CPMI) work to facilitate cooperation among regulators. 

Wire transfers

The Federal Reserve Bank regulates domestic wire transfers, and international (cross-border) wire transfers must comply with SWIFT payment system regulations.

What is the Electronic Funds Transfer Act (EFTA), and how does it impact EFT payments?

The Electronic Funds Transfer Act (EFTA) provides U.S. regulations for consumer protection. These rules cover all EFTs in which a financial institution has authorization to debit or credit a consumer’s account. 

Here is how the EFTA impacts EFT payments:

Consumer protection

Individuals who engage in EFT transactions have rights and protections, which include:

• Disclosure: Financial institutions must clearly and accurately disclose EFT transfers, pricing, and fees. 
• Dispute resolution: Consumers have the right to dispute errors, and financial institutions must investigate the errors promptly.
• Limited liability: EFTA limits the consumer’s liability for unauthorized EFT activity if the loss or theft is reported within a specified timeframe.

Regulatory oversight

The EFTA authorizes the CFPB and other regulatory agencies to enforce compliance with EFT regulations to protect consumers.

Preauthorized transfers

Preauthorized EFT transactions, such as recurring payments or direct deposits, are regulated by EFTA.  Consumers must authorize each transfer before the EFT is initiated, and there are disclosure and notification requirements.

Enforcement and remedies

The EFTA provides consumers with recourse options if a financial institution or other entities violate EFT regulations.

How long does an EFT payment take to clear?

The time required for an EFT to clear varies based on the type of transaction:

• ACH: ACH transfer speed is generally the same business day or one to three business days. NACHA provides a schedule of ACH payment timelines.
• Wire transfers: Wire transfers take from hours for domestic wires to three to five business days or more for international wire transfers. 
• Other transfers: Digital wallet money transfers, P2P, credit card, debit card, ATM, and pay-by-phone transactions are defined as EFT instant payments. 

Conclusion: EFT payment meaning

Business owners can use several types of EFTs to send or receive payments. As explained in this blog, businesses frequently use ACH payments for activities like payroll or invoice processing. 

While ACH fees are typically low-cost, processing fees can add up quickly depending on your payment volume. When that occurs, you want a reliable business banking partner and an easy-to-use platform to manage all your business banking needs. 

With the Rho platform, customers enjoy fee-free Same Day ACH and wires and a seamless user experience where they can manage all their payments, banking, and spending in one place. 

Are you interested in trying out the Rho platform? Schedule a demo today.