EFTs, or electronic fund transfers, allow consumers, businesses, and banks to move money quickly between accounts. These transfers can take a few minutes to a few days, depending on their size and scope.
Examples of EFTs include your paycheck arriving in your bank account every pay period without you lifting a finger or your scheduling recurring payments to a service provider (such as your utility company) without needing to write a check and mail it. These electronic transactions allow money to move between a payor and payee, often within seconds. In this article, you’ll learn more about EFTs in banking and the pros and cons of this powerful financial tool.
What Is the Meaning of EFT (Electronic Funds Transfer)?
The definition of an electronic funds transfer (EFT) is the digital movement of money between financial institutions, bank accounts, and people. Unlike paper methods, such as cash or checks, EFTs facilitate payments through an electronic network. Individuals, businesses, and banks use EFTs daily to purchase goods and services and pay workers.
Different EFT Payments
The term EFT includes many types of transactions. Here are some of the different kinds of EFTs that are possible:
Credit and Debit Card Transactions
Credit and debit cards use electronic payments to process purchases made in person or online. In addition, you can use EFTs to pay bills, such as for phones or utilities, and transfer a credit card balance to a new credit card account.
Direct Deposit
Direct deposit is how approximately 95% of employees are paid by their employers. The majority of U.S. employees receive their paychecks electronically by direct deposit instead of a paper check. This type of EFT is usually an Automated Clearing House (ACH) transfer (more on what that means below).
Electronic Checks
With electronic checks (or Echecks), you can make a payment with your checking account without paper checks. Instead, you can provide your routing and account numbers to a business and authorize a payment from your bank account.
ATM Transactions
ATMs use EFTs to enable cash withdrawals and transfer funds between your bank accounts. Every time you turn up at a terminal to take out some $20s, that’s an electronic funds transfer at work, fueling the transaction.
Pay by Phone
As with an electronic check, you can make a purchase by providing a business with your bank account and routing numbers over the phone. Then, the business can communicate with your financial institution to obtain payment.
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How Do EFTs Work?
EFTs work by digitally transferring funds between parties, such as a payor and a payee. The payor provides the information necessary for payment, such as a card number or account information. Then, the relevant financial institution performs an EFT, sending the designated amount of funds to the payee’s account at their financial institution.
For example, say you make a purchase online using your credit card. The merchant will use your card information, including the number, expiration date, and security code, to obtain payment from your credit card company. Then, the merchant receives payment through an EFT.
P2P vs EFT
A peer-to-peer payment system (P2P) like PayPal or Venmo also uses EFTs to move money between users and their financial accounts. Specifically, you can connect your credit card, bank account, or debit card to your P2P account. Then, to send money to another user, the P2P company will initiate an ETF from your financial institution to pull the money needed. In addition, you can also deposit funds from your P2P account into your bank account.
You can also usually leave funds in your P2P account to eliminate the ETF needed to move funds to and from your bank account. Instead, money can sit in your P2P account until you want to pay another user.
What Is ACH vs EFT?
Automatic Clearing House (ACH) indicates a specific type of EFT and the network in which it occurs. For example, your direct deposit from your job is through an ACH payment. Likewise, bank transfers are performed by ACH.
What sets the ACH network apart is that it facilitates payments in batches three times daily. As a result, transactions can usually take one to three days to process. Conversely, an EFT from a credit card, which is not an ACH transaction, typically happens instantaneously.
Pros and Cons of EFT
EFTs revolutionized how money is transferred. However, they have advantages and disadvantages to consider.
Pros
First, the upsides of EFTs:
Convenience
Firstly, EFTs are typically very convenient. They save consumers trips to the bank and eliminate the need to carry around cash and paper checks. Likewise, they facilitate a multitude of transactions without effort from the sender or recipient.
Speed
EFTs can also allow you to send and receive payments over long distances within a span of hours or a few days at most, depending on the type of transaction. In fact, some EFTs may occur within seconds.
Consumer Protection and Security
The Electronic Fund Transfer Act (EFTA) provides a layer of protection for EFTs. This legislation empowers consumers to dispute unauthorized transfers and seek repayment for fraudulent activity or bank negligence.
In addition, the EFTA spells out guidelines and recourse if your debit card is lost or stolen and used without authorization. Depending on how quickly you report the issue, you could be liable for nothing, $50, $500, or (if you fail to report the issue for more than 60 days) the full amountaccessed by a thief or scammer.
Also, while no financial transaction can claim to be 100% secure, EFTs do use multiple layers of encryption to protect transactions, which means sensitive data is encoded several times so it cannot be read by others. Identity verification procedures also play an important role in transactions to keep them as safe as possible.
Cons
Next, consider the potential downsides of EFTs:
Limited Reach
Certain EFTs aren’t compatible with foreign accounts. For example, sometimes debit cards aren’t accepted overseas. Instead, you might need the country’s currency, a card with specific international capabilities, traveler’s checks, or a wire transfer to pay for things. In addition, your international EFTs may incur extra fees.
Fees
EFTs aren’t always free. For example, paying your utilities by credit card might require a fee (say, 1% of the total amount or a flat fee) on all charges. As a result, you might pay for the convenience of an EFT.
Potential Hacks and Scams
EFTs use digital networks to transfer your financial information. Most of these are constantly updating their security protocols, but there is the chance, however slight, of losing money to hackers or fraudsters. Although the EFTA provides your transactions with a level of protection, you might become a victim of a scam or have your banking information fall into the wrong hands.
For a quick comparison, here’s a table of the potential upsides and downsides of EFTs:
| EFT Pros | EFT Cons |
|---|---|
| Your permission is not required | Your permission is required |
| Convenience | Limited reach |
| Speed | Fees |
| Consumer protection and security | Potential hacks and scams |
The Takeaway
EFTs, or electronic funds transfers, are speedy, convenient monetary transactions that can make everyday financial activity possible. For example, EFTs power credit and debit card payments and direct deposits. These transactions are often free and save time for all parties involved. Though you may not realize it, EFTs conduct many of the transactions that typically occur in personal banking.
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FAQ
How do EFT payments work?
EFT payments work by moving money electronically between financial institutions and people. Specifically, financial institutions work with the sender’s and the receiver’s account information to move funds to process bill payments, direct deposits, account transfers, credit card transactions, and more.
What is the main difference between an ACH and EFT?
An ACH (Automatic Clearing House) transfer is a specific type of EFT activity. For example, your direct deposits, payment app transfers, and online bill payments usually use the ACH network to conduct transactions.
How long do EFT transfers take?
EFT transfers take varying amounts of time depending on the transaction. For example, credit and debit card payments are usually instantaneous. On the other hand, your bill payments may take one to three days to clear.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
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