What Is an Electronic Funds Transfer?

A person pays a bill via a banking app.
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DEFINITION
An electronic funds transfer is the process of moving money from one bank account to another using computer-based technology.

An electronic funds transfer is the process of moving money from one bank account to another using computer-based technology. Electronic fund transfers eliminate the need for paper transactions, including paper checks. They also do not require in-person interaction with bank tellers.

The way the average person banks has changed a lot over the years. Discover the many different aspects of an electronic funds transfer and whether it’s the right decision for your financial situation.

Definition and Example of Electronic Funds Transfer

In simple terms, an electronic funds transfer, or "EFT," is merely the digital way of transferring funds from one bank account to another. This process, also known as "electronic banking," allows you to move money electronically. Since the transaction doesn’t involve any materials exchanging hands, the process doesn’t require in-person interactions with banking staff.

  • Acronym: EFT
  • Alternate name: Electronic banking

Don’t confuse “EFTs” with “ETFs.” Exchange-traded funds (ETFs) are a pooled investment product that allow investors to collectively invest in a basket of securities.

Electronic fund transfers are a secure, efficient, and less expensive alternative to paper checks. This helps make banking more simple, accessible, and convenient. One typical example of an electronic funds transfer that you’re probably familiar with is when your paycheck is directly deposited into your bank account. The money automatically shows up on payday without you ever cashing a check or visiting a bank branch location. Government benefits such as Social Security are also delivered via EFT.

How Does an Electronic Funds Transfer Work?

Every transaction has a starting point. The starting point happens anytime a money transfer is initiated through an electronic system with an electronic funds transfer.  These systems include ATMs, computers, telephones, remote banking programs, or magnetic tape (the black data stripe on the back of credit and debit cards). In general, funds can be transferred from nearly anywhere at any time as long as you have access to a computerized network, such as using mobile payment at a convenience store in the middle of the night.

Once an electronic funds transfer is initiated, it authorizes a bank or credit union to either debit or credit a consumer’s account for a specified amount of money.

Electronic funds transfers may require a personal identification number (PIN), password, or some other verification method to unlock online account services.

Making an electronic funds transfer is fairly straightforward. The process allows the person sending money to initiate a transfer from an originating account. In most cases, the Automated Clearing House channels the transaction through the Federal Reserve system before the money up in the receiver’s account.

The sender can be anyone, such as an employer distributing payroll, a business buying merchandise, or an individual paying an electricity bill. Similarly, the recipients can also be anyone, including employees, product suppliers, retailers, and businesses such as utility companies.

When performing an electronic funds transfer, you can send money to a different account within the same bank or credit union. You can also transfer money to one or several accounts outside the originating financial institution. On top of that, transactions that occur during business day hours, such as cash deposits, are typically cleared and available the same day.

The Electronic Fund Transfer Act (EFTA) of 1978 has rules to protect individual consumers who engage in electronic fund transfers.

EFTs can be a one-time payment such as buying a pair of sneakers, or they can be recurring transactions such as a biweekly payroll deposit. If an EFT service limits the frequency or dollar value of EFTs, then, in general, the service must clearly disclose that information to consumers.

Types of Electronic Funds Transfer

Electronic funds transfer can be considered a blanket term that describes all digital money transactions, but a true EFT uses Federal Reserve systems. To help you better understand, here are some common types of EFT services you may encounter.

Direct Deposit

This allows you to authorize specific deposits into your bank account, including paychecks, Social Security checks, or other benefits. You can also preauthorize automatic withdrawals directly from your bank account for recurring expenses such as auto insurance, mortgage payments, and utility bills.

Before preauthorizing recurring withdrawal payments, make sure the company is one you are familiar with and trust. This can help prevent money from being improperly withdrawn from your bank account.

ATM

An ATM (automated teller machine) is an electronic terminal that allows you access to a bank almost anywhere at any time. You can use them for withdrawing cash, making deposits, or transferring funds between accounts. The process generally involves inserting an ATM card and entering your security PIN.

Personal Computer Banking

Being able to handle banking tasks straight from the comfort of your home is a reality thanks to online banking. By using your personal computer and a secure internet connection, you can make transfers between accounts or even pay your bills electronically. There are also apps that extend this service to smartphones.

Pay-by-Phone Systems

Making an electronic funds transfer by phone (telephone banking) involves calling your financial institution and providing instructions to either pay specific bills or transfer money between accounts. Typically, you must have an agreement with your bank or credit union to make these transfers.

Debit or Credit Card Transactions

Whether using a debit or credit card, both work similarly by allowing you the ability to make purchases or make payments. Card transactions can occur in person, online, or via phone. The most significant difference between the two is that debit card purchases quickly remove money from your account. It’s crucial to make sure the money in your account is sufficient to cover your payment before using a debit card.

Typically, your liability and rights related to errors and unauthorized uses may differ between your debit card and your credit card.

Electronic Check Conversion

This is a process that converts paper checks into electronic payments. It works because a digital check gets generated after being authorized by the person making the payment or purchase. This can be done in a store or after a company receives your check by mail.

Peer-to-Peer Payment Apps

Sending money to someone you know is easier than ever since the introduction of peer-to-peer (P2P) payment apps such as PayPal, Venmo, and Zelle. These apps allow the sender to transfer money to another person by entering the recipient’s email address or phone number. Most of these transactions occur in real-time.

In most cases, P2P payments do not offer the same protections as debit and credit cards. The sender may be solely held responsible for losses if the incorrect email or number is entered and money is mistakenly sent to the wrong person.

Pros and Cons of an Electronic Funds Transfer

Pros
  • Cost-effective

  • Safe and convenient

Cons
  • Debit cards are susceptible to fraud

  • Isn’t always immediate

Pros Explained

  • Cost-effectivce: For businesses, EFTs are a cost-effective way to save money on printing paper checks and postage. EFTs not only eliminate the risk of human counting errors and fraudulent bills, but they also eliminate the risk of checks being lost or intercepted in the mail.
  • Safe and convenient: For consumers, no matter which method you choose, transferring funds typically requires minimal effort. In addition, it eliminates the need for visiting bank branches in person, which increases the consumer-convenience factor.

Cons Explained

  • Debit cards are susceptible to fraud: If your debit or ATM card is lost or stolen, you could lose money if you don’t report the loss quickly enough.
  • Isn't always immediate: Depending on the business and type of recurring transaction, it could take a few days or a few weeks to cancel recurring payments or direct deposits. Plus, fees could be involved, especially if you request a stop payment.

Electronic Funds Transfer Fees

When using an ATM, it’s important to note that some financial institutions and ATM owners may charge fees. These fees may be more likely if you don’t have an account with the ATM owner or your transactions occur at remote locations. Generally, ATMs must inform you on or at the terminal screen if there is a fee (and how much the fee is) for using the machine.

If you decide to use a credit card to send a payment through a P2P app, do so cautiously. Credit card companies may view the transaction as a cash advance and charge a higher interest rate than if you used the credit card to make a purchase at a retailer.

Are Electronic Fund Transfers Worth It?

One of the most appealing features of an electronic funds transfer is security. Of course, doing anything over the internet typically involves some degree of risk. Electronic fund transfers are generally considered a much safer method of sending payments than traditional paper checks, but the best way to ensure your money safely reaches its destination is to stick with companies you know and trust. 

Key Takeaways

  • An electronic funds transfer is the digital way of moving money from one bank to another.
  • Anyone with a bank account can initiate an electronic funds transfer.
  • Using an electronic funds transfer can be quicker, more secure, and more convenient than sending or receiving paper checks.
  • The Electronic Funds Transfer Act (EFTA) has protections in place for consumers.

Article Sources

  1. Bureau of the Fiscal Service. “Direct Deposit (Electronic Funds Transfer).” Accessed Jan. 31, 2022.

  2. Consumer Financial Protection Bureau. “Electronic Fund Transfers FAQs.” Accessed Jan. 31, 2022.

  3. Patent and Trademark Office. “Electronic Funds Transfer.” Accessed Jan. 31, 2022.

  4. The Federal Reserve Board. “Compliance With Regulation CC.” Accessed Jan. 31, 2022.

  5. Federal Reserve. “Electronic Fund Transfer Act.” Page 1. Accessed Jan. 31, 2022.

  6. Federal Reserve. “Electronic Fund Transfer Act.” Page 7. Accessed Jan. 31, 2022.

  7. Federal Trade Commission. “Comparing Credit, Charge, Secured Credit, Debit, or Prepaid Cards.” Accessed Jan. 31, 2022.

  8. Federal Reserve Bank of St. Louis. “Peer-to-Peer (P2P) Payment Services.” Accessed Jan. 31, 2022.

  9. Consumer Financial Protection Bureau. “You Have Protections When It Comes to Automatic Debit Payments From Your Account.” Accessed Jan. 31, 2022.

  10. Federal Trade Commission. “Electronic Banking.” Pages 1-2. Accessed Jan. 31, 2022.