What is an EFT payment? How electronic funds transfers work.

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In a Nutshell

Electronic funds transfers, or EFT payments, move money digitally between bank accounts at different banks. EFT payments are used in everyday financial transactions to make transferring money quicker and easier than paper-based methods.
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Even if you don’t know what EFT payments are, there’s a good chance you use them regularly.

Whenever you have your paycheck directly deposited into your checking account or use your debit card to make a purchase, you’re authorizing your bank to make an electronic funds transfer. EFTs can make the transfer of money safer, easier and faster than paper-based funds transfers.

Let’s look at what EFT payments are, how they work, and when you’ll use them during the regular course of making and receiving payments.

What is an electronic funds transfer (EFT)?

Electronic funds transfers rely on technology and computer networks to move money without the need for paper documents. An EFT is an electronic payment method that works behind familiar processes like direct deposit, ATM transactions, wire transfers, online bill pay and banking, pay-by-phone, and debit card transactions.

One type of EFT payment is automated clearing house payments, or ACH payments. You can pay bills or transfer money between bank accounts with an ACH payment, which works through the Automated Clearing House network. Banks that are part of the nationwide network batch transactions together to send to other banks that are also part of the network.

While all ACH payments are EFTs, not all EFTs occur over ACH networks. For example, wire transfers and payments by debit or credit card are EFTs that don’t use ACH networks.

It may also help to point out that the acronym EFT is often confused with another popular financial acronym, ETF, or electronically traded fund. This is a type of mutual fund that trades like single stock shares on a stock exchange.

How do EFTs work?

All EFTs, whether they’re through the ACH network or not, start through an electronic device — a computer, telephone, point-of-sale card reader or ATM. They may be one-time transactions, like an online debit card purchase, or a recurring transaction, such as your employer directly depositing your paycheck into your bank account.

EFT payments may go through the ACH network, or they may be handled directly between banks.

EFTs that operate through the ACH network are processed by financial institutions like banks or credit unions in batches each day. Banks send each other files of electronic credit and debit transfer information to adjust customer’s bank balances. To process the fund transfers, banks must verify payment details, availability of funds, and authorization for accounts sending and receiving payment information. 

Because of the verification and batching process, ACH transactions can take several days to process.

What information do I need to make an EFT?

If you’re receiving a direct deposit, you’ll need to provide the payor your banking details. These typically include …

  • Your full name
  • Bank name and address
  • Bank account number and type of account
  • Bank routing number

You may also need to provide the depositor with a blank and voided personal check.

If you’re authorizing someone to debit from your account, you’ll have to provide your bank account information or debit card information to the person or business you’re paying. This is common when you authorize a utility company, for example, to automatically deduct your payment each month. 

To send money from your account to someone else — for example, if you set up automatic bill pay through your bank’s online tools — you’ll simply tell your bank where to send the funds, along with the amount you’re authorizing. In some cases, you’ll provide an account number for your payee.

For purchases made online or in person, you’ll just use your debit card, usually with a PIN. 

How long does it take for EFTs to clear?

The timeline for an EFT to clear depends on multiple factors, including the type of EFT payment. With ACH, it typically takes a few days.

For example, some payroll companies initiate direct deposits two to three days before they appear in an employee’s account. So if your paycheck appears in your bank account every Friday, your employer likely starts the direct deposit transmission as early as Tuesday or Wednesday and at the latest, Thursday, for the funds to show up in time.

As mentioned previously, when you use debit cards to make a payment, the transfer of funds from your account to the payee is instant.

What are some types of EFT payments?

Direct deposits

When you set up a recurring transaction to have your paycheck or a government check such as unemployment benefits directly deposited into your account, you’re using an EFT.

Electronic checks

Even when you use a paper check — either in a store or through the mail — the recipient may convert it to an electronic check. They’ll send the information from the check, but not the check itself, to request payment from your bank.

Point-of-sale debit card payments

You’ll swipe or insert your physical debit card into a retailer’s payment processing machine. When you enter your PIN, the transaction is authorized in real-time, then processed via ACH at the end of the day.

Online purchases (using debit card)

You’ll enter the numbers from your debit card in a payment form online. These transactions are settled at the end of the day.

What’s next? What you can do if you have a problem with an EFT.

Even though legislation is in place to protect consumers who may have issues with EFT payments, there are times where you could still run into problems with them. Your payment to a vendor could be misdirected, your direct deposit may not come as expected, or your information could be used by someone in a fraudulent transaction. These are common issues with EFT payments, and you have protections under federal law for some transactions.

Here’s what you can do if you notice anything out of the ordinary with your bank account or any EFT transactions.

  • Monitor your accounts for strange or unfamiliar activity.
  • Contact your bank right away if you notice an issue.
  • For deposits, contact your employer or depositor to verify your deposit details.
  • Transaction details like the date, time, payee and payment method will be useful in your research — make a note of them and keep them handy to settle disputes.
  • Use this information to explain the problem to your bank (preferably in writing).
  • Continue to follow up until the issue is resolved.
  • If you’re not getting the help you need — especially in the case of fraud — contact consumer advocacy groups like your state attorney general’s office, the Consumer Financial Protection Bureau, the Better Business Bureau or the Federal Trade Commission’s Bureau of Consumer Protection.

About the author: Aja McClanahan is a Chicago-based writer and blogger who covers topics on personal finance and entrepreneurship. She holds a bachelor’s degree in economics and Spanish from the University of Illinois at Urbana-Champai… Read more.