Electronic Funds TransferWhat are EFTs? How are P2P Payments and Credit Card Transactions Fundamentally Different?

October 27, 2022 | 14 min read

Electronic Funds Transfer EFT

In a Nutshell

Electronic funds transfers have replaced the demand for paper checks and other payments… but are EFTs as safe to use as they are convenient? This article will explain everything you need to know about EFT payments, from what they are and how they work, to whether or not they benefit consumers and businesses.

What Makes an Electronic Funds Transfer (EFT) Different From a Typical Credit Purchase?

You’ve probably been using electronic funds transfers, or EFTs, to send and receive payments for a long time now. If you need to move money fast, an EFT is one of the easiest and safest methods to make it happen.

What exactly counts as en EFT, though? Also, despite the fact that they’re considered a more reliable payment method, are EFTs really as safe as banks and payment processors would have you believe? Do consumers and merchants enjoy the same benefits of EFT transactions?

In today’s post, we’ll tackle these and many other questions you might have about  electronic funds transfers to try and clear up some of the confusion surrounding this payment method.

What is an Electronic Funds Transfer?

Electronic Funds Transfer

[noun]/ə • lek • trän • ik • fənd • trans • fər/

An electronic funds transfer (EFT) is any exchange which involves the ordering, instructing, or authorizing of a financial institution to debit or credit a consumer's account via an electronic terminal, telephone, computer, or magnetic tape. The transmission of money in an EFT is a digital transaction, meaning there is no need for a paper document to verify the information.

The Electronic Fund Transfer Act of 1978 defines EFTs as any transfer initiated by telephone, computer, electronic terminal, or magnetic tape. These take many forms and are known by several names today, including e-checks, direct deposits, bank transfers, or peer-to-peer (P2P) payments.

Electronic funds transfers have all but replaced the need for paper checks and have become a preferred payment method worldwide. They’re faster, simpler to use, and more accessible. They’re also a more direct form of payment, and offer additional security features not offered by traditional payment checks.

Side Note

Though the acronyms are similar, an EFT is not the same as an ETF, or “exchange-traded fund.” The latter is a financial product; a type of pooled investment security that operates like a mutual fund, tracking a particular index, commodity, or other asset.

How Do EFTs Work?

The electronic funds transfer process is pretty straightforward. They involve two primary parties: the sender and the receiver of the funds being transferred.

When a sender initiates a funds transfer, the request will be channeled through a series of digital networks. These may originate from a physical terminal (like an ATM machine) or through the internet, with the receiver’s bank account being the final destination.

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To better illustrate this process, here are a few examples of common EFT transfers:

In-Store Card Purchases

Buying groceries at a grocery store with a debit card, for which a PIN is required to approve a transaction. In this case, the funds move in real time from an individual’s checking account into the merchant’s account.

Direct Deposit

Direct-deposited paychecks are also EFTs because a financial institution representing the employer must directly route electronic payments to an individual's bank account. The employer becomes the sender, and the employee becomes the receiver.

Online Shopping

Making a purchase online using your debit card is also an EFT. When a customer buys a product online, they are the sender, and the merchant becomes the receiver.

Senders and receivers can be individuals, employers, banks, utility companies, or merchants. Most EFT payments clear (finish processing) within a couple of days, and can even clear same-day, depending on the payment processor or bank. 

Peer-To-Peer (P2P) Payments & EFTs

Peer-to-peer payments processed using apps like Zelle, Cash App, PayPal, and Venmo are considered electronic funds transfers. P2P payment apps may be the most exciting new technology to hit the EFT space in the last decade.

To use P2P payments, users must load their debit card or banking information into the application via a secure platform that requires advance authentication to access and use. For instance, to access a digital wallet app like Zelle or Venmo, a user will need to set up a PIN number or opt for biometric authentication to enter the app and process payments.

Once an individual’s authorization details are loaded into the app, P2P systems can facilitate very simple and fast payments between individuals. People can pay one another directly from their bank accounts. They may also set up recurring payments, or preload money into the app for later use. 

To process P2P payments, all a user needs to do is open the app, select the user they wish to pay, select the amount they wish to send, then approve the payment. External users must be preloaded, but  this can also be set up in the app.

Additionally, some apps will allow users to add credit cards to their digital wallets and use them for P2P payments. To do so, however, they may be charged an additional fee per transaction. 

Other Types of EFTs

Electronic funds transfers are simple and fast to use. So, it’s no wonder why they are preferred by consumers, financial institutions, and merchants alike.

We’ve talked about P2P payments. But, as we alluded to already, there are many other methods of electronic funds transfer that are commonplace across the globe. These include:

ATM Transactions

ATM transactions are EFTs that are processed through electronic kiosks located at banks, shopping malls, and various institutions throughout the globe. To process a withdrawal, an individual will insert their debit card into a physical machine that will communicate with that customer’s bank in real-time to process a funds removal request from their bank balance.

Debit Card Transactions

Credit and debit cards basically operate the same way, with the swipe, insertion, or contactless transfer of funds from an individual’s account to a retailer or business. However, for EFT purchases, the card used will be a debit card that requires PIN entry or some other form of verification to process the transaction.

Direct Deposit

Funds are automatically deposited into an individual or merchant’s bank account without additional paperwork. Once automatic deposits are set up, they require very little oversight to maintain, making this a preferred payroll method for most companies and employees.

Electronic Checks

E-checks are a form of payment in which a digital check will be generated at the request of the payer on behalf of the payee. These payments are generally used for vendor and invoiced payments.

eCommerce Transactions

Rather than making a card-present purchase via a tap or swipe, an internet debit card payment is processed by a series of inputted information through a retailer’s website or online sales portal. Funds are generally transferred immediately, but the finalization might take a couple of days to process.

Phone Payments

Any transaction conducted over the phone that involves individual bank accounts or debit cards are considered EFTs too.

So, we see that EFTs cover a wide range of payment options. What about direct debits, though? Well, those are a little different. 

What is Direct Debit?

Direct debit withdrawals involve one financial institution or individual withdrawing funds from another person’s bank account.

This transaction includes the person or institution withdrawing funds (“the payee”) who either directly debits the funds or requests the funds be removed from the account of someone else (“the payer”). Said funds will then be deposited into an account designated by the payee.

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Direct debits are mostly used for recurring payments. For example, credit card and utility bills if the payment amounts vary between payments. Although, if authorization is in place, the actual withdrawal of funds is not overseen by the bank or financial institutions in question. Rather, it’s considered a direct agreement between the payee and payer. 

Direct debits are available mostly in Europe, the UK, and South Africa. They’re governed and regulated according to each country’s domestic transaction laws. An exception in this respect is the Single Euro Payments Area, or SEPA.

SEPA allows for Euro-denominated cross-border and domestic direct debits. SEPA has been in place since November 2010 and, because it’s transnational, is governed by European Union law.

EFTs, Direct Debits & the ACH Network

In the United States, direct debits are processed through the Automated Clearing House (ACH) network. In effect, all ACH payments are EFT payments, but not all EFT payments are ACH payments.

The ACH network is used for card-present and card-not-present credit and debit transactions. It’s also used for direct payments like payroll deposits or recurring billing like utilities or rental payments. These payments are processed in batches daily, but can take up to four business days to complete. This is because of redundancies in the process that are meant to ensure correct reconciliation, but which also slow down finalization of transactions.

Some EFT payments, in contrast, occur in real-time. Payments can be initiated, processed, and finalized on the same day or by the following business day, depending on the payment processor and financial institution. Thus, some EFT payments that are not conducted via the ACH network can be faster than ACH payments or bank transfers. 

Advantages of Electronic Funds Transfers

One of the most prominent advantages of electronic funds transfers is how secure they are. As mentioned earlier, EFT payments are protected through the Electronic Fund Transfer Act, which provides legal recourse if something’s amiss with a particular transaction.

Here are just a few of the protections consumers enjoy under the EFTA:

  • Compensation for Violation: If a bank or payment processor violates any EFTA guidelines, consumers may be entitled to recoup losses.
  • Lost or Stolen Debit Cards: If a consumer reports a debit card lost or stolen within 2 days, the consumer’s liability will be limited to $50. If the lost card isn’t reported within 60 days, the consumer may be liable for all unauthorized transactions.
  • Limited Withdrawals: Banks are required to set daily withdrawal limits on debit cards to protect consumers in the event their cards are lost or stolen.
  • Unauthorized Transactions: Cardholders have up to 60 days to report any unauthorized transactions to their bank or financial institution.

The timelines involved in these liability protections are crucial. To get the most out of electronic funds transfers, it’s vital to consistently review banking statements to ensure the legitimacy of all transactions.

Are There Drawbacks of EFTs?

There really isn’t any specific, serious complaint one can make about electronic funds transfers. That said, there will always be a few drawbacks of which merchants and consumers should both be aware when it comes to different payments. Any exposure to risk automatically demands extra care, and the same holds true for EFT payments. For example, one may face issues with:

Availability of Funds

Some electronic funds transfers take days to process, while others go through immediately. Unlike paper checks or bank transfers, when customers make purchases with EFT, those funds must be available right away. If the funds aren’t available, the transaction will be denied.

Higher Fees

Every payment processing company that accepts credit and debit cards charges a processing fee per transaction. If a merchant uses a processor that offers “same-day” funds availability, they could be charged a processing fee of 10% or higher.

Possible Bounced Payments

Some electronic funds transfers can be returned, much like a bounced check. When EFT payments are returned, there is usually an associated fee attached.

Risk of Account Takeover

Fraudsters only need to take control of a user’s account long enough to send the money to a new destination. One type of fraud, known as account takeover fraud (or ATO), is predicated on a fraudster taking control of a user’s account to push through unauthorized transfers.

None of these issues negates the general safety and security of EFT payments. Still, they should encourage merchants and consumers to be cautious with their personal information.

For consumers, the protections against fraud laid out in the EFTA are fairly comprehensive. Merchants on the other hand, do not enjoy the same protections. This is particularly true with regard to friendly fraud chargebacks, to which some EFTs are subject.

EFTs & Chargebacks

Remember, the Electronic Fund Transfer Act guarantees consumers the right to dispute incorrect financial statements. This also plays a role in outlining how to approach and resolve disputes known as chargebacks.

For banks and consumers, the rules and procedures for filing a debit card chargeback differ from those used with credit card disputes. As a merchant, however, you’ll find the end result is essentially the same. In both cases, the transaction amount and any associated fees get forcibly taken from your account. You’ll also lose the purchased merchandise, and any shipping or stocking costs.

Each card network has its own regulations and protocols. These can change at any time. Chargeback reason codes, for instance, differ from one card brand to another. Many are similar, but there are variations in terminology, verbiage, and definitions that can impact chargeback rules and processes. 

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What is an electronic funds transfer?

An electronic funds transfer (EFT) involves the digital transmission of money from one bank account to another. As a digital transaction, there is no need for paper documents, and all transactions occur independently from bank employees or agents.

The U.S. Electronic Fund Transfer Act of 1978 defines EFTs as a transfer initiated by telephone, computer, electronic terminal, or magnetic tape to order, instruct, or authorize a financial institution to credit or debit an account.

What are the types of electronic fund transfer?

EFTs include P2P payments, ATM Transactions, credit and debit card transactions, direct deposits, electronic checks, internet transactions, and phone payments.

Is direct debit an EFT?

Yes. Direct debit withdrawals involve one financial institution or individual withdrawing funds from another person’s bank account. This transaction includes the person or institution withdrawing funds (the payee) who either directly debits the funds or requests the funds be removed from someone else’s (the payer’s) account. Said funds will then be deposited into an account designated by the payee.

How long does an EFT transfer take?

Most EFT payments clear (finish processing) within a couple of days. Some may even clear one the same day, depending on the payment processor or bank.

What are the advantages of EFTs?

For consumers, EFTs feature comprehensive liability protections, increased security, lower to zero transaction fees, speed, and convenience.

For merchants, EFTs can ensure funds are available for deposit on the same day, or in just a couple of days, whereas paper checks and ACH transfers take longer to process and clear. Additionally, the added security features help to accurately authenticate customers.

What are the disadvantages of EFTs?

Merchants don’t enjoy the same liability protections as consumers and are almost always responsible for any fraud committed through electronic payments. Besides this fact, customers must have funds available in their account to initiate an EFT, transactions could feature higher fees if same-day funds are required, and electronic payments could still “bounce.”

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