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Blog:

EFT Payments – The Guide to Electronic Fund Transfers

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By: AvidXchange

March 13, 2019

Today, commerce is relying more and more on electronic communications to handle financial transactions efficiently and affordably. For this, businesses are turning to electronic fund transfer system (EFT) networks to initiate and process payments using the Internet.

What is an EFT Payment?

EFT is an umbrella term that describes a variety of electronic payments, including wire transfers and automated clearing house (ACH) transfers. Together, they present a modern-day solution for an age-old problem: sending fast and reliable payments on time.

According to the U.S. Bureau of the Fiscal Service, in FY2018 over 99.5% of government-wide salary payments and allotments were facilitated via EFT. Similarly, about 84% of total tax refund payments were issued using EFT systems in the United States.

For millions, EFT networks allow 24-hour access to their cash and a more convenient and efficient means of accessing their account information. However, today, EFT is preparing business owners for the economy of tomorrow by providing them with faster, safer, and more reliable methods of issuing B2B payments.

The History of the EFT: A Primer

The electronic fund transfer (EFT) industry first emerged in the 1960s with the arrival of the automated teller machine (ATM). The ATM leveraged new telecommunications technology to facilitate account transfers, deposits, cash withdrawals, and more using a magnetic stripe card and a personal identification number (PIN).

The advent of ATM networks brought global finance into the EFT era. In the proceeding years, EFT networks grew rapidly across the United States following a 1985 Supreme Court decision that upheld an earlier Court of Appeals decision that found ATMs do not represent bank branches.

Consequently, interstate EFT networks quickly spread throughout the country.

Fast forward to the 21st-century and now countless merchants, vendors, government agencies, and even individuals use EFT networks to send and receive money. Whenever debit cards, direct bank deposits, or e-Transfers are used to facilitate a transaction, an EFT network is used.

In other words, EFT networks are the backbone of the modern B2B payment processes and the peer-to-peer economy.

ACH vs. EFT

Whenever a discussion arises regarding EFT accounting, the conversation immediately steers toward the automated clearing house (ACH) network.

For those wondering what an ACH payment network is, an ACH definition refers to a computerized exchange between participating financial institutions like banks and financial services companies.

There is no clear difference between ACH and EFT, mostly because they are, in a sense, one and the same. You can think of ACH transactions to be a subcategory of EFTs, where some EFT payment processes are built on top of an ACH infrastructure.

In this sense, an ACH transfer or ACH direct deposit is a type of EFT in which payments are sent through the Automated Clearing House network for authentication purposes.

At a glance, ACH and EFT are similar in that they both involve sending payments electronically from one network node to another. However, EFT is a broader term that encapsulates several methods of payment, including debit cards, credit cards, and POS transactions.

Today, all major U.S. financial institutions, including JPMorgan Chase, require all external accounts to support ACH transactions to facilitate EFT billing.

It’s clear that ACH and EFT are, in fact, not in opposition to one another. Rather, you can define ACH payment or an ACH transfer as merely a type of EFT that is leveraged across a variety of industries for its security and low fees which, initially, were designed to replace physical check payments.

Types of EFT Payments

There are several ways that you can send money electronically. Here are a few of the most common types of EFT payments that are used in business finance.

  • Electronic Checks: An electronic check is, as the name suggests, the electronic equivalent of a standard paper check. Using a bank account number, ACH trace number, and routing number, the e-check can transmit encrypted data to make EFT deposits.
  • Debit Charges: A debit charge is a type of EFT payment that uses a physical debit card issued by a bank or credit union to move money from one account to another. They can be used with a POS system, over the phone, or online.
  • ATMs: ATMs are a type of EFT banking that allows bank account holders to access their funds remotely without interacting with a physical teller. At an ATM, located either at a bank or a white-label ATM station, account holders can withdraw cash, make deposits, or transfer funds.
  • Personal Computer Banking: Today, personal computer banking represents a major share of the total online banking transaction volume. Personal computer banking allows users to make transactions with a PC, tablet, or mobile device connected to the Internet.
  • Wire Transfers: A staple of the EFT network, wire transfers are a fast and efficient means of sending money for large, high-value payments. Wire transfers are often used to make down payments on physical assets like real estate. We talk a bit more about the differences between wire transfers and ACH here.
  • Direct Deposit: A direct deposit is the electronic transfer of a payment directly from one account (usually the employer) to the receiver’s account (usually the employee). Direct deposits are facilitated via a direct deposit service provider who, after running payroll, authorizes deposits into each employee’s account.

In sum, EFT transactions, across their many forms, make up the electronic banking industry. Each of the above EFT payment types share one common element—they are all connected to the ACH network, a secured electronic system that links all U.S. banks and financial institutions.

It should be noted, however, that not all EFT transaction types carry equal fees. To make an informed decision about which to use, all ACH-connected account holders should check the EFT details provided by their financial institution.

They may be surprised to find that EFT fees tend to vary by location and transaction method.

How Long Does an EFT Take to Process?

In an increasingly competitive and fast-moving global market, the need for reliable and efficient payment processing is constant. In an accounts payable department, there is often little time to spare for pen and paper payments, lengthy processing times, and other delays.

Instead, business owners can leverage EFT technologies to pay vendors and suppliers via direct deposit. We’re often asked, “how long does EFT take?” The answer, for most accounts payable departments, is seconds.

Compare this to the hours it may take to print a check, stuff it in an envelope, dig around for a stamp, and rush it to the post office. Assuming the check clears the bank, it may take several days for the process to finalize from end-to-end.

Knowing this, many accounts payable offices are migrating to automated EFT solutions to replace paper checks and outdated, delay-inducing postage. At AvidXchange, we offer a host of full-service bill payment methods via our software to help bring business accounting systems into the 21st century.

How Does It Work?

Instead of selecting payments for print, with an EFT-based accounts payable you simply select to pay. With the click of a button, business owners can trigger payments electronically. Once submitted, payments are sent to the E Payment Application portal where the payment files are routed to approvers before finally being issued to vendors.

From there, payments are debited from the payer’s account to a secured trust account. The payer’s account then becomes a system of record, storing and hosting all files needed for reconciliation.

The Benefit of EFT Payment Systems

There are several key benefits that accounting departments and business owners can derive from EFTs. First among them is that an EFT transfer is an economical choice—in terms of both saving time and money. However, there are a host of other advantages available to EFT users, including:

  • No physical postage required
  • No check cashing costs incurred (saving up to $1 per issue)
  • Speedy, near-instant processing time
  • Fully encrypted with SSL 128-bit data
  • Easy to track

The main advantage lies in the superiority of EFT and ACH processing time. Unlike manual pen-and-paper accounts payable, e-payments are near-instantaneous and can often be sent for free or for a low fee comparable to the price of a postage stamp. This makes EFT a can’t-lose solution for those stuck on dated, manual payment processing systems.

Whether you’re a business or supplier, you understand the frustration of late payments and slow, laggy payment processing. An accounts payable cycle that is held back by late payments can result in serious issues for any business, including:

  • Mounting late fees
  • Fractured relations with suppliers
  • Disrupted workflows
  • Cash flow shortages

Late repayments constitute one of the leading causes of poor supplier relationships and piling debts. Fortunately, the EFT payment method circumvents this issue by providing an efficient and cost-effective means for sending and receiving payments electronically.

Creating a Secure, Efficient Accounts Payable

By leveraging the power of EFT payments, including wire transfers or ACH, businesses can modernize their check writing experience. Paying with ease has never been simpler thanks to the secure, automated EFT technologies available to forward-focused accounts payable offices.

The latest payment automation software reduces risk, saves time, and eliminates the hassle of postage. It’s no wonder, then, that so many businesses are making the switch and migrating to an electronic payment processing system to improve the timeliness of their transactions.

 

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AvidXchange

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