Article summary
Electronic fund transfers (or EFTs for short) provide a way to send money via an online network as either an individual or a business. They’re used to move money from one bank account to another and a common way of transferring money digitally.
Sometimes EFTs are also referred to as electronic checks, e-checks, or direct deposit payments in the US. Whatever you know them as, we’re here to help you decide if it’s a good method of moving money for you.
Use this guide to learn more about what an electronic funds transfer is, how it works, the ways you can use them to your advantage and examples of electronic funds transfers.
In this article
- What is an electronic funds transfer?
- A full electronic funds transfer definition
- Explaining the Electronic Fund Transfer Act
- How does an electronic funds transfer work?
- Examples of EFTs
- FAQs and guides
What is an electronic funds transfer?
An electronic funds transfer (EFT) is the process of moving money over an online network using digital/computer-based technology, from one bank account to another. This can be between accounts held with the same financial institution or different ones, initiated by a person or business.
EFTs are also used as a general term covering the modern payment processing method. It has become the main method for money transfers as they’re relatively simple, direct and require no paper checks, in-person interaction or intervention from bank employees.
A full electronic funds transfer definition
EFTs are so widely used that you’re probably already making them without realizing. They’re essentially the process behind a variety of payment and preauthorized charges, such as:
- Paying for groceries with your credit or debit card
- Withdrawing dollars from an ATM
- Making direct debits to cover utility bills
- Covering the costs of a payment at any point of sale online or in person with a card
The process behind each of these transactions is powered by an EFT.
A common electronic funds transfer example is when you receive a paycheck that’s deposited directly into your bank account. Here the money appears automatically with no need to visit a bank or cash a check. In 2018 nearly all government salaries were paid via EFT processing, for example.
Money transfer services such as Western Union also use EFTs when you send money online or in person to another bank account or for a cash pickup. When you use online banking, you can make your own EFTs as well, to other accounts that you or a loved one hold.
Explaining the Electronic Fund Transfer Act
The Electronic Fund Transfer Act (EFTA) is a federal law that was introduced in 1978 to protect consumers when they make an EFT. This includes when paying with a debit card, using an ATM, or withdrawing from a bank account.
The Federal Reserve Board implemented EFTA due to greater use of ATMs and electronic banking. In 2011 the rule-making authority for EFTA passed over to the Consumer Financial Protection Bureau (CFPB).
The EFTA defines requirements for banks and consumers when an error happens, guiding them on the process to follow. It means that under EFTA consumers can:
- Challenge errors
- Get any errors corrected within a 60-day window
- Receive limited financial penalties to $50 if reported lost within two days
It further protects both consumers and banks by outlining the specific information banks must provide and detailing ways to limit liability if a credit or debit card is lost or stolen. If you lose a card and don’t report it until after two days, you could be liable for up to $500, or the entire account contents after 60 days.
The EFTA applies to all persons and financial institutions – including foreign ones – that provide EFT services for residents of any US state. It also requires banks to set withdrawal limits to further protect consumers.
How does an electronic funds transfer work?
To understand how an electronic funds transfer works, read these steps:
- Starting point. Every money transfer has a starting point. This is simply when you initiate an electronic funds transfer via an electronic system. For example, this could be:
- Inserting your debit card into a card machine to pay for your restaurant bill
- Tapping in your card details to buy from an online store
- Logging into your online bank account and setting up a bank transfer to a friend
- Initiating an EFT. After you’ve started an EFT the actual initiation point is when you confirm an electronic funds transfer. Depending on your method this could be entering your PIN, swiping your debit card, or clicking confirm to make an online bank transfer within your online bank account.
- Entering your PIN or clicking confirm/send authorizes your bank, credit union or another financial institution to debit your account for that specific amount. The money is essentially taken from your account and deposited into the receiver’s – whether it’s an individual account, such as your friend’s, or a business account, if paying for your weekly groceries at the store.
The amount of time it can take to process an EFT depends on the type of payment you make, your provider and when you initiate it. Sometimes there may be a fee to make an EFT payment (usually if an ATM charges, for example), so check beforehand.
If you’ve made a mistake, it may be impossible to cancel an EFT after you initiate it, however the EFTA doesn’t protect you here as it will be between you and the receiver. You may be able to stop recurring or scheduled EFTs though.
Examples of EFTs
Understand more about how EFTs work with these common electronic funds transfer examples:
Direct deposit
Authorize certain deposits into your bank account – usually paychecks and Social Security checks. Many businesses use direct deposits to pay their employees with ease. You can also pre-authorize withdrawals, for things like car insurance and mortgage payments.
ATM
You’re able to access a bank without going into one at an automated teller machine (ATM). Here you can make a variety of EFTs – usually withdrawing cash, depositing money into your bank account, or transferring money between accounts. Inserting your bank card and entering your PIN can start an EFT.
Personal computer banking
Online banking allows you to use your personal computer, laptop, mobile device, or tablet to make EFT payments from the comfort of your own home. With a secure internet connection, you can easily transfer money between accounts and pay bills electronically.
Pay-by-phone systems
There are two types of pay-by-phone systems, depending on who you call:
- Bank or financial institution – when you call your bank to authorize or provide instructions for paying a bill or moving money between accounts.
- Business – speaking to a business, such as your energy company, to provide and authorize the use of your banking information to make a payment.
Debit or credit card money transfers
Both debit and credit cards work in a similar way when enabling you to make EFTs. This can be for online purchases, paying bills online, in person or over the phone, or moving money between accounts. Businesses can also accept these types of payments to cover the costs of their goods or services.
Electronic check conversion
Like a paper check, you can use electronic checks by entering your bank account and routing number to make a payment. It can convert paper checks into an electronic format and can be done in a store or after a company receives your check.
Peer-to-peer payment apps
Peer-to-peer (P2P) payment apps enable senders to transfer money to a receiver with just their address or phone number in many cases. Many of these EFTs happen in real time but may not offer the same level of protection as debit and credit card payments.
FAQs and guides
- How to send money from a credit card
- How to send money to someone without a bank account
- What is a remittance?
