Electronic Funds Transfer – or EFT – is a system of transferring money or funds from one bank account directly to another without any paper money or funds changing hands in the exchange. One of the most widely-used EFT programs is some thing called direct deposit, in which payroll checks are deposited directly into an employee bank account. EFT, does, however, refer to any transfer of funds initiated through an electronic terminal, including credit card, ATM, Fedwire and all point-of-sale transactions. It is used for both credit transfers, such as the abovementioned payroll payments, and for debit transfers, such as for regular mortgage payment installments.
Electronic Funds Transfers are used for a number of different concepts and operations, including: Cardholder-initiated transactions, whereby a cardholder makes use of a payment card; Direct deposit payroll payments for a business to company employees, often via a payroll services company; Direct debit payments from customer to business, whereby the transaction is initiated by the business with customer permission; Electronic bill payment in online banking, which may be delivered by EFT or paper check; Transactions involving stored value of electronic money, possibly in a private currency; Wire transfer via an international banking network (generally carries a higher fee); Electronic Benefit Transfer.
In the course of an Electronic Funds Transfer, transactions are processed by a bank through the Automated Clearing House – or ACH – network, the secure transfer system that connects all U.S. financial institutions. For payments, funds are transferred electronically from one bank account to the billing business’ bank, usually less than twenty four hours after the scheduled payment date.
The growing popularity of Electronic Funds Transfer for online bill payment is driving the operation of paper payment exchange of checks, stamps, envelopes and paper bills into virtual obscurity. The many varied benefits of Electronic Funds Transfer include reduced increased efficiency, administrative costs, simplified bookkeeping, and significantly greater security. However, the number of companies that send and receive billing information through the internet is still relatively small.
The U.S. Government closely monitors EFT compliance through Regulation E of the Federal Reserve Board, which implements the Electronic Funds Transfer Act. Regulation E governs all financial transactions with electronic payment services, specifically with regard to disclosure of account information, consumer liability, error resolution, records retention and receipts printed from electronic terminals.
Electronic Funds Transfers transactions require communication between a number of parties. When a card is used at a merchant or an ATM, the transaction is first routed to an acquiring banking institution, then through a number of networks, then to the issuer where the cardholder’s account is held.
An Electronic Funds Transfer transaction may easily be authorized offline by any of these entities through what is known as a stand-in agreement. A stand-in authorization may be used when a communication link is not available or used simply to save communication cost or time spent. A stand-in is subject to the transaction amount below the agreed limits, which are calculated based on the risk of authorizing a transaction offline, that therefore vary between merchants and card types. Offline transactions may be subject to other important security checks, such as verifying the card number against a stolen card list, velocity checks – that limit the number of offline transactions allowed by a cardholder – and random online authorization.
Depending upon the business rules of the issuer, a hold may be placed on the funds that are authorized. This hold reserves that amount of money for a defined period of time. If a transaction is not cleared within this defined period, then the hold will be automatically removed and the funds made available again.
Some financial networks operate a single message solution, in which a transaction is authorized and cleared via the same message.
A transaction will be authorized through a pre-authorization step, whereby a merchant requests the issuer to reserve an amount on the cardholder’s account for a specific period time, followed by completion, whereby the merchant requests an amount blocked earlier with a pre-authorization. This two-step transaction flow is often used in businesses, such as hotels and automotive rental merchants, where the final amount is not completely known, and the pre-authorization total is based on an estimated amount. Completion may form part of a settlement process, typically performed at the end of the day when the day’s completed transactions are submitted for batching. All of these messages are sent online from the merchant acquirer over to the issuing bank.
Electronic Funds Transfer transactions may be accompanied by several methods to authenticate the card and, in turn, the cardholder. The merchant may manually verify the signature of the cardholder, or the cardholder’s Personal identification number may be sent online in an encrypted form for validation by the credit card issuer. Other information may also be included in the transaction, some of which is not visible to the card holder – such as magnetic stripe data – some of which may be requested from the cardholder.