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What Is Electronic Funds Transfer
(EFT)?
Electronic Funds Transfer (EFT) refers
to the movement of funds from one bank account to another
by means of electronically communicated payment instructions.
EFTs allow a company to pay or collect corporate obligations,
and exchange payables and receivables information electronically.
Settlement of funds takes place among all parties on
an agreed upon date.
EFTs are becoming a significant factor in day to day
commercial transactions. Both public and private sectors
have recognized that the electronic payment and receipt
of funds offers significant advantages over conventional
processing techniques. Consequently, government and
business have increasingly implemented EFTs as a means
to reduce costs and paperwork — improving operating
efficiency — and to better control their receivables
and payables.
To initiate EFT, a company must enter into an agreement
with a financial institution capable of originating
these transactions. The company needs to obtain written
authorization from its customers and suppliers allowing
for deposits or charges to their accounts. All parties
can then agree on responsibilities and the manner in
which entries will be processed and settled.
Based on the agreed-upon payment schedule, the company
prepares and delivers the necessary information to its
originating financial institution. The transaction,
processed through the ACH (Automated Clearinghouse),
is passed on to the customer's or supplier's financial
institution.
When making Electronic Funds Transfers, the suppliers
receive credit to their corporate account along with
invoice information. When EFTs are used to collect payment
due, the customer's corporate account is debited and
information to update their payables is provided.
Functionally, EFTs include two principal categories:
credit transfers and debit transfers. A credit transfer
is one in which the originator instructs its bank (via
a payment order) to transfer funds belonging to the
originator for credit to the beneficiary’s account
— i.e., the instruction to pay is given by the
person making the payment. A debit transfer is one in
which the originator instructs its bank (via a payment
order) to collect funds on behalf of the originator
by debiting another party’s account at the other
party’s bank — i.e., the instruction is given
by the person receiving payment.
A typical credit transfer is initiated by the originator
(e.g., a buyer wishing to pay its supplier), who sends
a payment order to its bank instructing the bank to
cause a payment to be made to the beneficiary (e.g.
the supplier to be paid) by deposit to the beneficiary’s
bank account.
The originator’s bank accepts and processes the
payment order received from the originator, and executes
the originator’s payment order by sending another
payment order to the beneficiary’s bank. In EFT
transactions, the payment order of the originator’s
bank, and any subsequent payment orders, are communicated
electronically to the beneficiary’s bank, as is
the originator’s payment order to its bank.
A funds-transfer system is normally used to communicate
payment orders from the originator’s bank to the
beneficiary’s bank, and for effecting a settlement
of funds between such banks in order to complete the
funds transfer (although other mechanisms are available).
The funds-transfer systems and funds-transfer mechanisms
are available for effecting payments electronically
in the United States.
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