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Electronic Funds Transfer (EFT) and how it works

If you own a small business, you know the importance of getting paid quickly. Although there was a time when cash and cheques ruled, these days, reliable payment means electronic — more specifically, Electronic Funds Transfer (EFT).

EFT payments are fast, safe and reliable. Additionally, they enable you to take many more forms of payment, from credit cards to Apple Pay.

In this guide, we’ll explain the meaning of EFTs and explore why you might want to use them in your business.

What is an EFT payment?

An EFT payment is exactly what it sounds like: a transaction where money is moved digitally from one financial account to another. These accounts can be at the same institution, but they don’t have to be. Since the transaction is entirely electronic and digital, it can be performed across boundaries — whether institutional, geographic or otherwise.

The transaction typically works by debiting one account and crediting the other, though there are several different variations on how the process occurs (more on that below).

Should your business use EFT payments?

In short, yes — you probably should be using EFT. In fact, there’s a good chance you already are, though you may not realise it yet.

EFT payments offer a number of benefits, but the main two involve convenience — for you, and for your customers:

Convenience for you: with EFT payments, there’s no need to use paper cheques. EFT payments also reduce paperwork — generally, everything is handled electronically. This means that you should be able to link your payments system directly into your accounting software, further reducing manual work.

Convenience for your customers: debit and credit card transactions are both forms of EFT. (This is what we meant when we said you’re probably already using EFT payments). If you’re not, it’s definitely worth considering, as being able to accept cards is extremely convenient for consumers. It’s also all but necessary for online transactions.

There are very few reasons not to use EFT. The main issue for small businesses is likely to be fees, but typically the increased revenue from being able to accept card payments makes up for any fees associated with those payments.

Types of EFT payments

As we mentioned above, “EFT” is actually an umbrella term for multiple types of digital transactions. Here, we’ll explore some of the most common types.

Direct deposit

Direct deposit is one of the most straightforward EFT payment methods — funds simply move from one account to another. This is a popular method of processing payroll.

ATMs

Automated Teller Machine (ATM) transactions are perhaps one of the most common forms of EFT. Transactions at these machines occur completely electronically. You can move money between accounts and make deposits and withdrawals, without the need for a human customer service agent.

Card transactions (credit/debit)

Credit and debit card transactions are forms of EFT. Although the physical card is used as a key of sorts, all of the funds are moved electronically.

Wire transfers

A wire transfer is a fast method of moving a large sum of money from one account to another. They’re most often used for infrequent transactions like down payments, where a rapid and secure transfer method is needed. There’s typically a fee associated with wire transfers.

Phone payments

When you provide payment information over the phone, you’re most likely authorising an EFT transaction.

Electronic cheques

Electronic cheques are a common method vendors use to pay by EFT. They work exactly like a paper cheque would, but you enter the routing number and account information digitally, rather than providing that piece of paper.

Mobile wallets

A newly popular form of EFT payment in Australia is the mobile wallet — think Apple Pay or Google Pay. These apps are extremely convenient and offer potential freedom from having to carry credit or debit cards everywhere.

Personal online banking

Anytime you complete a bank transaction on your smartphone or computer, you’re engaging in an EFT. These transactions can take several forms, but the common thread is their digital nature.

Internet transactions

Finally, any time you make a purchase online, you’re completing an EFT transaction. In 2021, that makes this perhaps the most common type of EFT.

How does EFT payment work?

On the back end, most EFTs are similar: servers and/or networks exchange information to complete a transaction. You provide information for the two accounts involved in the transfer and the transaction either occurs directly or goes through the ACH network. However, the specifics can vary depending on what type of transaction you’re performing.

Transactions through the ACH system, such as direct payroll deposits, go through a more rigorous process where they are checked for accuracy. You’ll also need to provide more information, such as the employee’s bank name and account information.

Debit card transactions at a store, on the other hand, are more straightforward. International EFTs tend to be the most complex, simply due to various rules governing the moving of money across borders.

How long do EFT payments take to clear?

How long it takes for an EFT payment to clear heavily depends on what type of transaction is being performed. Debit card and ATM transactions often clear instantly. ACH transactions typically clear the next day. International transactions might take longer — often two business days.

High-value transactions (over $25,000) might take longer to process, depending on the countries and institutions involved. Additionally, weekends and bank holidays can further extend the time it takes for EFTs to clear. For example, a transaction that occurs on Friday may not clear until the following Monday (or Tuesday, if Monday is a holiday). This is important to keep in mind.

The business benefits of EFTs

EFTs are extremely convenient. But in business, convenience isn’t always all there is to it. Fortunately, there are a lot of other benefits to EFTs, making them an attractive option for nearly any small business.

Security

The number one benefit of EFTs is security. EFTs, and especially ACH payments, are highly secure and go through rigorous checks to reduce the possibility of theft and fraud.

Ease of use

EFTs are generally simple and easy to complete. The impact of this shouldn’t be underestimated: Over time, the reduced friction can be a major boost to productivity.

Low fees

EFTs often come with low (or no) fees, making them highly cost-effective. Typically only ACH and credit card transactions come with moderate fees.

Lower risk of human error

Since accounts and available funds are verified electronically, often before money is released, there’s a lower risk of entering the wrong dollar amount or account number. You also avoid the possibility of counting errors that are common when dealing with cash.

Right to dispute a transaction

Depending on the scenario, it’s often possible to dispute a mistaken EFT transaction if you act quickly. This usually entails a request that your bank investigates the transaction if you think it may be fraudulent.

In Australia, the rules around EFT payments are covered by the ePayments Code.

Fast access to funds

EFTs generally mean that merchants get access to their funds quicker — sometimes the same day. This is a huge benefit.

Works with debit or credit cards

EFTs work with debit or credit cards, making them highly convenient for merchants, vendors and customers.

Automatic payments

The ability to set up automated payments is an enormous convenience for many, and a major advantage of EFTs. Automatic payments help minimise service disruptions and ensure your business gets paid on time.

No hold on funds (usually)

With most EFTs, funds will be available immediately after the transaction clears. In the worst cases, you might have to wait a couple of days.

Digital records

EFT accounting is all digital, so it’s much simpler than trying to keep up with cash and paper cheques. It’s even possible to automate record-keeping.

Employee savings

Using EFT to pay your employees can have a surprising side effect: It may help them avoid fees. Banks sometimes waive minimum balance requirements when employees utilise direct deposit.

EFT vs. ACH

Automated Clearing House (ACH) transactions might seem like a different type of payment method, but in reality, ACH is a subtype of EFT. All ACH transactions are EFTs, although not all EFTs are ACH transactions.

ACH is powered by a network of financial institutions, and the transfer passes through that network on its way to the final destination. The result is that ACH transactions typically take a day or two longer than other types of EFTs, but are more secure. As such, they’re commonly used for payroll purposes.

EFT FAQs

Can you stop an EFT payment?

Typically, you cannot stop an EFT payment once it’s been initiated. Any disputes you have with the individual or institution you paid need to be addressed after the transaction has been completed.

But there are some exceptions. In particular, you may be able to stop recurring payments by notifying your bank or financial institution in advance of the next scheduled payment. Typically, a bank will need at least three business days to process a stop-payment request.

Are EFT payments safe?

Absolutely. In fact, safety is one of the biggest reasons to use EFT.

Of course, any transaction carried out over the internet comes with an inherent risk. However, provided you follow standard safe computing practices, EFTs are much safer than transactions involving paper cheques or cash. This is even more true for ACH transactions.

What are the risks of EFT payments?

EFTs are generally very safe, but there are some risks involved in any financial transaction, especially those involving large sums of money. The primary risk is that the recipient of the EFT isn't who they claim to be, in which case you’d need to dispute the transaction.

What information is needed for an EFT payment?

Information required for EFT payments varies with the type of transaction, but generally, you’ll need to know the name of the recipient, their bank and their account number. For online shopping or debit card payments, you won’t need any of that — you’ll just have to provide your own payment details.

Start sending and receiving EFT payments

EFT payments are fast, secure, reliable and convenient. If your business isn’t using them, you’re missing out.

Getting started can seem overwhelming, but it doesn’t have to be — help is available. Get MYOB today and start processing payroll and accepting payments more easily than ever.

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