The world has gone digital, so it only makes sense for small and medium-sized businesses to adopt Electronic Funds Transfers (EFT payments) to move money. Not only are EFT transactions easier to track and more hygienic, but they’re also faster since you no longer need to depend on an overburdened postal system for money transfers.
Did you know that the digital wallet market around the world reached a value of $269 billion in 2023? The total payments processed by Apple Pay—one of the more popular digital wallets—on a global scale in 2022, stood at $6 trillion.
The pandemic of 2020 did play a huge role in boosting the use of cashless payments such as digital wallets. The number of Apple users alone grew by a staggering 66 million in 2020. Also, the use of Apple Pay by consumers for POS transactions rose by 59% during the pandemic. Data also shows that over 12% of all online payments for consumer goods were done via Apple Pay. For in-store purchases, this data stands at 3.1%.
Paper checks as a payment method are passé and we have proof. When it comes to digital payment trends from 2012 to 2021, the share of checks has dropped from 15% to only 4%.
However, electronic payments aren’t as simple as they sound. There are a variety of ways to implement them and there’s a lot of complex terminology surrounding the process. So, let’s dive deeper into the world of EFT payments and learn how they work, the benefits you might expect, and a few of the most popular electronic payment options.
What Are Electronic Fund Transfers or EFT Payments?
An Electronic Funds Transfer is the digital transfer of funds from one bank account to another. The term EFT applies to a wide variety of electronic payments, which we will explore in a bit. EFT payments can occur within the same bank or account in different banks.
Such payments use various payment methods including ACH (Automated Clearing House), debit card, and credit card networks, and payment apps such as Fedwire. Essentially, whenever a remittance is made from one bank account number to another, it constitutes an EFT payment.
EFT payments are getting increasingly popular in the B2B sector as they are so much more efficient when compared to checks. Processing and transfer fees are also reasonably priced making EFT the perfect solution for many businesses.
How Do EFT payments Work?
EFT payments are also known as “electronic banking.” While EFT generally refers to funds transfers from one financial institution to another, it also includes P2P transactions and mobile payments.
The two main players in an electronic fund transfer are the sender and the recipient. The sender chooses an EFT method (e.g., a digital wallet), enters the amount to be transferred, and chooses the receiver from a list or enters the payment details of the receiver. The receiver should then ideally get a notification that they have received a payment. It must be noted that different types of EFT transactions have different processing times.
The use of EFT on apps like Apple Pay has skyrocketed during the COVID pandemic. Retailers avoid paper payments to prevent the spread of the virus, and some small businesses have gravitated to accepting payments on P2P apps like Zelle and Venmo.
What Are the Benefits of Electronic Fund Transfers?
Let’s take a look at some of the key benefits that EFT payments offer.
Convenient and efficient
EFT payments are cheaper, faster, more hygienic, and much simpler to process than checks. The most important reason why EFTs became popular is the speed at which EFT transactions are completed. Payments go through in just a few days and since they’re electronic, you don’t need to depend on the postal system to get your payment to the payee.
Wide range of options
EFTs include so many types of payment products that you can choose one for each transaction type required in your business. Do you need to pay employees? Use ACH Direct Deposits for payroll-related transactions. Want to make a one-time payment of a substantial amount to a vendor? Wire transfer is the answer. You can even use EFTs for recurring bill payments.
Secure transactions
Encryption, data security, and encoding technologies are getting better day by day. Consumers are also becoming more aware of data security and data leaks, and hacks have shown the world how dangerous such compromises can be. Hence, consumers want more from companies and institutions processing EFT transactions.
Take for example the credit card. Magnetic strip cards are now being replaced by more secure EMV chip cards that use encoding when data is being transferred. Unlike a check, it is very difficult for an EFT transaction to fall into the wrong hands.
Affordable fees
Considering the immense benefits that EFTs offer in terms of speed and security, the processing fees for EFTs are quite reasonable. Of course, different EFT products and providers set their own fees but they are relatively affordable.
In most cases, EFT payments are a no-brainer for small to mid-size retailers. However, there is one factor to consider before you go completely paperless.
A Pew study found that 14% of Americans still primarily pay with cash in 2022. These consumers are also less likely to have used mobile payments in the past year.
Although the study shows that 41% didn’t use any cash for their weekly purchases, the drop in usage of cash over the years is not as steep as one would believe. The use of cash also differs when looking at spending in various age groups. For example, senior citizens tend to stick to cash payments as adapting to changing payment technology can be difficult for them.
Many consumers who fall in this category are “underbanked,” which means they don’t have a checking account, or they don’t have a smartphone or debit card to access it with. Because of this, you may want to retain a cash payment option if you sell small-ticket consumer essentials or food items.
Are EFT Payments Safe?
If you’re a first-time EFT payment user, you might feel a little nervous about sharing your bank account information. But keep in mind that EFT payments use the same bank account information that you would normally share on a check.
However, unlike checks, with EFT, there’s no risk of your bank account information ending up in the wrong hands. So, to answer your question, EFT payments are 100% safe.
The most common way you can lose money using EFTs is by sending money to the wrong person. Payment apps let you send money with a few taps but this speed and efficiency can lead you to accidentally send money to the wrong account if you are in a hurry. If you cannot convince the recipient to return your money, the amount is lost.
You should also be aware of scams and check the recipient’s bank details before transferring any money. Also, it’s common knowledge that credit and debit card information is frequently stolen and leaked during big data hacks. Large businesses and financial institutions are responsible for preventing such data breaches but you can do your part by checking your statements regularly and reporting any fraudulent transactions as soon as possible.
What Is the Normal EFT Payment Processing Time?
EFT payments are usually processed in 1-4 business days. Keep in mind that once you initiate an EFT payment, you can’t cancel it, unlike check payments. If you send funds by mistake, you must ask the receiving party to refund it once they get your payment.
What Are the Most Common EFT Payment Methods?
EFT is an umbrella term that refers to many different types of funds transfers. Let’s look at a few of the most prominent ones, and their benefits for small to medium-sized businesses.
1. Debit cards
Debit cards can help you move money from your bank account to the payee’s, and you can use it to withdraw cash from ATMs. Not just for outgoing payments, they can be used for incoming payments from customers as well.
The “tap-to-pay” feature on cards allows customers to enter their card details without swiping. This is a great way to ensure touch-free payments during the pandemic.
2. Direct deposits
Direct deposits are an easy way to process payments to employees. It’s easy to outsource them, so they’re a great option for mid-sized companies or those without an HR department. They can be done through a service provider that processes your payroll and authorizes payouts.
3. Mobile wallets
According to a Forbes Advisor survey in 2023, 53% of participants in the US said they used digital wallets such as Apple Pay more than traditional modes of payment The number of Apple Pay users in the US alone was 50.8 million in 2022. The app stores your credit card information, which you can access through Face ID or your passcode. Mobile wallets are a quick, secure way to process touch-free customer payments in-store and online.
Mobile wallets come under a wider type of EFT product known as peer-to-peer (P2P) payments. PayPal was the first P2P EFT product, founded in 1998. There are so many apps available these days for P2P payments including Cash App and Venmo.
4. Credit cards
Credit card providers such as Visa and MasterCard also allow tap payments. The only difference from debit cards is that you buy on credit, instead of transferring funds from your account to that of the payee. You can use them for incoming payments as well.
5. Wire transfers
Typically used for large, infrequent payments (because they involve a fee), wire transfers also offer a fast way to make payments.
6. The Electronic Federal Tax Payment System
The EFTPS is an EFT service that enables taxpayers to make payments to the IRS.
7. ATM transactions
It is hard to believe that the ubiquitous ATMs that have been around since 1967 process EFT transactions. Withdrawing, depositing, and transferring money using ATMs are all EFT transactions.
How Do EFT Payments Differ from ACH Payments?
ACH transfers or Automated Clearing House payments are a type of EFT payments. Over 31.5 billion ACH transactions were processed in 2023, totaling more than $80.1 trillion in payments.
Be it Direct Deposits or electronic checks, ACH payments use the Automated Clearing House Network to send funds from one bank to another. It usually takes 1-2 business days to process, unlike credit or debit cards.
However, ACH payments are some of the safest, since they must meet the National Automated Clearing House Association (Nacha) security standards. ACH transactions are processed in batches, unlike other forms of EFTs. The batch processing frequency differs and hence they may take a little longer than other EFTs but they are safer.
Even though ACH payments are a type of EFT payments, there is a difference between the two. All ACH payments go through the ACH network or Nacha, while EFT payments forego this – they’re just digital transactions between two financial institutions.
While ACH transactions are the most secure, EFT payments are faster, often in real-time. So, whether you offer ACH, EFT, or both will depend on what’s more important for your business – speed or security. You’ll also need to factor in the compatibility with your current payment processing solutions.
How Do You Track EFT Payments?
EFT payments are encrypted for security. They’re easy to track since each transaction receives a unique EFT trace number. Most banks offer end-to-end tracking, so you can check the progress of your payment at any time. However, you’ll want to confirm that your bank offers this before you sign up for a business account.
Final Words
Cash and checks will soon be a thing of the past. If you are considering switching to EFT payments, but don’t know how to mitigate the costs, contact Payment Depot’s in-house support staff. They’ll help you understand your options and get the best possible rates for your business. Learn how Payment Depot can help your business save on credit card processing.
Quick FAQs about EFT Payments
Q: What is an EFT payment?
An Electronic Funds Transfer (EFT) is the digital transfer of funds from one bank account to another. It includes a wide variety of electronic payments, including payments via mobile wallets like Apple Pay, P2P transactions, and bank-to-bank transfers called ACH payments.
Q: How does an EFT payment work?
An EFT payment works by digitally moving money from one bank account to another, eliminating the need for physical checks. All EFT transactions are encrypted for security and come with a unique EFT trace number to facilitate tracking.
Q: What is the difference between an EFT payment and an ACH payment?
While ACH transactions are a type of EFT, there is a distinction between the two. All ACH payments go through the ACH network, while EFT payments skip this step and occur as purely digital transactions between two financial institutions.
Q: Are EFT payments secure?
Yes, EFT payments are secure. They use the same bank account information that you would normally share on a check, but without the risk of physical theft. Furthermore, EFT payments are encrypted for added security.
Q: What types of fund transfers does EFT include?
EFT includes multiple types of fund transfers like tap-to-pay via credit or debit cards, direct deposits, mobile payments (like Apple Pay), credit card payments, wire transfers, and more.
Q: Can an EFT payment be canceled?
EFT payments generally cannot be canceled after initiation. If funds are sent by mistake, the receiving party must be asked to refund the payment once received.
Q: How long does it take for an EFT payment to process?
EFT payments are typically processed within 1-4 business days. However, the exact timeline can vary depending on the type of transfer and the banks involved.
Q: How has the pandemic affected the use of EFT payments?
The use of EFT payments, especially via Apple Pay, substantially increased during the pandemic. Retailers adapted EFT to prevent virus spread, and several small businesses began accepting payments on P2P apps like Zelle and Venmo.
Q: What is the EFTPS?
The EFTPS is an EFT service that allows taxpayers to make payments to the IRS.
Q: What are the advantages of EFT payments over traditional check payments?
EFT payments are faster, cheaper, more hygienic, and easier to track than traditional check payments. They offer several options for fund transfers making it ideal for various payment scenarios. Some types of EFT payments include debit cards, tap-to-pay via credit or debit cards, direct deposits, mobile payments, credit card payments, wire transfers, etc.
