Whether you’re splitting a restaurant bill with friends or paying your utility company online, chances are you’re using an EFT transaction. EFT is an umbrella term that includes payment methods like ACH, wire transfers, and ATM withdrawals.
EFT transactions use secure digital networks to move money from one account to another. But what exactly are they, and how do they work?
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What is ACH?
ACH stands for Automated Clearing House and is the electronic network allowing banks to transfer funds directly. Unlike credit card payments or eChecks that involve third-party payment processors, ACH transactions are direct bank-to-bank transfers.
There are two types of ACH transactions: ACH credits and ACH debits. During an ACH credit transaction, the payer (like your customer) initiates the transfer by providing their bank account information to your business. Once your customer’s bank validates the information and ensures they have enough money, they will authorize your ACH payment processing company to “push” funds into your bank account.
While ACH transactions are quick, easy, and secure, they present a small fraud risk. Like paper checks, ACH payments contain personal information that can be used to impersonate someone. However, unlike a traditional check that contains a series of magnetic ink characters and bank details, ACH payments only include the RDFI (Receiving Depository Financial Institution) ID number and the unique account number for the paying or receiving party.
Fortunately, the ACH network is regulated by Nacha (formerly NACHA) and adheres to strict rules that protect your customers and your business. As a result, EFT vs. ACH transactions are much more reliable than other payment methods, such as international wire transfers. Moreover, ACH payment costs are far more cost-efficient than credit card transactions.
What is EFT?
EFTs are digital payments that move money between people and businesses. EFTs are a faster alternative to cash and paper checks, providing more protection against fraud by allowing consumers to dispute incorrect financial statements (also known as chargebacks).
Anytime you withdraw money from an ATM or use an app on your smartphone to pay for a restaurant tab, you make an electronic payment. These transactions are all facilitated by a shared bank network. In addition to the ACH, other global networks allow for international EFTs.
Unlike paper checks, which require the involvement of personnel to print and mail them, EFT payments are completed instantly. They can be made from a bank account via direct deposit or ATM transactions, credit cards, or pay-by-phone systems.
Peer-to-peer electronic payment systems also use EFT technology to make transfers fast. These services typically charge a fee for each transaction but can be a convenient way to pay for something on the go. They can also help reduce the costs associated with paper checks by eliminating the need for check printing and postage and the time it takes to process them.
How do EFT and ACH work?
EFT is an umbrella term for any transaction using modern technology instead of traditional means. It includes everything from cash withdrawals at an ATM to paying back someone for a meal with your P2P app of choice. The same goes for ACH, which stands for Automated Clearing House and is a massive network of banks and financial institutions that enable electronic transactions nationwide.
For businesses, ACH can process payroll payments or recurring utility bills. It’s a cost-effective way to make domestic or international payments. It can also be used for account-to-account transfers, accounts payable payments, and more.
Essentially, a company or individual that wants to use ACH will send the payment information to their bank. Then, the financial institution that handles this type of transaction—an ODFI—will send it to the ACH operator (in most cases, the Federal Reserve Bank). The ACH operator then tallies the payments and sends them to all the RDFIs in their network, including the originating bank.
The RDFIs then debit or credit the accounts that have received these payments. During this process, the original financial institution never sees the money being transferred to or from their customer’s accounts. This is one of the reasons that ACH is more secure than other forms of payment, like debit and credit cards.
How can I accept EFT and ACH payments?
There needs to be more clarity around the terms EFT and ACH. They are sometimes used interchangeably, but each carries distinct operational and legal meanings. While EFT is the more general term and covers all electronic payments not made using checks, ACH is a specific form of digital payment.
An ACH transaction moves money from one bank account to another through the ACH network. Those payments can be either credit or debit, and they’re commonly used for things like bill payments or direct deposit. They can also be used to send funds between individuals, though that requires more steps and typically takes longer to appear in the recipient’s account. ACH payments are built into many electronic payment services.