What Is an EFT Payment? Definition and Examples (2024) - Shopify (2024)

Cash and personal checks are a convenient way to complete transactions locally and in person, but for conducting business on a larger scale, these payment methods aren’t always ideal.

Forexample, they are a poor fit for transferring large sums or paying an international vendor. This is where EFT payments come in.

What is an EFT payment?

Electronic funds transfer (EFT) is a catch-all term that includes a wide variety of electronic payments, like credit card payments, ACH payments, and wire transfers. EFTs make it easy to digitally move any amount of money from one bank account to another, whether those accounts are hosted by the same financial institution or not.

No human bank employees or paper documents are required to execute these transfers. Instead, the premise behind EFTs might be fairly expressed as “a bank-approved email system for money.”

EFTs are one of the more popular payment options for moving money around the world. They are accessible to businesses of any size, straightforward to use, and eliminate the need to send paper checks or cash anywhere.

How do EFT payments work?

EFT payments are processed on a designated money network, most commonly the Automated Clearing House (ACH). This is the money transfer system that connects every financial institution in the US to one another, from large banks to small credit unions.

An EFT requires two parties to execute a transaction: one to send funds, and another to receive them. The sender must also offer up a few important details to successfully execute the transfer, including the recipient’s bank name, bank account number, routing number, and account type.

An EFT sender might be an employer or individual paying a contractor for some kind of service. The recipient could be an employee of that business, a third-party vendor, or even a utility company. In fact, it’s quite common for utility companies to use EFTs to get paid when a customer sets up auto-pay on their account.

Once the electronic transfer is initiated, it moves through a series of digital networks via the internet or a via the internet or a payment terminal to the sender’s bank to the sender’s bank, then to the receiver’s bank. EFTs that occur on the ACH network are executed in batches: the network waits to accrue a collection of pending transfers, and then processes them later. Most of these payments are cleared within a couple of days.

EFT technology is an effective way to make payment over the internet while maintaining security and maximizing ease of use.

7 types of EFT payments

There are a variety of different types of ETFs out there, and some are bound to be quite familiar to you—in fact, you may even already be using EFTs without realizing it.

1. ACH payments: The Automated Clearing House is a major network for moving money between bank accounts across the US. ACH debit and credit payments move through the ACH network, which is overseen by NACHA and operated partially by the Federal Reserve (as opposed to conventional credit card networks, which are owned and operated by for-profit companies). ACH payments settle in about two to three business days. ACH transactions can happen as a credit or a debit. Importantly, all ACH payments are a type of EFT, but not all EFTs are ACH payments.
2. Direct deposit: When you arrange to have your employer deposit your salary directly into your bank account, that’s an EFT. Direct deposit is a type of transfer designed to make it simple to pay people who work for you. This is often facilitated by a third-party service provider. The employer tells the provider how much every employee should receive and how often, and the rest happens on its own.
3. ATMs (automated teller machines): When you make a withdrawal or deposit at an ATM, the machine uses EFT payment to update your bank account balance without the need for you to enter a physical bank branch.
4. Credit and debit cards: You probably use your credit or debit card regularly to move money between bank accounts, make purchases, and pay bills. These all represent a type of EFT payment for consumers paying for goods and services.
5. Wire transfers: Wire transfers are a go-to EFT mechanism for moving large amounts of money—for instance, a down payment on a house. When people or business entities want to pay for big-ticket items that go beyond conventional consumer spending, a wire transfer is likely how they will do it.
6. Pay-by-phone systems: This is a less-common variety of EFT, but it’s still in use today. Some people rely on phone-based systems in order to initiate payments for covering bills or moving money from one bank account to another. These systems render that transfer request into something that can be interpreted and carried out by computers.
7. Electronic checks: You might hear them referred to as e-checks. They function just like paper checks, but without the paper. You must input your routing number and bank account number into an EFT payment service to successfully complete a transaction.

Final thoughts

Finance has become increasingly digitized since the Federal Reserve implemented the Electronic Funds Transfer Act in 1978. Today, money has more in common with computer data than ordinary cash.

EFT payments underpin the global economy through speed, security, and accessibility. Whether you’re looking to buy goods online or get paid for selling them, find the EFT payment solution that benefits you most.