An electronic funds transfer is the electronic transfer of money from one account to another from within a single financial institution or across multiple banks or credit unions. It occurs through a computer-based system without the need for direct intervention from an employee.
The U.S. Electronic Fund Transfer Act of 1978 defines EFTs as a transfer initiated by telephone, computer, electronic terminal, or magnetic tape for the purpose of ordering, instructing or authorizing a financial institution to credit or debit an account.
This process goes by several different names today. It may be called an e-check in the United States, a bank transfer in the UK, or a giro transfer in Europe. Direct deposits, ATM transfers, direct debits by a cashier, and instant payments all qualify as an EFT.
Several electronic funds transfer advantages and disadvantages are worth considering when looking at this process of moving funds.
List of the Advantages of Electronic Funds Transfers
1. You have the right to dispute a transaction completed by EFT.
If you paid with an electronic funds transfer and have a dispute with a merchant, then you have the right to have your bank investigate anything that seems incorrect or unauthorized. Although you have a 60-day deadline from the time of the bank statement to request help with something that seems wrong, you may have some financial protections available with this advantage that safeguard you against potential fraud.
Make sure that you carefully review every statement from your bank or credit union to ensure there isn’t any unauthorized transaction that sneaks through.
2. It helps merchants to access funds faster.
Merchants experience several unique benefits when they complete a transaction using an electronic funds transfer. It may reduce some of their bank fees, eliminates time spent by employees and deposits, and stops chances for fraud to occur. This advantage also benefits customers because it can prevent price increases that are due to issues such as these.
When wire transfers occur in the United States, the money typically moves within 1-2 business days. Some same-day transfers are possible. International payments may take 3-4 business days to complete when using this technology.
3. You can still pay for items without a debit or credit card.
Many businesses will accept an electronic check conversion as a form of payment even though they don’t accept a traditional check. That means customers have a chance to buy items that they would otherwise not have a chance to do so if they don’t have a credit or debit card. Since the money comes directly from the linked bank account, there isn’t the threat of debt occurring with this process either.
4. Customers can set up automatic payments with EFTs.
Although ACH transactions are the most common way to create an automatic payment, an electronic funds transfer process can accomplish the same result. A merchant will pull funds from your account every time you have a bill that is due, which is usually on a monthly basis. The biller is the one who is responsible for initiating the transaction, which means a customer doesn’t need to take any action. If you get busy and forget to pay for some responsibilities, then this option can keep your accounts current.
You’ll need to fill out some paperwork to use this advantage. Then you can stop the automatic withdrawal whenever it is needed.
5. Most EFT transactions don’t require a hold on the funds.
Because the money moves quickly with an electronic funds transfer, the recipient shouldn’t need to wait for any funds to clear before they can claim or use their money. That’s an advantage over a traditional check that may need to wait 14 days or more before the funds become available. It can take several weeks, and sometimes longer, to discover that a payment was bad when using the traditional method.
This advantage allows merchants to put their revenues to use right away instead of waiting for them to clear the bank.
6. It is generally safe to receive funds through the EFT process.
It is mostly safe to receive money from a wire transfer. Payments are more certain with this process because an institution will only send money that is available. Once the cash arrives, then it is typically yours to take within a business day – although some exceptions may apply in specific situations. It’s also difficult for a sender to take the money back after transferring it to you.
You must verify that the wire transfer is real before trying to access funds. You will want to speak with someone at the bank to determine if the funds cleared. Some electronic payments can get reversed.
7. This service is available almost anywhere in the world.
Many people use electronic funds transfers to send money internationally. It is usually performed through a service like MoneyGram or Western Union, but banks and credit unions can sometimes also offer this service. It is a service that you can find almost anywhere, and online providers make it convenient enough where you don’t even need to leave your house. Multiple centers accept payments in every city, so the average person doesn’t need to travel very far to find a place to give or receive cash. You’ll also receive the money in your current currency.
List of the Disadvantages of Electronic Funds Transfers
1. Customers need to have the funds available immediately.
An electronic funds transfer is a process that happens immediately. If a customer purchases something using EFT, then they must have the money available right away. It’s not like the traditional check that might take a few business days to clear before the bank releases the funds. Most institutions will typically release cash from your account much faster, often on the same business day.
2. You won’t receive a copy of the canceled check.
When you pay through an electronic funds transfer, then you’re initiating a transaction that’s similar to a debit card. You’ll receive a receipt at the register for the amount spent, but you will not receive a copy of a canceled check from the bank. This disadvantage applies even when you write a paper check that the merchant processes through their point-of-sale equipment. That means you must pay close attention to your statements to ensure that the transaction processes correctly.
3. It creates purchasing opportunities around the clock.
The convenience of an electronic funds transfer can also become a disadvantage for some consumers. The urge to buy something in the Internet economy means there are 24/7 shopping opportunities for anyone with a data connection. Sellers want to encourage this process by removing any potential barriers to a buying opportunity.
Some sellers don’t accept an electronic funds transfer – and may not even allow for a debit card. Universal acceptance may never happen, which means consumers must have multiple forms of payment available to ensure that they can buy what they need.
4. Payments can still “bounce” when using an EFT.
An electronic funds transfer can come back as “returned,” which creates a result that’s similar to bouncing a check. Customers must take immediate action if a payment declines or gets returned to you so that payment can occur. Financial institutions do not automatically try to reprocess returned or declined transactions.
Most institutions will charge a returned EFT fee for every item that comes back for any reason. It’s often a similar fee to that of a bounced check, although it is usually a lower amount. Merchants will pass this cost along to a customer when it occurs if they are at fault for the problem with the transaction.
5. It is almost impossible to bank anonymously in the United States.
Some countries allow consumers to have accounts anonymously, which means their electronic fund transfers don’t provide any personal information at all. This process doesn’t happen in the United States. Individuals can keep their identity from businesses and individuals to some degree, but it also allows law enforcement to find you if there is a need to do so. Even the banks in Switzerland that are famous for their anonymity cooperate with American policing efforts.
6. If you lose money in a wire transfer, it may not be recoverable.
Many scams involve electronic funds transfers because the initiator may not realize that their money isn’t going to its intended purpose until the process is too far along to stop. A thief only needs to take control of an account for a few days to send money to a different location. Wire transfers can go to overseas accounts where the cash gets withdrawn almost immediately in some situations. That’s why you should never use an EFT to send money to someone that you don’t personally know.
7. You cannot guarantee the recipient unless it is yourself.
Unless you initiate an electronic funds transfer to pay yourself or transfer money between accounts, there is no way to verify that the intended recipient got the cash. Someone with a fake ID could collect the money without going through an extensive verification process. Some transactions that use this method are particularly risky, such as wiring money to an office that pays proceeds in cash.
Down payments for home loans are particularly vulnerable with a wire transfer. If you receive instructions by email, then it isn’t that difficult to alter the instructions to send the EFT to the wrong place.
8. Some ETFs must get reported to the government.
Any transaction that involves more than $10,000 cash with an electronic funds transfer gets reported to the Internal Revenue Service in the United States. Some banks require advanced notice before they’ll transfer a large sum of money to you or someone else, so you’ll want to check with your institutions before you find yourself in a place where you have an immediate need. You might need to have funds available the day before closing the transaction to ensure that there aren’t any problems with the account.
9. Wire transfers can sometimes get lost.
There is a myriad of problems that can occur when using an electronic funds transfer to send money. Numbers can get transposed when writing down account information. Some ETFs can even get lost between the initiator and the bank. When you miss the deadline for this process, then the money isn’t going to go out until the following business day. A manager who approves a transfer might be unavailable, creating a further complication to consider.
10. The fees for some EFTs can be somewhat high.
Every wire transfer service provider charges a fee for the initiated transaction. It is usually the sender that pays this amount, giving the receiver the entire balance sent. Some companies require a minimal fee from the receiver or a percentage of the amount sent as compensation for the services. International transactions usually cost more than the local transfer. If you want the money to be available in real-time, then the fee can be as high as 15% of the amount being sent.
Since an electronic funds transfer is nonreversible in this circumstance, it is essential to make sure that you want to go through with this process. Senders are not going to get their money back once they initiate the transaction.
The conventional electronic funds transfer typically connects directly to a payer’s bank account. Moving money between checking or savings may be a trusted process, but there are some weaknesses in this system that can give some consumers pause when working with a merchant. It doesn’t expose much personal information to complete the process, but there is also a hesitation by providing bank account info when a debit card provides another layer of protection.
EFTs make sense when someone doesn’t want to use a debit or credit card. Some people may not qualify for these payment methods. This process gives them another opportunity to become a customer.
These electronic funds transfer advantages and disadvantages are essential to consider because merchants and customers must find a place of common ground. If we can keep costs low while providing more shopping opportunities, then everyone can walk away from a transaction feeling like a winner.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.