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Guide to Electronic Funds Transfers

When you want to transfer money to a person or business, there are two main ways in which this can be done. Either you can make a physical transfer (usually in the form of cash or a cheque), or you can send from your account to theirs the equivalent amount in electronic funds. The second way of transferring money is called an electronic funds transfer (EFT), and this guide will take you through everything you need to know about EFTs and the benefits of using them.

Updated: 10/06/2021
Read time: 10 minutes
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What is an electronic funds transfer?

An EFT is a way of passing money from one person or business to another electronically. This is done by moving money between accounts held with relevant financial institutions. These are typically banks, but also include electronic wallets or accounts with separate providers.

These transactions are entirely electronic, which means that no paper money ever exchanges hands. For this reason EFTs are sometimes categorised as non-paper financial transactions. In addition, the process is completely automated. Once instructions for the EFT have been entered, the bank’s systems complete the transfer without any further human input.

Banks are the financial institutions most commonly used for carrying out EFTs, but online money transfer companies are becoming an increasingly popular alternative due to the fast transactions speeds and low costs they can provide. EFTs are also becoming an increasingly popular way of sending money overseas, including being used to facilitate remittance payments around the world.

How does an EFT work?

When a person or business tells their bank to initiate an EFT on their behalf, they enter the necessary instructions for the institution to follow. These instructions include the amount that they wish to send, the day on which they want the money to be sent, and the account that they want the funds credited to.

The sender’s bank or online transfer provider will remove that amount from their account on the requested day and the recipient’s will have that amount added to their account when it receives the instructions to do so. Once this has been done, the transfer will have been completed.

An EFT relies on a computerised network that links together different financial institutions and the accounts that they hold on their customers’ behalf. Banks use the network to communicate with each other, ensuring that the necessary adjustments are made to the right accounts, at the right time and for the right amount of money whenever an EFT is initiated. The network most commonly used for electronic international transactions is the SWIFT network, with certain countries within Europe also using the SEPA network for these transfers.

In most cases, an EFT is made using an ACH payment. ACH stands for Automated Clearing House. Clearing houses act as an intermediary between banks and their systems, and its role is to support transactions between banks, tracking each step to ensure that they happen correctly.

What information do I need when initiating an electronic funds transfer?

To request an EFT, the transfer provider that you are using will require you to provide a set of details so that it can send the funds to the correct person or business. In general you need certain specific information in order to let a bank or money transfer provider know exactly where to send the money. Make sure these are correct to avoid problems with reversing the wire transfer.

Here are the details that a bank or money transfer provider will typically request:

  •  The name of the recipient’s bank
  • The recipient’s name and address (either personal or business)
  • The recipient’s account details (typically their account number along with their sort code or routing number)

If you are sending money overseas, then you will also need to provide the following:

  • The recipient bank’s SWIFT code
  • Either the recipient’s Bank Identifier Code (BIC), or their International Bank Account Number (IBAN)

Pros and cons of EFTs

There are a number of advantages to using an EFT over physical transactions. The primary benefit is that it is automated and therefore a relatively quick and easy way to send money around the world, and on top of this it is easy to compare your options to find a reasonable rate. There are some disadvantages, however, such as it often not being possible to correct and redo a transfer if an error has been made.

Here are the pros and cons of using electronic funds transfers:

Pros
EFTs are automated so have low administrative costs
The details of each transfer are tracked and recorded
Transferring funds electronically ensures greater security and protection
Most EFTs use an ACH as intermediary, providing an additional layer of security
Recurring EFTs can be set up to send money on a regular basis
There is no need to handle and deliver physical documents or cash
Cons
Some EFTs can take up to four days to complete
If a transfer is returned or declined, financial institutions do not try to reprocess it
EFTs are susceptible to scams with little recourse to recoup losses
Fees can sometimes be high

Different types of EFT

There are a number of different types of electronic funds transfer, here’s a quick summary of the most common:

  • Direct Deposits: Direct Deposits transfer funds from one account to another on a recurring basis. They are often used by businesses to pay salaries each month.
  • Wire Transfers: Wire Transfers are a quick and efficient way of sending a large amount of money. They are generally used for large, one-off payments such as a deposit on a house.
  • Automatic Teller Machine (ATM): ATMs terminals allow you to transfer funds between your account and others. This transaction uses an EFT to complete. 
  • Debit Cards: When you make a purchase or pay a monthly bill using your debit card, the funds for each are transferred from your account to the payee using an EFT.
  • Electronic Cheques: Electronic checks are similar to paper cheques, but render payment only in electronic form using an EFT.
  • Pay-by-phone Systems: Similar to an ATM, electronic money transfers can be initiated by phone, using pay-by-phone systems.
  • Personal Computing Banking (online banking): Transfers can be initiated using online banking. As this does not involve any human intermediary to carry out, and the funds are sent electronically. This is one of the most common examples of an EFT.

How much does an EFT cost?

EFTs are generally cheaper than paper-based financial transactions because they do not require human involvement. That being said, there isn’t really a one-size-fits-all answer to this question because of the variety of different types of EFT that there are. Whether or not there is a fee, and how much it is, varies depending on the bank/transfer provider, the destination, and the type of EFT you are using. 

While some EFTs may be available free of charge, in most cases money transfer companies or banks will charge a fee for making transfers electronically. The provider you select to facilitate the transfer will normally make it clear what fees are applicable and, in most cases, the person or business who initiates the transfer covers the cost of the fee. Only in some cases will the recipient’s bank charge a fee – either a set amount or a percentage of the funds received – before depositing the funds into their account. For example, Transferwise charges a flat fee and a fixed percentage of the transfer amount when using its services. 

It is important to note that transferring money to an account overseas will usually cost more than transferring money to an account in the same country, and if there’s a currency conversion involved in the transfer then there will also usually be a margin applied on top of the mid-market exchange rate. 

With banks this exchange rate margin can be as high as 5%, but is usually more around the 1% or 2% mark when using an online money transfer company. Transferwise does not apply any margin to the exchange rate, but does charge a fee as we saw above. Another company, XE, however, takes a slightly different approach in that it charges no fee but does add a markup – between 0.4% and 1.2% – to the interbank exchange rate of an international transfer. This means that you’ll pay lower upfront fees, but more of your transfer amount will be lost at the point the currencies are exchanged.

In some cases an EFT can come back as ‘returned’. This is usually because of an error in the transfer details, or due to there not being enough money in the sender’s account.  If there is a problem which prevents the transfer from completing, and they are not at fault, most financial institutions will charge a fee for an ETF that doesn’t go through.

Example of an electronic funds transfer

As you will have seen from the different types of EFTs listed above, there are many different ways that an electronic funds transfer can be used and many different purposes that it serves. Let’s look at one example to illustrate how the process works.

Our example subject, Paul, lives in France. He has a daughter living and studying in the United States and, occasionally, he sends her money to assist with living costs. He decides to send her $1,000 as she needs a new laptop.

Paul looks at the various EFT options available, and eventually decides to make an international transfer using Transferwise. He is drawn to it because his daughter needs the money as soon as possible and, although it is slightly more expensive, Transferwise has a “Fast transfer” option, which reduces the time it takes for the money to arrive into her account. 

Transferwise (as we saw above) applies a flat fee, combined with a variable percentage on the amount that Paul wants to send. This fee varies depending on where the money is being sent to, and where it’s being sent from. In this case, for a transfer from France to the United States, as Paul wishes to do, the flat fee is €1.06 and the variable rate is 0.41%, which comes to €3.62.

The total cost of the transfer, therefore, is €4.68. In order to cover this cost, as well as factoring in the exchange rate at the time that he wishes to make the transfer,, the total funds that Paul needs available in order for his daughter to receive $1,000, is €888.74. 

Once Paul has instructed Transferwise to make the transfer, €888.74 is removed from his account. Using the network linking the Paul and his daughter’s respective banks to each other, $1,000 is deposited into his daughter’s account held by her bank in the US. 

The entire process takes approximately 2 business days from the time Paul issues the instructions to send the money, to the moment his daughter is able to access it.

How long do electronic funds transfers take?

The length of time it takes for an EFT to complete depends on the type of transfer being undertaken, the financial institutions involved, and where the funds are being sent to. Typically, an EFT can take anywhere from 1 to 4 business days to complete.

Using a bank for an EFT means that, typically, it will only be processed on business days (between Monday and Friday). If requested on a weekend, or after 9pm on a weekday, the bank will usually initiate it only on the next working day. Generally, this restriction doesn’t apply to money transfer companies, as they are able to initiate the transfer the moment it is instructed.This is one reason why they are considered a preferable alternative to using a bank for this additional flexibility which they provide. 

Can you cancel an EFT?

Normally no. Once a transfer has been initiated, it typically cannot be cancelled. If the transfer was mistakenly initiated, or sent to the wrong person or business, then it is between the sender and the person who received it to resolve.

As we saw above, however, EFT payments are not always immediately enacted. This means that in some instances there is a limited timeframe within which it is possible for an EFT to be cancelled. The timeframe will depend on the type of EFT, when the request was made and how long it takes for the bank or transfer provider’s systems to initiate it.

EFT payments that are set to occur on a regular basis, however, can be cancelled. This can be done by letting the bank know to apply the cancellation at least three days in advance of the next transfer date. The procedure for doing so varies from bank to bank, but each one will have specific guidelines on how to do this.

Summary

There are a variety of different kinds of EFT, all of which operate on the same principle of moving money from one account to another. This happens either within the same bank/transfer provider, or across different institutions, and within either the same country or between different countries.

Whether EFTs are used either for personal accounts or business accounts, the transfers that occur between them all do so in fundamentally the same way. They are completed automatically once the instructions have been entered, and use a computerised network that links the different accounts together via the institutions facilitating the transfers. In most cases the transfer process makes use of an automated clearing house (ACH) to facilitate the transaction.

One of the most popular ways that EFTs are used is for international money transfers. While these can be initiated using a bank, a popular alternative is to use a specialist money transfer company that focuses primarily on moving money between different countries. Different charges apply for this, depending on the company that you use. They usually encompass a flat fee and a markup on the mid-market exchange rate, but it varies from provider to provider and from transfer to transfer. Online money transfer companies are usually cheaper, faster and more efficient than banks when it comes to processing EFTs.

If you want to find the best deal to transfer your money anywhere in the world electronically, then simply use our quick money transfer comparison tool and we’ll show you your best options within minutes.

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Artiom
Written by
Artiom

Artiom is a marketing graduate from the University of Portsmouth, Artiom’s primary experience is in PR and Outreach but he has a broad knowledge of search engine optimisation and all facets of digital marketing. He optimises the organic experience on MoneyTransfers.com with the content team manages and creates unique marketing tactics, and generally supports the overall growth of the website.

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