Electronic Funds Transfer System (EFTS)

Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly to another without any paper currency changing hands whatsoever. It refers to the overall, internationally-integrated, computer-based systems used to perform financial transactions electronically. One of the most common EFT programs is known as direct deposit, in which employment payrolls are deposited right into employees’ checking or savings accounts.

EFT refers to any transfer of funds initiated through an electronic terminal, including credit card, ATM and point-of-sale (POS) transactions. EFT is used for both credit transfers, such as payroll payments mentioned above, and for debit transfers, such as mortgage payments.

Banks process payments through what is known as the Automated Clearing House (ACH) network, the secure transfer system that connects all United States and certain foreign financial institutions. For payments, funds are transferred electronically from one bank account to the bank account of a billing company, usually within 24 hours of the scheduled payment date.

The growing universality of EFT for online bill payment is opening the path for a potentially paperless marketplace in which checks, stamps, envelopes and paper bills will become obsolete in the not-too-distant future. The many and varied benefits of EFT include, but are not limited to, reduced administrative costs, truly increased efficiency, greatly simplified bookkeeping and other recordkeeping, and greater security overall. However, the number of companies that now send and receive bills through the Internet is still modest, though growing exponentially.

The United States government monitors EFT compliance through what is known as Regulation E of the Federal Reserve Board, which implements the Electronic Funds Transfer Act (EFTA). Regulation E governs financial transactions with all electronic payment services nationwide, specifically overseeing disclosure of information, consumer liability, records retention, error resolution and the provision of printed, paper receipts at electronic terminals.

There are many card-based EFT transaction types that occur on a regular basis, including

• a sale in which the cardholder pays for goods or service;

• a refund in which a merchant reverses a previous payment made by a cardholder;

• a withdrawal whereby a cardholder removes funds from an account (ATM or Cash Advance, usually when the funds are advanced by a merchant);

• an “enquiry” in which a transaction is made without financial impact (balance enquiry, available funds enquiry, linked accounts or request for a statement of recent transactions on the account);

• a deposit, in which a cardholder deposits funds to her own account;

• cash back, where a cardholder withdraws funds from their own account at the same time that they purchase something;

• an actual payment, in which someone transfers funds to a third party account;

• electronic “top-off,” whereby a cardholder can use a POS or ATM to add funds to a pre-paid mobile telephone;

• inter-account transfer, by which someone transfers funds between linked accounts belonging to the same cardholder;

• a mini-statement, where a cardholder uses a an ATM to obtain details of recent transactions on their bank account; and

• administrative issues, which cover a variety of non-financial transactions including PIN number changes.

All EFT transactions necessitate some form of communication among a number of people, companies and financial institutions. When a payment card is used at a merchant or ATM, the transaction is first routed to an acquirer or acquiring bank, then through a number of networks, then to the issuer where the cardholder’s account is maintained.

A transaction may be authorized offline by any of these entities through what is known as a stand-in agreement. Stand-in authorization may be used when a communication link is not available because of technical problems or other issues, or simply to save overall communication time and cost. Stand-in is subject to the agreed transaction amount limits, known as floor limits. These limits are based on the risk of authorizing a transaction offline, and thus differ among merchants as well as among payment card types and companies. Offline transactions may be subject to many other security checks, such as checking the card number against a stolen card list, velocity checks (limiting the number of offline transactions allowed by any one cardholder) and random online authorizations.

Before online authorization became standard practice for merchants and banks, when credit cards were processed using manual vouchers, each merchant would agree to a bottom limit with their bank. For purchases over this amount, they had to call in for a unique authorization code. If this was not carried out and the transaction subsequently was refused by the issuer, the merchant would not be entitled to a refund.

There are financial networks that operate with a “one message” method, in which a transaction is authorized and cleared through the same single message. A transaction will be authorized through steps, where the merchant requests the issuer to reserve an amount on the cardholder’s account for a specific time frame, followed by completion, in which the merchant requests an amount blocked earlier with a pre-authorization. This two-step transaction stream is often used in businesses such as automotive rentals, restaurants and hotels, where the final amount is typically unknown and a pre-authorization is made based on an estimated amount. Completion may form part of a settlement process, typically performed at the end of the day when all completed transactions are submitted. These messages will be sent from the merchant acquirer to the issuing bank.

All EFT transactions are usually accompanied by ways to authenticate the card and the cardholder, too. Merchants may manually verify the cardholder’s signature or the cardholder’s personal identification number (PIN) may be sent online in an encrypted form, such as through SSL, for validation by the card issuer. Customer information may be included in the transaction, which is not visible to the cardholder, and additional information may be requested from the cardholder, such as an address or the CVV number printed on the back of the card.