What is EFT? | Definition, Working vs Types

Electronic funds transfer (EFT) transfers money from one bank account to another.  It takes without a manual transaction for single or multiple institutions.

It is a cashless system of transferring money from one bank account to another. It’s commonly used via ATM, Fedwire, and point-of-sale (POS) via credit and debit transfers via an electronic medium.

Key Takeaways

  1. EFT or Electronic Funds Transfer is a system that allows the electronic transfer of money between two banks or financial institutions.
  2. It is a secure and efficient way to transfer funds, eliminating the need for paper-based transactions.
  3. EFT can be used for various purposes, such as payroll deposits, bill payments, and money transfers.
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How does an EFT payment work?

  1. The sender first authorizes an amount for transfer via EFT.
  2. The amount is deducted from the sender’s account and deposited into the recipient’s account.
  3. The process of transfer requires between 1-4 days.

The sender should possess the following information:

a) Receiver’s account bank number.


Banking Quiz

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The receiving party should possess the following documents:

  1. The name of the bank receiving funds
  2. The type of account receiving funds (e.g., checking or savings)
  3. The bank’s ABA routing number
  4. The recipient’s account number

An automated clearing house (ACH) is primarily used to transfer money to all United States financial institutions securely.

The funds are then transferred directly to the company’s bank account.

The transactions are carried out in a batch process by the ACH network and then sent to the financial institutions.

Types of EFT

There are many ways to transfer money electronically.

Direct deposit

  1. This method is commonly used for providing payroll to employees.
  2. The employer deposits money in each employee’s bank account by notifying the service provider.
  3. A direct deposit is then made to each employee’s account on payday.

Wire transfers

  1. This method is commonly used for transferring a lump sum amount.
  2. These transfers are very fast, but the sender is charged a certain fee for transferring the amount.
  3. Infrequent large-sum payments to vendors for building equipment are made via this transfer.
  4. The Electronic Federal Tax Payment System (EFTPS)
  5. As the name suggests, it’s used for paying federal duties like IRS tax payments.


  1. It’s the ideal and most used form of EFT by the working-class population.
  2. An ATM is used for this mode of transfer.
  3. It lets you deposit, withdraw, and even transfer funds.

Debit cards

  1. Transactions are carried via a card that consists of a chip.
  2. It allows the consumer to pay bills online, in person, or over the phone by simplifying entering the card details.

Electronic checks

  1. It’s very similar to a paper check but in an electronic mode.
  2. The account details like account number and routing number are required to make payment electronically.

Mobile wallets

  1. It lets you pay bills, transfer money between accounts, or receive payments over the phone via an app from the respective bank.

Advantages and Disadvantages of EFT

The transfer of money is fast.  The details need to be entered correctly before making a transaction.  
The money is securely transferred without the involvement of any bank staff.The transfer, once initiated, can be stopped.  
The other benefits of EFT include reduced administrative costs and simplified bookkeeping.  The transfer can be stopped if the respective financial institution is informed not less than 3 business days before the scheduled transfer.  


  1. Automatic teller machines (ATM)
  2. Direct deposit payroll systems.
  3. Direct payments between buyer-seller businesses.
  4. Electronic bill-paying via online banking.
  5. International cash wire transfers.
  1. https://www.jstor.org/stable/40686032?seq=1
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