Most people have been in contact with some sort of digital payment during their life. The most familiar for many people is the direct deposit of your paycheck into your bank account.
If you are a business owner, you may be aware that there are many options for digital payments. Today, we will discuss ACH and EFT payments. They accomplish the same goal but are processed in different ways. It’s important for you to know these differences and how they affect you and your customers.
What is the Difference Between ACH and EFT?
ACH vs EFT Payment Table of Contents
ACH and EFT payments are digital ways to move money from one account to another. However, an EFT is a broad term that refers to all electronic payments, while an ACH is a specific type of electronic payment. In other words, all ACH payments are EFTs, but not all EFTs are ACH payments.
What is an ACH Payment?
ACH stands for Automated Clearing House. This is a network that connects financial institutions across the country to move funds from one account to another electronically. A larger entity manages the ACH called the National Automated Clearing House Association (NACHA), which governs the activity of the ACH and ensure compliance and security.
As mentioned, the most common type of ACH payment is the direct deposit many companies offer their employees. Through the ACH network, an employer can directly move funds from their payroll account into an employee’s bank account.
Other types of ACH payments include social security deposits and auto-bill payments. When you setup your mortgage or utilities to be automatically deducted from your bank account, you are setting up an ACH payment. This is an efficient and low-cost way to move money from one account to another without writing a paper check or going to the bank to get cash.
How Are ACH Payments Processed?
When an ACH transaction is initiated, several pieces of information are needed to process it. Those include:
- Issuing bank account number
- Receiving bank account number
- Receiving bank routing number
Moving money from one account to another requires diligent checks and balances to ensure that the funds arrive safely in the correct account. Many banks require more than these three data points to make the transfer, but these are the basics.
Once the account numbers are entered into the payment portal, they are encrypted and sent to the receiving bank. That bank will verify that the numbers are correct and send a confirmation back to the issuing bank. Once confirmation is received, the funds are transferred electronically. This can happen instantly, or it can take 24-48 hours, depending on the banks involved and the amount of the transaction.
How to make an ACH Payment
As a consumer, you may participate in these transactions more frequently than you realize. For example, if you are shopping online and you choose to pay using your bank account number instead of a credit or debit card, you are setting up an ACH payment. Since the use of a bank account number includes the need for an account and routing number, that payment will be sent through the Automated Clearing House for verification.
Alternatively, you can also make ACH payments for various things if you are a business. The most common is to setup auto-deposit of payroll for your employees. If you don’t have employees, you may use ACH in other ways. This includes paying vendors via electronic check or setting up monthly bills on autopay from your business account.
In a nutshell, any time you make a payment using your bank account numbers instead of your credit or debit card, you are using the ACH system.
What is an EFT Payment?
The acronym EFT stands for Electronic Funds Transfer. This umbrella term is used to describe a wide range of digital payment types. These are cashless payments that move through a massive computer network that connects banks, financial institutions, and other third parties for the purpose of moving money.
What Types of Payments Are Considered EFT Payments?
Many types of payments fall into the EFT category. Here is a closer look at some of those payment types:
- Direct Deposit: This type of EFT payment is also an ACH. It is run through the automated clearing house and involves moving money from one bank account to another using bank account numbers and routing numbers.
- ATM: Depositing and withdrawing cash from an ATM is a form of EFT. This may seem counter-intuitive since it involves the use of cash, but the transfer of money between you and the account happens digitally, without the need of another person’s involvement. This qualifies it as an EFT.
- Credit/Debit Cards: Card payments are one of the most common payment types in the world. Swiping a card at a physical terminal or entering your card information online to make a purchase are both considered EFT payments.
- eChecks: Electronic checks are an easy alternative to writing a paper check. These are EFT payments because they electronically transfer funds from one account to another, but they are also ACH payments because they are processed through the Automated Clearing House.
- Pay-By-Phone Systems: Making a payment over the phone can be an EFT, and ACH, or both. Depending on what method you use in the phone system you may be using one or both type of payment. For example, if you use a credit card over the phone, that’s just an EFT. If you use a bank account over the phone, that’s an ACH.
What Are the Benefits of EFT Payments?
Businesses and consumers can benefit from EFT payments because they are flexible and efficient. The ability to send and receive payments electronically reduces time and saves paper. Before these payment options existed, consumers had to go to the bank to get cash or write a paper check at the store to make a payment. For businesses, this was a nightmare!
Dealing with paper checks and the possibility that they might not clear the bank was a huge risk for businesses. Allowing a consumer to leave your store with goods in-hand, and not know whether the check would bounce was a major concern for many merchants.
On the other hand, accepting cash payments came with its own risks. Although businesses felt more secure that they had cash in-hand with no risk of bounced checks, this was also a security issue. The more cash your business had in your registers, the greater target you were for criminals.
EFT payments have helped reduce these risks and make things easier for consumer and merchants. Offering multiple payment options to your consumers is a great way to increase your business and decrease your anxiety. Just make sure to follow the proper data security protocols to protect everyone involved.
