Electronic Fund Transfer (EFT) is the broad term used for the digital movement of money from one bank account to another. It encompasses all kinds of digital payment methods including credit card processing, wire transfers, and ACH.
Electronic fund transfers do not require the direct involvement of bank employees. EFTs are fully initiated and processed on digital channels using supporting rules and algorithms.
There are primarily two main parties involved in an EFT—the sender and the receiver of the money. The sender initiates the money transfer request on a payment terminal over the internet. The sender’s bank then sends a request to the receiver’s bank directly or via clearing houses. The receiver’s bank verifies the accounts details and collects the payment.
Flow chart of how electronic money transfer works (Source)
In this section, we’ll look at the difference between an ACH payment transfer and a wire transfer.
ACH is a form of electronic fund transfer used in the US. It is a way of transferring money from one bank account to another through direct electronic transfer. The fund transfer is processed via ACH (Automated Clearing House) network, a platform that connects hundreds of financial institutions across the US. The ACH platform processes payments in batches, often resulting in a delay of a few hours in receiving the funds.
ACH payments include several different payment categories such as person-to-person (P2P) payments, direct deposits, ACH payments initiated by paper checks, and bill payments initiated on e-commerce portals.
To pay via ACH, the customer needs to authorize the biller to directly withdraw funds from his account. The customers provide their bank accounts and routing numbers to their checking account. They also sign an agreement authorizing the biller to withdraw funds against invoices.
ACH also allows customers to authorize recurring bill payments. In such cases, the bill amount is deducted from the customer’s bank account on a regular basis.
Here’s a brief round-up of the advantages and limitations of ACH payments.
|ACH payment processing is lower cost than paper checks and wire transfers (The median transaction charge is $0.29)||You must be a part of NACHA (National Automated Clearing House Association) to be able to use this service|
|The processing time is faster than checks (but slower than wire transfers)||Only available within North America|
|More secure than wire transfers and other forms of e-payments||Can process US dollar transactions only|
|Pro tip: ACH transfers work well for high volume B2B payments because of their low processing costs per transaction. ACH is the preferred payment method for salaries, bills, and supplier invoices.|
A wire transfer is similar to ACH transfer but does not involve a clearing house. Instead of a centralized clearing house, banks act as intermediaries for wire transfer. Wire transfers are typically used for large transaction volumes and money can be transferred domestically or internationally.
Wire transfers require the sender to have adequate funds in their accounts and don’t take more than a few minutes to clear the transaction and deposit the money in the recipient’s account. The sender’s bank sends a message to the recipient’s bank via secure systems such as SWIFT or Fedwire to initiate the wire transfer process.
Here’s a brief round-up of the advantages and limitations of wire payments.
|Instant payments, processed in real-time; faster than ACH||More expensive than most other payment methods (Average fees ~$14 for domestic and up to $75 for international transfers)|
|Supports transfer of funds internationally||Transactions cannot be reversed|
|Convenient and safer than checks||Cannot make recurring payment requests; only one-time transfers supported|
|Pro tip: Request your customers for wire transfers if you want to close the invoice or account immediately or if the client is outside of the US. Wire transfers are also preferred for transfer of large sums of money involved in real estate transactions, M&A deals, etc.|
In addition to ACH and wire transfers, digital advancements have also given rise to other forms of electronic fund transfer options. We discuss some of the popular ones in this section:
eChecks are a form of ACH payments wherein the merchants get customers’ authorization to collect monthly payments directly from their accounts. It works like a digital version of the check used for making payments.
Unlike regular ACH transfers that a customer has to initiate each time, eChecks allow the convenience of setting up automatic payments and not bothering about it every time. This saves time and effort, and reduces chances of manual errors. eChecks are generally used for B2B transactions and not personal use.
Credit card transactions: Credit card payments are a type of EFT that is processed by card unions such as Visa and Mastercard. Once the card unions approve of a credit card transaction, funds are released as ‘guaranteed funds’. Credit card payments are not instantaneous and can take up 2-3 days to reflect in the receiver’s account. The numerous credit card frauds also make them less secure than other means like ACH. Credit cards are often not preferred by many businesses for receiving B2B payments because of the additional 3-4% processing fees charged by credit card companies.
Credit card processing flowchart (Source)
e-Wallets: A digital wallet or an e-wallet is an online service that allows one party to make electronic transactions with another party from their mobile phone or laptop. An e-wallet is linked to the business’s bank account or needs to be refilled periodically (in case of pre-paid e-wallets). Google Pay, Venmo, PayPal are some of the most popular e-wallets.
While predominantly a B2C transaction method, e-wallets are becoming popular for B2B e-commerce payments. Payoneer, Veem, and OFX are some examples of e-wallets targeting B2B transactions. While e-wallets are non-interest earning, uninsured accounts, they offer small businesses a route to remit funds minus bank charges.
SEPA: SEPA is the ACH equivalent in Europe and stands for Single Euro Payments Area. It helps process bank transfers denominated in Euro. It allows customers to make cashless Euro payment transfers via credit transfer or direct debit to anywhere in the European Union and select non-EU countries.
|For more on global payment formats, check our ebook – 11 Global Payment Formats|
Despite growing interest and awareness about digital payments and cryptocurrencies, the most common B2B payment method continues to be paper checks. This is followed by ACH payments, wire transfers, credit cards, and cash. According to a PYMNTS study, nearly 40% of all B2B payments are still made via paper checks.
Paper checks continue to be the trusted mode of B2B payments, with many organizations still struggling to make the ‘digital’ shift. Many businesses are also looking at incorporating digital channels to work along with check-based options.
According to a study done by PYMNTS and MasterCard, the below are the preferred payment channels when it comes to accounts receivables.
Does it matter whether your customers pay you via wire transfer or ACH or credit card? Yes and No.
As discussed in the earlier sections, the processing fee involved with the different payment methods vary. For example, credit card processors charge the recipient 3-4% of the transaction volumes as a fee. This means you could end up giving up a share of your profits to pay this fee.
ACH transfers may take two-three days to be completed. In case you want to close an account before the financial year ends (say, on the last day), it would be good to receive the payment via wire transfer even though it may cost a tad more.
While ACH transfers work best in most scenarios, depending on your specific situations, you could subtly persuade your customers to pay via the mode that your company prefers.
Today, no business can afford to say that they don’t support any particular payment method. It diminishes the customer experience. Even a mid-market business needs to offer multiple payment methods to retain and grow its client base.
Do not worry if your ERP isn’t able to offer you all the payment methods that you wish to have. AR solutions providers like our company can step in to help you. Our Electronic Invoice Presentation and Payment module (part of Integrated Receivables suite) and e-Invoicing & Collections module (from RadiusOne suite) help you set workflows to accept and manage payments from multiple payment methods including ACH, wire transfers, checks, SEPA, and GiroPay (internet-based payment transfers in Germany).
Global payment support options in EIPP cloud
Browse our website to learn more or talk with one of our solution experts for quick guidance.
HighRadius Integrated Receivables Software Platform is the world’s only end-to-end accounts receivable software platform to lower DSO and bad-debt, automate cash posting, speed-up collections, and dispute resolution, and improve team productivity. It leverages RivanaTM Artificial Intelligence for Accounts Receivable to convert receivables faster and more effectively by using machine learning for accurate decision making across both credit and receivable processes and also enables suppliers to digitally connect with buyers via the radiusOneTM network, closing the loop from the supplier accounts receivable process to the buyer accounts payable process. Integrated Receivables have been divided into 6 distinct applications: Credit Software, EIPP Software, Cash Application Software, Deductions Software, Collections Software, and ERP Payment Gateway – covering the entire gamut of credit-to-cash.