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What is electronic funds transfer (EFT)?

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Electronic funds transfer (EFT) refers to the transferring of funds from one bank account to another through an electronic computer-based system.

EFTs today have largely become the default method of paying employees.

Some examples of EFTs include:

  • Wire transfer
  • ACH transfers
  • Direct deposits
  • ATM transactions
  • Phone payments
  • Electronic checks

How do EFTs work?

The way an EFT transfer works will likely depend on the type of EFT. With that said, there are some basic stages likely to be involved:

  • Initiation and authorization. The request for payment is initiated by the sender. In payroll, that would be the employer. This involves providing all the necessary information to authorize the payment and ensure the transaction is accurate and secure – such account number, routing number, and other information.
  • Processing, clearing, and settlement. As part of the processing stage, transactions may go through various payment systems to ensure security – like the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. In the case of SWIFT, each financial institution gets assigned a SWIFT code or Business Identifier Code (BIC) to identify them during cross-border transfers. In cases of domestic transfers, transactions may also go through an ACH (automatic clearing house) system to facilitate payments between banks that are within the same country.
  • Transfer of funds and confirmation. In this stage, funds are transferred within a given amount of business days – depending on the type of payment made. Confirmation is then sent both to the sender and the recipient.

What are the risks of EFT?

Electronic fund transfers can come with several risks if not managed correctly. Some examples include:

  • Scams and fraud. Bad actors may work to steal information to make unauthorized transfers.
  • Currency exchange risks. There can be cases where fluctuation in currency values during international transfers can impact the final amount sent to the recipient.
  • Transaction delays. Multiple systems or technical issues can lead to delays in transactions.
  • Disputes and errors. This is especially common in cases of international transfers. Examples can include the wrong amounts being sent, or the right amounts being sent to the wrong accounts.

How to mitigate these risks:

These risks are a constant if you’re handling payments on a regular basis with EFTs – for example, in the case of payroll.

Using software that can handle these risks by offering a secure infrastructure and technology-driven solution is one way to ensure your payments are made safely and on time.

You’ll also want to make sure you have access to regulatory experts in the countries where you are transferring money to avoid compliance mishaps.


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