Electronic Funds Transfer

A check you write is generally processed as just that, a check. In that case, check laws and regulations govern your rights. Some merchants, however, may use your check as a source of information to create an electronic fund transfer. When this happens, you must receive notice that your check may be processed this way. Electronic fund transfers are governed by different laws and have different consumer rights than check payments.

The Federal Reserve System’s Regulation E safeguards the use of direct deposit and EFT. Electronic funds transfer or EFT refers to the computer based systems used to perform financial transactions electronically. The term is used for a number of different concepts in electronic funds transactions.

One of the most common EFT’s is Direct Deposit. Many employers, including the federal government, use direct deposit to pay employees. In addition, individuals increasingly use electronic funds transfer in lieu of writing checks to pay their bills.

Automated teller machines, point-of-sale transactions with debit and check cards can be used when shopping to allow the transfer of funds from the consumer’s account to the merchant’s. To pay for a purchase, the consumer presents an EFT card instead of a check or cash. Money is taken out of the consumer’s account and put into the merchant’s account electronically.

The mechanics of using direct deposit, electronic checks or EFT are simple: the payee furnishes a nine-digit routing number to the payor. The routing number is also called the ABA number. An employee that wants his employer to directly deposit his pay to a bank account would furnish the routing number to his employer. For such periodic transactions as mortgage or auto loan payments, the payor directs his bank to debit his account and credit the lender’s account using the routing number.

The most common payments system in the U.S. for clearing electronic transactions is the Automated Clearing House (ACH) system. ACH is used for making and receiving payments. The Electronic Payments Association (NACHA) supervises the use of the ACH system for electronic payments.

This entry was posted on Sunday, October 12th, 2008 at 11:39 am and is filed under Banking and CD Guide. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.