Electronic funds transfer (EFT) is the movement of funds using an encrypted electronic format. Moving money electronically is generally more efficient, more secure, and less costly than handling cash or paper checks. Although payments by cash and checks still dominate in the United States, nonpaper, or “e-payments,” are growing rapidly through integration of existing and new electronic technology. The predominant means of electronic funds transfer are CREDIT CARDS, debit cards, and automatic clearing house (ACH) transactions. Credit cards are used in almost 20 percent of all customer-business transactions and are growing annually. In a credit-card transaction, cardholders, merchants, card-issuing banks, merchants’ banks, and credit-card companies are all linked electronically. Scanning credit cards simply activates accounts of participants in their banking and credit-card companies, recording the transaction that is taking place. Debit cards are similar to credit cards, but the electronic funds-transfer system is more direct. Debit cards create point-of-sale (POS) transactions, eliminating the issuance of credit between the buyer and seller and instead directly debiting the buyer’s account and crediting the seller’s account. Like automated teller machine (ATM) transactions, debit cards are linked to a customer’s bank account. In the 1990s the federal government began using electronic funds transfer systems to provide electronic benefits transfer (EBT) programs, in part to reduce costs and also to reduce FRAUD. Most states have joined the federal program and provide cash entitlement assistance (AID FOR FAMILIES WITH DEPENDENT CHILDREN) and food assistance (Food Stamps), using cards that allow recipients to make cash withdrawals from designated ATM machines or to pay for food purchases at grocery stores using the equivalent of a debit card. Another category of electronic funds transfer involves wire and ACH systems. Wire transfers are payments made among banks and other financial institutions through either of two electronic payments systems, CHIPS and Fedwire. CHIPS (Clearing House Interbank Payment System) is operated by the NEW YORK CLEARING HOUSE ASSOCIATION and is primarily used to settle FOREIGN EXCHANGE transactions among major banks. Fedwire is operated by the FEDERAL RESERVE SYSTEM and is used to settle interbank transactions. ACH is a nationwide electronic funds-transfer system facilitating payments among individuals, businesses, and governments. Created in the 1970s, ACH is a network used for payroll direct deposit, automatic bill payments, and corporate tax payments. It is also used as the settlement mechanism for ATM, credit card, and debit card transactions. Settlement means balancing of debits and credits. During the course of any business day, there are likely to be thousands of electronic payments on the behalf of customers and businesses between any two large banks. Settlement determines which bank transfers funds electronically to compensate for the balance in exchanges between the two institutions. Each bank settles with all other banks with which it had funds transfers, also done electronically through the clearinghouse. There are four ACH operators in the United States. The largest is the Federal Reserve, which clears almost 80 percent of all ACH transfers. The major ACH transfer is direct deposit of employee salaries. Approximately 50 percent of employees in the U.S. utilize payroll-deposit programs, and 75 percent of Social Security recipients utilize electronic transfer. The second major use of ACH transfer is cash concentration. Companies with many branches or sales outlets lose ACH to aggregate funds into a central cash account. The third major use of ACH operators is bill payment by the federal government, businesses, households. The Debt Collection Improvement Act (DCIA, 1996) directed the federal government to expand its use of electronic funds-transfer systems. As per the DCIA:
1. The government should be able to maximize on collection of delinquent accounts.
2. Debt-collection costs can be minimized by consolidating functions and activities.
3. The reduction of losses from debt-management activities is achieved by conducting proper screening for potential borrowers, monitoring accounts, and sharing information between federal agencies.
4. The federal government will ensure the public is fully aware of their debt-collection policies so debtors are cognizant of the obligation to repay amounts owed.
5. Debtors are afforded all DUE PROCESS rights, including the ability to challenge, verify, and compromise claims and have access to administrative appeals procedures.
6. When appropriate, agencies are encouraged to sell any delinquent debt, especially debts with underlying collateral.
7. The experience and expertise of private-sector professionals should be employed to help provide debtcollection services for federal agencies.
Relatively new uses of electronic funds transfer include electronic bill presentment and payment and e-money. In the increasingly popular method of electronic bill presentation and payment, bills are received over the computer, and payment is initiated or authorized electronically. Bills received in the mail may also be paid via the computer or telephone.
E-money has been attempted by a number of electronic service providers, with minimal success to date. One type of e-money system is prepaid stored-value cards, by which consumers pay in advance for set dollar amounts, which are then scanned to execute purchases. Most stored-value cards are designated for specific purchases, such as telephone, photocopying, and mass-transit cards. Multipurpose stored-value cards are gaining acceptance in Europe but more slowly in the United States. E-cash systems, including DigiCash and PayPal, have attempted to create an on-line currency exchanged among customers and merchants, thus avoiding the use of credit cards and the potential for credit-card FRAUD. These forms of electronic funds transfer have not yet been widely accepted.
See also DEBIT, CREDIT; E-COMMERCE.