The check is in the mail! A catchphrase synonymous with late payments sheds light on the essential versatility of digital payment technology that continues to grow as businesses embrace Electronic Funds Transfers (EFTs).
What are EFT payments?
Electronic Fund Transfers (EFTs) date back to the late 19th century when wire transfers appeared and would later become vital to accepting payments for alcohol post-prohibition in the 1930s. In response to an increase of Automatic Teller Machines (ATMs), the Electronic Funds Transfer Act (EFTA) of 1978 was passed. It outlined definitions, guidelines, and protections for EFTs in use at the time and provided the groundwork for their oversight today. Originally regulated by the Federal Reserve, the Consumer Financial Protection Bureau assumed this responsibility in 2011.
Simply put, an EFT is any transfer of funds through a network of banks without the assistance of banking staff. EFT is an umbrella term that refers to multiple types of transactions:
- ATMs—Transactions made using an Automated Teller Machine kiosk, enabling the user to process withdrawals and transfers.
- Direct Deposit—Using an account number and bank routing number provided, businesses are able to deposit compensation directly into an employee's account on payday.
- Debit Cards—Transactions made using a card with a magnetic strip and a PIN to authorize payment.
- Wire Transfer—Transfer of funds through systems like SWIFT that deposit funds immediately into the receiving account.
- Online Banking—Transactions or payments made online through apps or websites that are connected to a bank account.
- eChecks—Electronically processed transfer of funds using bank account and routing numbers.
How do EFT payments work?
Payments made using EFT technology happen in real-time with apparent ease. They require a sender and a receiver, authorization of the transaction(s) between the two parties, and a financial institution(s) to process. This can be as simple as using your debit card while at a coffee shop or the bank account information required to set up direct payments for employees. These details—bank account number, routing number, and Personal Identification Number (PIN)—authorize a financial institution to begin and complete the transfer of funds, without the help of an in-person bank teller.
Benefits of EFT payments
The advent of EFT technology has led to vast improvements in B2B and B2C transactions. Payments that happen in real-time or within a short window of time mean that there aren’t guessing games or long waits for the completion of AP cycles. Further, EFT payments are secure transactions; they do not carry the risk of a lost check that contains sensitive account information. EFT technology also provides accessible tracking data with the push of a button. In the past, monthly account statements would arrive in paper format in the mail requiring manual follow-up for payments. Today, account dashboards and account information pages within apps and online platforms provide immediate visibility for EFT transactions.
Cons of EFT payments
Incorrect routing information, expired debit cards, and/or outdated devices or software can lead to incomplete or stalled EFTs. It is best practice to manage these possibilities prior to point of sale or payment to mitigate delays. For example, businesses that complete regular transactions with suppliers can provide Pre-Authorization Debit (PAD) paperwork that gives a supplier permission to use the same debit card on file for all transactions. Automatic transactions, however, can be troublesome if the amounts being debited are more than what is available in an account or in the event that the debit card on file is expired. To avoid late or transaction fees, AP and AR departments should work together to keep this documentation up-to-date and communicate any potential overdraft occurrences.
What are ACH payments?
Automatic Clearing House (ACH) payments are a form of EFT that occurs between two banks. The Clearing House itself is a financial institution that has been around since 1853 and is owned by large, commercial banks. The Automated Clearing House connects myriad financial institutions including credit unions to complete transactions. Payments made using ACH take one of two forms, Direct Payments and Direct Deposits, with the main difference being which party is sending and which is receiving funds. ACH payments include: paychecks, employer-reimbursed expenses, government benefits, tax refunds, annuity payments, and interest payments. Businesses that use ACH payments follow operating guidelines created by the National Clearing House Association (Nacha). Learn more about ACH payments here.
Benefits of ACH payments
In 2020, nearly 27B transactions were made using ACH according to Nacha. Like the overall benefits of EFTs, ACH payments increase speed of transactions and provide a secure means to make payments. For ACH payments specifically, the ability to make batch payments increases productivity and lowers costs of AP processes. An ACH batch payment is a bulk payment that is processed at one time with multiple recipients through various financial institutions. Where a business would traditionally need to process, print, and mail each payment individually, they can now process these payments all at once with the transactions completing within a couple of days.
Cons of ACH payments
Because ACH payments are a type of EFT, they are also subject to similar challenges: overdraft and overpayment. For example, as with any automatic payment system, situations may occur where payments continue despite the stop of business relations. For ACH, timing is key. Missing batch windows can delay a payment to a vendor or supplier. Additionally, some banks charge fees, some up to $30, for ACH transactions. Finally, different institutions will have limitations on the amount of ACH funds they can transfer within a day. AP departments will need to navigate payee priority so that limits do not prevent payments.
While challenges exist, speed, accuracy and security of EFT processes will continue to improve as technology advances. There will always be a charm to opening your mailbox and seeing a card or check for money owed. However, these deliveries take time, and where deadlines that come and go result in late fees, loss of trust, and even contract termination, relying on a delivery system over which your business cannot assert control can have a negative impact on business relations. By understanding and utilizing processes like ACH payments, businesses gain the advantage.
How Routable can help with ACH payments
Routable's automated AP solution can help your business set up ACH payments for your vendors and suppliers within the United States. Routable allows you to receive bills or invoices in the way that’s most convenient to you and get them approved and paid quickly. Routable even supports same-day ACH transactions up to the U.S. federal government’s current limit of $25,000, as well as next-day transfers.
To learn more about how Routable can help you automate your AP process, schedule a demo today.