ACH stands for Automated Clearing House, an electronic payment system used to transfer funds electronically. EFT stands for Electronic Funds Transfer, which is a generic term that typically refers to payments made using ACH. Technically speaking, however, ACH falls under the larger umbrella of EFT.
The distinction between ACH and EFT is more than just semantics. The specific type of EFT used for direct deposits and automated payments can impact your balance, your disclosure on monthly statements and the ease with which you can dispute transactions on your account.
What is ACH?
ACH is a way for you to transfer money electronically. It’s also used by businesses to pay vendors and receive electronic payments from consumers. If sent domestically, an ACH transaction clears within three business days, typically at no cost.
There are several types of transactions that could result in your checking or savings account being debited. Direct deposits, such as payroll and social security payments, are typically processed under the ACH system. This is also true for electronic transfers initiated by your credit or debit card company and bill payments you make using a third party service like PayPal or Bill Pay.
ACH transactions can only be sent to and from U.S. bank accounts, including prepaid cards issued by U.S. banks.
What is EFT?
EFT stands for Electronic Funds Transfer, which includes transactions made over the ACH network but also encompasses wire transfers and money orders processed through automated clearing houses (ACHs). It’s a generic term used to describe all electronic money transfers.
Mobile payments are debited using EFT, as are funds transferred by online bill payment services or direct withdrawal from your account to pay another party.
How ACH Transfers Work?
When you make an electronic transfer via ACH, the transfer is initiated by entering a command into your online bank account or providing information to your bank for it to initiate the transfer. You can also use ACH to make transfers between accounts you hold at different banks using online bill payment services.
When initiating an ACH transaction, you funnel money through what’s known as a “ACH originator.” This is typically your bank, but other companies like PayPal act as ACH originators to process transfers between accounts they hold, like your credit card or PayPal account. The ACH command instructs the originator to transfer money from one bank account to another electronically.
The recipient’s own bank can also initiate an ACH transaction by sending the payment information back through the system in order to deposit funds into his or her account.
How Direct Deposits Work?
When you sign up for a direct deposit at your employer’s human resources department, the ACH system is used to transfer money from your company account into your personal bank account. This process can take up to three business days after the originator initiates the transfer, as opposed to EFTs, which are typically processed within one business day.
An EFT occurs when the originator transfers money electronically to the recipient’s account number. Direct deposits, on the other hand, use your name and Social Security Number as identifiers rather than your bank account information; you initiate the transfer by submitting this personal identifying information to your employer.
What’s important to understand about direct deposit is that the originator, your employer in this case, can only initiate an ACH transaction. Your bank may or may not choose to process the transfer immediately – it doesn’t have to. It could wait until the date of your payday to process the transaction, resulting in a delay between when you request the money and when it’s available for you to spend.
If there is a delay between when an originator sends an ACH transaction through the system and when your bank processes it, this is known as a “float.” The date you receive the money in your account is called the “posted” date. Your bank could also choose to “credit” your account on the business day following when you initiated the transfer, which would result in a money availability delay between two to three days.
Typically, ACH originators begin processing transactions at 4 pm Eastern time on the day they’re sent through by its end-users. However, banks can choose when during that 24-hour window they’re going to complete the transaction.
If you initiate a transfer of money from your account to pay an individual, that person receives it by direct deposit, too. ACH is typically used in these instances because it’s so much faster than wiring the money. But if you owe someone a small amount of money, say $50, it’s often easier to just write a check.