Banking was once paper-based, meaning that people wrote checks and withdrew paper money to perform their everyday financial transactions. More recently, electronic banking has become the norm for consumers. You may benefit from learning the basics of how electronic banking works as well as its advantages and disadvantages.
Definition and Types
An electronic banking transaction -- also called an electronic funds transfer (EFT) -- is any transaction that is processed over the Internet. Either the consumer or the bank can initiate an electronic transfer. One common type of electronic transaction is an automated clearing house (ACH) payment or deposit, which allows a merchant to deposit or withdraw money directly to or from a checking account. Bill pay transactions, which allow you to send a payment to another person or company from your bank account, also are classified as electronic transfers. Another common type of electronic banking transaction is a debit card purchase, in which the user swipes his card through a processing machine to make a payment or withdraw money from an automated teller machine (ATM) electronically. The consumer also can transfer funds between bank accounts electronically.
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Summary of How It Works
Electronic banking transactions typically involve three parties — the bank, the consumer and a merchant. In some cases, only the bank and the consumer must participate to complete the transaction. The consumer initiates the transaction by either submitting the request online, going to a store or visiting an ATM machine. The bank receives the request and either approves or rejects the electronic transfer of funds based on the accuracy of the data provided in the request (card number, address, routing number or account number) and the available funds in the case of withdrawals. After processing is completed, the funds electronically transfer to or from the consumer's account to reach the intended recipient.
One of the main advantages of electronic banking is its speed compared with paper transactions. ACH transactions commonly process within one to two bank business days. Setting up electronic transactions is also simple and straightforward: You typically log into your online bank account or call the bank to initiate the transaction. Electronic banking allows you to access your money 24 hours a day. Finally, electronic banking often provides more security than other options, because the transactions occur over secure servers and networks.
Though the speed of electronic banking is a benefit to some, it is a problem for others. If a consumer misjudges the date that an electronic transaction is scheduled to occur, whether it is a deposit or withdrawal, that could cause the account to become overdrawn.