Electronic funds transfers and debit cards may seem similar, but are actually very different. In fact, their only real similarity lies in that each is a cashless electronic payment system. Each has its own advantages and disadvantages, and each has its own best use.
A main difference is an EFT could be either a wire transfer or an Automated Clearing House transaction, while a debit card refers only to a direct debt transaction. Wire transfers are electronic transfers that take place between one bank and another, or between commercial wire-transfer companies such as Western Union or MoneyGram. An ACH transaction is a paper check alternative. Finally, a debit card is a way to transfer funds, usually in real-time, from a bank account to a merchant or an automated teller machine.
Wire Transfer Characteristics
Bank-to-bank and commercial wire transfers are common for single, time-sensitive payments. In both cases, funds are sent to the receiving party using a secure online system. High dollar and international wire transfers must comply with record-keeping and reporting regulations outlined in the Patriot Act of 2001. That act was put in place to prevent money laundering and to stop people from funding terrorist activities.
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ACH transactions are common for business purposes such as direct deposit payroll, government benefits and personal online bill payments. Unlike with a wire transfer or a debit card, where each transaction is processed individually, ACH handling takes place in large batches in regular, predetermined intervals. Batched transactions are sent to either the Federal Reserve or a secure clearinghouse. After sorting, individual transactions go to the receiver's bank, which debits or credits the person's bank account.
Debit card transactions skip an intermediary and link directly to a bank or financial institution. Most transactions deduct payments in real time. For example, if you swipe a debit card at a retail store, the merchant service verifies with your financial institution that the funds are available and approves or denies the transaction. A similar process at an ATM allows you to withdraw cash or deposit money into an account.