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.
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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.
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.
- North Carolina Office of the State Controller: Electronic Funds Transfer Overview
- Consumer Financial Protection Bureau: What is a Wire transfer?
- NACHA: ACH Network: How It Works
- Washington State Department of Financial Institutions: Debit Cards Frequently Asked Questions
- Greenburg and Company: The USA Patriot Act: How It Impacts You