For Developers For ISVs, Integrators & Aggregators

Are You Making These Mistakes When Talking About EFT and Digital Payments?

As the world of global money movement adjusts to the ever-changing financial landscape, new non-traditional, forward-facing payment processing options provide Payer and Payee flexibility.

As the world of global money movement adjusts to the ever-changing financial landscape, there is an almost palpable excitement in the field. After all, with more businesses than ever jockeying for a place online, through digital means, it makes sense that many aspects of money flow would move into the same space. However, despite—or perhaps because of—both the glut of information and solutions available, there is often confusion surrounding a couple key terms: electronic funds transfers (EFT) and digital payments. In this article, I’ll run through a few definitions of these two terms to clarify what we at XTRM mean when we use these terms, as well as what others might mean when they use them in their own content.

Digital payments, defined

A good resource for laypersons’ definitions of common fintech terms is readily available online. It is called “The Concise FINTECH COMPENDIUM” (TCFC) by Patrick Schueffel—published by the School of Management Fribourg. The TCFC defines digital payments as “a computer-based transaction of money authorized electronically on an electronic device.” That is a very general definition. Although it does make sense; in the landscape of all possible payment options, there are means of physically moving money, those traditional, paper-documented transactions that can be carried out in the appropriate financial institutions. Digital payments are not physical. Digital payments technology makes use of digital architecture without any need for “physical” documentation and movement.

Electronic funds transfers, defined

Treating EFT payments as a synonym of “electronic payment,” “e-payment,” and “Epayment,” the TCFC defines it like so: “an electronic payment is a payment made from one bank account to another via electronic means without the direct intervention of bank staff instead of using cash or check, in person or by mail.” So, we can see that the TCFC stakes a more specific claim of EFT being part of a larger and more officially defined process.

Even though this definition is still quite high-level, we can see its implications are that EFT sits firmly within the formal system of money movement using traditional bank accounts.

Compare this to the following definition from “An electronic funds transfer… allows payment between two parties by using electronic signals to transfer money.” Yet again, this seems to be talking about the step in a money movement transaction that specifically includes the handing off of money between intermediary financial institutions.

Mind you, there is no mention of banks here. However, the examples of the types of transactions shown in the article above are rooted in traditional institutions:

  • 24-hour ATMs
  • ATM fees
  • Direct deposit of paychecks
  • Pay by phone
  • Internet banking
  • Debit cards
  • Electronic check conversion

The gist of EFT here is firmly rooted in tradition, a connotation that is easily seen on any number of similar definitions from numerous different sources.

On the surface, this is quick and easy to digest. But I got to wondering if this is merely a sort of self-fulfilling prophecy: could it be that those who talk in terms of EFT have simply grown accustomed to an idiosyncratic usage in the past, and thus propagate that usage into the future?

I decided to go back and look at a landmark ruling, the “Electronic Funds Transfer Act” of 1978, to see if this was what EFT was always destined to mean. Here is that definition:

“Electronic funds transfer (EFT) is a transfer of funds initiated through an electronic terminal, telephone, computer (including online banking), or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account. EFTs include, but are not limited to point-of-sale (POS) transfers; automated teller machine (ATM) transfers; direct deposits or withdrawals of funds; transfers initiated by telephone; and transfers resulting from debit card transactions, whether or not initiated through an electronic terminal. (Section 205.3(b)).”

Not one and the same

So, it looks like this original, official definition settles it. EFT, by and large, speaks to part of a larger process that requires interaction with banks and the management of payee bank information. Digital payments, on the other hand, is an umbrella term that covers the types of payment operations that can be carried out without necessarily requiring the intervention of traditional institutions, relying instead on technology such as (but not limited to) digital wallets to handle wallet-to-wallet money movement between parties. In a very concrete way, we can think of “digital payments” as the next step in the lifecycle of the payments process, carried out fully, A to Z through digital infrastructure.

Non-traditional, forward-facing payment processing options

With the chains of the traditional banking institutions cast off—at least for handling the money movement—the stage is now set for increased simplicity and freedom in how payments are made. You’ve had the traditional flow: the payer has their account debited for the payment and then relies on the intermediary institutions to communicate and settle the transaction, and then the final transfer is completed, incurring processing fees. Now you have a new option, using a payments platform that incorporates a digital wallet architecture to make wallet-to-wallet (W2W) payments that are simple and don’t require any intervention from anyone other than the payer and the recipient: payer places money into the wallet and moves that money to the recipient’s wallet. Just like that, the money is accessible for the recipient to do as they please. Fee-less.

Payer Flexibility

Using a digital payments platform based on these types of forward-looking W2W processes can be a real cost saver. By eliminating the lion’s share of the behind-the-scenes processing fees and allowing the freedom to create numerous different wallets for various applications, such as currency exchange or industry segments, suddenly you have the best of many worlds. You get a more cost-effective payments process, coupled with the flexibility that the traditional infrastructures and processes just don’t offer.

Payee Flexibility

In the case of XTRM’s payment platform, it’s not just payers that benefit from this flexibility. Payees can choose their payment method by selecting their preferred external transfer point from their wallet: transfer to their bank (EFT), paper check, virtual Visa, Visa Debit or digital gift card. So both remitter and beneficiary benefit from the digital payment flexibility. That’s a win-win.

If a better and more flexible user experience through self-serve digital payments sounds good to you, drop us a line to see how XTRM can help you put that in place.

You may also be interested in