Difference between EFT and ACH

Key Difference: 'EFT' stands for Electronic Fund Transfer. It is an umbrella term for all the transactions or transfer of funds that takes place through computer-systems. ACH stands for Automated Clearing House. It is an automated network provided for the financial transactions. ACH transactions are batch-processed and a value-dated EFT facility is obtained between the originator and receiver financial institution. ACH have been devised to reduce the paper checks.

We often need to transfer the funds from one account to the other. The advent of new technologies had made the task very easy. Looking back, one can easily remember a long queue of people in bank for various purposes. EFT has simplified the ways of banking.

'EFT’ stands for Electronic Fund Transfer. It is an umbrella term for all the transactions that are carried out  electronically, without the actual transfer of paper money. EFT may be explained by a simple example:- if we purchase an item from a shop and pay it using our debit or credit card, then we are not providing the money in form of actual paper money. The transaction is made by the details derived from the card. EFT covers those transactions also, which can happen between banks, bank to customer, and customer to banks, or any other type. The key term in EFT is that it does not involve real transfer or exchange of actual paper money.

Automated Clearing House (ACH) is an electronic network that is used for financial transactions. It processes large volumes of transactions in batches. However, the inter-bank clearing of transactions can be of any form, either credit or debit types. ACH is generally used in context to a secure, private electronic transfer system that connects U.S. financial institutions. In simple words, an ACH is an electronic network for the exchange of payment instructions among financial institutions, typically on behalf of customers.

ACH of America was created in 1970. In 1974 National ACH Association arose from regional ACH organizations and rules were established to facilitate the nationwide clearing of ACH payments. This network is a batch processing, store and forward system. Many countries have a national automated clearing house. Apart from few differences, the basic processing remains the same. Transactions that are received by any financial institutions are generally stored and then processed later in batches. The payments are not sent individually. These ACH transactions are then accumulated and sorted depending upon the destination for transmission during a predetermined period. It avoids paper checks, and thus ACH transactions are transmitted electronically.

The payments covered under ACH are:-

Direct deposit of payroll

Direct deposit of government benefits like social security

Payment of consumer bills as loans etc,

E-commerce related payments

Business to business payments etc,

Automated Clearing House (ACH) system is known be the name of Electronic Clearing Service (ECS) in India. ECS is currently available in around 89 centers in India. Reserve Bank of India operates this service in India. With the introduction of NACH or National Electronic Clearing Service (NECS) by Reserve Bank of India, the reach of the system has been further extended.

ACH is also a way of transferring the funds via electronic funds, therefore it will be considered under EFT. However, EFT is an alternative payment to make payments instead of using credit or debit cards. ACH systems have been devised to avoid the paper checks that were involved in earlier transactions. However, the credentials are not checked instantly in ACH payments as in the case of payment by credit or debit card. ACH services are generally working as a bridge for banks as a linking device whereas EFT can also refer to a simple transaction that just involves the credit or debit in account that is done electronically.

However, EFT can also be used in context to an electronic fund transfer modes that operate on a deferred net settlement (DNS) basis and settles transactions in batches. In that case, the differences between the two terms will be described considering that EFT transactions take place with the help of an automated clearing service.

Image Courtesy: instantshift.com, nacha.org

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