The future of payments is here. Now.
Digital payments have arrived. It’s time for businesses to not only familiarize themselves with digital payments but embrace them and understand that they are a key factor in the growth and overall success.
Businesses that have already made the switch to digital payments have reported many advantages over traditional payment methods. Here are the top two: Higher returns and increased convenience for staff. In Canada, the most common electronic payment is EFT, which securely moves money from account to account at financial institutions.
The increased use of EFTs to make payments to contractors, vendors and other entities is leading to an increasingly paper-free banking system, where a large number of payments take place over digital networks. We will take a closer look at all aspects of EFT payments and how they benefit Canadian businesses.
In this guide we will cover the following:
- What is EFT?
- The Types of EFT Payments
- Inefficiencies in current EFT Payments
- How does an EFT Payment Work?
- EFT vs ACH
- EFT vs Wire Transfers
- Pros and Cons of EFT Payments
- Are EFT Payments right for my business?
- EFT Use Cases
- VoPay EFT Solution
What are EFT payments?
EFT stands for Electronic Fund Transfer and is the backbone of the Canadian payment industry. Electronic Funds Transfers offer a safe and cost-effective way to electronically credit or debit accounts at any Canadian financial institution in Canadian or U.S. dollars.
EFT payments are useful for businesses and individuals alike, as they eliminate the need to write a cheque or use cash to pay for a business expense. These payments are often referred to as electronic payments, eCheck, electronic banking, or electronic bank transfers. We will take a closer look at all aspects of EFT payments and how they benefit Canadian businesses.
Types of EFT Payments
There are many different types of electronic fund transfers, some of which consumers and business owners use on a daily, weekly or monthly basis. One main distinction for EFT banking is whether or not it requires human interaction to complete the transaction.
For the purposes of this guide, our focus will be on EFT debits/credits or eChecks:
- Electronic Cheque/eChecks: Electronic equivalent of a regular paper cheque. Using a bank account number and routing number, the eCheck can transmit encrypted data to make EFT deposits.
- EFT Credits: Electronically pay vendor invoices, bills and employees via account-to-account payments.
- EFT Debits: Electronically pull funds from the customer’s bank account on a single or recurring basis.
EFT transactions, across their many forms, make up the electronic banking industry. Each of the above EFT payment types shares one common element—they’re all connected to the Canadian banking network.
Inefficiencies in Current EFT Payments
Traditionally, EFT payments are manually processed through a Canadian financial institution. The entire procedure is labour intensive and lacks any form of tracing or visibility, which we will discuss in more detail below.
1- Manual Processing and Labour Intensive
EFT payment services that are available through banks and credit unions are offered via an online banking service or through a file processing system. In both methods, the client must manually submit the transaction and it takes 3 to 5 business days to clear. Then the client must ensure that the transaction status is updated accordingly to reflect correctly on their books. This is challenging for businesses with hundreds of transactions; combined with this process having a high risk of human error. It becomes more complicated when the business needs to collect installment payments and then repeat this process weekly, biweekly or monthly.
2- Lack of Visibility and Transparency
Similar to cheques, if a business accepts and sends payments using outdated EFT banking methods, they are unable to verify any information about the payer bank account, ownership or availability of funds. They are not able to predict if the payment is successful and it can take up to 5 business days to have final confirmation. More importantly, the inability to connect existing banking systems to the business software or platform they use to manage their AR/AP, will result in manual reconciliation and updating the status of each client account. This can result in costly financial errors.
In order to process EFT payments digitally, businesses must connect to a technology-driven payment gateway or EFT processor to eliminate the manual steps and allow businesses to have full control and visibility over their payments.
How does an EFT payment work?
Sending an EFT only requires the recipient’s bank account information to get started. Typical account information includes name, account number and institution/routing number. There are two parties: the sender of funds, and the receiver of funds. EFT debits (decrease) one person’s account and EFT credits (increase) the other person’s account.
- A business can send an EFT payment to a supplier, vendor or borrower.
- Or, a business may give customers the option to pay their invoice or bill via an electronic funds transfer.
Pre-Authorized Debit (PAD) agreement
Pre-Authorized Debit Agreement, or PAD, is an agreement between you and your customer that enables you to debit accounts on a single or recurring basis without getting permission each time. Payments Canada and its participant financial institutions established terms and conditions to make sure that PADs are properly authorized and to protect against improper withdrawals. These agreements are great because they remove several steps from the process and help you ensure that your payments always arrive on the expected day. PAD agreements can be in paper form or electronically embedded into the user journey.
EFT vs ACH
EFT is a blanket term for all digital transactions, and an ACH is just one type of EFT. ACH stands for Automatic Clearing House, run by an organization called Nacha (National Automated Clearing House Association) and holds the weight of the American payment industry.
ACH connects the banks and creates a daily debit and credit tally. The ACH network processes EFTs in batches, which means that transactions are accrued throughout the day and processed later. Transactions processed through the ACH network take approximately 3 days to settle. ACH is a US-only network, therefore VoPay customers who want to make payments to US customers use our ACH processing service to process USD payments.
EFT vs Wire Transfers
Online transfer is where the old-fashioned concept of bank wire transfers meets the modern technology of EFT. Let’s explore the main differences between the two payment types:
- Control: The business owner has full control over when the EFT payment processing occurs, enabling the payments to be debited from their client’s bank account on a particular day.
- Speed: Wire transfers typically take around 3-5 business days to move money between bank accounts. EFTs are usually complete within 1-2 business days. In some cases, they are processed on the same day.
- Cost: Bank wire transfers are usually very expensive, especially when it comes to international payments. While EFT can be very cost-effective, wire transfers are more expensive than other EFT methods, sometimes as much as $50 per international wire transfer. Processing costs for various payments are outlined below in the infographic.
- Process: Often, a wire transfer requires taking a trip to the bank, especially for larger payments. EFT payments are completely digital through a payment facilitator. There’s no need to go to a bank, or even leave your office.
Pros and Cons of EFT Payments
Bringing your payment systems into modern times will benefit your business in many ways. Notably:
- Control and Visibility
One of the major disadvantages of using traditional paper payments is the lack of control over the payments. Businesses spend so much time waiting for: customers to review invoices, cheques in the mail and credit card transaction approval. On the other hand, EFT allows businesses to initiate payments from the customer and decide when the payment is withdrawn from the bank account.
Most online credit card processors charge 3% on every payment. It’s beneficial to provide more ways for your customers to pay, but at what cost? EFT costs as low as $0.50 per transaction with EFT processors like VoPay only charging a flat fee per transaction, saving businesses thousands of dollars per month.
- Flexible, Customer-Friendly Payment Options
Setting up recurring payments and deposits is quick and easy. And your customers will enjoy the convenience of making EFT payments (especially when part of a recurring payments plan), as the customer only has to provide their bank account information once and future payments are fully automated.
- High-Level Security
EFT payments are sent from one bank account to another and are sitting at bank-level security. By moving money electronically businesses reduce the risk of paper cheques being lost or stolen and reduce the risks associated with cheque fraud and forgery. By using payment processors or gateway like VoPay, businesses add an extra layer of security by utilizing the measures already in place.
Some of the disadvantages of shifting business and personal banking processes to online systems are the same as upgrading any kind of process. It requires time, research and due diligence to look into security features, cost-benefits and effectiveness of EFT payment options. Likewise, other systems such as automated billing, invoicing and accounting systems may require updating and organizing digitally. The right payment technology partner can help make this transition seamless.
Are EFT Payments right for my business?
To determine if accepting EFT payments is right for your business, there are several questions you need to answer:
- Does your business currently require recurring payments?
- Does a major proportion of your customers currently pay by paper cheques?
- Does a significant proportion of your customers currently pay by credit card?
- Do the fees for EFT processing save you money compared to credit card fees?
- Would you be able to convert your credit-card-using customers to pay by EFT instead?
EFT payments will have substantial benefit to your business if you require any of the following:
- Pay employees, suppliers and utilities
- Collect payments from customers
- Need to improve security by reducing lost, stolen and forged cheques
- Wish to reduce late payments and associated charges
- Moving from manual systems to electronic systems
- Reduce credit card costs and operating expenses
- Lending/LMS: Optimized cash flow through faster payments and collections
- Real Estate: Streamlined back-office operations through reduced NSFs and delays in closing
- Market Places: Increase revenue with reduced merchant fees and decreased chargeback risk
- Crowdfunding: Improve payment security through verified users and data tokenization
- Property Management Service: Collect recurring monthly payments and reduce returns by utilizing advance EFT account verification services
VoPay’s EFT Payment Solution
EFT payments are not created equally thanks to our mission of digitizing online bank account payments with speed, transparency and traceability. VoPay’s EFT payment solution allows businesses to accept, collect and send EFT payments by connecting businesses to financial institutions across Canada. EFT payments are one of the main services offered by VoPay and you can set up either single or recurring payments to your vendors and suppliers using our API integration or white-label solutions designed for enterprises.
Using a payment gateway like VoPay, to facilitate EFT payments removes the friction and inefficiencies associated with the manual processing that takes place if businesses set up EFT through their financial institution. The traditional process requires manual submission and complicated file processing from the payee to initiate the setup, whereas these onboarding steps are automated with a completely digital experience when using a payment gateway.
VoPay offers two types of EFT Payments including Standard EFT and Intelligent EFT (iQ11). Businesses benefit from faster transaction speeds and lower costs from either solution.
Open Banking Payments
For our clients, that means faster payments as well as the elimination of costly NSFs and slow cheque processing times. Our Open Banking payment technology securely validates bank account information for EFT payments without ever seeing the customer, business or vendor’s bank account or financial details. One-off or recurring EFT Payments can be processed through the VoPay API or portal with transactions clearing as quickly as the same day. VoPay can fully support EFT transfers for its Canadian merchants and enable electronic transfers using ACH for cross-border transactions.
By partnering with VoPay businesses can leverage an easy-to-implement solution to debit or credit Canadian bank accounts electronically. We work with individual businesses to create the desired payment flows and processing needs that enable rapid scaling and seamless payments. For more information about EFT processing solutions, contact our payments team today!