Wire transfers and Electronic Funds Transfer (EFT) systems are similar in many ways, and yet differ greatly in terms of their uses and evolution. While wire transfers have long been and continue to be a reliable and popular means for transmitting large sums of money, EFT systems have grown so large that they permeate nearly all aspects of modern business and employment. EFT has become so popular that even the IRS now accepts electronic payments online for both individual and business taxes.
Wire Transfers
A wire transfer is simply a transfer of money between two banks through a secure system such as Fedwire for banks within the Federal Reserve system, or Clearing House Interbank Payments System (CHIPS), which is owned jointly by its members. Traditionally, for an individual (or business entity) to conduct a wire transfer, he must furnish his bank with the receiving information of the recipient's bank in order to initiate the transaction. Generally the sending and receiving banks must hold reciprocal accounts with each other, but the use of a third bank (and thus the payment of additional fees) that holds an account with both may be used. There are, however, several consumer-oriented wire transfer services that will allow you to transmit money over great distances without holding an account with any bank, often at higher fee rates. The most popular example of this type of service is Western Union.
Electronic Funds Transfers
EFT systems simply take the traditional paper check transaction cycle and bring it into the Digital Age. Instead of the receiver's bank using a paper check to initiate a transfer from the sender's bank, a digital signal is generated upon the execution of a transaction and sent through an intermediary known as a clearinghouse.
Considerations
While wire transfers are viewed as one of the most secure ways to transmit money, many people are reluctant to take advantage of EFT systems due to reports of fraud, theft and other vulnerabilities inherent in transmitting personal information over an electronic system. These are real issues that presented serious problems during EFT's early stages, but with each passing year the systems involved become more sophisticated and secure. In addition, the Federal Reserve System offers protection for all direct deposits and electronic transfers under Regulation E.
Benefits
Wire transfers generally utilize banking sources that are trusted by the sending and receiving parties and are the method of choice for large institutional transactions or transfers between nations.
EFT, on the other hand, has made it possible for smaller businesses to dramatically reduce payroll and other processing costs related to receiving, filing and depositing paper checks. Employees also benefit greatly from the ability to receive wages electronically, as well as the ability to pay bills without the hassle and lead times associated with mailing paper checks.
The Future
As the world continues its march toward complete digital dependence, it stands to reason that EFT has a lot of room for expansion. We already use electronic means to collect our paychecks, pay our bills and to make everyday purchases. One day soon we may be using electronic transfers to conduct all monetary transactions, from repaying debts between friends to giving our children their allowance.
