As the popularity of e-commerce and online payments has increased, so has the need for cross-border financing. Vendors are selling internationally and thus, they must find a way to be paid. Contrarily, buyers want to buy like never before. That often means buying over borders. So, they are also looking for a quick way to pay these retailers and get what they want. That means moving international funds.
To understand how an international online payment works, you must first know what a basic electronic payment is and how people are using them with U.S. dollars.
What is an EFT Payment?
An EFT payment process will differ by country. EFT stands for “electronic funds transfer” and it’s a means of moving money digitally from one account to another. This process is referred to as “electronic banking.” The accounts can be at the same financial institution or two different ones, but it will change how things work. All transactions are done electronically over a digitized network. It’s all completely paper-free.
EFTs are regulated by the Electronic Funds Transfer Act (EFTA) which lays out the liabilities and rights for electronic funds transfers. According to the United States EFTA of 1978, the official definition of an EFT payment is:
“A funds transfer initiated through an electronic terminal, telephone, computer (including on-line banking) or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account.”
EFTs can be confusing because they go by many names depending on the country and payment system, but it’s all the same process. In the United States, they are often referred to as an “electronic check,” “e-check,” or ACH. The United Kingdom refers to EFTs as “bank transfer” or “bank payment.” Several European countries employ the term “giro transfer” but it’s all the same idea. Money moving from one account to another through an electric process.
Types of EFT payments
There are quite a few ways to perform an electronic funds transfer. Moving money digitally has advantages. Here are a few different types of EFTs:
- Wire Transfers – If you’re sending your friend a few bucks, then a wire transfer doesn’t apply. This is typically for large lump sums on a one-time basis. Western Union comes to mind. They specialize in emergency EFTs. Businesses also use wire transfers to pay vendors or make a large down payment on supplies.
- Direct Deposits – This is a means of electronically paying employees rather than issuing a physical check. After payroll is run, a company will tell their direct deposit service provider how much to put in each employee’s bank account. Then, on payday, the EFT will be sent. It is a much more cost-effective way to pay people but not all employers can make it mandatory. Make sure you fully understand direct deposit laws first.
- Electronic Checks – Just like a paper check, e-checks work the same way. You will need to enter a routing number and account number to make a payment. Many people use this method to pay bills online or set up automatic payments.
- ATMs – Automated Teller Machines (ATMs) believe it or not are a form of EFT. That’s because you’re not going inside of the bank to see a teller. You are transacting electronically with a machine. You can withdraw cash, make deposits, transfer funds, and some even let you pay utility bills.
- Debit Cards – This is a means to electronically link your cash to a card that can be used just like cash. Your debit card is electronic funds. Whenever you use it, you are making an EFT transaction. You can use it to move money, make purchases, pay bills, etc.
- Pay-by-phone Systems – If you’ve ever called and paid a bill on the phone, this is just another form of digital cash. You are accessing your bank account over the phone and using the data to pay a third party.
- Personal Computer Banking – Any banking transaction made with a computer or mobile device is a form of EFT. You are using a digital device to move money. Personal computer banking can include:
- Automated teller machine (ATM) transfers
- Instant payment
- Transactions involving stored value of electronic money (think private currency or Bitcoin)
- Electronic bill payment
- Transfers that result from a debit or credit card transaction
- Transfers initiated by phone
- Direct debit payments from a customer’s bank account for goods/services
- Direct deposit
- Wire transfer via an international banking system (like SWIFT)
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Automated Clearing House
It should be noted that the American system uses the Automated Clearing House (ACH) to move funds electronically. Although this might not be entirely applicable to international EFTs, it’s good to understand how it all works. Every day, banks and corporations all over America gather ACH withdrawal and deposit requests in large batches and send them to the centralized ACH at scheduled times. The Clearing House typically sends the EFTs back out the next morning after they are “cleared.”
The Automated Clearing House isn’t the fastest and sometimes can take several days for a deduction or payment to clear. However, it’s an incredibly affordable means of moving money and thus, is very popular. If you’ve ever had your paycheck directly deposited into your bank account, then you’ve received an EFT from the ACH.
However, a downside to ACHs is that they aren’t as easy as European systems. In Europe, most people can simply log into their bank account and send another bank account money. All in just a few simple steps. Not so in America. That’s why people use financial systems like PayPal or Venmo.
It should also be noted that ACHs are almost exclusively domestic and used only in the U.S. However, International ACH transactions (IATs) are starting to become more popular with American banking institutions. That’s because they’re highly regulated.
What is an International ACH Transaction? (IAT)
Recently, International ACH Transactions (IAT) have been gaining in popularity. The gig economy and freelancing have demanded a need for people to do international business. An IAT is an ACH entry that is part of a payment transaction from a financial institution that is not part of the territorial jurisdiction of the United States. In other words, it’s an office of a foreign financial agency that is involved in the transaction, holds an account that is being credited/debited, receives or sends funds directly to a person, or serves as an intermediary in the transaction.
NACHA and the Office of Foreign Assets Control (OFAC) have developed a new ACH format that includes information on all parties involved in the transaction. This allows the Receiving Depository Financial Institution (RDFI) to easily comply with rules and regulations of the Clearing House. Thus, making international payments possible.
The new regulations include two major points:
- Data must be included on all parties involved with the ACH.
- Gateway Operators must classify payments that are transmitted or received from any agency outside of the United States as IATs.
It benefits RDFIs because it makes it quicker to recognize if an EFT is domestic or international, making it a much more secure process. It also enables institutions to comply with legal obligations by including the data they need to clear the transaction. This makes it easier to intercept unlawful transactions and mitigate fraud.
There is no real way to differentiate between consumer and corporate IATs. There is only one SEC code for International ACH Transactions and it’s used for both types. The consumer protections under Regulation E and time frames apply to all IATs.
Travel Rule Information is also required for all IATs, regardless of whether they exceed $3,000 or not. The foreign exchange can be handled by either party in the transaction. There is no regulation on this from NACHA Operating Rules.
There are two types of IATs. Inbound and outbound. An inbound IAT originates from a foreign country and is transmitted into the United States. An outbound IAT is the opposite. It’s digital funds leaving the United States and transmitting to a foreign country.
Why International EFTs Matter
The internet has forever changed the global community. The increased use of digital finance has lead to a paper-free banking system. Not only is this a faster way of doing business, it’s much better for the environment. Using EFTs for online bill payments also means less mail and clutter overall. A large number of invoices and digital payments are taking place over digital networks.
International EFTs are also highly cost-effective and fast. Without the need for paper, the responsibility of processing is the onus of the computer. There is less need for labor and less time to wait for funds. It’s a way to streamline the entire financial process and the way we do business.
Lastly, it connects us on a universal scale like never before. People thought it was pretty amazing when the internet was born and chatrooms came along. Today, we can network and build empires thanks to international banking systems and innovative financial technology.