There are so many acronyms floating around that it can be difficult to keep them all straight. That’s especially true in the field of finance. Being a complex topic, finance is filled with technical jargon.
String together a bunch of technical terms and you suddenly have one big, unwieldy term on your hands like “Automated Clearing House” (ACH), “Electronic Funds Transfers” (EFT), and “Electronic Data Interchange” (EDI).
These terms are all related but are not interchangeable. If you’re going to operate an ecommerce store or other online business, it’ll be helpful to know what each definition stands for. Anyone processing online payments can expect to run into some of these terms at some point.
So let’s go over how they’re related and also how they’re different.
Automated Clearing House Payments Defined
Automated Clearing House payments are a type of electronic fund transfer. So ACHs are EFTs. However, not all EFTs are ACHs (I’ll go over EFTs later). Automated Clearing House payments refer to only one (very popular) type of electronic fund transfer.
Banks frequently use the Automated Clearing House.
ACH transactions are made through the Automated Clearing House network. The network is an electronic network that supports financial transactions between banks and other financial institutions. It’s typically used for low-value, domestic transactions. Many countries have their own ACH network.
The network is designed to support a high volume of low-value transfers. This means ACH payments are especially valuable for ecommerce and the like. Instead of processing individual payments, they are processed in batches. This makes it easier for financial institutions to process a large number of low-volume payments while keeping costs manageable.
The automated clearing house network is able to process a huge volume of transactions. In 2018, more than $50 trillion (yes trillion, with a T) dollars’ worth of payments were processed. In total, roughly 23 billion transactions were made.
And keep in mind, this is just for the United States.
Electronic Funds Transfers
An electronic funds transfer is exactly what the name implies: it’s the electronic transmission of funds from one financial institution to another. Typically, an electronic funds transfer does not require any bank staffers to intervene in the process. Everything is handled automatically.
Payments with credit cards are one type of EFT.
Given that definition, it’s easy to see why ACH payments count as electronic fund transfers. However, there are many other types of EFTs. For example, when you withdraw money from an ATM machine, that is an EFT.
The same is true of payments with credit and debit cards. If you’ve ever paid utility bills online, whether with a card or your bank account, that’s yet another type of EFT. Direct deposits and direct debits also count.
EFTs are now very common. ACH payments are an important type of EFT but far from the only one. So yes, ACH payments are a type of EFTs, but so too are many other transfers.
As far as the history of currencies and finance, EFTs are relatively new. For end consumers, credit cards with magnetic stripes, which can be read by computers, didn’t emerge until the 1980s. Before that, most transactions were conducted physically, with checks or hard currency. Credit cards before magnetic strips functioned more like punch cards.
Now, very few people use checkbooks. They’re hard to balance and your debit card can accomplish just as much with a swipe. Increasingly, retailers and other companies don’t want to deal with checks either and some have flat out stopped accepting them.
Not only that, but 3 in 10 Americans now say they don’t make a single purchase with cash in a given week. EFTs are simply easier.
So What’s An Electronic Data Interchange?
Besides money, companies also have to exchange data. Transferring data can be pretty tricky. It’s easiest for data to be transferred if it is standardized. This way, the parties on both ends can quickly understand and utilize the data.
Electronic Data Interchanges refer to the standardized transfer of data. The most common information sent between companies electronically are invoices and purchase orders. This is similar to exchanging money, but at this stage, money isn’t actually changing hands.
Why deal with paper invoices (and hard currency, for that matter) when you can handle it all electronically?
Like EFTs, one of the primary purposes of EDIs is to speed up transfers. Without EDIs, a company might print up an invoice, put it in the mail, and then wait for the other company to reply. The receiving company would have to plug the invoice into their system. All of this takes time and wastes paper.
So why not conduct everything electronically? Just as electronic payments are a convenience for consumers who can simply swipe their cards (or tap their phone) instead of carrying cash, EDIs make business processes much easier.
Why Should You Care?
You’ll be able to use ACH payments, electronic fund transfers, and even Electronic Data Interchanges without understanding the intricacies of how they work. The above information is more of a broad overview, but you already know more than probably 90 percent of the people using these systems.
What’s more important is understanding and leveraging the positive impacts of these systems. With ACH payments, you can quickly send and receive money. That’s perfect for online payments. With ETFs, you can pay employees, accept credit card payments, and more. Again, businesses will benefit.
EDIs can be especially helpful for businesses. Why deal with paper invoices and receipts when you can handle it all online? This will increase productivity and help you keep your books in order.
Conclusion: Know Your Acronyms
Across the board, ACH payments, EFTs, and EDIs are making transactions and interactions easier. This is true for online businesses and brick and mortar enterprises as well. So don’t sweat the details but do make sure you’re taking advantage of the opportunities!
It’s smart to sit down and figure out which systems, payment solutions, invoicing software, and whatever else will work best with your business. As for PayKickstart, we make accepting a wide variety of EFTs easy. Many electronic payment solutions, including Square, Paypal, credit cards, and debit cards, can be used in our shopping cart.
So don’t have to worry about the messy details, focus on running your business!