ELECTRONIC FUND TRANSFER

Sudeep Peter

S1 MBA IB,
Roll No. 25,
School of Management Studies,
CUSAT, Kochi- 22.
E-mail: [email protected]

Abstract: "Electronic fund transfer" is becoming more popular in these days. With
the introduction of Electronic fund transfer it is possible to do all the financial
transactions without the physical flow of cheques and currency.
The following description deals with scientific study of various types of EFT systems,
the essential components of a EFT systems the advantages and disadvantages of
using EFT system etc.

Keywords: EFT, Cheque, ATM, POS, CVV2, EMV.

1.0 INTRODUCTION

Throughout history, people have looked for convenient methods of paying for
goods and services. In earlier days, we used to pay for goods and services by goods or services
itself. Later commodities were replaced by coins and paper money, a more portable form of
exchange. Now even more convenient than currency are cheques and credit cards.

We have now developed banking and payment systems involving currency, cheques, and
credit cards. We can also transfer funds by computer from one account to another without the use
of written cheques. This process is called ELECTRONIC FUNDS TRANSFER ( EFT ).

Here we are going o discuss about the terminals through which EFT take place and
various aspects of EFT, including how it works and what are the benefits of dealing with money in
this way.

1.1 ELECTRONIC TRANSFER OF FUNDS

Although we have not eliminated money altogether, millions of rupees are moved daily
from one account to another using computers and telecommunications without any currency

Electronic funds transfer or EFT refers to the computer-based systems used to perform financial
transactions electronically.
The term is used for a number of different concepts:
• cardholder-initiated transactions, where a cardholder makes use of a payment card
• electronic payments by businesses, including salary payments
• electronic cheque clearing

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1.2 CARD-BASED EFT

Credit cards
EFT may be initiated by a cardholder when a payment card such as a credit card or debit card is
used. This may take place at an automated teller machine (ATM) or point of sale (POS), or when
the card is not present, which covers cards used for mail order, telephone order and internet
purchases.
Card-based EFT transactions are often covered by ISO the standard.
1.3 EFT can be segmented into 3
1. Banking and financial payment
 Large scale or whole sale payment
 Small scale or retail payment
 Home banking

2. Retailing payment
 Credit cards
 Private label credit/ Debit
3. Online electronic commerce payment(Token Based)
 Electronic cash
 Electronic cheque
 Smart card or debit card
1.4 ELECTRONIC TOKENS
 Electronic tokens are design as electronic analogues of various forms of payments
backed by a bank or financial institution. Simply stated electronic tokens are equivalent
to cash that is backed by a bank.
1.5 ELECTRONIC TOKENS ARE OF 3 TYPES
1. Cash or real time
Transactions are settled with the exchange of electronic currency. An example of online currency
exchange is electronic cash (e-cash)
2. Credit or Post paid
The transactions are settled within a specific period.

3. Debit or Prepaid information. Example of prepaid payment mechanism

Users pay in advance for the privilege of getting i is stored in smart cards and electronic purses
that store electronic money.

1.6 TRANSACTION TYPES

A number of transaction types may be performed, including the following:

• Sale: there the cardholder pays or return or service.
• Refund: where a merchant refunds an earlier payment made by a cardholder.
• Withdrawal: the cardholder withdraws funds from their account, e.g. from an ATM. The term
Cash Advance may also be used, typically when the funds are advanced by a merchant rather
than at an ATM.
• Deposit: where a cardholder deposits funds to their own account (typically at an ATM).
• Cash back: where a cardholder withdraws funds from their own account at the same time as
making a purchase.
• Inter-account transfer: transferring funds between linked accounts belonging to the same
cardholder
• Payment: transferring funds to a third party account

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• Inquiry: a transaction without financial impact, for instance balance inquiry, available funds
inquiry, linked accounts inquiry, or request for a statement of recent transactions on the
account.
• Administrative: this covers a variety of non-financial transactions including PIN change.
The transaction types offered depend on the terminal. An ATM would offer different transactions
from a POS terminal, for instance.

1.7 Authorization

EFT transactions require communication between a number of parties. When a card is used at a
merchant or ATM, the transaction is first routed to an acquirer, then through a number of networks
to the issuer where the cardholder's account is held.
A transaction may be authorized offline by any of these entities through a stand-in agreement.
Stand-in authorization may be used when a communication link is not available, or simply to save
communication cost or time. Stand-in is subject to the transaction amount being below agreed
limits. These limits are calculated based on the risk of authorizing a transaction offline, and thus
vary between merchants and card types. Offline transactions may be subject to other security
checks such as checking the card number against a 'hotcard' (stolen card) list, velocity checks
(limiting the number of offline transactions allowed by a cardholder) and random online
authorization.
A transaction may be authorized via a pre-authorization step, where the merchant requests the
issuer to reserve an amount on the cardholder's account for a specific time, followed by completion,
where the merchant requests an amount blocked earlier with a pre-authorization. This transaction
flow in two steps is often used in businesses such as hotels and car rental where the final amount is
not known, and the pre-authorization is made based on an estimated amount. Completion may form
part of a settlement process, typically performed at the end of the day when the day's completed
transactions are submitted.

1.7 Authentication

EFT transactions may be accompanied by methods to authenticate the card and the
cardholder. The merchant may manually verify the cardholder's signature, or the cardholder's
Personal identification number (PIN) may be sent online in an encrypted form for validation by the
,
card issuer. Other information may be included in the transaction some of which is not visible to
the cardholder (for instance magnetic stripe data), and some of which may be requested from the
cardholder (for instance the cardholder's address or the CVV2 value printed on the card).
EMV cards are smartcard-based payment cards, where the smartcard technology allows for a
number of enhanced authentication measures .
1.8 BENEFITS OF EFT

EFTs allow a company to pay or collect corporate obligations, and exchange payables and
receivables information electronically. Settlement of funds takes place among all parties on an
agreed upon date.
EFTs are becoming a significant factor in day to day commercial transactions. Both public
and private sectors have recognized that the electronic payment and receipt of funds offers
significant advantages over conventional processing techniques. Consequently, government and
business have increasingly implemented EFTs as a means to reduce costs and paperwork —
improving operating efficiency — and to better control their receivables and payables.

1.9 DISADVANTAGES OF EFT:

Though EFT created a new era in fund transfer, it has some disadvantages also. There
are chances of fraud transactions if the EFT is not well protected. EFT fund transfer may not be
effective all the time because of the failure in technology. It is possible to track the individuals who
uses EFT ,this in turn affect the privacy of the individuals .Since EFT is fully controlled by a
computer based system there is no scope for human reasoning and in turn reasoning.

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1. Computers: Technology, applications, and social implications:-

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