EFT vs RTGS – Difference and Comparison

What is EFT?

Electronic Funds Transfer, commonly referred to as EFT, is the electronic exchange of money between accounts using computer-based systems. It enables individuals and businesses to conduct financial transactions quickly and efficiently without the need for paper documents or physical cash. EFT is widely used in various applications, from everyday consumer transactions to large-scale corporate payments.

How EFT Works

EFT transactions are facilitated through a network of banks, financial institutions, and payment processors. When a transaction is initiated, the information is transmitted electronically between the parties involved, through secure networks.

The funds are then transferred from the sender’s account to the recipient’s account, within a few business days. The process involves several steps, including authorization, authentication, and settlement, to ensure that transactions are completed accurately and securely.

Types of Electronic Funds Transfer

EFT encompasses a variety of transaction types, each serving different purposes and needs. Here are some of the most common forms of EFT:

Direct Deposit

Direct deposit is one of the most widely used forms of EFT. It allows employers to transfer employees’ salaries directly into their bank accounts. This eliminates the need for paper checks and ensures that funds are available to employees on payday. Direct deposit is also commonly used for government benefits, tax refunds, and other recurring payments.

Automated Clearing House (ACH) Transfers

ACH transfers are electronic payments made through the Automated Clearing House network. They are commonly used for bill payments, mortgage and loan payments, and recurring transactions. ACH transfers are generally slower than wire transfers but are more cost-effective and reliable for routine transactions.

Wire Transfers

Wire transfers are electronic transfers of funds between banks or financial institutions. They are used for large, urgent transactions that require immediate settlement. Wire transfers are faster than ACH transfers but may involve higher fees. They are commonly used for real estate transactions, international payments, and large corporate transfers.

Debit Card Transactions

Debit card transactions involve the electronic transfer of funds from a cardholder’s bank account to a merchant’s account. When a customer makes a purchase using a debit card, the transaction is processed electronically, and the funds are debited from the customer’s account in real time. Debit card transactions are convenient for everyday purchases and are widely accepted by retailers.

Electronic Bill Payment

Electronic bill payment allows consumers to pay bills electronically through their bank’s online platform or a third-party payment service. This method simplifies the bill payment process by eliminating the need for paper checks and mailing. Customers can schedule payments, set up recurring payments, and receive notifications when bills are due.

Electronic Checks (E-Checks)

E-checks are digital versions of paper checks that allow funds to be transferred electronically from a payer’s account to a payee’s account. E-checks are commonly used for online transactions and can be processed through the ACH network. They offer a convenient and secure way to make payments without the need for physical checks.

What is RTGS?

RTGS is a payment mechanism where funds are transferred from one bank to another on an individual transaction basis without netting debits with credits. Each transaction is processed individually and settled as soon as it is initiated, ensuring that the beneficiary receives the funds immediately. The system is called “real-time” because it processes transactions instantly, without any delay, and “gross” because transactions are settled individually rather than in batches.

Key Characteristics of RTGS

• Immediate Settlement: RTGS systems settle transactions instantly, allowing for quick fund transfers. This immediacy makes RTGS ideal for high-value and time-sensitive transactions.
• No Credit Risk: Since transactions are settled immediately, there is no credit risk involved. Funds are transferred directly between banks, eliminating the risk of one party defaulting.
• High Security: RTGS systems are highly secure, with multiple layers of authentication and encryption to protect against fraud and unauthorized access.
• Irrevocable Transactions: Once a transaction is processed through RTGS, it cannot be reversed. This ensures the finality and reliability of the payment process.

How RTGS Works

RTGS systems operate through central banks, which manage the transfer of funds between participating banks. Here’s how the process works:

Step-by-Step Process

1. Initiation: The customer or bank initiates a payment instruction through the RTGS system. This instruction contains details such as the amount to be transferred, the recipient’s bank account number, and the recipient’s bank name.
2. Validation: The originating bank validates the payment instruction to ensure that all details are correct and that the customer has sufficient funds in their account to cover the transaction.
3. Submission to Central Bank: Once validated, the payment instruction is submitted to the central bank’s RTGS system. The central bank acts as an intermediary, facilitating the transfer of funds between the participating banks.
4. Settlement: The central bank debits the amount from the originating bank’s account and credits it to the recipient bank’s account. This process is completed instantly, allowing for real-time settlement.
5. Confirmation: Both the originating and recipient banks receive confirmation of the transaction, and the recipient’s account is credited with the transferred funds.

Difference Between EFT and RTGS

EFT is a broad term encompassing various types of electronic payments, including direct deposits and wire transfers, and is generally used for smaller, routine transactions. EFT transactions are processed in batches, meaning they are not instant and may take a few hours to a couple of days to complete.

On the other hand, RTGS is specifically used for high-value transactions that need to be settled immediately. In RTGS, transactions are processed individually and in real-time, ensuring that funds are transferred instantly and without any delay.

Comparison Table Between EFT and RTGS

Parameters of Comparison	EFT (Electronic Funds Transfer)	RTGS (Real-Time Gross Settlement)
Definition	Electronic transfer of money between bank accounts.	Real-time, continuous settlement of funds individually.
Settlement Time	Typically batch-processed, may take several hours or days.	Real-time settlement, within minutes.
Transaction Amount	Generally used for smaller, routine transactions.	Suitable for large-value transactions.
Transaction Limit	Lower limits compared to RTGS.	No upper limit, but a minimum amount is required.
Availability	Available during bank working hours.	Available during bank working hours, sometimes extended.
Cost	Lower fees compared to RTGS.	Higher fees due to immediate processing.
Purpose	Everyday transactions like bill payments, salary deposits.	High-value transactions requiring immediate settlement.
Security	Secure but may have higher risk due to batch processing.	Highly secure due to immediate processing.
Reversal of Transactions	Possible, but may take time depending on bank policies.	Difficult to reverse due to real-time processing.
Processing Mode	Batch processing.	Individual transaction processing.