Electronically Fund Transfer vs Paper Check
Because checks are paper documents, there are more steps in completing a check-based transaction. Unlike currency, checks are not money, but are legal instruments instructing the bank to take money out of the check writer’s, or the payer’s account and give it to the payee of the check. Only then is the payment final.
Typically, the payee deposits or cashes the check at her bank. At the end of the day, the bank sends the check to a clearinghouse operated by the Federal Reserve or to a private clearinghouse, where both the payer’s and payee’s banks have accounts.
Clearing is the transfer of the check from the payee’s bank to the payer’s bank and the transfer of funds from the payer’s account to the payee’s account, and settlement is the actual adjustment of accounts that reflects the transaction, where the payer’s account is debited and the payee’s account is credited.
Electronic funds transfers (EFTs) are basically electronic checks that automatically debit the payer’s account and credit the payee’s account. Electronic fund transfers do not require clearinghouses because the routing information is contained in the electronic message.
The ACH Network is operated by the Federal Reserve and Electronic Payments Networks, and most banks use this network in the same way that they used clearinghouses — to exchange payment information. An ACH transaction consists of the account numbers of the payer, the payer’s bank, the payee’s bank, the account number of the payee, and the amount of the payment. An ACH transaction has the same basic type of information on the payer as a paper check with its bank routing number and the payer’s account number. It differs from the paper check in that it also has the payee’s bank routing number and the payee’s account number so it can be completed as a single transaction