Electronic Funds Transfer - Financial Management

The previous discussion of methods to speed up collections and slow disbursements assumes that virtually all transactions involve the transfer of paper (checks) between the payer and the payee. These methods to control collections and disbursements are designed to reduce the float involved in financial transactions. In a sense, the total float in the financial system can be viewed as a measure of inefficiency in the financial system. In an idealized world, the total float would be reduced to zero. Payments would be made and received as usable funds instantaneously.

Although the financial system has a long way to go before this ideal is realized, in recent years, tremendous progress has been made.

Many consumers now have automatic teller cards that give them access to cash 24 hours a day, 7 days a week. In addition, banking customers can use automatic tellers to transfer funds between accounts. Special credit cards, called “debit cards,” are used by some consumers. When a debit card is used, funds are transferred from the consumer’s bank account electronically to the account of the retailer. The retailer no longer must be concerned whether a check will be good when it is deposited. Increasingly, small and large businesses are using microcomputer links to manipulate funds between interest-bearing accounts and non-interest-bearing disbursement accounts.

In addition to ATM and debit card transactions, numerous other types of financial transactions are handled electronically. For example, many companies offer direct deposit of payroll checks into their employees’ checking accounts. Likewise, the U.S. government offers direct deposit of various types of transfer payments (e.g., social security) into recipients’ bank accounts. Also, most major banks offer automatic bill payment services, whereby customers authorize the bank to periodically transfer funds electronically from their accounts to pay bills, such as mortgages, car loans, and utilities.

Large payments can be made by wire transfers or through an automated clearinghouse. Automated clearinghouse (ACH) systems are computer-based alternatives to the papercheck collection and clearing system. The ACH sorts checklike electronic images and exchanges electronic records of payment and receipt. Although acceptance of electronic checking was initially slow, growth has increased dramatically in recent years. Electronic funds transfer (EFT) systems account for less than 1 percent of the number of all payments in the United States, but they account for more than 80 percent of the value of payments.

EFT mechanisms are profoundly changing the nature of the cash management function. Although paper checks, with their associated mail and processing float, will not disappear completely for some time (if ever), as increased volumes of payments are made electronically, the importance of developing elaborate mechanisms to manage float will be greatly reduced. Increased reliance on EFT as the mechanism for payment will free up some of the cash invested in accounts receivable for more productive uses in a firm. Contemporary financial managers will be challenged in the years ahead to stay current with a fast-changing, high-technology system of receiving payments and making disbursements.

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