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Electronic services
While banks provide many of their small-business services through their branch networks, electronic services are gaining an edge due to the speed, reliability, and security of electronic transactions.
This topic explains the most common electronic payments systems used by financial institutions in the U.S. It also looks at some of the alternative payments systems and explains some of the basic terminology of electronic payments.
To begin, let's look at the role of the major parties involved in an electronic payment: payor, payee, the respective financial institutions, and the payment system.
The payor is the party that makes the payment. The payee is the party that receives the payment. The payor used a payment system to transfer funds, or remit payment, to the payee. Historically, a check is used to make payment. After the payee deposits the check, her bank and the payor's bank process the transaction. This process is called settlement.
When the payor's bank clears the funds, it debits the payor's account and credits the payee bank's account. The payee's bank, in turn, credits the payee's account.
Today, electronic data interchange (EDI) has replaced a great deal (but not all) of the check writing that has dominated the payments system. Most employers use direct deposit to pay employees and individuals increasingly use electronic funds transfer (EFT) in lieu of writing checks to pay their bills.
The Federal Reserve System's Regulation E safeguards the use of direct deposit and EFT. You can obtain a copy of Regulation E at the nearest Federal Reserve Bank, or contact your financial institution for more information.
The mechanics of using direct deposit or EFT are simple: the payee furnishes a nine-digit routing number to the payor. The routing number is also called the ABA number. An employee that wants his employer to directly deposit his pay to a bank account would furnish the routing number to his employer. For such periodic transactions as mortgage or auto loan payments, the payor directs his bank to debit his account and credit the lender's account using the routing number.
The most common payments system in the U.S. for clearing electronic transactions is the Automated Clearing House (ACH) system. ACH is used for making and receiving payments. The Electronic Payments Association (NACHA) supervises the use of the ACH system for electronic payments.
A wire transfer is similar to direct deposit and EFT. Wire transfers are often large sums of money exchanged between financial institutions. Often, wire transfers are used for handling electronic payments between countries.
The primary wire-transfer system used to make and receive payments between banks in the U.S. is the Fedwire Funds Transfer System, or Fedwire. Fedwire is a clearinghouse used by member banks of the Federal Reserve System. In 2005, Fedwire handled an average daily volume of 527,641 transactions and average daily transactions of $2.066 trillion. The magnitude and volume of transactions makes it clear that the Fedwire system is reliable and trustworthy.
An alternative to Fedwire for making wire transfers is the Clearing House Inter Bank Payment System (CHIPS). CHIPS is owned by member banks. For all of 2005, CHIPS handled an average daily volume of 284,787 transactions with an average daily value of over $1.394 trillion.
In addition to payroll services, businesses increasingly rely on electronic services to make tax payments. Among those taxes that your business can pay electronically are excise taxes, unemployment (FUTA) taxes, payroll taxes, and the federal income taxes you are required to withhold from an employee's pay.
To assist you in making estimated federal tax payments, the Internal Revenue Service launched its Electronic Federal Tax Payment System (EFTPS OnLine) in the third quarter of 2001.
Next Topic: Merchant services
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