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This article is authored by Akash Krishnan, a law student from ICFAI Law School, Hyderabad. It discusses in detail the Electronic Fund Transfer System, its growth, different forms of electronic funds transfer and the procedural guidelines governing these transactions in India.

This article has been published by Diganth Raj Sehgal.

Introduction

The landscape of shopping has changed on a global level in the last decade. What once was limited to physical transactions between two individuals, now seems a distant memory with the advent of online shopping. How do you make payments for these online purchases? What is the meaning of going cashless and thriving in a cashless economy? How does the mere swiping of cards in one part of the world ensure a secure payment to someone sitting on the opposite end of the world? The answer to all these questions is the concept of Electronic Fund Transfer.

In simple words, electronic funds transfer can be defined as a system of exchange wherein, money is transferred from the account of one person to another. This system uses a secure network built around the internet to ensure that the transactions are completed in a safe environment whilst ensuring the privacy of the transacting parties and the amount involved in the transaction. In today’s dynamic world, one could say that the electronic funds transfer system has increased the ease of doing business globally. Now that we have a fair idea about what we are dealing with, let us try and understand this concept in detail.

Electronic funds transfer

In earlier times, if one had to send money to someone for a transaction, the preferred modes were issuing cheques and other negotiable instruments or visiting the banks and making the transactions through the banking system with the help of the bank employees. Both these processes ensured the creation of a formal record of the transaction, thereby creating a sense of security and trust between the transacting parties, something that was absent in the cases of cash-based transactions.

An electronic funds transfer system is built around the use of the internet to carry out transactions in the digital world. What is important is that even though it is a transaction that is carried out by the parties directly, it creates a formal record of the transactions. The added advantage herein is that the time that was spent in issuing different negotiable instruments and encashing them or visiting the banks for carrying out transactions, is now saved. All electronic funds transfer transactions can happen at the tap of a finger.

Due to these factors, it has become the preferred form of transactions worldwide and with the increase in its popularity, the former system of transactions that was predominantly based on negotiable instruments have been side-tracked.

Common uses of electronic funds transfer

Using credit/debit cards

When we use our credit and debit cards to make payments physically at retail stores or to make payments for online transactions, the money from our account is electronically transferred to the account of the seller. This form of transaction is widely used both nationally and internationally. According to statistics, in 2020, the combined transactions using Visa, MasterCard etc, accumulated a total of 368 billion transactions worldwide.

Online bill payment

The bill payment system in the country has been revolutionised over the past few years with the advent of UPI systems and online bill payment platforms like Google Pay, PhonePe, BHIM, BharatPe, Paytm etc. According to statistics, India recorded over 11 billion UPI transactions in 2019. The total amount of money that was being spent through UPI transactions in India was recorded to be $373 billion for the year 2020.

Direct debit

In this form of transaction, the cardholder allows the bank to automatically debit the money from the account in accordance with the timeline for payment. The bank, as and when the bills or loan amount becomes due, debits the amount and credits it to the appropriate account.

Direct deposit

In this form of transaction, the salaries of individuals are directly credited into their bank accounts from the account of the employer. The cost and time of extra documentation, issuing and depositing cheques is saved and the money is directly transferred electronically.

International transactions

When an individual is buying products on online e-commerce platforms that do not operate from India, online payment companies like PayPal ensure that the safe and secure transfer of money from the account of the buyer located in India to the account of a retailer located in any foreign country. This is also applicable to businesses in cases of import and export of goods wherein the payment for such imports/exports are made via online transactions.

Benefits of electronic funds transfer

There are multiple benefits associated with the use of electronic funds transfer. Some of these benefits have been enumerated below:

  1. The transactions occur at a fast pace and the transfer of money between the parties is completed within a matter of seconds, irrespective of the location of the transacting parties.
  2. There is minimum human intervention involved in the transaction, i.e., one does not have to wait for approvals from the banks for conducting online transactions.
  3. It is a time-efficient process.
  4. The risks of forgery that plagued the era of negotiable instruments is avoided.

Forms of electronic funds transfer

Real Time Gross Settlement

Introduction 

The RTGS system was introduced in India in the year 2004 and soon after its introduction, it witnessed over 81 million transactions in 2014 itself. This number has significantly risen over the years and the total number of RTGS transactions that occurred in 2021 stands at about 159 million (as of October 2021). Due to its immense use, the RBI in October 2020 announced that RTGS transactions would be operational 24x7x365 from December 14th 2020. During its launch, there were only 4 banks that facilitated RTGS transactions. This number has now risen to over 237 participating banks that facilitate RTGS transactions.

Meaning 

The Real Time Gross Settlement (RTGS) mechanism is one of the most prevalent forms of online transactions. In this system, money and securities held in a Demat form can be transferred from one bank to another in real-time and on a gross basis. The meaning of the term ‘real time’ is that there is no waiting period involved in the transaction and the amount that is debited from one account is credited to the other account at the same time. The meaning of the term ‘gross settlement’ is that each transaction is settled on an individual level, i.e., the system does not wait for multiple transactions to be made from one account in a day and then settle each transaction together, instead, it settles each transaction individually irrespective of the number of transactions made in a day.

Transaction limits and charges

The minimum amount that can be transferred by using RTGS is ₹2 lakhs. There is no upper limit for such transactions.

There is no processing charge that is levied for RTGS Transactions. However, banks may charge a certain sum of money on outward transactions, i.e., an amount less than ₹24.5 for transactions between ₹2 lakh and ₹5 lakh and an amount less than ₹50 for transactions above ₹5 lakhs.   

National Electronic Funds Transfer

The National Electronic Funds Transfer (NEFT) system was established in 2005 to facilitate one-to-one transactions between individuals at a quicker rate. Under this system, individuals, firms and corporates can transfer money from one account to another, provided that both the banks involved should be participating under the National Electronic Funds Transfer Scheme. The RBI announced that National Electronic Funds Transfer transactions will be available on a 24x7x365 basis from December 16th 2019.  

As of now, there are over 247 participating banks in the National Electronic Funds Transfer network and according to statistics, in October 2021 itself, there were over 7 lakh National Electronic Funds Transfer transactions amounting to a total value of over 50 crores.

Prerequisites for national electronic funds transfer transactions

  • The banks of the sender and recipient of the money should be part of the National Electronic Funds Transfer network.
  • The sender should have access to the account details of the recipient and will have to add the recipient as a Beneficiary under his National Electronic Funds Transfer network.
  • To add an individual as a Beneficiary, the account number, account type, name of the recipient, IFSC code of recipient’s bank etc should be known to the sender.

Transactions limits and charges

National Electronic Funds Transfer transactions do not have an upper or lower ceiling, i.e., any amount of money can be transferred by the sender to the recipient.

There are no charges levied on inward transactions. However, for outward transactions, the following maximum charges can be levied by the participating banks:

  1. For transactions up to ₹10,000: ₹2.50 + GST;
  2. For transactions between ₹10,000-₹1,00,000: ₹5 + GST;
  3. For transactions between ₹1,00,000-₹2,00,000: ₹15 + GST;
  4. For transactions above ₹2,00,000: ₹25 + GST.

Immediate Payment Service

The Immediate Payment Service (IMPS) is a transaction mechanism that was launched by the National Payments Corporation of India in association with the Reserve Bank of India in the year 2010. This system was initiated with 4 participating banks and as of now, it has over 150 participating banks. Through this system, an individual can transfer funds through both net banking and mobile banking.

This system also follows an instant payment mechanism, i.e., there is no waiting time involved. It is available on a 24x7x365 basis. The banks are allowed to levy certain amounts as transaction charges and the option to determine the transaction charge is given to each individual participating bank.

Plastic money

The term plastic money refers to the use of plastic cards that are issued by banks for making both online and physical transactions. Banks issue the following types of cards for transaction purposes.

Credit card

This card allows the user to make transactions on credit, i.e., the bank pays the money upfront to the recipient of the transactions and then at the end of every credit cycle, the user has to repay the amount of money that he has spent on credit. The mode of repayment could also be on an instalment basis. The credit card schemes vary from bank to bank and individuals with higher income are issued credit cards with a higher credit facility compared to individuals with a lower income.

Debit card

These are standard issued cards by the bank by which the user can withdraw money from his account or make payments using the amount available in his account.

Co-branded cards

Sometimes banks issue specialised cards to their customers. These cards are formed through an agreement between the bank and other entities wherein the offers of the affiliate entities can be availed at a lower price by the users transacting with such cards.

Electronic payment systems

Electronic payment systems play a big role in the online transactions that happen on a day-to-day basis globally. These methods are on the verge of transforming the economy of the entire world into a cashless economy. Several payment methods are used under this system. These methods have been discussed below.

Digital cheques

Digital cheques are similar to paper cheques except for the fact that they are issued in a digital environment. These electronically signed negotiable instruments are used by transacting parties to settle online transactions. These cheques are electronically secured by the banks involved in the transactions. They are easy to use and bypass the risks of failure/delay in the delivery of cheques.

Electronic cash

This term refers to the daily transactions that individuals undertake over UPI platforms like Google Pay, Paytm etc. Money from the account of the user is digitally transferred to the account of the recipient through registered phone numbers, QR code scanners etc.

Electronic wallets

E-wallets have gained popularity in recent times. Several platforms like Paytm, PhonePe, Airtel Money, Amazon Pay etc allow the users to create digital wallets and store money in these wallets. Users can then make transactions using the money available in these digital wallets directly.

Electronic Funds Transfer System Procedural Guidelines

The RBI in 2005 had introduced guidelines for the use of the electronic funds transfer system. Some of the relevant features of these guidelines have been discussed below.

Participants

The guidelines provide that if any entity wants to become a participant of any of the online banking systems, i.e., RTGS, National Electronic Funds Transfer, IMPS etc, the entity has to fulfil the following eligibility criterion:

  1. It should be a bank or a financial institution.
  2. It should have attained and continues to comply with capital adequacy norms.
  3. It is willing and able to comply with the technical operational requirements of the  electronic funds transfer system.
  4. It has to be approved by the RBI as eligible to maintain a settlement account with it.

Parties to the electronic funds transfer system

There following are the 6 parties of the electronic funds transfer system:

  1. The sending bank: The bank through which the user initiates the transaction.
  2. The sending service branch: An office that receives the request to make a transaction and send the same for processing.
  3. The sending electronic funds transfer centre: An office wherein the money that is being sent is processed for debiting from the sender bank.
  4. The receiving electronic funds transfer centre: An office wherein the money that is being received is processed for credit to the recipient bank.  
  5. The receiving electronic funds transfer branch: An office that receives the processed transactions and ensures their execution in a timely manner.
  6. The receiving bank: The bank which receives the payment sent by the sending bank and deposits the same into the account of the recipient.  

Inter-banks fund settlement

Every participant entity has to open and maintain a settlement account for settling the payment obligations arising from the electronic funds transfer transactions. This account should be maintained at the respective electronic funds transfer centres.

General rights and obligations of the participating banks

  1. Comply with the procedural guidelines;
  2. Execute electronic funds transfer in a secure manner;
  3. Maintain the security, integrity and efficiency of the electronic funds transfer system.

Conclusion

Given the present circumstances and statistics, it can be concluded that the world is moving towards a cashless economy at a greater pace. Between online card-based transactions increasing the pace of business and the upcoming age of UPI transactions, the number of users that will shift to the electronic funds transfer systems will only increase in the coming times. Only time will tell how efficiently this system will transform the banking sectors worldwide.   

References

  1. https://www.ijert.org/a-comparative-analysis-of-electronic-transfer-systems-2
  2. https://cleartax.in/g/terms/electronic-fund-transfer-eft
  3. https://scripbox.com/pf/eft-payment/
  4. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2208110

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