Let's look at the role of the major parties involved in an electronic payment: payor, payee, the respective financial institutions and the payments system.
is the party that makes the payment. The payee
is the party that receives the payment. The payor uses a payments 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, including the federal government, use direct deposit
to pay employees. In addition, 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 2006, Fedwire handled a daily volume of 532,292 transactions and average transactions of $2.281 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. Through December 2007, CHIPS handled more than 347,000 payments a day worth a combined value of over $485 billion.
If you are a business owner, you can make tax payments to the U.S. Internal Revenue Service with its Electronic Federal Tax Payment System (EFTPS OnLine
). If you are filing an individual income tax return, you can use the IRS's e-file
program and submit a tax payment electronically. Most state governments allow you to file electronic tax returns and remit payments using EFT.