Online banking is the new paradigm of the banking industry. It has garnered tremendous support from the clients and banking officials alike.
With 57% of the world’s population having access to the internet, things have pretty much changed regarding the transfer of funds. With the antagonists turning into supporters, financial institutions, too, have started to revolutionize the banking sector.
Online payment systems are widely popular these days because of the hassle-free paperless transactions involved. Several countries are leveraging their banks to modify the older approach by introducing numerous online credit transfer methods.
ACH and NEFT are two of the many online credit transfer methods. Both allow a client to make or receive payments from the comfort of their home. People get confused that, since both of them are online banking methods, they are the same. However, there is a big difference between the two.
ACH vs NEFT
The main difference between ACH and NEFT is that an ACH transaction leads to a direct deduction of the money from the bank account without the approval of the client, whereas for the NEFT transaction, the consent of the client is a must.
ACH is the online credit transfer method where the transactions are automated. There is no requirement of paperwork or entering credit card details every time. NEFT is the online credit transfer method where money transfer from one bank to another takes place online. For this, both the banks must be NEFT enabled.
Comparison Table Between ACH and NEFT (in Tabular Form)
| Parameter of Comparison | ACH | NEFT |
|---|---|---|
| Definition | ACH is the online credit transfer system where fund-transfer from one bank or individual to another can take place swiftly, generally without approval for repetitive transactions from the client. There is no need to sign a check or other paper documents. | NEFT is the online credit transfer system where the money is transferred from one bank to another, generally after the request from the client. For this, both the banks must be NEFT enabled. |
| Advantages | ACH offers the following advantages : · Direct deposition of salary · Automatic payment of bills · Online purchase without entering credit card details again and again | NEFT offers the following advantages : · Effective transactions · Low processing charges · High dependability |
| Disadvantages | ACH has the following disadvantages : · The service providers have direct access to the client’s bank account · Money may be deducted from the account without prior notification | NEFT has the following disadvantages : · Highly technical for everyone to understand · Transactions may be risky |
| Limits on Transactions | ACH is generally preferred and allows the transfer of small funds. | With NEFT, there is no upper or lower limit on the number of funds to be transferred. |
| Security | ACH is a very safe method of online fund transfer since there is no need to enter banking details for every transaction. | NEFT is relatively less safe because hackers can easily hack the browser and transfer funds to their accounts. |
What is ACH?
The term ACH stands for Automated Clearing House. It is an online credit transfer method where money can be transferred from one bank account to another without entering sensitive bank details and issuing cheques.
It was first introduced in the USA in the late 1960s by the banks in California as a replacement for cheque payments. In India, it is better known as Electronic Clearing Service (ECS) and is managed by the RBI.
The process of an ACH transaction begins with an originator who initiates a transaction request to the ODFI (Originating Depository Financial Institution). The ODFI sends this request to the ACH, which routes it to the RDFI (Receiving Depository Financial Institution), which finally credits or debits the account of the beneficiary.
ACH offers advantages such as automatic payment of bills without the need for initiating the transaction. This means that a client does not need to remember when the next installment is due.
However, it also has disadvantages such as the deduction of money without any notification. This can lead to an overdraft fee if the account balance is lower than the transaction to be done.
What is NEFT?
The term NEFT stands for National Electronic Funds Transfer. It is an online credit transfer method where money can be transferred from one bank to another by entering the account details of the beneficiary.
It was introduced in India in November 2005 by the Institute for Development and Research in Banking Technology (IDRBT). Since then, RBI is the regulatory authority for NEFT enabled banks.
The process of online funds transfer using NEFT is very simple. The client just has to provide his account details and the account details of the beneficiary, and then select the mode of transfer as NEFT.
NEFT offers advantages such as the rapid settlement of transactions and high dependability. Also, the processing charges are low, and there is no limit on the number of funds to be transferred. However, there are certain disadvantages of NEFT, such as high technicality, which allows only a technologically sound client to carry out the functionalities.
Main Differences Between ACH and NEFT
- ACH is used to automatically transfer money online to any individual or service provider, whereas NEFT allows the transfer of money from one bank account to another.
- In ACH, money is automatically deducted from the account for frequent transactions such as monthly bills. On the other hand, in NEFT, the money is transferred only when the client manually approves the transaction.
- No notice is served before the deduction of money from the bank account in case of ACH, whereas the NEFT facility provides instant messages regarding the transaction.
- The bank details need not be entered every time in an ACH transaction, whereas NEFT necessitates filling the details every time.
- There is a limit on the number of funds that can be transferred using ACH, whereas there is no such limitation in the case of NEFT.
- ACH mode of online credit transfer is considered highly secure due to low instances of entering bank details. On the other hand, the NEFT mode is less secure due to the vulnerability of the browser application to potential hackers.
Conclusion
Online banking has revolutionized the credit sector. Different modes are available to transfer money, each with its own merits and losses. ACH, NEFT, and RTGS belong to the category of online payment modes. Some have limits on the threshold of transfer, while some do not.
The RBI is the apex body for all banking activities in India. It is also the regulator of the ACH, NEFT, and other facilities. On 16 December 2019 the RBI rolled out the 24*7 NEFT banking facility. This will enable online transactions on non-working days using the STP ( Straight Through Processing ) mode.
The financial organizations are trying their best to provide the people with the best facilities. It, however, depends upon the discretion of the people to use them safely, so that their financial security is protected from being breached.
References
- https://econpapers.repec.org/article/achjournl/y_3a2020_3aid_3a819.htm
- http://www.mecs-press.org/ijieeb/ijieeb-v7-n4/IJIEEB-V7-N4-5.pdf
- https://iiardpub.org/get/IJBFR/VOL.%205%20NO.%202%202019/AUTOMATED%20CLEARING%20SYSTEM.pdf