How electronic payments work

National Electronic Fund Transfer (NEFT) and Electronic Clearing Systems (ECS) are both modes of electronic payments. But that is where the similarity ends. The two terms are often mixed up or not fully understood. Here's explaining the two routes of transferring funds online.

NEFT

Say, you owe your friend a good amount of money for booking flight tickets . Going to the ATM, drawing the cash, handing it over to your friend who in turn has to deposit it in her bank is an annoying exercise.

Instead, with your internet banking facilities, key in your friend's account and bank details, the amount to be transferred and sit back. Work's done and the maximum effort you've put in is to type the required details.

You have just executed an NEFT transaction. The NEFT system facilitates the transfer of funds from one account to another. Individuals or companies can use the NEFT system to move funds.

An amount as less as Rs 50 can be transferred through the system, and there is no maximum limit. Transfers cannot be made to overseas accounts except Nepal.

Contrary to popular belief, you don't require net-banking to use the NEFT system. Just walk into the bank with the cash and provide the required details. Here, however, only amounts of up to Rs 50,000 can be transferred.

In the NEFT system, transactions are bunched together and processed by a clearing centre operated by the Reserve Bank. Clearing is done every hour starting from nine in the morning and ending by seven. Saturdays have the last clearing at 1 pm.

This means that if you initiate a transaction at 11.08 in the morning, it will be up for clearance only at 12 noon. If you're on the receiving end of a transfer, you can usually expect a credit for transactions initiated up to 5 pm.

For those that were effected after 5 pm, amounts will be credited by some banks on the same day, but most definitely by the next day. Charges for making an NEFT transaction is a maximum of Rs 5 for the first Rs 1 lakh, Rs 15 from that till Rs 2 lakh and Rs 25 for amounts over Rs 2 lakh. Service tax is applicable on these amounts.

When there's talk of NEFT, there's also talk of RTGS. Expanding into Real Time Gross Settlement, RTGS differs from a NEFT transaction in that settlements between accounts are done on an individual basis.

They are not pooled and sorted. Amounts are credited into the receiver's account in a maximum of two hours. The starting amount for an RTGS transaction is Rs 2 lakh.

ECS

Let's move on to the next form of electronic payments. To illustrate, say you have a life insurance policy requiring a yearly premium of Rs 11, 220. To rid yourself of the danger that you forget the due date and skip a premium, you instruct your insurer to debit the premium from your account when it falls due.

That's a transaction under the ECS system. It is used by institutions to collect payments such as utility bills, insurance premia, loan instalments and so on or make payments such as interest and salaries.

Here, it isn't a one-to-one transaction as is the case with NEFT.

There's one institution which collects amounts from a number of accounts. When you use the system to make a payment, it is an ECS debit transaction and when you receive money it is an ECS credit transaction.

ECS debits and credits are initiated on your explicit instructions - it is necessary for the institution to collect the mandates. You can withdraw the ECS mandate at any time; a notice for it should be given at least two weeks in advance. You can also stipulate a maximum amount which can be debited from your account.

However, take care while giving the dates on which debits will be made from your account, making quite sure that there is sufficient money.

An ECS debit transaction falling through due to lack of funds on your part carries a fine. Given the range of dates for the various payments – phone, electricity, credit cards, insurance – and the single day on which salary is credited, managing ECS debits should be done carefully.

Charges for the ECS service are not regulated by the RBI. It is left entirely to the banks and institutions involved to levy fees and can therefore vary.

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