What Is an Automatic Transfer of Funds?

Definition and Example of an Automatic Transfer of Funds

An automatic transfer of funds is a banking arrangement wherein money is transferred electronically from one customer account to another. The customer may be the owner of both the source and destination accounts, or they can transfer funds to another person’s account.

Account holders can set up AFTs from savings to checking accounts for overdraft protection, holiday or vacation savings, or recurring monthly loan payments. The account holder approves AFTs in advance, allowing the bank to remove money from their account on the specified date.

• Alternate name: Automatic funds transfer
• Acronym: AFT

For example, a bank customer can schedule an automatic transfer from their checking account to their savings account every payday, or a parent may automatically move money into a child’s account every month.

How Does an Automatic Transfer of Funds Work?

Much like autopay, transfers are arranged in advance and occur automatically once they’re scheduled.

Many consumers use an automatic transfer of funds to budget and save money. To set one up, you will have to enroll and authorize the bank to move money from one account to another on your behalf.

To set up an automatic transfer of funds online, you would use your bank’s website to log into your account and then find the option to schedule an automatic transfer. You might arrange for money to be moved from your checking account to your savings account every payday, for example. The amount you chose can be a percentage of your paycheck or a predetermined dollar amount. The money automatically moves to your savings account once the transfer is established.

This is one example among several illustrating why account holders move money between accounts. Here are the most common situations in which someone might schedule an AFT:

• Saving and budgeting: Some banks offer Vacation Club or Christmas Club savings accounts as tools for customers to save. Account holders may use an AFT to contribute to these or another savings account regularly.
• Help a spouse or dependent: Parents can make regular deposits into a child’s bank account using an AFT, and spouses may use it to move money between their accounts.
  
• Credit or loan payments: If you have a credit card or a loan agreement issued by your bank, you can arrange a recurring AFT payment between your accounts.
• Bank-to-bank transfers: Customers use bank-to-bank transfers to pay loans, rent, or send money to an external account or person. To complete an AFT payment to another account at a U.S. financial institution, you will need the account information for both the source and destination account. Once this is completed, both accounts will be verified and linked so future AFTs can be scheduled.
• Retirement and investment accounts: An AFT may be used to send IRA payout distributions. Conversely, account holders can schedule a recurring automatic transfer of funds to contribute to an IRA, a 529 college savings plan, or another investment account.
• Sweep accounts or zero balance accounts (ZBAs): Companies with multiple subsidiaries use ZBAs or sweep accounts to manage payroll, petty cash, and other administrative needs. These accounts undergo an automatic sweep wherein all the funds are “swept” out of the ZBA into a master account regularly via an automatic transfer of funds.
  
• Fixed balance accounts (FBAs): Fixed balance accounts allow you to set up automatic transfers at a certain account balance. For example, you could set up your fixed-balance checking account to automatically transfer funds so that you never have more than, say, $5,000 in it. FBAs help with budgeting and security. When savings account interest rates are higher, they can help you maximize your interest earned, too.

Overdraft Protection

Overdraft protection does involve a transfer of funds, but the permissions, regulations, and fees surrounding it are entirely different. They are not scheduled in advance like AFTs.

Bank customers can set up a recurring transfer from savings to checking accounts to prevent overdrafts. Additionally, many banks offer an overdraft protection service, automatically transferring money from a savings or credit account to a checking account when the latter is about to be overdrawn. Customers usually opt in for this service and may still have to pay an overdraft fee. They may also be subject to fees for excessive withdrawals.