Automatic Transfer of Funds

What Is an Automatic Transfer of Funds?

An automatic transfer of funds is a standing banking arrangement whereby transfers between a customer's two (or more) accounts are made on a regular, periodic basis under specified conditions. Automatic transfers are executed without further instruction or action by the customer; a common way that automatic transfers are executed is through "sweep" instructions, whereby all excess funds in one account are swept into another account. The automatic transfer of funds is one core offering of both commercial and online banks.

How an Automatic Transfer of Funds Works

Automatic transfers are often used for the regular movement of funds from a checking account to a savings account. Automatic transfers may be used to transfer money between the accounts of two spouses, or between a parent and a child. Setting up automatic transfers to pay bills is a useful budgeting tool because they can be used for periodic equal payments, such as for mortgages or other loan payments.

Another common use of these transfers is for overdraft protection, whereby funds are moved from a higher-interest-earning account to cover payments due in another account.

Corporations with multiple subsidiaries will sometimes make use of a zero-balance account (ZBA). A ZBA often arranges for the automatic transfer of funds because it is a checking account in which a balance of zero is maintained. When funds are needed in the ZBA, the exact amount of money required is moved to the account through an automatic transfer of funds from a central, or master, account. 

Corporations also may use a ZBA if its employees have company credit or debit cards because it allows for greater control in regards to the distribution of company funds (along with limiting excess balances). A ZBA account can help ensure that managers pre-approve all activity on company debit/credit cards. After approval, an automatic transfer of funds from a master account is initiated in amounts just large enough to cover the charges presented.

Special Considerations

Amongst online banks, cybersecurity has become especially critical in order to prevent making electronic information vulnerable to damage or theft. When information is transferred across networks, such as during an automatic transfer of funds, cyberattacks may occur.

Cyberattacks can occur in a range of forms, include backdoor attacks, in which a thief exploits an alternate method of accessing a system; denial-of-service attacks, which prevent a rightful user from accessing a system; and direct-access attacks, includes bugs and viruses, which gain access to a system and copy its information and/or modify the system.