In Banking, What Is a Third Party Transfer?

Within the banking industry, a third party transfer is a type of transaction that involves making out and depositing a payment into the account of a party other than the individual or entity who received the payment. This type of activity has been common in banking for many years and can be managed manually or using electronic transfer technology to complete. A third party transfer may involve the issuance of third party checks or even using online third party transfer protocols to manage tasks such a paying bills with the aid of a funds transfer.

One of the older approaches to this type of transfer involves the use of a check. In this scenario, a check is issued as a payment by a buyer to a seller. Instead of depositing the check into the seller's account, the seller chooses to endorse the check over to a third party, possibly as a means of settling an outstanding debt. Using the endorsement as authority, the bank of the third party accepts the check and applies the credit to the customer’s account. While the third party was not involved in the original transaction between the buyer and seller, that party does ultimately benefit from the transaction.

More recently, the ability to manage bill paying functions online have made it possible to use the same basic process of a third party transfer electronically. With this application, a bank customer can provide a bank with written authorization to honor requests for payment from specific creditors when and as they are presented. It is not unusual for the creditor to use a third party agency that manages financial transactions on behalf of that creditor to interact with the bank and complete the transfer of funds from the account at the bank to the bank of the creditor. This allows the creditors to present the bill electronically to the bank and have the payment process without any delays. An approach of this type can be used to manage everything from monthly utility bills to mortgage or car payments, or even other recurring expenses such as the payment or premiums on life insurance policies.

The key with a third party transfer is that authorization is provided to manage the transaction by introducing a third party into the process. In many cases, this means that rather than a client and vendor managing the transaction between themselves, the bank or other financial institution functions as the third party, using instructions provided by the client and vendor to manage the transactions seamlessly. Since transactions of this type can be documented and often completed quickly and easily, this approach has become increasingly common for not only business enterprises, but also for individual households who prefer to manage bill paying with as little effort as possible.