This paper provides the solution to the problem of defining thermal efficiency for heat exchangers based on the second law of thermodynamics. It is shown that corresponding to each actual heat exchanger, there is an ideal heat exchanger that is a balanced counter-flow heat exchanger. The ideal heat exchanger has the same UA, the same arithmetic mean temperature difference, and the same cold to hot fluid inlet temperature ratio. The ideal heat exchanger’s heat capacity rates are equal to the minimum heat capacity rate of the actual heat exchanger. The ideal heat exchanger transfers the maximum amount of heat, equal to the product of UA and arithmetic mean temperature difference, and generates the minimum amount of entropy, making it the most efficient and least irreversible heat exchanger. The heat exchanger efficiency is defined as the ratio of the heat transferred in the actual heat exchanger to the heat that would be transferred in the ideal heat exchanger. The concept of heat exchanger efficiency provides a new way for the design and analysis of heat exchangers and heat exchanger networks.