Electronic Fund Transfer Act (EFTA)What Merchants Need to Know to Remain Compliant

How Does the Electronic Fund Transfer Act (EFTA) Protect Consumers From Fraud?

As digital payments began gaining popularity in the late 20th Century, the need for new consumer protections that were responsive to digital finances became increasingly important. In response to the growing demand, and to ensure the safety of consumers who utilize electronic banking methods, Congress enacted The Electronic Funds Transfer Act, or EFTA.

The EFTA serves as a comprehensive regulatory framework for electronic fund transfers. It applies to a wide range of transactions, including online bill payments, direct deposits, and point-of-sale transactions. This legislation aims to protect consumers by mandating transparency, accountability, and security measures from financial institutions involved in electronic banking.

What is the EFTA?

Electronic Fund Transfer Act

[noun]/ə • lek • trän • ik • fənd • trans • fər • akt/

The Electronic Fund Transfer Act is a piece of US legislation that requires banks to provide certain information to customers regarding electronic fund transfers (EFTs). It also regulates the way banks must respond to consumer complaints and sets limits on liability for lost or stolen debit cards.

The EFTA was first enacted in 1978. You can read the full text of the EFTA here. However, to give you a basic overview of the legislation and what it entails:

Like the Fair Credit Billing Act that came before it, the EFTA guarantees consumers’ financial rights under federal law. But, while the FCBA applied to credit cards, the EFTA was designed to safeguard the use of electronic transfers.

The legislation was adopted as a direct response to the increased use of Automated Teller Machines (ATMs), but its preview is not limited to ATM withdrawals or deposits. Other transaction types protected by the EFTA include:

• Direct deposits
• Automatic Clearinghouse (or ACH) systems
• Remittance transfers
• Point-of-sale (POS) terminals
• Transfers or payments initiated through a telephone
• Remote banking
• Bill-payment plans involving recurring transfers

The EFTA is one of several laws impacting the way in which chargebacks are managed. Check out a more comprehensive roundup of different chargeback laws below:

Learn more about chargeback laws

What Does the EFTA Do?

In a nutshell, the Electronic Fund Transfer Act sets parameters for the fair use of electronic fund transfers.

The mandate requires transparency from financial institutions concerning electronic transfers. It also limits consumer liability for unauthorized transactions. The aim is to ensure that financial institutions do not take advantage of consumers using ATMs or debit cards.

More specifically, the EFTA:

• Requires financial institutions to provide customers with terms and conditions for funds transfers.
• Mandates the obtaining of authorization, in writing, from consumers prior to the transfer arrangements.
• Guarantees consumers the right to select which financial institution(s) will receive an electronic payment.
• Prohibits banks from issuing debit cards without the customer’s consent.
• Prohibits a creditor or lender from requiring a consumer to repay a loan or other credit by electronic fund transfer (in most situations).

The EFTA has been amended multiple times since its inception. It now covers areas that weren’t necessary before, such as prepaid card usage and overdraft fees for ATMs.

What Payments are Eligible for EFTA Protection?

The Electronic Fund Transfer Act (EFTA) guards consumers from unauthorized electronic fund transfers (EFTs). It also outlines conditions for financial remedies, like reimbursement for illicitly transferred funds, provided account holders respond in a timely manner.

To qualify, the transaction in question must:

Be an Electronic Fund Transfer

The EFTA doesn't cover transfers made using checks or other paper instruments. It also doesn't apply to transfers between businesses or financial institutions, including wire transfers.

Also, transfers made for buying or selling securities or commodities are not covered. The same applies to transfers within a financial institution under an agreement with the consumer.

Be “Unauthorized”

To be considered “unauthorized,” the transfer must be made by someone other than the consumer without the authority to make the transfer, and the consumer shouldn't receive any benefit from the transaction.

Important caveats to this rule include:

• If a consumer intentionally grants access to their account (e.g., sharing an ATM card or access code), the EFT isn't considered unauthorized. If the relationship ends, the consumer must inform the bank that the person's authority has been revoked for EFTA protection to apply.
• The EFTA now differentiates between intentional access and access obtained through fraud or robbery. For instance, a consumer who shares their PIN with someone impersonating a bank representative is still protected.
• EFTs initiated by the consumer or the financial institution for fraudulent purposes are not considered unauthorized (more on this below).

Be Made From an Individual (Non-Commercial) Account

The EFTA applies to accounts used primarily for personal, family, or household purposes. It does not typically apply to business or commercial purposes.

The term "account" is broadly defined, including not only traditional savings and checking accounts, but also accounts that hold personal assets.

Understanding the EFTA's scope and limitations can help consumers protect themselves from substantial financial loss due to unauthorized electronic fund transfers. Consumers can take advantage of the safeguards provided by this legislation by acting quickly and adhering to the EFTA's provisions.

The Bank’s Responsibilities Under the EFTA

The EFTA mandates that financial service providers disclose certain information to their customers in regards to electronic transfers. These include:

• The types of transfers the customer can make, along with any associated fees or limitations.
• Contact information for whomever should be notified in the event of an unauthorized transaction.
• Summaries of both the customer’s and the bank's liabilities regarding unauthorized transactions and transfers.
• A summary of the customer’s rights, including the right to receive periodic statements and purchase receipts.
• When and why an institution will share the customer’s account information with a third party.
• Information on how to report an error or request more information, and the time limits for doing so.

The Act also governs the way financial institutions may assign liability in case a customer’s card is lost or stolen. For merchants, this may be the most important aspect of the mandate.

Why Was the EFTA Necessary?

Before the EFTA, there was a lack of clear regulations and consumer protections for electronic transactions. This created uncertainty for merchants and consumers, which could have resulted in diminished trust in electronic payment systems.

The EFTA established a legal framework that defined the rights and responsibilities of all parties involved in electronic transactions, including merchants. A few key reasons why the EFTA was necessary include:

Essentially, the EFTA builds on earlier laws to both protect consumers and also ensure confidence in electronic payments. It provides a regulatory framework that promotes consumer trust and improves overall transactional integrity. 

How are “Unauthorized” Transactions Handled Under the EFTA?

As mentioned above, the Electronic Fund Transfer Act grants consumers specific rights if their debit card is lost or stolen, or if someone withdraws money from their account without permission. The customer may be liable for part or all of the contested amount. However, the specific amount of liability they hold depends on the situation.

To remain compliant, financial institutions must give customers 60 days to report an unauthorized transaction. This period starts the same day on which the bank statement containing the error was issued. If a debit cardholder fails to report the error within that 60-day timeframe, the bank is under no obligation to investigate the claim.

The liability the customer holds for the unauthorized transaction depends on when it is reported. If the bank is notified within 48 hours of a debit card fraud incident, then the cardholder can only be held responsible for a maximum of $50. That limit increases to $500 if reported between three and 60 days after the incident.

Here’s how that liability breaks down:

Unauthorized transfers
from a lost or stolen debit card

Time Frame	Max. Cardholder Liability
Reported less than 2 business days after issuance of the statement showing the fraudulent charge.	No more than $50
More than 2 business days, but less than 60 calendar days, after issuance of the statement showing the fraudulent charge.	No more than $500
More than 60 calendar days after issuance of the statement showing the fraudulent charge.	Unlimited

Unauthorized transfer(s)
not involving loss or theft of a debit card

Time Frame	Max. Cardholder Liability
Less than 60 calendar days after issuance of the statement showing the fraudulent charge.	$0
More than 60 calendar days after issuance of the statement showing the fraudulent charge.	Unlimited

The rules seem straightforward. However, the setup can lead to some confusing situations.

The 60-day window addresses legal liability, for example. There is no absolute legal deadline for reporting an error, though. While financial institutions are under no legal obligation to accept claims after 60 days, many will shield cardholders from responsibility with “zero liability” arrangements.

Responsibilities & Dispute Best Practices Under the EFTA

Filing transaction disputes is a consumer right, as laid out in the Electronic Fund Transfer Act. If a consumer has a valid reason to dispute a recent purchase, they can find detailed instructions in our recent post about how to dispute a charge.

Learn how to dispute a charge

That said, both consumers and merchants are impacted by EFTA guidelines. While the ruleset primarily focuses on the responsibilities of financial institutions and consumers, merchants also play a role in handling disputes. And, more often than not, merchants bear the brunt of the financial burden.

In preparation for any dispute involving an electronic fund transfer, merchants should follow these best practices:

Merchants do not directly handle the dispute process under the EFTA. Still, they play an essential role in facilitating the resolution by cooperating with consumers and financial institutions, providing transaction information, and adhering to the financial institution's decision. For more information on the merchant’s end of the dispute process, refer to our main article on chargeback management: 

Learn more about chargeback management

Is the EFTA Enough?

As we mentioned, the regulations for electronic fund transfers have evolved. The law will undoubtedly continue to change in the future. Most card networks and issuers already provide consumer fraud protections stronger than those legally required under the law. For instance, many banks offer zero liability, regardless of the time frame.

That said, the Electronic Fund Transfer Act was enacted 45 years ago. That was long before the internet, eCommerce, and in-app purchasing were considerations. Even with updates, the EFTA still fails to address abuse due to tactics like friendly fraud, family fraud, and cyber shoplifting.

The chargeback system is an important safeguard for consumers. It works well when used as intended. To effectively protect both consumers and merchants from fraud, however, the payments space needs a framework that’s more comprehensive and responsive than the EFTA.