Electronic Fund Transfer Act (EFTA)

February 4, 2022 | 8 min read

Electronic Fund Transfer Act

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

The Electronic Fund Transfer Act (EFTA, sometimes referred to as Regulation E) is a federal mandate aimed at financial institutions. The legislation was designed to safeguard consumers. However, it doesn’t offer much protection to merchants.

In this post, we’ll look at how the EFTA works. We’ll examine the timelines and liabilities, and see just how much impact it has on businesses that accept electronic payments.

What Is the Electronic Fund Transfer Act?

Electronic Fund Transfer Act (EFTA)

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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.

Electronic fund transfers, or EFTs, use digital or electronic methods to authorize and transfer funds from a customer's account. Modern consumers have come to depend on EFTs in a variety of everyday situations. However, this complex process requires careful regulation and oversight to ensure that consumers stay safe.

The EFTA was first enacted in 1978. It was adopted as a direct response to the increased use of Automated Teller Machines (ATMs). The mandate requires transparency from financial institutions concerning electronic transfers. It also limits consumer liability for unauthorized transactions.

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. Transaction types protected by the EFTA include:

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  • ATM withdrawals or deposits
  • 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

What Does the EFTA Do?

In a nutshell, the Electronic Fund Transfer Act sets parameters on the fair use of electronic fund transfers. It helps 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).

Financial service providers must also 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 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.

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.

Can Cardholders Dispute Electronic Fund Transfers?

The Electronic Fund Transfer Act guarantees consumers the right to dispute incorrect financial statements. It also plays a role in outlining how to resolve a dispute if the bank does not agree with a customer’s claim.

If a cardholder files a dispute, claiming that a charge was invalid, the bank will investigate the claim. If they feel it’s legitimate, they will initiate a chargeback and refund the customer.

For banks and consumers, the rules and procedures for filing a debit card chargeback differ from those used with credit card disputes. As a merchant, however, you’ll find the end result is essentially the same. In both cases, the transaction amount and any associated fees get forcibly taken from your account. You’ll also lose the purchased merchandise, and any shipping or stocking costs.

Each card network has its own regulations and protocols. These can change at any time.

Chargeback reason codes, for instance, differ from one card brand to another. Many are similar, but there are variations in terminology, verbiage, and definitions that can impact chargeback rules and processes. However, as a merchant, you generally face most of the same problems you do with credit card chargebacks.

How the EFTA Handles Unauthorized Transactions

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. 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 the cardholder fails to report the error within that 60-day deadline, the bank is under no obligation to investigate the claim.

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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:

Electronic Fund Transfer Act (EFTA)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

Electronic Fund Transfer Act (EFTA)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.

Banks have a lot of leeway in determining what they want to hold their customers liable for. They can choose to reimburse cardholders for any fraud incidents, even if the incident occured beyond the 60-day window required by law.

The bank effectively has no time limits on transaction disputes. In some situations, they can dispute an unauthorized transaction that occurred ten years earlier if they choose to do so.

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. Many banks offer zero liability, regardless of the time frame.

That said, the Electronic Fund Transfer Act was enacted 45 years ago. That 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.

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