The EFTA

You can’t have healthy commerce without trust, especially in e-commerce where consumers are expected to send money and private information over electronic channels to organizations they don’t really know much about. Laws and regulations can help build that trust by giving consumers some recourse when they feel like they’ve been scammed.

Many merchants already have some familiarity with the laws concerning credit card transactions, but it’s also important to understand laws that cover other types of payments, like the Electronic Fund Transfer Act. What is the Electronic Fund Transfer Act, and how does it protect consumers from fraud?

You might already know about the Fair Credit Billing Act, the 1974 law that essentially created the chargeback process.

As merchants and consumers explore alternatives to credit card transactions—which can be costly for both parties—the other laws that govern payments take on greater relevance.

One of the most significant of these is the Electronic Fund Transfer Act, which covers a wide range of transaction processes that underpin many alternative payment systems.

Fraud targets every type of payment method, not just credit cards. While merchants may be able to reduce their chargeback rates by steering customers toward payment methods that don’t involve credit cards, most platforms do allow users some way to dispute a transaction if fraud is involved—either from a third party or the merchant.

These disputes might not get you in hot water with your acquirer or the card networks, but they can still be costly, time-consuming, and detrimental to your customer relationships.

In order to adequately protect yourself from disputes of any stripe, you need to be familiar with laws such as the Electronic Fund Transfer Act.

What Is the Electronic Fund Transfer Act?

The EFTA became Federal law in the US in 1978 and was implemented by the Federal Reserve Board as Regulation E. Following the passage of the Dodd-Frank Act in 2011, it was placed under the auspices of the Consumer Financial Protection Bureau.

Just as the Fair Credit Billing Act’s creation was spurred on by the rise of credit cards, the EFTA was enacted because of the increasing use of automated teller machines.

The law was intended to protect consumers from financial loss due to lost or stolen cards, and it regulates several aspects of the bank-to-customer relationship as it pertains to electronic payments. Later amendments to the EFTA updated it to account for newer financial products such as prepaid debit cards.

Generally speaking, the EFTA covers unauthorized transactions in which funds are transferred directly from the consumer’s account to the recipient’s electronically. This would include the following:

• ATM withdrawals
• ACH payments
• Debit card transactions
• Direct deposits
• Point-of-sale transactions
• Phone and online payments
• Electronic check conversions
• Pre-authorized bank withdrawals

Per the EFTA, consumers must report an erroneous or fraudulent transaction within 60 days. They may be asked to furnish additional documentation or details regarding the issue, which must take place within ten business days of the request.

Once a dispute is received, the financial institution has 45 days to investigate it, with an extended time frame allowed for new customer accounts. If the financial institution disagrees with the consumer’s claim, they must provide the consumer with an explanation (and, if requested, any documents used in the investigation). If the financial institution determines that theft or error did occur, they must credit the customer’s account.

The EFTA limits consumer liability to $50 if they file a dispute within two business days of the unauthorized transaction, or $500 if they file within three to 59 days. If they report a lost or stolen card before any unauthorized transactions are placed on it, they are not liable for any charges at all.

Merchant disputes involving defective or undelivered goods are not covered under the EFTA. Because of this, EFTA disputes are less likely to be exploited as a vehicle for friendly fraud. Nevertheless, merchants should always carefully research and analyze these disputes. Even if they can’t be challenged, it is vital to understand where your disputes are coming from and why they are happening.

What Obligations Do Financial Institutions Have Under the Electronic Fund Transfer Act?

In addition to remedying payment disputes, financial institutions are also required to disclose certain things to their customers under the EFTA:

• Information about their liability for unauthorized transactions
• Instructions on how to file a dispute for an unauthorized or erroneous transaction
• What types of transactions the customer is allowed to make, along with any fees or limitations associated with them
• What rights the consumer has to receive periodic statements, purchase receipts, and other information related to their account
• When and under what circumstances the financial institution will share the customer’s account information with third parties

The EFTA also established the following regulations for financial institutions:

• Debit cards cannot be issued without the customer’s consent
• Overdraft protection fees cannot be charged without the customer’s consent
• Limits must be placed on how much cash the customer can withdraw from their account within a 24-hour period
• Financial institutions must cut off recurring payments if the customer requests it at least three days before the scheduled date of the next payment

Finally, the EFTA prohibits creditors from requiring that customers use electronic payment methods. They can offer these as an option, but a non-electronic alternative must be provided as well. Employers are allowed to mandate the use of direct deposit for paying wages, but employees retain the right to choose which bank and account will receive the direct deposit funds.

Conclusion

One notable upside to EFTA disputes is that they don’t involve the credit card networks, which means they aren’t tracked and monitored, and there is no threat of remediation programs or account closure if you experience a high rate of fund transfer reversals.

However, this may not remain the case forever, especially if payments based on direct fund transfers begin to cut into credit cards’ market share. The payments industry has a vested interest in keeping fraud and dispute levels low, and merchants should always be proactive about fighting fraud and trying to resolve customer complaints directly.

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