Electronic Fund Transfer Act

The Electronic Fund Transfer Act (EFTA) is a federal law enacted in 1978 to protect consumers when they use electronic means to manage their finances. Electronic fund transfers are defined as transactions that use computers, phones or magnetic strips to authorize a financial institution to credit or debit a customer’s account.

This includes the use of ATMs, debit cards, direct deposits, point of sale transactions, transfers initiated by phones and pre-authorized withdrawals from checking or savings accounts. Consumers typically use a card or pin number to initiate transfers from one account to another.

The EFTA includes provisions that allow consumers to challenge errors and have them corrected within a 45-day period with limited financial penalties. When errors occur, EFTA outlines requirements for banking institutions and consumers to follow. It also requires banks to provide certain information to consumers and defines how consumers can limit liability in the case of a lost or stolen card.

More than half the states in the United States have their own provisions regarding the EFTA, but in virtually every instance where there is conflict, the federal law takes precedent over state laws.

Types of Electronic Fund Transfers

Financial institutions offer a variety of services to make electronic banking more convenient.

The six most basic services that are protected under the EFTA are as follows:
  • ATM – enables virtually 24-hour access to make withdrawals or deposits. If the ATM is owned or operated by an institution other than your bank, you may be charged a fee. This charge must be disclosed at the time of transfer.
  • Direct Deposit – offered by most banks; allows you to preauthorize deposits (e.g. payroll checks or government benefits) or recurring bill payments (e.g. mortgages, insurance payments or utility bills). You have the right to stop preauthorized transfers at any given time, regardless of any opposing contract terms. To stop future automatic payments, notify your bank at least three days before the next scheduled transfer.
  • Pay-by-Phone – enables you to instruct and authorize your financial institution to make payments or transfer funds via telephone. Banks are required to confirm your identity by asking account-specific questions.
  • Internet – allows you to access your accounts through financial institutions’ web portals, enabling account monitoring, transfers and online bill payment.
  • Debit Card – issued by financial institutions; allows consumers to make purchases online or at a retail store or business. This does not include gift cards, store-value cards, credit cards and prepaid phone cards, which are excluded from the EFTA.
  • Electronic Check Conversion – enables a business to convert a paper check into an electronic payment by scanning the check and capturing the bank name, address, account number and routing number. After the paper check is scanned into an electronic payment, it becomes null and void.

EFT Service Providers and Consumer Protection Requirements

The EFTA requires financial institutions and any third party involved in EFT services to disclose specific pieces of information to consumers before engaging in any transactions. Institutions must provide such information in a form that you can keep, such as in a downloadable and printable document or in a hardcopy paper document.

Institutions must provide the following information to consumers:
  • A summary of liability regarding unauthorized transactions and transfers.
  • Contact information for the person or persons who should be notified in the event of an unauthorized transaction, along with the procedure to report and file a claim.
  • The types of transfers you can make, any fees associated with them and any limitations that might exist.
  • A summary of your rights, including the right to receive periodic statements and point-of-sale purchase receipts.
  • A summary of the institution’s liability to you if it fails to make or stop certain transactions.
  • The circumstances under which an institution will share information with a third party concerning your account and account activities.
  • Notice describing how to report an error, request more information and how long you have to make your report.
  • Notice that you may have to pay a fee for use of an ATM where you don’t have an account.

Unauthorized Transactions

If you suspect there have been unauthorized transactions involving your accounts, it could be a result of identity theft or a lost or stolen debit card. In these cases, you have recourse under the EFTA.

Through the act, you have 60 days to report an unauthorized transaction to your financial institution. The time limit begins on the date of the first periodic statement which contains the transaction. The institution has no obligation to conduct an investigation if you miss the 60-day deadline.

If you report a lost or stolen ATM or debit card within two days, the EFTA limits your liability to $50. If you report the loss within 60 days after your statement is mailed to you, you could lose as much as $500. Once you report the loss, you are not responsible for unauthorized use of the card.

If you don’t report a loss within 60 days you risk unlimited loss.

Once notified, the financial institution has 10 business days to conduct an investigation of the claim. The institution must tell you the results within three days of concluding its investigation. If a mistake was made, the institution must correct it within one business day.

Required Use

You can’t be required to use an electronic fund transfer, either to make or to receive a payment. Creditors are allowed to encourage this form of payment by offering reduced interest rates, but they must give you an additional payment option.

There is an exception to this: your employer may choose to pay you via direct deposit. If direct deposit is required, you are allowed to choose the bank and account where your paychecks are deposited.

Withdrawal Limits

The EFTA requires banks limit the amount of money that can be withdrawn from your account during any given time period.

Most banks set the limit at $200 or $300 each day, meaning you cannot electronically withdraw more than this amount in cash within a 24-hour period. This protects you as a consumer by limiting loss in the event your card is stolen.

Issuing Cards

When you are first issued a debit or bank card, the issuer must disclose certain information to you such as fees and liability regulations. The card must have a unique identification, as determined by the magnetic strip and account number.

A bank or credit company can’t issue you a debit card without your consent. You can only be issued a card if you request it or if it is replacing another card.

The best practice concerning your personal finances is to monitor your bank accounts regularly. Only engage in EFTs with reputable companies that you trust. To ensure the most protection under the EFTA, be responsible with your ATM or debit card, choose a personal identification number that is not easily guessable and file all of your statement information in a safe place.

Limited Stop Payment Privileges

The EFTA does not give consumers the right to stop payment if a product they purchase is defective or not delivered. Consumers are required to settle issues like that with the seller if they want money back.

However, if a consumer has arranged recurring payments for things like insurance or utilities, the consumer can stop payments by notifying the company at least three days before the scheduled transfer. The notice can be written or oral. If it is oral, it must be followed up with written notice within 14 days.

Financial institutions or state laws may provide more rights to stop payments. Check with those institutions and state laws to see if there is a difference with the federal law.

Overdraft Protection

There are specific regulations within the EFTA to deal with instances where consumers use a debit card or ATM card for a one-time purchase or payment and don’t have sufficient funds to cover the transaction.

Banks are prohibited from charging an overdraft fee without first receiving permission from the customer. They must send you a notice and get your opt-in agreement before charging you. If you choose not to opt-in, the transaction will be declined and no overdraft fee will be charged.

However, these rules do not apply to recurring electronic payments on your account like utilities, insurance or rent. Banks may enroll you in their own overdraft protection programs, which means they will “loan” you the amount you are short for a transaction. They will charge you the amount of the loan, plus a fee for the overdraft protection.

If you do not want to be subject to overdraft protection, contact your bank and ask that it be discontinued.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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