Protection From Electronic Banking Fraud and Errors
In a world of instant electronic payments and money transfers, you might worry about a simple mistake draining your bank account (or it could happen due to fraud). Your money could be withdrawn by somebody thousands of miles away, and you’ll never know about it unless you review your accounts or start getting overdraft notices.
In many cases, you do not have to pay when something goes wrong with your bank account. Federal law gives you the right to have those fraudulent charges removed. But you also have the responsibility that comes with those rights. Your job is to monitor your accounts and report any problems to your bank or credit union quickly.
Federal Law, Additional Benefits
Over the years, rules have evolved to help you avoid paying for charges that are not legitimate. Lawmakers began to address the issue as early as 1978 with the Electronic Funds Transfer Act (also known as Regulation E). Reg E applies to electronic funds transfers (EFTs) in bank accounts, but not necessarily to other bank-like services.
For example, your debit card is protected because it pulls directly from your checking account, but your credit card uses different rules (credit cards are generally safer than debit cards when it comes to consumer protection). Some prepaid cards are covered, while others are not.
Your bank or card issuer might offer benefits above and beyond what’s required by law. You’ll often hear of a “zero liability” policy, and those features can help you manage your risk (the benefits are similar to the protection you get with a credit card). But you still might be without cash in your account for a few days while things are sorted out.
Types of Electronic Transfers
What types of problems are you protected from? Electronic fund transfers that affect your account due to errors and fraud. Some common examples include:
- ATM withdrawals
- Debit card transactions (whether completed in-person, online or by phone)
- Paper checks that were converted to electronic checks
- Transfers between your bank accounts
- Transfers in and out of your accounts (such as direct deposit or online bill payments – but if your bank prints and mails a check, the payment might not be covered)
If your debit card gets stolen, it’s important to act quickly. If you notify your bank of the loss before any unauthorized charges hit your account, you aren’t liable for the charges. However, waiting can cost you.
You can be held responsible for up to $50 of unauthorized charges if you notice the charges and tell your bank of the loss within two business days of the loss. The more time you allow to pass, the greater your portion of uncovered expenses grows. You may be responsible for up to $500 of unauthorized charges if you wait to tell your bank within 60 days (but you miss the two business day deadline).
Wait longer and your risk is unlimited. If you wait more than 60 days – thieves can drain your account and spend money you don’t even have by using overdraft lines of credit.
Note that losing a credit card is not nearly as risky as losing a debit card. With a lost or stolen credit card, you’re only liable for up to $50 of unauthorized charges (just like with debit cards, you’re not liable for charges that hit your account after you report the loss).
Errors in your Account
If you still have possession of your debit card, you have more time to report errors and get charges reversed – but it’s never a good idea to wait. If an error hits your account, you have 60 days after your statement is created to report errors. After that time, you may be responsible for any charges, so be sure to review your bank accounts regularly.
After you Notify your Bank
Once you notify your bank of any problems, do you get the money back immediately? Not necessarily. This is another way debit cards are riskier than credit cards: the money you need for bills might not be available when you need it (whereas an error on a credit card does not have a direct and immediate effect on your checking account).
Banks have 10 days to investigate any claims you make or temporarily credit your account (known as a provisional credit). You’ll often see the funds credited sooner than that. An investigation into the error might take much longer – up to 45 or 90 days, depending on the type of transaction – but you’re allowed to use the funds while an investigation takes place. However, if the bank determines that there was no error or fraud, you’re responsible for the charges. The provisional credit will be taken back, and you’ll have to replace that money if you already spent it.
Notifying your bank might require more than just a phone call or a quick email. To get full protection under Regulation E, it’s essential to follow any instructions that your bank provides. After a verbal notification, you may be required to submit a specific form or provide documentation proving that you’re not responsible for the charges. If you skip any steps, you might forfeit your rights.
More (or Less) Protection
Regulation E is not the only set of rules that can protect you from fraud and errors. State laws sometimes provide additional relief. Find consumer protection resources in your state if you’re having problems (ask the Office of the Attorney General if you don’t know where to start).
Payment processors can also help. For example, Visa and MasterCard both offer robust protection to cardholders. Other intermediaries like PayPal offer similar benefits.
Unfortunately, if you run a business, you don’t enjoy the same protection as consumers. Regulation E does not cover business accounts, so it’s especially important that you monitor bank accounts, manage cash levels, and keep track of spending cards. However, you might get zero liability protection from credit card issuers.