What is an EFT (Electronic Funds Transfer)?

All three of these different methods have different settlement timelines and they each carry their own reversal dangers as well. Your chargeback prevention strategy has to account for all of these differences if you want to protect your business.

Merchants who understand how EFTs work can screen for fraud with much better accuracy and they can have the right proof to win disputes when they come up. To handle payment danger well, start with this knowledge – how electronic fund transfers move the money from one account to another.

How It Works

Payment processing has a few steps built into it and most of us never stop to remember what they are. When you know what’s going on in the background, it makes quite a bit more sense as to why some transactions finish faster than others.

The whole process starts when you give permission to make a payment. Maybe you’re swiping your card at the register, or maybe you’re typing in your bank details on a website – in either case, that authorization is what gets everything moving. If you don’t have your approval first, the payment can’t go anywhere.

Once you authorize the transaction, the payment networks start to verify that you have enough money in your account. At the same time, they check to make sure that your account is real and still active. For most card payments, this verification takes only a few seconds. Other payment methods can take quite a bit longer to confirm. When the verification is done, the networks send your payment through the right channels until it lands at the merchant’s bank.

The move of the funds between banks is called settlement in the industry. Your bank sends the money over to the merchant’s bank. Wire transfers usually settle on the same day that you make the payment. ACH payments take between 1 and 3 business days to settle. Card transactions are a bit different – the authorization happens right away. But settlement still takes another 1 or 2 days to complete.

The final step is when the merchant sees the money show up in their account and that’s called posting. Most disputes and complications happen in the time between when you authorize a payment and when the merchant gets the money. Customers might dispute charges during this time, or banks might flag some transactions as suspicious and hold them for an extra review.

How it Affects Chargeback Prevention

Electronic funds transfers might all seem pretty similar. But they carry very different levels of chargeback risk and dispute possibilities, and each type of EFT operates under its own set of requirements. These differences matter for protecting your business.

Card-based EFTs go through the standard chargeback process that most merchants are familiar with. Customers can dispute these transactions through their bank for dozens of different reasons, and the process follows a well-established protocol. ACH transfers work differently – they use returns and reversals instead of the traditional chargeback system. Wire transfers are final once they settle – even though fraud claims can still come up in certain situations.

The payment methods you accept can depend on your risk tolerance. High-value transactions tend to work better with wire transfers because they give you a bit more security and they’re final. Smaller recurring payments are a natural fit for ACH since the risk is lower and the convenience factor is much higher – it makes sense to match your payment strategy to the type of transaction you’re processing.

Every EFT generates a paper trail and these records can save your business when the disputes start coming in. Authorization codes prove that the customer approved the transaction. Transaction IDs let you track the payment as it moves through the system. Settlement confirmations show when the money has changed hands. You should keep these records organized and easy to find because they become important evidence if a customer disputes a charge.

Your best defense is to catch the problems before they turn into chargebacks. Watch your EFT data for patterns that seem unusual. Multiple transactions from the same IP address can point to fraud. Sudden changes in purchase amounts might mean that someone’s account got compromised. The faster you spot these red flags, the better your chances are of preventing disputes altogether.

Example Scenarios

Electronic fund transfers work quite differently depending on what type of business you’re running and each one has its own quirks to work with. A subscription box company that relies on ACH debits to pull monthly payments from customers will face a particular problem. If a customer doesn’t have enough money in their account, the company receives something called an NSF return instead of the common chargeback – this distinction matters quite a bit because NSF returns are usually much easier for merchants to manage and they cost quite a bit less to resolve than chargebacks do. You can usually just retry the same payment a few days later once the customer has had time to add some money back into their account.

Retail stores face a whole different set of challenges when they work with card-based electronic transfers. A customer might claim that they never received their order. A merchant can show that the authorization took place right when the customer placed their order and then show that settlement only occurred after the shipment went out – this timeline proves that the merchant followed the procedures and it gives them a much stronger position in that dispute.

Business-to-business companies like to use wire transfers for their bigger purchases because they want to stay away from payment disputes entirely. A wholesale supplier might need a $50,000 wire to move before they ship the inventory to one of their retail customers. Wire transfers are almost impossible to reverse once they go through and this gives the supplier some protection from payment disputes that might devastate their cash flow. The buyer receives their invoice and confirmation before they send out the wire so both parties have the records they need. Both sides know where they stand before any money actually changes hands.

Requirements and Timeframes

Electronic fund transfers have some pretty strict deadlines and business owners need to know only how long their customers have to file a dispute. Under Regulation E, customers who want to dispute an EFT transaction get up to 60 days to report their issue – so they have time to file it after the transaction happens.

ACH returns work on much tighter schedules. For the insufficient funds returns, you only get 2 banking days to work everything out. Unauthorized ACH transactions are a different story – customers can dispute those for up to 60 days as well. These timeframes work differently from credit card chargebacks, so you can’t use the same playbook for both payment types.

Records matter a lot when there are EFT disputes. You have to keep every transaction record and authorization form on file because they’re going to be your strongest defense when the disputes start to come in. If you don’t have records to back you up, you won’t have a chance to win the disputes that shouldn’t have been valid.

Recurring payments need some extra care on your part as a merchant. Before you can process an ACH debit, you’ll have to let your customer know ahead of time about the upcoming charge. You also need proof that shows the customer actually agreed to those recurring payments. A quick phone conversation won’t cut it. Written authorization that shows the payment amount, how often the charges will happen and when they’ll happen is what you’ll need to stay protected.

Your payment processor sets the deadlines for how fast you have to respond to EFT disputes. Missing one of these deadlines means you will automatically lose the dispute – and it won’t matter if you have perfect records or if you’re right about the situation. After that deadline has passed, the case will be closed and you’re out of luck.