Chapter 28 Banking in the Digital Age

The UCC defines ordinary care as...

"observance of reasonable commercial standards, prevailing in the area in which [a] person is located, with respect to the business in which that person is engaged"

The Expedited Funds Availability Act (EFAA) and Regulation CC10

(the regulation implementing the act) establish when funds from deposited checks must be made available to the customer.

Bank Customer Relationships: Agency Relationship.

- Bank must pay customer's checks and collect for customer if she deposits checks

When the bank receives an item properly payable from its customer's checking account but the account contains insufficient funds to cover the check, the bank has two options.

- Dishonor the item - Create an Overdraft

Cashier's Check

- the bank serves as both the drawer and the drawee - when a bank draws a check on itself, the check is called a and is a negotiable instrument on issue - the bank assumes responsibility for paying the check, thus making the check more readily acceptable as a substitute for cash

Electronic Fund Transfers 4 Types

1. Automated teller machines (ATMs) —The machines are connected online to the bank's computers. A customer inserts a plastic card (called an ATM or debit card) issued by the bank and keys in a personal identification number (PIN) to access her or his accounts and conduct banking transactions. 2. Point-of-sale systems —Online terminals allow consumers to transfer funds to merchants to pay for purchases using a debit card. 3. Direct deposits and withdrawals —Customers can authorize the bank to allow another party, such as the government or an employer, to make direct deposits into their accounts. Similarly, a customer can ask the bank to make automatic payments to a third party at regular, recurrent intervals from the customer's funds (insurance premiums or loan payments, for instance). 4. Online payment systems— Most financial institutions permit their customers to access the institution's computer system via the Internet and direct a transfer of funds between accounts or pay a particular bill. Payments can be made on a one-time or a recurring basis.

The Expedited Funds Availability Act (EFAA) Rules:

1. Local checks: one business day from the date of deposit. 2. Non-local checks: five business days from the date of deposit. 3. For cash deposits, wire transfers, and government checks, funds must be available on the next business day. & The first $100 of any deposit must be available for cash withdrawal on the opening of the next business day after deposit

overdraft protection agreement.

A bank can expressly agree with a customer to accept overdrafts • If such an agreement is formed, any failure of the bank to honor a check because it would create an overdraft breaches this agreement and is considered a wrongful dishonor

Postdated Checks

A bank may charge a postdated check against a customer's account unless the customer notifies the bank, in a timely manner, not to pay the check until the stated date.

Substitute Check

A reproduction of the front and back of an original check that contains all of the same information required on checks for automated processing. • A bank creates substitute checks from digital images of original checks • It can then process the check information electronically or deliver substitute checks to banks that wish to continue receiving paper checks. • The original check can be destroyed after a substitute check is created, helping to prevent the check from being paid twice

"on-us item." (Customers of Same Bank)

An item that is payable by the depositary bank that receives it (which in this situation is also the payor bank) - Usually, a bank issues a "provisional credit" for on-us items within the same day.

Intermediary Banks:

Any bank except the payor bank or the depositary bank to which an item is transferred in the course of this collection process

Collecting Banks

Any bank except the payor bank that handles a check during some phase of the collection process

Checks and electronic fund transfers (EFT's) governed by..

Articles 3 and 4 of the UCC Article 3: covers all negotiable instruments, including checks. Article 4: establishes a framework for deposit, EFT's and checking agreements between banks and customers

Bank Customer Relationships: Creditor-Debtor

Bank owes money to customer and must honor customer's checks

Truth-in-Savings Act (TISA) and Regulation DD

Banks must pay interest based on the full balance of a customer's interest-bearing account over the relevant period Require banks to provide customers with statements: o . . . balance, amount of interest on account, fees, charges, penalties, and o Statement containing certain information on the interest in the account.

What did Congress enact to streamline the costly and and time-consuming traditional method of check collection?

Check Clearing in the 21st Century Act (Check 21)

Stale Checks

Commercial banking practice regards a check that is presented for payment more than 6 months from its date...it is bank's choice whether to honor or not

Commercial Fund Transfers: 2 major wire payment systems are the

Federal Reserve wire transfer network (Fedwire) and New York Clearing House Interbank Payments Systems (CHIPS).

Banks Liability for Wrongful Payment on a Stop Payment

If bank pays, they will be obligated to recredit the customer's account. o In addition, if order causes subsequent checks written on the drawer's account to "bounce," the bank will be liable for the resultant costs the drawer incurs. o The bank is liable only for the amount of the actual loss suffered

Travelers Check

Instrument that is payable on demand, drawn on or payable at a financial institution (such as a bank) • The issuing institution is directly obligated to accept and pay its traveler's check • Designed to be a safe substitute for cash when a person is on vacation or traveling. • Each check is issued for a fixed amount • The purchaser is required to sign the check at the time it is purchased and again at the time it is used

How the Federal Reserve System Clears Checks

It is a network of 12 district banks located around the country and headed by the Fed. Reserve of Goveners Serves as "clearinghouse" where checks and drafts are exchanged, and drawn on each other's accounts

Customers of Different Banks

Once a depositary bank receives a check, it must arrange to present the check, either directly or through intermediary banks, to the appropriate payor bank. When the check reaches the payor bank, that bank is liable for the face amount of the check • Depositary bank must present check to next intermediary or payor bank before midnight of the next banking day following receipt • UCC permits "deferred posting" bank can set a particular time (e.g. 2:00 pm) as cutoff hour

Check

Special type of draft that is drawn on a bank, ordering the bank to pay a fixed amount of money on demand

Depository Bank

The first bank to receive a check for payment

Violations and Damages of EFT System

Unauthorized access to an EFT system constitutes a federal felony, may be fined up to $10,000 possibly 10 years in prison. • Banks must strictly comply with the terms of the EFTA and are liable for any failure to adhere to its provisions • For a bank's violation of the EFTA, a consumer may recover both actual damages (including attorneys' fees and costs) and punitive damages of not less than $100 and not more than $1,000.18 Failure to investigate an error in good faith makes the bank liable for treble damages (3x the amount of damages). Even when a customer has sustained no actual damage, the bank may be liable for legal costs and punitive damages if it fails to follow the proper procedures outlined by the EFTA for error resolution.

Forged Drawers' Signatures & General Rule

When a bank pays a check on which the drawer's signature is forged, generally the bank suffers the loss •If the customer's negligence substantially contributed to the forger, bank may be able to recover at least some of the loss. A forged signature on a check has no legal effect as the signature of a customer-drawer •The general rule is that the bank must recredit the customer's account when it pays on a forged signature. For this reason, banks require a signature card from each customer who opens a checking account

Bank Customer Relationships: Contractual Relationship

Whenever a bank-customer relationship is established, certain contractual rights and duties arise. customer does not have to prove that the bank breached its contractual commitment or was negligent

Certified Checks

a check that has been accepted by the bank on which it is drawn • When a drawee bank certifies (accepts) a check, it immediately charges the drawer's account with the amount of the check and transfers those funds to its own certified-check account - Accepted by the bank upon which it is drawn. - Bank immediately debits drawer's account.

If a bank wrongfully dishonors a cashiers check

a holder can recover from the bank all expenses incurred, interest, and consequential damages

Stop Payment Orders - conditions - Time frame

an order by a customer to her or his bank not to pay a certain check -only a customer cam do it - can't stop if already certified - anyone who wrongfully stops payment liable by the pay e - must have legal ground for stopping - Orally = Binding for only 14 days - Written = 6 months

Check Clearing n the 21st Century Act (Check 21)

changed the collection process by creating a new negotiable instrument called a substitute check - the act does not require banks to change their current check collection practices, - its creation of substitute checks facilitates the use of electronic check processing.

Does death or incompetence revoke a banks authority to pay?

no, not until it has knowledge up to 10 days after

A customer who fails to report a forged signature within...

one year loses the legal right to have the bank recredit her or his account

Smart cards

plastic cards containing microchips that can hold much more information than magnetic strips can. A smart card carries and processes security programming. This capability gives smart cards a technical advantage over stored-value cards.

The Electronic Fund Transfer Act (EFTA)

provides a basic framework for the rights, liabilities, and responsibilities of users of EFT systems. o governs financial institutions that offer electronic transfers of funds involving customer accounts. • The act gave the Federal Reserve Board authority to issue rules and regulations to help implement the act's provisions. • The Federal Reserve Board's implemental regulation is called Regulation E.

The Expedited Funds Availability Act

requires the Federal Reserve Board to revise the availability schedule for funds from deposited checks to correspond to reductions in check-processing time. • Therefore, as the speed of check processing increases under Check 21, the Federal Reserve Board will reduce the maximum time that a bank can hold funds from deposited checks before making them available to the depositor. • ...account holders will have faster access to their deposit funds

When the customer can prove that the bank was also negligent...

that is, that the bank failed to exercise ordinary care—then the bank, too, will be liable. • The loss will be allocated between the bank and the customer on the basis of comparative negligence

Float Time

the time between when the amounts actually deducted from the account

Commercial Fund Transfers

transferred electronically "by wire" between commercial parties. • In fact, the dollar volume of payments made by wire transfer is more than $1 trillion a day—an amount that far exceeds the dollar volume of payments made by other means. governed by Article 4A of the UCC, which has been adopted by most of the states.