Chapter 29 Checks and Electronic Fund Transfers McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Terminology Regarding Check Transactions Draft: Order instrument; one party orders second party to pay money to party listed on instrument Draft: Order instrument; one party orders second party to pay money to party listed on instrument Drawer: Party who gives order to pay draft Drawer: Party who gives order to pay draft Drawee: Party that must obey drawer’s order to pay draft Drawee: Party that must obey drawer’s order to pay draft Payee: Party who receives benefit of drawer’s order; party who receives money from draft Payee: Party who receives benefit of drawer’s order; party who receives money from draft Check: Special draft that orders drawee (typically a bank) to pay fixed amount of money on demand Check: Special draft that orders drawee (typically a bank) to pay fixed amount of money on demand 29-2

Terminology Regarding Check Transactions (Continued) Cashier’s Check: check in which both drawer and drawee are same bank Cashier’s Check: check in which both drawer and drawee are same bank Teller’s Check: Check drawn by one bank and usually drawn on another bank Teller’s Check: Check drawn by one bank and usually drawn on another bank Traveler’s Check: Instrument payable on demand, drawn on/through a bank, designated as a “traveler’s check”, and requires countersignature by person whose signature appears on instrument Traveler’s Check: Instrument payable on demand, drawn on/through a bank, designated as a “traveler’s check”, and requires countersignature by person whose signature appears on instrument Money Order: Instrument stating that certain amount of money is to be paid to a particular person (usually in same form as personal check) Money Order: Instrument stating that certain amount of money is to be paid to a particular person (usually in same form as personal check) Certified Check: Check accepted at bank at which it is drawn Certified Check: Check accepted at bank at which it is drawn 29-3

Terminology Regarding Acceptance of Deposits Depositary Bank: First bank that receives check for payment Depositary Bank: First bank that receives check for payment Payor Bank: Bank on which check drawn; bank ultimately responsible from granting funds for check Payor Bank: Bank on which check drawn; bank ultimately responsible from granting funds for check Collecting Bank: Any bank (except payor bank) that handles check during collection process Collecting Bank: Any bank (except payor bank) that handles check during collection process Intermediary Bank: Any bank (except payor bank and depositary bank) to which check transferred Intermediary Bank: Any bank (except payor bank and depositary bank) to which check transferred 29-4

Check Clearing For The 21 st Century Act Also known as “Check 21” or “Check Truncation” Act Also known as “Check 21” or “Check Truncation” Act Allows banks to forgo sending original checks as part of collection or return process, and send a “truncated” version instead Allows banks to forgo sending original checks as part of collection or return process, and send a “truncated” version instead Instead of original check, bank may send: Instead of original check, bank may send: Substitute check (paper reproduction of original check) Substitute check (paper reproduction of original check) By agreement, electronic image of check, along with data from magnetic ink character recognition (MICR) line on original check By agreement, electronic image of check, along with data from magnetic ink character recognition (MICR) line on original check 29-5

“Substitute Check” Requirements Contains clear replication of front and back of original paper check Contains clear replication of front and back of original paper check Bears MICR line with all information on original check’s MICR line Bears MICR line with all information on original check’s MICR line Conforms with generally applicable industry standard for paper stock, dimensions, and other general qualities Conforms with generally applicable industry standard for paper stock, dimensions, and other general qualities Is suitable for automated processing in same manner as original paper check Is suitable for automated processing in same manner as original paper check 29-6

The Truth-In-Savings Act Information that must be given to customer: Minimum balance required to open account and be paid interest Minimum balance required to open account and be paid interest Manner in which balance of account will be calculated Manner in which balance of account will be calculated Annual percentage yield of interest for account Annual percentage yield of interest for account Manner in which interest on account calculated Manner in which interest on account calculated Notification of fees, charges, and penalties account may be assessed and how they are calculated Notification of fees, charges, and penalties account may be assessed and how they are calculated Notification of any limitations on withdrawals/deposits Notification of any limitations on withdrawals/deposits 29-7

When Bank May Charge Customer’s Account “Properly Payable” Rule: Bank may pay instrument only when authorized by drawer, and payment does not violate agreement between bank and customer “Properly Payable” Rule: Bank may pay instrument only when authorized by drawer, and payment does not violate agreement between bank and customer Wrongful Dishonor: Bank refuses to pay properly payable check; bank incurs liability upon wrongful dishonor Wrongful Dishonor: Bank refuses to pay properly payable check; bank incurs liability upon wrongful dishonor Overdraft: If insufficient funds in customer’s account, bank may Overdraft: If insufficient funds in customer’s account, bank may Dishonor check, or Dishonor check, or Create overdraft by paying check and charging account amount overdrawn Create overdraft by paying check and charging account amount overdrawn Stop-Payment Order: Drawer orders bank to not pay check drawn on customer’s account Stop-Payment Order: Drawer orders bank to not pay check drawn on customer’s account Post-Dated Check: Customer can post-date check, but must give bank notice of post-date Post-Dated Check: Customer can post-date check, but must give bank notice of post-date 29-8

When Bank May Charge Customer’s Account (Continued) “Stale” Check: Check not presented to bank within six (6) months of its date “Stale” Check: Check not presented to bank within six (6) months of its date Death or Incompetence of Customer: If drawer of check has died/ is adjudicated incompetent, bank authorized to pay check if bank not aware or does not have a “reasonable opportunity” to act on knowledge; if bank aware of death, bank may pay checks drawn on account for ten (10) days after date of death Death or Incompetence of Customer: If drawer of check has died/ is adjudicated incompetent, bank authorized to pay check if bank not aware or does not have a “reasonable opportunity” to act on knowledge; if bank aware of death, bank may pay checks drawn on account for ten (10) days after date of death 29-9

Forgeries and Alterations Check Bearing Forged Signature: Generally, drawer not liable for forged check, unless drawer substantially contributed to forgery Check Bearing Forged Signature: Generally, drawer not liable for forged check, unless drawer substantially contributed to forgery Check Bearing Forged Endorsement: Neither drawer nor drawer’s bank liable for forged endorsement Check Bearing Forged Endorsement: Neither drawer nor drawer’s bank liable for forged endorsement Altered Check: If unauthorized change modifies obligation of party to instrument, drawer generally not liable for altered amount, unless he/she negligently contributed to alteration Altered Check: If unauthorized change modifies obligation of party to instrument, drawer generally not liable for altered amount, unless he/she negligently contributed to alteration 29-10

Electronic Funds Transfer (Definition): Money transferred by electronic terminal, telephone, or computer 29-11

Types of Electronic Funds Transfer (EFT) Systems: Automated Teller Machines (ATMs): Machines connected to bank’s computer located in convenient places, allowing customers to conduct banking transactions without going into bank Automated Teller Machines (ATMs): Machines connected to bank’s computer located in convenient places, allowing customers to conduct banking transactions without going into bank “Point-of-Sale” System: System that allows consumer to directly transfer funds from bank account to merchant “Point-of-Sale” System: System that allows consumer to directly transfer funds from bank account to merchant Direct Deposits and Withdrawals: Pre-authorized actions performed on customer’s account through electronic terminal Direct Deposits and Withdrawals: Pre-authorized actions performed on customer’s account through electronic terminal “Pay-by-Telephone” System: Merchant allows customers to use telephone to make payments/transfer funds “Pay-by-Telephone” System: Merchant allows customers to use telephone to make payments/transfer funds Online Banking: Banks grants customers electronic access to account data to perform banking tasks (Example: Online transfer of funds) Online Banking: Banks grants customers electronic access to account data to perform banking tasks (Example: Online transfer of funds) 29-12

E-Money and Online Banking “Digital Cash”: Money stored electronically (microchips, magnetic strips, other computer media) “Digital Cash”: Money stored electronically (microchips, magnetic strips, other computer media) “Stored-Value” Cards: Plastic cards with magnetic strips (similar to those on credit cards/ATM cards) containing data regarding card value “Stored-Value” Cards: Plastic cards with magnetic strips (similar to those on credit cards/ATM cards) containing data regarding card value “Smart Cards”: Cards that are the same size as regular check and ATM cards, but that contain a microchip (instead of a magnetic strip), for storing larger amounts of data “Smart Cards”: Cards that are the same size as regular check and ATM cards, but that contain a microchip (instead of a magnetic strip), for storing larger amounts of data 29-13

The Uniform Money Services Business Act Model state law regarding money transactions and financial transactions conducted by entities other than banks; proposed by National Conference of Commissioners on Uniform State Laws (NCCUSL) in effort to create symmetry among various state laws 29-14