Checks and Electronic Fund Transfers

Chapter 29Checks and Electronic Fund TransfersCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.29-2Terminology Regarding Check TransactionsDraft: Order instrument; one party orders second party to pay money to party listed on instrumentDrawer: Party who gives order to pay draftDrawee: Party that must obey drawer’s order to pay draftPayee: 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 demand29-3Terminology Regarding Check Transactions (Continued)Cashier’s Check: check in which both drawer and drawee are same bankTeller’s Check: Check drawn by one bank and usually drawn on another bankTraveler’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 instrumentMoney 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 drawn29-4Terminology Regarding Acceptance of DepositsDepositary Bank: First bank that receives check for paymentPayor Bank: Bank on which check drawn; bank ultimately responsible from granting funds for checkCollecting Bank: Any bank (except payor bank) that handles check during collection processIntermediary Bank: Any bank (except payor bank and depositary bank) to which check transferred29-5Check Clearing For The 21st Century ActAlso known as “Check 21” or “Check Truncation” ActAllows banks to forgo sending original checks as part of collection or return process, and send a “truncated” version insteadInstead of original check, bank may send: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 check29-6“Substitute Check” RequirementsContains clear replication of front and back of original paper checkBears MICR line with all information on original check’s MICR lineConforms with generally applicable industry standard for paper stock, dimensions, and other general qualitiesIs suitable for automated processing in same manner as original paper check29-7When 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 customerWrongful Dishonor: Bank refuses to pay properly payable check; bank incurs liability upon wrongful dishonorOverdraft: If insufficient funds in customer’s account, bank mayDishonor check, orCreate overdraft by paying check and charging account amount overdrawnStop-Payment Order: Drawer orders bank to not pay check drawn on customer’s accountPost-Dated Check: Customer can post-date check, but must give bank notice of post-date29-8When Bank May Charge Customer’s Account (Continued)“Stale” Check (Definition): Check not presented to bank within six (6) months of its dateIf payee presents uncertified, stale check to bank, bank not required to pay amount of checkIf bank pays check in good faith, it may charge drawer’s account29-9Forgeries and AlterationsCheck Bearing Forged Signature: Generally, drawer not liable for forged check, unless drawer substantially contributed to forgeryCheck Bearing Forged Endorsement: Neither drawer nor drawer’s bank liable for forged endorsementAltered Check: If unauthorized change modifies obligation of party to instrument, drawer generally not liable for altered amount, unless he/she negligently contributed to alterationElectronic Funds Transfer(Definition): Money transferred by electronic terminal, telephone, or computer29-1029-11Types 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“Point-of-Sale” System: System that allows consumer to directly transfer funds from bank account to merchantDirect 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 fundsOnline Banking: Banks grants customers electronic access to account data to perform banking tasks (Example: Online transfer of funds)29-12E-Money and Online Banking“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“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 dataThe Right to Financial Privacy ActFinancial institutions, such as banks, may not give a federal agency information regarding a person’s finances without that person’s explicit consent or a warrant29-13