CHECKS, THE BANKING SYSTEM, AND E-MONEY CHAPTER 25 CHECKS, THE BANKING SYSTEM, AND E-MONEY © 2010 Pearson Education, Inc., publishing as Prentice-Hall

Bank – Customer Relationship Customer making deposit is creditor; bank is the debtor. Customer loaning money to bank. Customer also principal and bank is agent if: Deposit is check that bank must collect for customer, or Customer writes check against his or her account. Contractual relationship.

UCC Banking Provisions Revised Article 3 (Negotiable Instruments) Revised Article 3 (Negotiable Instruments) Article 4 (Bank Deposits and Collections) Article 4 (Bank Deposits and Collections) Article 4A (Funds Transfer) Article 4A (Funds Transfer)

Parties to a Check Drawer – Customer who maintains checking account and writes checks against it. Drawee – Bank on which check is drawn. Payee – Party to whom check is written.

Check

Indorsement of Check Payee is holder. Payee may: Demand payment of check, or Indorse check to another (indorsee) by signing back. Indorsee then becomes holder.

Bank Checks Certified Check Cashier’s Check Bank agrees to accept check when presented. Pays out of funds set aside from customer’s account. Cashier’s Check Two-party check. Bank is both drawer and drawee. Holder is payee.

Honoring Checks Customer agrees to keep sufficient funds in account to cover any checks written. If adequate funds, bank under a duty to honor check.

Honoring Checks (continued) Stale Checks Check outstanding for more than six months. Bank has no obligation to honor. Incomplete Checks E.g., amount or payee’s name omitted. Bank that makes good faith payment may recover from customer.

Honoring Checks (continued) Postdated check Bank must abide by postdate if drawer gave separate written notice to bank, notifying bank not to pay immediately. Stop-Payment Orders Order by drawer not to pay. Bank must have reasonable opportunity to stop payment Oral order binds bank for 14 days. Written order effective for six months.

Honoring Checks (continued) Overdrafts Drawer has insufficient funds in account. Bank may dishonor check or pay. Wrongful Dishonor Bank liable for all damages.

Federal Currency Reporting Law Requires financial institutions and other entities to file Currency Transaction Report with IRS reporting: Cash transaction in amount greater than $10,000. Suspected criminal activity by customers involving $1,000 or more.

Forged Signatures Bank under duty to verify drawer’s signature. Forged signatures wholly inoperative as signature of drawer. Bank must recredit drawer’s account. Bank can recover from the presenter.

Altered Checks Payor bank may dishonor altered check. If paid, bank can: Charge drawer’s account for original tenor. Recover difference between altered amount and original tenor from party who presented check.

Altered or Forged Checks Drawer’s reporting obligations Bank has no liability for paying altered or forged instrument if drawer did not report problem within one year. If same wrongdoer engages in series of forgeries or alterations on same account, customer must report that to payer within reasonable time, or bank has no liability after this date and prior to notification.

The Collection Process Metro Bank Drawer Payee City Bank Country Bank

The Collection Process (continued) 12 regional Federal Reserve Banks serve as clearinghouses. Deferred posting. Provisional credits applied to accounts. Final settlement “on us” “on them” Deposit of money into account.

Customer’s Duty to Examine Bank Statements Must examine monthly statements of checking accounts in timely fashion and with reasonable care. Determine whether checks may have been altered or forged. Promptly notify bank of unauthorized payments. Customer liable if bank suffers a loss due to customer’s failure to perform this duty.

FDIC Insurance Government agency that insures deposits at most bank and savings institutions. Backed by full faith and credit of U.S. Limits of $250,000 per single account. Covers savings, checking, money markets, CDs, IRAs. Does not cover stocks, bonds, mutual funds, life insurance, annuities.

E-Banking and E-Money Electronic Funds Transfer System ATM Point-of-Sale Terminal Direct Deposit and Withdrawal Online Banking

Electronic Funds Transfer Act Consumer Rights Unsolicited cards not valid for use. Consumer liable for only $50 if debit card lost or stolen, and customer notifies bank within 2 days. Bank must provide written receipt of electronic transaction. Bank must provide monthly statement of electronic transactions.

Electronic Wire Transfers Fast and low-cost way to transfer funds. Commercial funds transfers governed by UCC Article 4A. Security procedures (codes, identifying numbers, etc.) prevent unauthorized payment orders. If bank complies and pays, customer bound to pay the order, unless can prove unauthorized payment not initiated by agent or person who obtained information from customer.