1. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C HAPTER 27: B ANK D EPOSITS, C OLLECTIONS, AND F UNDS T RANSFERS

2. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. I.Bank Deposits and Collections. A. Collection of Items. B. Relationship Between Payor Bank and Its Customer. II.Electronic Funds Transfers. A. Types of Electronic Funds Transfers. B. Consumer Funds Transfer. C. Wholesale Funds Transfers. T OPICS C OVERED C HAPTER 27: B ANK D EPOSITS, C OLLECTIONS, F UNDS 2

3. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS Depositary Bank – the bank in which the payee or holder deposits a check for credit. Provisional Credit – tentative credit for the deposit of an instrument until final credit is given. Final Credit – payment of the instrument by the payor bank; if the payor bank (drawee) does not pay the check, the depositary bank reverses the provisional credit. 3

4. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS Intermediary Banks – a bank, other than the depositary or payor bank, involved in the collection process. Clearinghouse – association of other banks, who settle accounts on a daily basis. 4

5. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS  Collecting Banks. Any bank (other than the payor bank) handling the item for payment. Agency – a collecting bank is an agent or subagent of the owner of the check until the settlement becomes final. Duty of Care. H ONEYCUTT V. H ONEYCUTT (2002). H ONEYCUTT V. H ONEYCUTT (2002). 5

6. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS  Collecting Banks. Duty to Act Timely – a collecting bank acts timely if it takes proper action before its midnight deadline (midnight of the next banking day). Indorsements. 6

7. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Holder Drawer check originally issued to payee $ or account credited or returned check $ or returned check account debited Intermediary Bank (Collecting bank) check Depositary Bank (Collecting bank) check Payor Bank (Drawee bank) check canceled check B ANK C OLLECTIONS

8. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS  Warranties. Customers and collecting banks give warranties on transfer, presentment, and encoding. Final Payment – occurs when the payor bank does any one of the following: (1)­ pays an item in cash;  8

9. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS  Warranties. Final Payment... (2)­settles without the right to revoke the settlement; or  (3)­ makes a provisional settlement and does not properly revoke it. 9

10. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C OLLECTION OF I TEMS  Payor Banks. Under its contract with the drawer, the payor or drawee bank agrees to pay to the payee or his order checks that are issued by drawer, provided the order is not countermanded by a stop payment order and provided there are sufficient funds in the drawer's account. 10

11. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  The relationship between a payor bank and its checking account customer is contractual.  Payment of an Item. Payor bank may either: (1) Dishonor and return an item for which the funds in the account are insufficient, or  11

12. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Payment of an Item. Payor bank may either: (2) Pay the item and charge the customer's account even though an overdraft is created. 12

13. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Substitute Check. A bank may transmit an electronic equivalent of a paper check, which may, then be printed on paper upon transmission. If this document accurately represents the original check, it is legal and must be accepted as the original. 13

14. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Stop Payment Orders. An oral stop payment order is binding for fourteen calendar days; a written order is effective for six months and may be renewed in writing. 14

15. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Bank's Right to Subrogation on Improper Payment. If a payor bank pays an item over a stop payment order or otherwise in violation of its contract, the payor bank is subrogated to (obtains) the rights of: (1)­any holder in due course on the item against the drawer or maker;  15

16. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Bank's Right to Subrogation on Improper Payment. If a payor bank pays an item over a stop payment order (cont’d): (2)­the payee or any other holder against the drawer or maker; and (3)­the drawer or maker against the payee or any other holder.  16

17. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Bank's Right to Subrogation on Improper Payment. L EIBLING, P.C. V. M ELLON PSFS (NJ) N ATIONAL A SSOCIATION (1998). L EIBLING, P.C. V. M ELLON PSFS (NJ) N ATIONAL A SSOCIATION (1998). S EIGEL V. M ERRILL L YNCH, P IERCE, F ENNER & S MITH, I NC. (2000). S EIGEL V. M ERRILL L YNCH, P IERCE, F ENNER & S MITH, I NC. (2000). 17

18. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Disclosure Requirement. All depositary institutions must disclose in great detail to their consumers the terms and conditions of their deposit account.  Customer’s Death or Incompetence. A bank may pay an item if it does not know of the customer's incompetency or death. 18

19. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. R ELATIONSHIP BETWEEN P AYOR B ANK AND ITS C USTOMER  Customer's Duties. The customer must examine bank statements and items carefully and promptly to discover any unauthorized signatures or alterations. U NION P LANTERS B ANK, N ATIONAL A SSOCIATION V. R OGERS (2005). U NION P LANTERS B ANK, N ATIONAL A SSOCIATION V. R OGERS (2005). 19

20. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T YPES OF E LECTRONIC F UNDS T RANSFER  Definition. Any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account.  20

21. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. T YPES OF E LECTRONIC F UNDS T RANSFER  Automated Teller Machines.  Point-of-Sale Systems.  Direct Deposits and Withdrawals.  Pay-by-Phone Systems.  Wholesale Electronic Funds Transfers. 21

22. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONSUMER F UNDS T RANSFERS  Electronic Fund Transfer Act. Provides a basic framework establishing the rights, liabilities, and responsibilities of participants in consumer electronic fund transfers. Federal Reserve has issued Regulation “E.” 22

23. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C ONSUMER F UNDS T RANSFERS  Disclosure.  Documentation and Periodic Statements.  Preauthorized Transfers.  Error Resolution.  Consumer Liability.  Liability of Financial Institution. 23

24. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W HOLESALE F UNDS T RANSFERS  Definition. The movement of funds through the banking system; excludes all transactions governed by the Electronic Fund Transfer Act. 24

25. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W HOLESALE F UNDS T RANSFERS  Scope of Article 4A. Payment Order –instruction of sender to a receiving bank to pay, or to cause another bank to pay, a fixed amount of money. Parties – include originator, sender, receiving bank, originator's bank, beneficiary's bank, beneficiary, and intermediary banks. 25

26. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. W HOLESALE F UNDS T RANSFERS  Scope of Article 4A. Excluded Transactions.  Acceptance –  Acceptance – rights and obligations that arise as a result of a receiving bank's acceptance of a payment order. 26

27. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. C REDIT T RANSACTIONS Originator Originator’s Bank Intermediary Bank (if any) Beneficiary’s Bank Beneficiary