1. Checks and Electronic Fund Transfers
Chapter 29
Chapter 29: Checks and Electronic Fund Transfers
Checks and Electronic Fund Transfers
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2. Overview LO29-1: What are the components of a check?
LO29-2: What are the differences among the various types of checks?
LO29-3: How and where are deposits accepted?
LO29-4: When may a bank charge a customer’s account?
LO29-5: What are the different types of electronic fund transfers?

3. Chapter 29 Hypothetical Case 1
On February 1, 2012, Kevin Bolen wrote a check for $175 to Computer Bugs Sales and Service, Inc. ("Computer Bugs") for computer repair. The owner of Computer Bugs misplaced Bolen's check and did not find it until fall of the following year. On September 15, 2013, the check was presented to Bolen's bank, First Locality Bank, and processed. Bolen only had $49 in his checking account at the time, and with no overdraft protection in place, the Computer Bugs check bounced. First Locality Bank charged Bolen a $35 bounced check fee, and Computer Bugs charged a similar fee of $30. Bolen had forgotten about the Computer Bugs check, since he had written it over nineteen months before it was presented for payment.
Bolen believes that First Locality Bank should have notified him and sought his permission before processing the check. Is Bolen legally responsible for First Locality Bank's $35 and Computer Bugs's $30 bounced check fees?
Chapter 29 Hypothetical Case: On February 1, 2012, Kevin Bolen wrote a check for $175 to Computer Bugs Sales and Service, Inc. ("Computer Bugs") for computer repair. The owner of Computer Bugs misplaced Bolen's check and did not find it until fall of the following year. On September 15, 2013, the check was presented to Bolen's bank, First Locality Bank, and processed. Bolen only had $49 in his checking account at the time, and with no overdraft protection in place, the Computer Bugs check bounced. First Locality Bank charged Bolen a $35 bounced check fee, and Computer Bugs charged a similar fee of $30. Bolen had forgotten about the Computer Bugs check, since he had written it over nineteen months before it was presented for payment.
Bolen believes that First Locality Bank should have notified him and sought his permission before processing the check. Is Bolen legally responsible for First Locality Bank's $35 and Computer Bugs's $30 bounced check fees?
[Instructor: See When a Bank May Charge a Customer’s Account in Chapter 29]

4. Chapter 29 Hypothetical Case 2
According to an article published by the Wall Street Journal:
"A federal judge in California... (has) ordered Wells Fargo & Co. to pay more than $200 million to compensate customers who the judge said were improperly charged millions in overdraft fees. In a class-action ruling, Judge William Alsup, in the U.S. District Court of Northern California, said the San Francisco bank improperly generated excessive overdraft fees for customers by posting transactions in an order that would generate more fees—a practice many big banks have used for years. Overdraft fees are fees charged to customers who run a negative account balance in their bank accounts and the Federal Reserve recently issued new rules that will curb banks' ability to charge the fees.
Wells Fargo said it is ‘disappointed’ with the ruling and will appeal... A spokeswoman for Wells Fargo couldn't be reached immediately. Banks' practices in charging overdraft fees, which generate about $40 billion a year for the banking industry, have been at the heart of customers' complaints against banks since the onset of the financial crisis three years ago. To charge higher fees, banks used various methods in handling customers' accounts. In many cases, banks re-ordered customers' transactions at the end of the day, first subtracting the largest purchases from the account's balance.“1
1 Wall Street Journal. "Wells Fargo to Pay $200 Million in Overdraft-Fee Case.”
Chapter 29 Hypothetical Case 2: According to an article published by the Wall Street Journal:
"A federal judge in California... (has) ordered Wells Fargo & Co. to pay more than $200 million to compensate customers who the judge said were improperly charged millions in overdraft fees. In a class-action ruling, Judge William Alsup, in the U.S. District Court of Northern California, said the San Francisco bank improperly generated excessive overdraft fees for customers by posting transactions in an order that would generate more fees—a practice many big banks have used for years. Overdraft fees are fees charged to customers who run a negative account balance in their bank accounts and the Federal Reserve recently issued new rules that will curb banks' ability to charge the fees.
Wells Fargo said it is ‘disappointed’ with the ruling and will appeal... A spokeswoman for Wells Fargo couldn't be reached immediately. Banks' practices in charging overdraft fees, which generate about $40 billion a year for the banking industry, have been at the heart of customers' complaints against banks since the onset of the financial crisis three years ago. To charge higher fees, banks used various methods in handling customers' accounts. In many cases, banks re-ordered customers' transactions at the end of the day, first subtracting the largest purchases from the account's balance.“1
[Instructor: See When a Bank May Charge a Customer’s Account in Chapter 29]

5. Chapter 29 Hypothetical Case 2 (cont’d)
In your reasoned opinion, is the commercial banking practice of re-ordering customer transactions (by first subtracting the largest purchases from the account's balance in order to increase the number and amount of overdraft fees) unethical? Should such a practice be illegal? Are overdraft fees inherently unethical?
Chapter 29 Hypothetical Case 2 (cont’d): In your reasoned opinion, is the commercial banking practice of re-ordering customer transactions (by first subtracting the largest purchases from the account's balance in order to increase the number and amount of overdraft fees) unethical? Should such a practice be illegal? Are overdraft fees inherently unethical?
[Instructor: See When a Bank May Charge a Customer’s Account in Chapter 29]

6. Terminology Regarding Check Transactions
Draft: Order instrument; one party orders second party to pay money to party listed on instrument
Drawer: Party who gives 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
Check: Special draft that orders drawee (typically a bank) to pay fixed amount of money on demand
In terms of check transactions, a draft is an order instrument where one party orders a second party to pay money to a party listed on the instrument. A drawer is a party who gives an order to pay a draft. A drawee is a party that must obey the drawer's order to pay a draft. A payee is a party who receives the benefit of the drawer's order, in receiving money from the draft. A "check" is a special draft that orders a drawee (typically a bank) to pay a fixed amount of money on demand.

7. Terminology Regarding Check Transactions (cont’d)
Cashier's check: Check for which both drawer and drawee are same 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
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
A cashier's check is a check for which both the drawer and the drawee are the same bank. A teller's check is a check drawn by one bank and usually drawn on another bank. A traveler's check is an instrument payable on demand, drawn on or through a bank, designated as a traveler's check, and requiring a countersignature by the person whose signature appears on the instrument. A money order is an instrument, usually in the same form as a personal check, stating that a certain amount of money is to be paid to a particular person. A certified check is a check accepted at the bank at which it is drawn.

8. Terminology Regarding Acceptance of Deposits
Depositary bank: First bank that receives check for payment
Payor bank: Bank on which check is drawn; bank ultimately responsible for granting funds for check
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
In terms of acceptance of deposits, a depositary bank is the first bank that receives a check for payment. A payor bank is a bank on which a check is drawn that is ultimately responsible from granting funds for the check. A collecting bank is any bank (except the payor bank) that handles a check during the collection process. An intermediary bank is any bank, except the payor bank and the depositary bank, to which a check is transferred.

9. Check Clearing for the 21st Century Act
Also known as Check 21 or the Check Truncation Act
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:
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
The Check Clearing for the 21st Century Act, also known as Check 21 or the Check Truncation Act, allows banks to forgo sending original checks as part of a collection or return process, and send a truncated version instead. Instead of an original check, the bank may send a substitute check (a paper reproduction of the original check), or, by agreement, an electronic image of the check, along with data from the magnetic ink character recognition (MICR) line on the original check.

10. Substitute Check Requirements
Contains clear replication of front and back of original paper check
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
Is suitable for automated processing in same manner as original paper check
A substitute check must contain a clear replication of the front and back of the original paper check, bear the MICR line (with all the information from the original check's MICR line), conform with industry standards for paper stock, dimensions, and other general qualities, and be suitable for automated processing in the same manner as the original paper check.

11. When a Bank May Charge Customer's Account
Properly payable rule: Bank must 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
Overdraft: If insufficient funds in customer's account, bank may
Dishonor check, or
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
Postdated check: Customer can postdate check, but must give bank notice of postdate
According to the properly payable rule, a bank may pay an instrument only when authorized by the drawer, and payment does not violate the agreement between the bank and the customer. Wrongful dishonor occurs when a bank refuses to pay a properly payable check; a bank incurs liability upon wrongful dishonor. When insufficient funds are in a customer's account (overdraft), a bank may dishonor the check, or create overdraft by paying the check and charging the account the amount overdrawn. With a stop-payment order, the drawer orders the bank to not pay a check drawn on the customer's account. A customer can postdate a check, but must give the bank advance notice of the postdate in order to legally require the bank to honor the postdate.

12. When a Bank May Charge Customer's Account (cont’d)
Stale check (definition): Check not presented to bank within six (6) months of its date
If payee presents uncertified stale check to bank, bank not required to pay amount of check
If bank pays check in good faith, it may charge drawer's account
A stale check is a check not presented to a bank within six months of its date. Banks generally have the choice whether to honor a stale check.

13. Forgeries and Alterations
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
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
If a check bears the drawer's forged signature, the drawer is generally not liable for the forged check, unless the drawer's negligence substantially contributed to the forgery. If a check bears a forged endorsement, neither the drawer nor the drawer's bank is generally liable for the forged endorsement. If a check is altered, (in other words, if an unauthorized change apparently modifies the obligation of a party to the instrument), the drawer is generally not liable for the altered amount, unless the drawer's negligence substantially contributed to the alteration.

14. Electronic Funds Transfer
An electronic funds transfer results when money is transferred by an electronic terminal, by telephone, or by computer
An electronic funds transfer results when money is transferred by an electronic terminal, by telephone, or by computer.

15. Types of Electronic Funds Transfer (EFT) Systems
Automated teller machines (ATMs): Machines connected to bank's computer, located in convenient places, that allow 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
Direct deposits and withdrawals: Preauthorized actions performed on customer's account through electronic terminal
Pay-by-telephone system: Merchant allows customers to use telephone to make payments/transfer funds
Online banking: Banks grant customers electronic access to account data to perform banking tasks (Example: Online transfer of funds)
Types of electronic funds transfer, or EFT systems include automated teller machines (ATMs), or machines connected to a bank's computer, located in convenient places, that allow customers to conduct banking transactions without going into a bank; point-of-sale systems, which allows consumers to directly transfer funds from a bank account to a merchant; direct deposits and withdrawals, preauthorized actions performed on a customer's account through an electronic terminal; pay-by-telephone systems, where merchants allows customers to use the telephone to make payments or transfer funds; and online banking, where banks grant customers electronic access to account data to perform banking tasks, such as an online transfer of funds.

16. E-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 data
With regard to e-money and online banking, digital cash is money stored electronically (through the use of microchips, magnetic strips, or other computer media). Stored-value cards are plastic cards with magnetic strips (similar to those on credit cards and ATM cards) containing card value data. Smart cards are 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.

17. The Right to Financial Privacy Act
Financial institutions, such as banks, may not give a federal agency information regarding a person's finances without either that person's explicit consent or a warrant
Pursuant to the Right to Financial Privacy Act, financial institutions, such as banks, may not give a federal agency information regarding a person's finances without either that person's explicit consent or a warrant.

18. Chapter 29 Hypothetical Case 3
Greta Pearson loves shopping for values at the local Bull's-Eye Mart because it saves her so much money. On her regular Saturday morning shopping outing, Pearson completes her selections at Bull's-Eye Mart, parks her large and overburdened shopping cart (filled with all sorts of items she may need in the future) at the checkout counter, and is considerably surprised that in spite of all the money she has saved in making her value-priced selections, her bill nevertheless amounts to $ Currently, Pearson realizes that her checking account balance at Homeland Bank is only $98, but she has a solution to her shopping dilemma: Pearson knows that the following Wednesday, her employer will directly deposit her monthly paycheck in her checking account, and that at that time, she will have more than enough in account deposits to fulfill the Bull's-Eye bill. Pearson postdates the check made payable to Bull's-Eye for the following Thursday, fills her minivan with her shopping bags, and returns home. There is a slight problem with Pearson's plan. The following Tuesday, her bank processes the check, the check bounces, and now Bull's-Eye Mart and Homeland Bank are charging her $40 each in bounced check fees. Bull's-Eye Mart also wants its $748. Pearson has no overdraft protection at Homeland Bank.
Is Pearson legally responsible for the bounced check fees?
Chapter 29 Hypothetical Case 3: Greta Pearson loves shopping for values at the local Bull's-Eye Mart because it saves her so much money. On her regular Saturday morning shopping outing, Pearson completes her selections at Bull's-Eye Mart, parks her large and overburdened shopping cart (filled with all sorts of items she may need in the future) at the checkout counter, and is considerably surprised that in spite of all the money she has saved in making her value-priced selections, her bill nevertheless amounts to $ Currently, Pearson realizes that her checking account balance at Homeland Bank is only $98, but she has a solution to her shopping dilemma: Pearson knows that the following Wednesday, her employer will directly deposit her monthly paycheck in her checking account, and that at that time, she will have more than enough in account deposits to fulfill the Bull's-Eye bill. Pearson postdates the check made payable to Bull's-Eye for the following Thursday, fills her minivan with her shopping bags, and returns home. There is a slight problem with Pearson's plan. The following Tuesday, her bank processes the check, the check bounces, and now Bull's-Eye Mart and Homeland Bank are charging her $40 each in bounced check fees. Bull's-Eye Mart also wants its $748. Pearson has no overdraft protection at Homeland Bank.
Is Pearson legally responsible for the bounced check fees?
[Instructor: See Checks in Chapter 29]

19. Chapter 29 Hypothetical Case 4
Recall from Chapter 28 Hypothetical Case 4 that Rhonda Kepler receives a Carolina State Bank check for $500 from Heather Gonzalez as repayment of a loan, which was then dishonored. Kepler requests that Gonzalez instead present a cashier’s check for $500 to settle the debt.
Why is Kepler more confident that Gonzalez’s debt will actually be repaid if she presents a cashier’s check?
Chapter 29 Hypothetical Case 4: Recall from Chapter 28 Hypothetical Case 4 that Rhonda Kepler receives a Carolina State Bank check for $500 from Heather Gonzalez as repayment of a loan, which was then dishonored. Kepler requests that Gonzalez instead present a cashier’s check for $500 to settle the debt.
Why is Kepler more confident that Gonzalez’s debt will actually be repaid if she presents a cashier’s check?
[Instructor: See Checks in Chapter 29]