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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
Chapter 18
Bank–Depositor Relationships and Cyber-Banking
I. Key Terms
ATM card (p. 429) Overdraft (p. 417)
Bank (p.417) Payor bank (p. 426)
Check 21 Act (p. 428) Presenting bank (p. 426)
Collecting bank (p. 426) Provisional (p. 427)
Debit card (p. 429) Regulation E (p. 430)
Depositary bank (p. 426) Remitting bank (p. 426)
E-check (p. 429) Stale check (p. 419)
Electronic fund transfers (EFTs) (p. 429) Subrogation (p. 424)
Forgery (p. 419) Substitute check (p. 428)
Intermediary bank (p. 426) Uttering (p. 419)
Midnight deadline (p. 422)
II. Learning Objectives
1. Clarify the bank’s duties in the bank–depositor relationship.
2. Clarify the depositor’s duties in the bank–depositor relationship.
3. Explain a drawer’s rights in relation to a stop-payment order.
4. Explain the extent of the insurance protection provided by the FDIC.
5. List the different terms used to describe banks during the bank collection process.
6. Outline a check’s life cycle.
7. Describe the process of an electronic fund transfer.
8. Describe the principal features of the Check 21 Act.
9. Describe the consumer protection features of the Check 21 Act.
10. Discuss the protection given to consumers by the Electronic Fund Transfer Act.
III. Major Concepts
18-1 The Bank-Depositor Relationship
The drawee bank must honor checks drawn by its customers when there are sufficient
funds on deposit. Failure to do so makes the bank liable to the customer for any actual
damages the customer suffers. A bank, however, is under no obligation to a customer to
pay a stale check unless it is certified. The drawee bank has no liability to the holder of a
check unless it is certified. Banks are responsible for paying altered or forged checks.
Banks may add contractual clauses providing that the bank is not liable for forgeries
resulting from the use of a facsimile or a non-manual signature. Banks must make funds
available to depositors according to a specific schedule. Depositors must examine their
bank statements and canceled checks promptly. It is a crime to write a check with
insufficient funds in the bank. Oral stop-payment orders are binding upon the bank for 14
days; written orders to stop payment are binding for six months.
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
18-2 Bank Deposits and Collections
During the bank collection process, banks are described by different terms, depending on
their particular function in a transaction. Sometimes a bank takes a check for deposit. At
other times, it pays a check as a drawee. At still other times, it takes a check for collection
only. The different terms that are used to describe banks and depositary bank, payor bank,
intermediary bank, collecting bank, presenting bank, and remitting bank. The lifecycle of
a check begins when the drawer writes a check and delivers it to the payee. If a payee
cashes a check at a payor (drawee) bank, the payment is final. If, instead, the payee
deposits a check in his or her bank, which sends it to the payor bank for collection, any
payment is provisional.
18-3 Cyber-Banking
The Check 21 Act establishes substitute checks, which may be returned to bank
customers in place of the canceled original check and thus make check clearing much
quicker through the use of electronic processing. An ATM card is used together with a
personal identification number (PIN) to gain access to an automatic teller machine. A
debit card is used to subtract money electronically from a bank account. Many banks
now use a combination ATM-debit card. A consumer’s liability for the unauthorized use
of an ATM card is limited to $50 only if notice of the loss or theft of a card is given the
issuer within 2 business days with liability increasing after that time. Under the
Electronic Fund Transfer Act, consumers who use EFTs have 60 days to notify the bank
of an error on a periodic statement or terminal receipt; thereafter, the bank must
investigate. The Electronic Fund Transfer Act does not apply to transactions between
banks and other businesses. Article 4A of the UCC has been adopted by many states to
govern EFTs made by banks and businesses. The federal government has set up the
Internet Crime Complaint Center which handles complaints involving cybercrimes such
as identity theft, cyber-extortion, and internet fraud. Congress has also passed legislation
aimed at solving these problems. Two such acts are the Identity Theft and Assumption
and Deterrence Act and the National Stolen Property Act.
IV. Outline
I. The Bank-Depositor Relationship (18-1)
A. Introduction
1. Under the UCC, a “bank” is “any person who engages in the business of banking.”
2. The relationship between the drawee bank and its customer is that of both debtor and
creditor, and agent and principal.
B. The Bank’s Duties
1. Duty to Honor Orders
a. The drawee bank is under a duty to honor all checks drawn by its customers when
there are sufficient funds on deposit in the customer’s account.
b. If there are insufficient funds on deposit, the bank may charge the customer’s
account even if it creates an overdraft.
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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
c. If a bank fails to honor a check because of a mistake on its part, the bank is liable
to the customer for any actual damages the customer suffers.
d. The bank is under no obligation to the holder of a check unless it is certified.
e. A bank has no obligation to honor a stale check although a bank may honor such a
check so long as it acts in good faith.
2. Death or Incompetence of a Customer
a. The drawee bank is not liable for the payment of a check before it has notice of
the death or incompetence of the drawer.
b. Even after notice, a bank may pay or certify checks for ten days after the date of
death of the drawer.
3. Forged and Altered Checks
a. A forgery is the fraudulent making or alteration of a writing.
b. If a bank in good faith pays an altered amount on a check to a holder, it may
deduct from the drawer’s account only the amount of the check as it was
originally written.
c. The bank is liable to the depositor if it pays any check on which the depositor’s
signature has been forged.
d. Banks may add clauses to contracts with customers providing that the bank is not
liable for forgeries resulting from the use of a facsimile or a non-manual
signature.
4. Availability of Funds
a. Regulation CC has required banks to make funds available to depositors
according to a prescribed schedule, and some state laws require even shorter time
periods for banks to make funds available.
b. Regulation CC also requires banks to disclose in advance their policy for making
funds available to depositors.
c. If the payor bank is not the depositary bank, it must settle for an item by midnight
of the banking day of receipt.
d. If the payor bank is also the depositary bank, it must either pay or return the check
or send notice of its dishonor on or before its midnight deadline which, in this
case, is midnight of the next banking day following the banking day on which it
receives the relevant item.
C. The Depositor’s Duties
1. Bad Checks
a. Most states have statutes making it larceny or attempted larceny for a person to
issue a check drawn on a bank in which the person has insufficient funds.
b. State statutes usually give the drawer a certain number of days in which to make a
check good, without fear of prosecution.
2. Duty to Examine Accounts
a. The UCC imposes a duty on depositors to examine bank statements and canceled
checks promptly and with reasonable care.
b. The UCC provides rules on reporting to the bank any forged or altered checks;
and, if they do not do so, depositors cannot hold the bank responsible for losses
due to the bank’s payment of a forged or altered instrument.
3. Antedated and Postdated Checks
a. A check may be antedated or postdated.
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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
b. A bank may charge a postdated check against a customer’s account unless the
customer has notified the bank of the postdated check within a reasonable time for
the bank to act on it.
D. Stop-Payment Rights
1. Drawers may order a bank to stop payment on any item payable on their account.
2. The stop-payment order must be received in time and in such a manner as to afford
the bank a reasonable opportunity to act on it.
3. An oral stop payment is binding upon the bank for fourteen days unless confirmed in
writing within that period.
4. A written stop payment is binding for six months, unless renewed in writing.
5. Under its right of subrogation, a bank that wrongly fails to honor a stop payment
order may take the place of any holder, holder in due course, payee, or drawer who
has rights against others on the underlying obligation.
E. Insured Accounts
1. The Federal Deposit Insurance Corporation insures deposits in banks as well as in
savings and loan associations.
2. There are limits on insurance coverage.
II. Bank Deposits and Collections (18-2)
A. Bank Descriptions
1. The depositary bank is the first bank to which an item is transferred for collection
even if it is also the payor bank.
2. The payor bank is a bank on which an item is payable as drawn or accepted.
3. The intermediary bank is any bank to which an item is transferred in the course of
collection, except the depositary or payor bank.
4. A collecting bank is any bank handling the item for collection, except the payor bank.
5. The presenting bank is any bank presenting an item, except a payor bank.
6. The remitting bank is any payor or intermediary bank remitting for an item.
B. A Check’s Life Cycle
1. The payee may take a check directly to the payor bank for payment; and, if the check
is paid in cash, the payment is final.
2. A payee will more likely deposit a check in the payee’s own account in another bank,
known as the depositary bank.
3. Any settlement given to a customer by a depositary bank is provisional and may be
revoked if the check is dishonored.
4. A depositary bank sends the check to a collecting bank which presents the check to
the payor bank for payment.
5. If the check is dishonored for any reason, a substitute check will be returned to the
payee via the same route that it was sent, and all credits given for the item will be
revoked.
III. Cyber-Banking (18-3)
A. The Check 21 Act
1. The Check 21 Act brings the check-clearing method into the modern age by the use of
electronic check processing.
2. Electronic processing could not be done prior to this 2004 law, because of the legal
requirement that original checks be presented to the drawee bank for payment.
3. A new negotiable instrument called a substitute check is used.
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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
4. A substitute check is a paper reproduction of both sides of an original check that can
be processed just like the original check.
5. Under the Check 21 Act, the customer has a right only to a paper substitute check that
is a reproduction of the front and back of the original.
6. The Check 21 Act includes a consumer’s right to claim an expedited credit under
certain circumstances.
B. Electronic Fund Transfers (EFT)
1. Computers and electronic technology is used as a substitute for checks and other
banking methods.
2. Payment by e-check is a system in which funds are electronically transferred from a
customer’s checking account, eliminating the need to process a paper check.
3. An ATM card is used together with a personal identification number to gain access to
an automatic teller machine either on or off the bank premises.
4. A debit card is used to electronically subtract money from a bank account to pay for
goods or services.
5. There are two types of debit cards – online and offline.
6. A debit card offers less protection than a credit card.
7. A debit card payment cannot be stopped if a purchase is defective or if an order is not
delivered.
8. Liability for an unauthorized use of a lost or stolen ATM card may also be greater
than liability for unauthorized use of a credit card.
9. The unauthorized use of an ATM card is a criminal offense punishable by a $10,000
fine and/or 10 years in prison.
10. Regulation E, issued by the Federal Reserve Board, establishes the basic rights,
liabilities, and responsibilities of consumers who use electronic fund transfer services
and of financial institutions that offer those services.
11. The Electronic Fund Transfer Act is a consumer protection law that does not apply to
transactions between banks and other businesses.
12. Article 4A of the UCC has been adopted by many states to govern electronic fund
transfer’s made by banks and businesses.
C. The Global Financial Cyber-Crisis
1. Global Level Problems
a. A rival firm, an enemy nation or a crime syndicate, could send an e-mail with an
attached PDF file that, when opened, will install a deadly virus into a corporate
computer system.
b. Without so much as a digital alarm going off, a corporation might lose all of its
data or a banking system might be wiped clean of all transactions.
2. Global Cyber-Targets and Cyber-Tactics
a. One step that has been suggested is to divide the data stream so that it travels
along a variety of routes so that if one line is attacked the others can continue to
transmit.
b. Unfortunately, there are bottlenecks along the global network at which the data
streams intersect and fall under the control of a limited number of domain-name
servers, making them tempting targets for cybercriminals and cyberterrorists.
3. Cyber-Command (Cyber-com)
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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
a. The global response to such problems has been the establishment of a new
cyber-command center which is to protect the military’s computer command
system.
b. The National Security Agency has been given control over this new center which
has been officially named Cyber Command or Cyber-com.
c. Cyber-com is designed to protect the American cyber-system from attack and to
formulate plans to undermine the computer systems of enemy nations.
4. Domestic Cyber-Targets and Cyber-Tactics
a. The federal government has taken steps to protect individual bank accounts and
identities from cyber-criminal attacks.
b. Protective steps include the establishment of the Internet Crime Complaint Center
and the passage of legislation aimed at protecting Internet transactions.
Internet Crime Complaint Center (IC3)
c. The federal government has set up the Internet Crime Complaint Center (IC3)
which connects the National White Collar Crime Center (NW3C) with the Federal
Bureau of Investigation (FBI).
d. The IC3 handles complaints involving cybercrimes such as identity theft,
cyberextortion, and Internet fraud.
5. Domestic Cyber-Legislation
a. Congress passed the Identity Theft and Assumption and Deterrence Act (ITDA)
and the National Stolen Property Act (NSPA).
b. The ITDA outlaws the unauthorized transfer, possession, or use of a means of
identifying another person to violate federal law.
c. The amendment to the ITDA adds a new crime, called aggravated identity theft.
d. Under the NSPA it is a federal crime to use interstate or foreign commerce to
transport personal currency and securities that an individual is aware were stolen,
were secured by fraud, or were taken by some other illegal method including an
unauthorized electronic transfer.
V. Background Information
A. Cross-Cultural Notes
1. Invoices in Switzerland must be made on a standard payment form. Payment can be
made in cash through the post office or bank.
2. An article titled “Jamie Dimon, CEO Of JPMorgan Chase, Calls International Bank
Rules 'Anti-American'” is available at
http://www.huffingtonpost.com/2011/09/11/jamie-dimon-jpmorgan-chase-rules_n_95
7740.html.
B. Historical Notes
1. Information on the First Bank of the United States, built when Philadelphia was still
the nation’s capital, is available at http://www.ushistory.org/tour/first-bank.htm.
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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
VI. Terms
1. A raised check is one that has been altered to be payable for a higher amount. Absent
negligence on the part of the drawer, the bank must bear the loss on the increased
amount.
VII. Related Cases
1. After her husband’s death, Mrs. Leitzman attempted to prevent withdrawal money
from the account of the O-Bar-O Ranch, which her husband owned. Neither her
husband’s name nor that of her own was on the account. A third-party sole signatory
withdrew funds over Mrs. Leitzman’s objections. The court ruled that although her
husband’s name did not appear on the signature card, the bank had sufficient reason
to conclude that Mr. and Mrs. Leitzman were customers. The bank therefore was
required to honor Mrs. Leitzman’s notice under UCC section 4-405 and pay her the
money from the account. The court upheld a jury verdict awarding Mrs. Leitzman
compensatory and punitive damages. Lietzman v. Ruidoso State Bank, 827 P.2d 1294
(N.M. 1992).
2. An employee of the Mid-American Clean Water Systems forged a number of checks
from Mid-American’s business account. Mid-American sued the bank for
reimbursement of lost funds. The court ruled that it was Mid-American’s own
negligence that contributed to the repeated forgeries because Mid-American was slow
to report the forgeries and also did not supervise the employee adequately. Thus, the
bank was not held liable. In re Mid-American Clean Water Systems, Inc., 22 UCC
Rep. Serv. 272.
3. In Ownbey Enterprises, Inc. v. Wachovia Bank, 457 F.Supp.2d 1341 (N.D. Ga. 2006),
among other findings, the court ruled that under Georgia’s version of the UCC, a
drawee bank was not liable to an account holder for forged checks made available to
the account holder more than 60 days prior to the customer’s notification to the bank
of the forgeries.
VIII. Teaching Tips and Additional Resources
1. The web site for the Office of the Comptroller of the Currency, charged with ensuring
a safe national banking system, can be found at http://www.occ.treas.gov/. A number
of resources are available at the site.
2. A resource provided by the federal government called MyMoney.gov addressing the
basics of financial education is available at http://www.mymoney.gov/.
3. Information on check services from the Federal Reserve is available at
http://www.federalreserve.gov/paymentsystems/check_about.htm.
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
4. The Federal Deposit Insurance Corporation has information on the Check 21 act
discussed in the text at
http://www.fdic.gov/regulations/resources/21actfaq/index.html.
5. An article from the New York Times on stop-payment orders titled “Stop Payment.
Now Stop It Again” is available at
http://www.nytimes.com/2010/07/25/your-money/25haggler.html.
6. Ask students if they have encountered problems with automated teller machines or
other electronic banking services. The Federal Trade Commission has extensive
information and facts for consumers regarding electronic banking at
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre14.shtm.
7. Further information regarding the Federal Deposit Insurance Corporation can be
found at http://www.fdic.gov/.
8. The Federal Reserve Board provides extensive information regarding banks, services
of banks, and other issues of interest to consumers at
http://www.federalreserve.gov/consumerinfo/default.htm.
9. Additional information regarding insured deposits is available at the web site of the
Federal Deposit Insurance Corporation at http://www.fdic.gov/deposit/index.html.
10. The American Bankers Association provides ATM safety tips at
http://www.aba.com/Consumers/Pages/CNC_contips_atm.aspx.
11. The web site for the Internet Crime Complaint Center referenced in the text can be
found at http://www.ic3.gov/default.aspx.
12. An article from The Wall Street Journal titled “Big Banks Agree to Settle Swaps
Lawsuit” reports that Bank of America and a number of other big banks of Wall Street
have agreed to a tentative settlement of $1.87 billion in regard to allegations that they
conspired to rig the market for credit derivatives.
http://www.wsj.com/articles/banks-wall-street-groups-agree-to-settle-credit-swaps-ant
itrust-case-1441988741.
13. The Federal Deposit Insurance Corporation addresses professional liability against
professionals including officers and directors of banks at
https://www.fdic.gov/bank/individual/failed/pls/.
14. Recently the federal government has allowed banks to get into different areas of
business. Have students research whether banks in their states have taken advantage
of these opportunities. Do local laws allow banks to operate across state lines?
15. The Federal Reserve Bank has been very active in trying to regulate the economy to
protect against inflation. Have students research the Federal Reserve’s actions over
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Chapter 18 - Bank–Depositor Relationships and Cyber-Banking
the last twenty years, and have them debate whether they think the Federal Reserve’s
monetary policies have helped or hurt the national economy.
16. To facilitate class discussion, obtain copies of your state’s criminal code that applies
to writing bad checks and distribute the copies to students. Invite a prosecuting
attorney to discuss policies of his or her office with respect to bad checks and explain
what fines, restitution, and jail penalties are possible for those charged with passing
bad checks.
17. Discuss how ATM cards and EFTs have changed personal financial transactions. Do
students believe debit cards should receive the same protection as credit cards in
relation to unauthorized use?
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