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192
“Bankers have no right to establish a customary law among themselves, at the
expense of other men.” Justice Foster
I. Teacher to Teacher Dialogue
transfers of money substitutes take place.
The future direction of technology in the area of money substitutes and some of the practical
problems the law is having while trying to keep up with emerging technologies need to be
explored, particularly in view of issues that are arising in both the fields of law enforcement and
privacy. Financial institutions have many more duties today to report patterns of certain types of
large amorphous stone sculpture was placed near the portico. It was quickly nicknamed the
“Bankers Heart” by local pundits. This resentment may be based on some of the same sources of
contempt for any number of professions. The larger society resents its dependence on them. It
objects to code language used by the members of these groups and wishes life would go back to a
get left at the station and resent it. In the meantime, welcome aboard for the ride.
The rules of rights and duties involving checks are really not all that new to the layperson.
Most students have an ongoing contractual relationship with a bank and are already familiar with
the basic rules involving negotiable instruments. The best way to approach issues involving
BANKING SYSTEM AND ELECTRONIC
FINANCIAL TRANSACTIONS
25
Banking System and Electronic Financial Transactions
II. Chapter Objectives
1. Describe the difference among certified and cashier’s checks.
2. Describe the system of processing and collecting checks through the banking system.
III. Key Question Checklist
What is the basic contractual relationship between the parties?
What negotiable instrument is at issue?
IV. Text Materials
Checks are the most common form of negotiable instruments used in the U.S.
The Bank-Customer Relationship
When a deposit is made at a bank, a creditor-depositor relationship is created with the customer
Contemporary Environment: Uniform Commercial Code (UCC) Governs Checks and
Banking
Article 3 establishes the requirements for finding a negotiable instrument; Article 4 establishes
Ordinary Checks
Parties to a Check – The drawer is the person who maintains the checking account at the
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Indorsement of a Check – The payee may either demand payment of a check or indorse the
Special Types of Checks
Certified Checks – Certified checks are guaranteed by the bank with funds set aside from the
Cashier’s Checks – Cashier’s checks are issued to specific payees, and are considered non-
Honoring Checks
Stale Checks – A check that has been outstanding for more than a certain period of time is
Incomplete Checks – If a check is left uncompleted, the payee or holder may complete the
Postdated Checks – In order for the terms of a postdated check to be honored by a bank, the
drawer must postdate the check and must give separate written notice to the bank, including a full
Stop-Payment Orders – Orders by the drawer of a check to the payor bank not to pay a
particular item may be oral or in writing. Oral orders will bind the bank for 14 calendar days
Overdrafts – If the drawer does not have enough money in his or her account when a properly
payable check is presented for payment, the payer bank can either (1) dishonor the check, or (2)
Wrongful Dishonor – When a payer bank does not honor a check and there are sufficient funds,
Ethics: Federal Currency Reporting Law
Banking System and Electronic Financial Transactions
Forged Signatures and Altered Checks
Critical Legal Thinking – A forged check is one that has been signed in a fraudulent manner.
Critical Legal Thinking – An altered check has been changed without authorization and
Series of Forgeries – Customers must report forgeries or alterations within a reasonable time, not
exceeding 30 days from the date of their bank statement, or the bank will be discharged from
liability on all similarly forged or altered checks.
was refused because of Spacemakers’ failure to give timely notice.
Issue: Did Spacemakers’s failure to uncover the forgeries and failure to provide SunTrust with
timely notice of the forgeries bar its claim against SunTrust?
Decision: Yes. The court of appeals held that Spacemakers had failed to give timely notice to
for any additional items forged by the same wrongdoer. The underlying justification for this
provision is simple: one of the most serious consequences of the failure of a customer to timely
examine its statement is that it gives the wrongdoer the opportunity to repeat his misdeeds.
Triplett failed to act ethically. Spacemakers would never have hired her if they had known about
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recoverable if discovered early enough.
The Collection Process
Banks are under a duty to accept deposits into customer’s accounts, including collecting checks
Federal Reserve System – This system consists of 12 regional banks which assist banks with the
Bank Payment Rules
Provisional Credits – Depository banks are not required to pay the customer until the check
time periods.
“On Us” Checks – Checks in which the depository and payor bank are the same, and must be
Deposit of Cash – Money deposited into an account becomes available on the next banking day.
Failure to Examine Bank Statements in a Timely Manner – Statements must be sent regularly
to the customer indicting sufficient information for them to be able to identify paid checks.
Contemporary Environment: FDIC Insurance of Bank Deposits
The FDIC insures deposits up to $100k per depositor per bank at most banks and savings and
loans.
E-Banking and E-Money
Automated Teller Machines – ATMs allow deposits and withdrawals outside of normal banking
hours.
Banking System and Electronic Financial Transactions
involved.
Direct Deposit and Withdrawal – Many banks allow recurring payments and crediting of
recurring deposits.
information through computer access.
Digital Law: Consumer Electronic Funds Transfers
Many customers now use debit cards to pay for goods and services. The Electronic Fund Transfer
Act and the Federal Reserve Board’s Regulation E establish consumer rights for unsolicited credit
Electronic Wire Transfers – Commercial or wholesale wire transfers are used to move monies
between businesses and financial institutions.
Digital Law: Commercial Electronic Funds Transfers
fund transfers.
Fund Transfer Procedures – Security procedures are used to protect the banking institutions
during fund transfers.
The Act reorganizes federal government supervision of the banking system, regulates previous
unregulated financial products and institutions, and adds a new consumer protection agency to
protect consumers from abusive lending and banking practices.
International Law: Hiding Money in Offshore Banks
The Bahamas offers bank secrecy laws and tax shelter laws.
V. Key Terms and Concepts
obligation of a party.
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including checks.
Article 4—Establishes the rules and principles that regulate bank deposit and collection
procedures.
Automated teller machine—An automated teller machine (ATM) is an electronic machine
that is located either on a bank’s premises or at some other convenient location, such as a
shopping center or supermarket.
consumer financial products and services, including requiring increased disclosure of credit
terms and risk to consumers.
Cashier’s check—A check issued by a bank where the customer has paid the bank the amount
of the check and a fee. The bank guarantees the payment of the check.
customer’s account.
Check—An order by the drawer to the drawee bank to pay a specified sum of money from the
drawer’s checking accounting to the named payee (or holder).
Collecting bank—The depository bank and other banks in the collection process (other than
the payor bank).
Article 4 of the UCC.
Commercial electronic funds transfer—Article 4A applies only to commercial electronic
funds transfers; consumer electronic funds transfers subject to the Electronic Funds Transfer
Act are not subject to Article 4A.
Commercial wire transfer—An electronic transfer of funds from one party to another party.
Revenue Service (IRS).
Debit card—Debit cards replace checks in that customers can use them to make purchases.
Deferred posting rule—A rule that allows banks to fix an afternoon hour of 2:00 p.m. or later
as a cutoff hour for the purpose of processing items.
next banking day following the deposit.
Depository bank—The bank where the payee or holder has an account.
Banking System and Electronic Financial Transactions
Electronic Funds Transfer Act—Congress enacted the Electronic Funds Transfer Act to
regulate consumer electronic funds transfers.
Electronic funds transfer system—Computer and electronic technology that makes it possible
for banks to offer electronic payment and collection systems to bank customers.
banks”) in the United States.
Federal Reserve System—A series of 12 regional Federal Reserve banks that assist banks in
the collection of checks.
Final settlement—Occurs when the payor bank (1) pays the check in cash, (2) settles for the
certain statutory time periods.
Forged instrument—A check with a forged drawer’s signature on it.
Honor—Payment of a drawer’s properly drawn check by the drawee bank.
Incomplete check—Drawers sometimes write checks that omit certain information, such as
the amount of the check or the payee’s name, either on purpose or by mistake. These are
called incomplete checks.
the check.
Indorsee of a check—The person to whom negotiable instrument is indorsed.
Indorsement of a check—Occurs when a payee indorses a check to another party by signing
the back of the check.
Indorser of a check—The person who indorses a negotiable instrument.
which the bank received the “on them” check for collection.
“On them” item—A check presented for payment by the payee or holder where the
depository bank and the payor bank are not the same bank.
“On us” item—A check that is presented for payment where the depository bank is also the
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referred to as online banking.
Ordinary check—An order by a drawer to a drawee bank to pay a specified sum of money
from the drawer’s checking account to the named payee (or holder).
Original tenor—The original amount for which the drawer wrote the check.
Overdraft—The amount of money a drawer owes a bank after it has paid a check despite
insufficient funds in the drawer’s account.
drawn.
Point-of-sale terminal—Debit cards can be used at merchants that have point-of-sale (POS)
terminals at the checkout counters. These terminals are connected online to a bank’s
computers.
Postdated check—A check that a drawer does not want cashed until sometime in the future.
been materially altered; and (3) the presenter has no knowledge that the signature of the
maker or drawer is unauthorized.
Principal-agent relationship—A principal–agent relationship is created if (1) the deposit is a
check that the bank must collect for the customer, or (2) the customer writes a check against
his or her account.
“clear.”
Regulation E—Regulation E has the force of law.
Revised Article 3—A revision of Article 3 of the UCC.
Series of forgeries or alterations—If the same wrongdoer engages in a series of forgeries or
alterations on the same account, the customer must report that to the payer bank within a
made available to the customer.
Stale check—A check that has been outstanding for more than six months.
Stop-payment order—An order by a drawer of a check to the payor bank not to pay or certify
a check.
Wrongful dishonor—Occurs when there are sufficient funds in a drawer’s account to pay a
