CHAPTER 15: BANKING IN THE DIGITAL AGE 27
whole or in part.
Money service businesses do not accept deposits, unlike banks, but do issue money orders, traveler’s
checks, and stored-value cards; exchange foreign currency; and cash checks. The UMSA applies to
traditional money services the same regulations that apply to other, traditional financial service businesses.
The UMSA requires persons engaged in money transmission, check cashing, or currency exchange to
obtain a license from a state, to be examined by state officials, to report on its activities to the state, and to
comply with certain record keeping requirements [UMSA 1–104].
TEACHING SUGGESTIONS
1. Commercial banks want to protect themselves against fraud and encourage the free flow of commerce.
Ask students to discuss whether they believe that the commercial banking system should be more concerned
satisfactorily balanced.
this change affect the ways in which commercial transactions are ordinarily conducted? Will the
financial system itself become more vulnerable to fraud and disruption? What sort of safeguards
might be adopted to reduce the potential for unauthorized electronic transfers of funds?
3. Ask students to discuss any electronic fund transfer problems they have either personally encountered or
whole or in part.
4. To lend substance to the subject of this chapter, bring “physical” items to class that relate to the topics.
These might include examples of the different types of checks mentioned in the text, receipts and statements
for electronic transactions, both consumer and commercial, and relevant Federal Reserve documents.
DISCUSSION QUESTIONS
written by its customers with the usual stipulation that there be sufficient funds in the account to pay each check. A
bank may properly dishonor a check for insufficient funds and incur no liability to the customer unless it has made
special arrangements with the customer to accept overdrafts—checks that are paid from that account even though the
account contains insufficient funds to cover the checks. A bank that dishonors overdrafts after having agreed to such
an arrangement may be liable to its customer for any proximate damages.
4. Who has the right to order that payment on a check be stopped? Only a customer—or, if a customer is de-
ceased, any person claiming an interest in the account—can order the customer’s bank to pay a check or stop
payment on a check. This right does not extend to holders—payees or indorsers—because the drawee bank’s
contract is only with its drawers. Moreover, a customer has no right to stop payment on a check that has been
certified or accepted by the bank.
the ground of breach of the presentment warranty that the instrument has not been altered.
6. What role does the Federal Reserve System play in clearing checks? The Federal Reserve System serves
as the central bank of the nation by transferring funds, handling government deposits, and supervising and regulating
CHAPTER 15: BANKING IN THE DIGITAL AGE 29
whole or in part.
instruments, thus greatly simplifying the clearing of checks (the methods by which checks deposited in one bank are
transferred to the banks on which they were written).
7. How might Check 21 affect the potential for banking fraud? Fraud may be more difficult to accomplish, in
part because the “float,” which contributes to the effective commission of a “check–kiting” scheme, is eliminated. Fraud
8. What types of financial institutions are covered by the EFTA? The EFTA governs financial institutions that
offer electronic fund transfers involving customer (consumer) accounts. The EFTA defines “financial institutions” to
include banks, savings and loan institutions, credit unions, and any other business entities that directly or indirectly
hold accounts belonging to consumers. Security brokerage houses that permit consumers to make electronic
transfers to and from money market fund accounts are also included.
of e-money. Under this act, all financial institutions must provide their customers with information on their privacy
policies and practices. This act proscribes the disclosure of financial institutions’ customer data without notice and an
opt-out opportunity.
10. Should only banks and regulated financial institutions be allowed to issue ATM cards? Yes, because
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Although the bank-customer relationship is contractual in nature and arises from the contract executed by both
2. Obtain copies of electronic fund transfer agreements from local banks and ask the class to compare the
similarities and differences of the agreements with each other. Ask the students to identify the provisions that appear
to be purely contractual in nature and the provisions that are modeled on the EFTA. Do any of the agreements
30 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
contain provisions that appear to be unreasonable? How might these provisions be redrafted to make them
3. Ask students to research the changes to the banking and financial industry caused by the Internet and those
changes caused by different federal and state laws and regulations. Will consumers understand the different
“hats” that banks may soon wear? Will consumers embrace online banks?
discovered the forgeries and reported them to Bank of America (the drawee) in May 1999. Boyd and the businesses
filed a suit in a California state court against the bank, alleging, among other things, unauthorized payment of the
checks. The bank filed a motion for summary judgment in part on the ground that UCC 4–406(d) precluded the claims.
The court granted the motion, and the plaintiffs appealed. In Espresso Roma Corp. v. Bank of America, N.A., a
state intermediate appellate court affirmed. Because the bank’s customers did not report the first forged check to the
that the failure contributed to the loss” under UCC 4–406(e). The court held that ordinary care, as used in UCC 4–406,
is a “professional negligence standard of care which looks at the procedures utilized in the banking industry . . . .
Reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does
not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general
banking usage.” Did the bank’s practices constitute “ordinary care”? Yes, according to the court, and the plaintiffs
What steps can a small business take to protect itself against embezzlement by a key employee? A
small business might set up a simple series of internal controls to frustrate attempts at embezzlement. For example,
one employee might check the accounts kept by another employee.
CHAPTER 15: BANKING IN THE DIGITAL AGE 31
whole or in part.
standard banking procedures and the bank’s own policies. RPM filed a suit in a federal district court against
Bank One to recover the amount of the check. Ask your students to answer the following questions, using the
information presented in the chapter.
1. How long is a written stop-payment order effective? What else could RPM have done to prevent
a check or a holder can sue the drawer for payment. A person who wrongfully stops payment on a check is
liable to the payee for the amount of the check and can also be liable for consequential damages.
3. What are a bank’s obligations with respect to stale checks? Should Bank One have contacted
RPM before paying the check? Why or why not? Under UCC 4–404, a bank is not obligated to pay a stale
to check with the customer before paying such a stale check.
why not? The failure to verify the signature will result in Bank One’s loss of the amount of the check. A bank
that pays a customer’s check bearing a forged indorsement must recredit the customer’s account or be liable
to the customer-drawer for breach of contract, under UCC 4–401(a), because the bank failed to pay the check
in accord with the customer’s “order to pay.” Banks today normally verify signatures only on checks that
exceed a certain threshold, such as $1,000, $2,500, or some higher amount, but in line with standard
to exercise ordinary care. If Rierson altered the check to cash it, and RPM is also considered to have been
To reduce fraud, checks that utilize mechanical or electronic signature systems should not be
honored. If businesses were forced to always have physical person sign each check, then fraud would be
reduced. Banks and businesses would be involved in fewer lawsuits over who is responsible for such fraud.
whole or in part.
1. Lyn writes a check for $900 to Mac, who indorses the check in blank and transfers it to Nan. She
then presents the check to Omega Bank, the drawee bank, for payment. Omega does not honor the
check. Is Lyn liable to Nan? Could Lyn be subject to criminal prosecution? Why or why not? Yes, to
both questions. In a civil suit, a drawer (Lyn) is liable to a payee (Nan) or to a holder of a check that is not
From whom can the bank recover this amount? The drawer is entitled to $6,300—the amount to which the
check was altered ($7,000) less the amount that the drawer ordered the bank to pay ($700). The bank may
recover this amount from the party who presented the altered check for payment.
whole or in part.
4. To lend substance to the subject of this chapter, bring “physical” items to class that relate to the topics.
These might include examples of the different types of checks mentioned in the text, receipts and statements
for electronic transactions, both consumer and commercial, and relevant Federal Reserve documents.
DISCUSSION QUESTIONS
written by its customers with the usual stipulation that there be sufficient funds in the account to pay each check. A
bank may properly dishonor a check for insufficient funds and incur no liability to the customer unless it has made
special arrangements with the customer to accept overdrafts—checks that are paid from that account even though the
account contains insufficient funds to cover the checks. A bank that dishonors overdrafts after having agreed to such
an arrangement may be liable to its customer for any proximate damages.
4. Who has the right to order that payment on a check be stopped? Only a customer—or, if a customer is de-
ceased, any person claiming an interest in the account—can order the customer’s bank to pay a check or stop
payment on a check. This right does not extend to holders—payees or indorsers—because the drawee bank’s
contract is only with its drawers. Moreover, a customer has no right to stop payment on a check that has been
certified or accepted by the bank.
the ground of breach of the presentment warranty that the instrument has not been altered.
6. What role does the Federal Reserve System play in clearing checks? The Federal Reserve System serves
as the central bank of the nation by transferring funds, handling government deposits, and supervising and regulating
CHAPTER 15: BANKING IN THE DIGITAL AGE 29
whole or in part.
instruments, thus greatly simplifying the clearing of checks (the methods by which checks deposited in one bank are
transferred to the banks on which they were written).
7. How might Check 21 affect the potential for banking fraud? Fraud may be more difficult to accomplish, in
part because the “float,” which contributes to the effective commission of a “check–kiting” scheme, is eliminated. Fraud
8. What types of financial institutions are covered by the EFTA? The EFTA governs financial institutions that
offer electronic fund transfers involving customer (consumer) accounts. The EFTA defines “financial institutions” to
include banks, savings and loan institutions, credit unions, and any other business entities that directly or indirectly
hold accounts belonging to consumers. Security brokerage houses that permit consumers to make electronic
transfers to and from money market fund accounts are also included.
of e-money. Under this act, all financial institutions must provide their customers with information on their privacy
policies and practices. This act proscribes the disclosure of financial institutions’ customer data without notice and an
opt-out opportunity.
10. Should only banks and regulated financial institutions be allowed to issue ATM cards? Yes, because
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Although the bank-customer relationship is contractual in nature and arises from the contract executed by both
2. Obtain copies of electronic fund transfer agreements from local banks and ask the class to compare the
similarities and differences of the agreements with each other. Ask the students to identify the provisions that appear
to be purely contractual in nature and the provisions that are modeled on the EFTA. Do any of the agreements
30 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
contain provisions that appear to be unreasonable? How might these provisions be redrafted to make them
3. Ask students to research the changes to the banking and financial industry caused by the Internet and those
changes caused by different federal and state laws and regulations. Will consumers understand the different
“hats” that banks may soon wear? Will consumers embrace online banks?
discovered the forgeries and reported them to Bank of America (the drawee) in May 1999. Boyd and the businesses
filed a suit in a California state court against the bank, alleging, among other things, unauthorized payment of the
checks. The bank filed a motion for summary judgment in part on the ground that UCC 4–406(d) precluded the claims.
The court granted the motion, and the plaintiffs appealed. In Espresso Roma Corp. v. Bank of America, N.A., a
state intermediate appellate court affirmed. Because the bank’s customers did not report the first forged check to the
that the failure contributed to the loss” under UCC 4–406(e). The court held that ordinary care, as used in UCC 4–406,
is a “professional negligence standard of care which looks at the procedures utilized in the banking industry . . . .
Reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does
not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general
banking usage.” Did the bank’s practices constitute “ordinary care”? Yes, according to the court, and the plaintiffs
What steps can a small business take to protect itself against embezzlement by a key employee? A
small business might set up a simple series of internal controls to frustrate attempts at embezzlement. For example,
one employee might check the accounts kept by another employee.
CHAPTER 15: BANKING IN THE DIGITAL AGE 31
whole or in part.
standard banking procedures and the bank’s own policies. RPM filed a suit in a federal district court against
Bank One to recover the amount of the check. Ask your students to answer the following questions, using the
information presented in the chapter.
1. How long is a written stop-payment order effective? What else could RPM have done to prevent
a check or a holder can sue the drawer for payment. A person who wrongfully stops payment on a check is
liable to the payee for the amount of the check and can also be liable for consequential damages.
3. What are a bank’s obligations with respect to stale checks? Should Bank One have contacted
RPM before paying the check? Why or why not? Under UCC 4–404, a bank is not obligated to pay a stale
to check with the customer before paying such a stale check.
why not? The failure to verify the signature will result in Bank One’s loss of the amount of the check. A bank
that pays a customer’s check bearing a forged indorsement must recredit the customer’s account or be liable
to the customer-drawer for breach of contract, under UCC 4–401(a), because the bank failed to pay the check
in accord with the customer’s “order to pay.” Banks today normally verify signatures only on checks that
exceed a certain threshold, such as $1,000, $2,500, or some higher amount, but in line with standard
to exercise ordinary care. If Rierson altered the check to cash it, and RPM is also considered to have been
To reduce fraud, checks that utilize mechanical or electronic signature systems should not be
honored. If businesses were forced to always have physical person sign each check, then fraud would be
reduced. Banks and businesses would be involved in fewer lawsuits over who is responsible for such fraud.
whole or in part.
1. Lyn writes a check for $900 to Mac, who indorses the check in blank and transfers it to Nan. She
then presents the check to Omega Bank, the drawee bank, for payment. Omega does not honor the
check. Is Lyn liable to Nan? Could Lyn be subject to criminal prosecution? Why or why not? Yes, to
both questions. In a civil suit, a drawer (Lyn) is liable to a payee (Nan) or to a holder of a check that is not
From whom can the bank recover this amount? The drawer is entitled to $6,300—the amount to which the
check was altered ($7,000) less the amount that the drawer ordered the bank to pay ($700). The bank may
recover this amount from the party who presented the altered check for payment.