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Chapter 29 Checks and Electronic Fund Transfers Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education 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? 29-2 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? 29-3 Chapter 29 Hypothetical Case • 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 Wall Street Journal "Wells Fargo to Pay $200 Million in Overdraft-Fee Case.” 29-4 Chapter 29 Hypothetical Case (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? 29-5 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 29-6 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 29-7 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 29-8 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 29-9 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 2910 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 2911 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 2912 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 2913 Electronic Funds Transfer • An electronic funds transfer results when money is transferred by an electronic terminal, by telephone, or by computer 2914 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) 2915 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 2916 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 2917 Chapter 29 Hypothetical Case • 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 $748.00 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? 2918 Chapter 29 Hypothetical Case • Recall from Chapter 28 Hypothetical Case 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? 2919
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