I. INTRODUCTION
In early 1999, the National Automated Clearing House Association (NACHA) board of directors approved rules that support the conversion of checks into electronic transactions at retail points–of–sale (POS). The conversions allow consumers to present checks to retailers to be processed through electronic readers which, in turn, record the bank account and check number along with routing information. The checks are then returned immediately to the consumer with a “void” stamp. There are a number of companies that market this service to retailers. The purpose of this article is to describe the generalities of the service.
The service promises to deliver a streamlined check acceptance process, eliminate returned checks, returned check fees and warranty claims, as well as reduce check fees and contact with the bank. For retailers, it also translates into reduced paperwork and improved cash flow through faster closing or balancing and settlement.
II. ELECTRONIC CHECK ACCEPTANCE PROCEDURES
When a customer purchases goods or services from a participating retailer by means of a check, the retailer will scan the check to obtain the information to make an electronic debit and to ascertain if the status of the customer’s account. If the check is accepted, it will be returned with a “void” stamp (the stamp may include information regarding the electronic deposit of the check). The retailer’s register will normally generate a receipt, in compliance with Regulation E, that contains an agreement and signature line. The agreement might state, for example: “I authorize the retailer to convert this check to a draft or an Electronic Funds Transfer and to debit my account for the amount of this transaction. Should this draft or Electronic Funds Transfer be returned unpaid, I agree to pay a $20 fee that may be charged to my account electronically or by draft.” A participating retailer converts a consumer’s check into an Electronic Check when the consumer signs the authorization slip.
A customer’s paper check is returned with a copy of the transaction receipt. The retailer sends the Electronic Check to the customer’s financial institution account through the Automated Clearing House (ACH) Network. The transaction is governed by Regulation E and therefore, the retailer is required to retain a copy of the signed authorization and to produce a copy in the event of a dispute. A retailer must locate a signed authorization and other information necessary to collect a returned ACH debit. The entire process is similar to a one-time debit card.
A customer’s funds are withdrawn from his or her account one to two days after the purchase, once the Electronic Check arrives at the customer’s financial institution. The customer’s statement will show information about each Electronic Checking transaction, including the retailer’s name, amount and check number.
A. Examples to Consider
Example 1. Bank customer gave her debit card and PIN to her roommate to assist with household purchases as roommate deemed appropriate. The roommate has used the customer’s debit card for purchases completely for the benefit of the roommate. What liability does the bank have toward the bank’s customer for the unauthorized purchases?
Answer: Since the bank’s customer gave the roommate the debit card and PIN, the bank customer would be liable for the charges, unless she had previously notified the bank that the bank customer was revoking the authority given to the roommate.
Example 2. Roommate took from the bank’s customer debit card and PIN from the bank’s customer purse without the permission of the bank customer, in other words, the roommate stole the card and used it without permission from the bank customer. Is the bank liable toward the customer for these unauthorized purchases?
Answer: The charges would be unauthorized and the bank would follow the liability section in Regulation E 205.6. This portion of the regulation states that if the bank customer notifies the bank within two business days after learning of the loss or theft, the customer’s liability is the lesser of $50 or the amount of unauthorized transfers that occurred before notice was given to the bank.
B. Rationale
The “Electronic Fund Transfer Act” found at 15 U.S.C. 1693 defines the term “unauthorized electronic fund transfer”. The term is defined to mean an “electronic fund transfer from a consumer’s account initiated by aperson other than the consumer without actual authority to initiate such transfer and from which the consumer receives no benefit, but the term does not include any electronic fund transfer (A) initiated by a person other than the consumer who was furnished with the card, code, or other means of access to such consumer’s account by such consumer, unless the consumer has notified the financial institution involved that transfers by such other person are no longer authorized, …”
Stated another way, once a bank customer provides authority to another to use the customer’s debit card, the bank customer is required to notify the financial institution that the transfers by the other person are no longer authorized.
III. ELECTRONIC CHECK ACCEPTANCE CONSUMER PROTECTION
Regulation E consumer protection procedures apply to electronic checks. If there is a discrepancy on the customer’s statement, then a customer has 60 days from the statement mailing date to report an unauthorized transfer that appears on the statement. As with other electronic transactions, the customer is protected from assuming responsibility for unauthorized transfers. If the customer notifies its financial institution within the 60-day time period, then the customer should receive credit for the unauthorized amounts. If the financial institution needs more than ten business days to investigate and resolve the matter it must return the amount in question to the customer’s account during the investigation. The customer may be asked to sign an Affidavit of Unauthorized Activity.