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Traditionally when a customer wrote a check (on the payor bank) and the payee deposited it into his account (at the depository bank), the check was physically routed by means of ground and air transportation to the various intermediary banks until it was physically presented to the payor bank for final settlement. The federal Check 21 Act (2004) promotes changes in this process by allowing banks to process electronic images of customers’ checks instead of the actual paper instrument: the data on the check is truncated (stripped) from the instrument and the data are transmitted. The original check can be digitally recreated by the making of a “substitute check.” Merchants—indeed, anyone with a check scanner and a computer—can also process electronic data from checks to debit the writer’s account and credit the merchant’s instantly.
In addition to Check 21 Act, the Electronic Fund Transfer Act of 1978 also facilitates electronic banking. It primarily addresses the uses of credit and debit cards. Under this law, the electronic terminal must provide a receipt of transfer. The financial institution must follow certain procedures on being notified of errors, the customer’s liability is limited to $50 if a card or code number is wrongfully used and the institution has been notified, and an employer or government agency can compel acceptance of salary or government benefits by EFT.
Article 4 of the UCC—state law, of course—governs a bank’s relationship with its customers. It permits a bank to pay an overdraft, to pay an altered check (charging the customer’s account for the original tenor of the check), to refuse to pay a six-month-old check, to pay or collect an item of a deceased person (if it has no notice of death) and obligates it to honor stop payment orders. A bank is liable to the customer for damages if it wrongfully dishonors an item. The customer also has duties; primarily, the customer must inspect each statement of account and notify the bank promptly if the checks have been altered or signatures forged. The federal Expedited Funds Availability Act requires that, within some limits, banks make customers’ funds available quickly.
Wholesale funds transactions, involving tens of millions of dollars, were originally made by telegraph (“wire transfers”). The modern law governing such transactions is, in the United States, UCC Article 4A.
A letter of credit is a statement by a bank or other financial institution that it will pay a specified sum of money to specified persons when certain conditions are met. Its purpose is to facilitate nonlocal sales transactions by ensuring that the buyer will not get access to the goods until the seller has proper access to the buyer’s money. In the US letters of credit are governed by UCC Article 5, and in international transactions they may be covered by a different internationally recognized law.
Article 4 of the UCC permits a bank to pay
The type of banks covered by Article 4 include
A bank may
Forms of electronic fund transfer include