When is a cheque not a cheque?

Abstract

Based on market demand for increased efficiency, banks, merchants and processors continuously develop new ways to transfer funds. Legal processes developed to accommodate paper cheques have experienced significant change, allowing merchants to take funds from consumer cheque accounts without the consumer ever touching a cheque. Remotely created cheques allow consumers to authorise merchants to create and sign a cheque from the consumer's bank account. Merchants obtain authorisation by telephone and internet, and then create cheques for payment from the consumer's bank account. Because remotely created cheques are susceptible to fraud and forgery, the Federal Reserve Board and Uniform Commercial Code switched traditional rules, and will hold the merchant's bank liable for remotely created cheque forgery, rather than the consumer's bank. Under Check 21, merchants can scan cheques, but scan and transmit substitute cheque images rather than physically presenting consumer cheques to the consumer's bank. This process increases efficiency, but requires the merchant's bank to warrant the validity of the substitute cheque. The third process, 'electronic cheque presentment' allows cheque clearing based only on digital information submitted by merchants, based on clearinghouse rules. Similarly, 'electronic cheque conversion' allows merchants to use cheques as a source of information to transfer money electronically. Electronic fund transfers are a process to transfer funds through an electronic terminal, telephone, computer, magnetic tape or to instruct a financial institution to debit or credit an account. When a consumer authorises such transfers on a recurring basis, special preauthorised electronic fund transfer rules apply under the Electronic Fund Transfer Act and Regulation E. While each method of obtaining funds brings unique benefits, they bring risks as well. For example, many state laws do not explicitly authorise merchants to charge returned cheque fees for debit entries returned unpaid.