Payment Systems
ACH Payments
Basic Concepts ACH Payments
Governing Law
• EFTA applies to natural persons with
consumer accounts.
• Common Law of Contracts
• NACHA Rules (Incorporating Article 4??)
Basic Concepts ACH Payments
The Players
Originator: The one who makes the entry that
initiates the transaction (not necessarily the
payor)
Originating Depositary Financial Institution (ODFI):
Financial Institution of the Originator
ACH Operator: Party that carries communication
and funds from ODFI to RDFI (usually a Federal
Reserve Bank)
Receiving Depositary Financial Institution (RDFI):
Financial Institution of the Receivor
Receiver: Party to which an entry is directed
Basic Concepts ACH Payments
Types of Entries
Credit Entry: Pay money
Debit Entry: Withdraw money
Note two ways to pay money:
Payor initiates a credit entry
Payee initiates a debit entry
Payments settled at Federal Reserve
Accounts of the participating banks
Basic Concepts ACH Payments
Timing
Debit Transaction must be entered the day
before the specified Settlement Date
Credit Transaction must be entered one or
two days before the specified settlement
date
Return of Entries (Debit or Credit) must be
made by RDFI to its ACH Operator by the
second business day after the Settlement
Date
Basic Concepts ACH Payments
Timing
Stopping Debit Entries
Consumers can stop if they notify RDFI
three banking days before the settlement
date
ODFI’s have five banking days to retract
duplicate or erroneous entries (but must
act in 24 hours of discovery)
Originators can retract if they notify Receiver
by the settlement date (No right to retract
after the settlement date for dissatisfaction
with underlying transaction)
Basic Concepts ACH Payments
Timing
Consumer Receivers of an erroneous or
fraudulant debit entry must notify RDFI
within 15 days of a statement showing the
entry.
RDFI must recredit “promptly” probably
meaning one day.
Basic Concepts ACH Payments
Risk of Loss for Unauthorized Items
ODFI warrants that the entry accords with
proper authorization.
Unauthorized Entry Timeline
1
2
3
33
O sends ODFI RDFI
RDFI
fraud
sends debits sends
entry
R
statement
account
47
R
notifies
RDFI of
error
RDFI
gets
funds
from
ODFI for
breach
of
warranty
ODFI
pursues
O for
funds
POS Conversion
Problem 8.9.1
• You pay ISP by an ACH transfer. You
agreed to this in account set up and
provided bank information.
• Is this most likely a credit entry or a debit
entry? See NACHA 14.1.28
Problem 8.9.1.a
• You pay ISP by an ACH transfer. You
agreed to this in account set up and
provided bank information.
• Is this most likely a credit entry or a debit
entry? See NACHA 14.1.28
• A Debit Entry Originated by ISP
Problem 8.9.1.a
• You pay ISP by an ACH transfer. You
agreed to this in account set up and
provided bank information.
• Is this most likely a credit entry or a debit
entry? See NACHA 14.1.28
• But it could be a recurring credit entry
initiated by you. Usually debit entries will
be for amounts that vary each month
Problem 8.9.1.b
• You live in Chicago (near Chicago Fed)
• ISP in Washington (near Seattle Fed)
• Identify parties and roles assuming a debit
entry
Problem 8.9.1.b
•
•
•
•
•
•
You
Your Bank
Chicago Fed
Seattle Fed
ISP Bank
ISP
Receiver
RDFI
Receiving ACH Operator
Originating ACH Operator
ODFI
Originator
Problem 8.9.1.c
• Assume next debit is due Monday April 1
• What (and by when) do you need to do to
stop the debit NACHA 8.4
Problem 8.9.1.c
• Assume next debit is due Monday April 1
• What (and by when) do you need to do to
stop the debit
• Oral or written notice to stop given to your
bank within three banking days of April 1.
NACHA 8.4
Problem 8.9.1.c
• Banking Day means “any day” on which a
DFI is open for banking business during any
part of such date. NACHA 14.1.14
Problem 8.9.1.c
• Banking Day means “any day” on which a
DFI is open for banking business during any
part of such date. NACHA 14.1.14
• Unlike under Regulation CC Saturday can
be a banking day!
Problem 8.9.2
• You pay your credit card by ACH transfer
(a credit entry to your bank) from your
home computer
• You initiate a $7000 payment but change
your mind the next day. Can you retract?
Problem 8.9.2
• You pay your credit card by ACH transfer (a
credit entry to your bank) from your home
computer
• You initiate a $7000 payment but change your
mind the next day. Can you retract?
• There is nothing you can do!
– This is not a debit entry so no stop payment under
NACHA 8.4
– Originators can only reverse entries that are
erroneous (NACHA 2.5 and 8.1)
Problem 8.9.3
• Your bank pays a check not properly
payable
• This causes your account not to have
enough to cover a scheduled debit which
is thus returned
• The intended payee car lender
repossesses car and this casues other
damage
• Is your bank laible to you?
Problem 8.9.3
§4-402(a) gives customers a right to
consequential damages for wrongful
dishonor of an “item”
An ACH debit is not an “item”
But NACHA 14.1.28 says “item” shall
include an entry and Article 4 will apply
What does that mean?
Problem 8.9.3
NACHA 14.1.28 says “item” shall include an
entry and Article 4 will apply
What does that mean?
Unless contrary NACHA Rule Article 4 rules
apply. Probably, as a matter of private
contract banks agree to be liable for
wrongfully dishonored debits as if they
were items and Article 4 applied!
Problem 8.9.4.a
Cliff pays by POS conversion at his grocery
store
Recently a double entry was put through for
groceries
What should he do?
Problem 8.9.4.a
Under EFTA 908(c) if he reports this error to
his bank they must recredit within the
earlier of their investigation being
complete or 10 business days
NACHA requires a “prompt” recredit which is
probably 1 business day NACHA 8.6
Problem 8.9.4.b
Instead of POS this was a telecheck where
telemarketer despite not being authorized
created a paper tele check.
Problem 8.9.4.b
Article 4 applies so check was not properly
payable
Under new tele check presentment
warranty, depositary bank warrants the
tele check was authorized so it bears the
loss
Problem 8.9.4.c
Telemarketer instead creates a TEL entry
Problem 8.9.4.c
This is now governed by EFTA rules and
NACHA as per problem 6.a
Problem 8.9.4.d
Who bears the loss?
Problem 8.9.4.d
Who bears the loss?
a. Cliff’s bank will recover from the merchant
bank under the ODFI warranty and indemnity
NACHA 2.2.1.1
b. Telemarketer bank would be responsible to the
Payor bank under new revisiosn to Article 4
c. Cliff’s bank will recover from the merchant
bank under the ODFI warranty and indemnity
NACHA 2.2.1.1
Problem 8-3
• Electra Smith was employed as a clerk for the
Business Corporation.
• One day it informed her that henceforth all her
paychecks would automatically be deposited in the
local bank of her choice. She chose Octopus National
Bank (ONB), her usual bank. Could she have
demanded a check and refused the EFT?
EFTA 913
No person may-(1) condition the extension of credit to a consumer
on such consumer's repayment by means of
preauthorized electronic fund transfers; or
(2) require a consumer to establish an account for
receipt of electronic fund transfers with a particular
financial institution as a condition of employment or
receipt of a government benefit.
Problem 8-3
ONB informed Electra that she could pay all her
bills by phone and that many creditors would be
willing to set up an automatic monthly payment
plan whereby ONB would pay routine bills
unless she instructed otherwise. Electra signed
such a contract with her landlord, to whom ONB
agreed to transfer $300 on the first day of each
month as rent. What details does ONB have to
explain to her? See Regulation E §205.7.
Problem 8-3
(a)One day ONB’s computer malfunctioned and
deducted $1,000 from Electra’s checking
account and credited it to an account
designated ‘‘Computer Maintenance.’’ Several
of her checks bounced as a result.
Is the computer’s deduction an ‘‘electronic fund
transfer’’ under Regulation E §205.3(b)? If so,
is it also an ‘‘unauthorized electronic fund
transfer’’ under §205.2(m)? Is the bank liable
under §910?
EFTA 903
(11) the term “unauthorized electronic fund
transfer” means an electronic fund transfer from
a consumer's account initiated by a person
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 . .
. or (C) which constitutes an error committed by
a financial institution.
Problem 8-3
• Is this covered by §4-401(a)? (Note UCC §4104(a)(9).)
• As to the bounced checks, see UCC §4-402
(Wrongful Dishonor).
Problem 8-3
(b) ONB failed to pay Electra’s rent on the first of
January because the computer got backlogged
with the huge Christmas volume. Can her
landlord evict her? When she is evicted and
sues ONB over §910, can the bank defend
using §910(b)(1)?
EFTA 912
If a system malfunction prevents . . . an
electronic fund transfer initiated by a consumer
to another person. . . [who] has agreed to
accept payment by such means, the
consumer's obligation to the other person
shall be suspended until the malfunction is
corrected and the electronic fund transfer may
be completed, unless such other person has
subsequently, by written request, demanded
payment by means other than an electronic
fund transfer.
EFTA 910
Subject to subsections (b) and (c) of this
section, a financial institution shall be liable to a
consumer for all damages proximately caused
by-(1) the financial institution's failure to make an
electronic fund transfer, in accordance with the
terms and conditions of an account, in the
correct amount or in a timely manner when
properly instructed to do so by the consumer,
except where--
EFTA 910
A financial institution shall not be liable under
subsection (a)(1) or (2) of this section if the
financial institution shows by a preponderance
of the evidence that its action or failure to act
resulted from-(1) an act of God or other circumstance beyond
its control, that it exercised reasonable care to
prevent such an occurrence, and that it
exercised such diligence as the circumstances
required; or
Problem 8-3
(c) One month Electra had a dispute with her
landlord, so she phoned ONB and told them not
to pay the next month’s rent due to be
transferred four days later. Is oral notice
sufficient? Is her notice timely?
• If the bank fails to stop payment, what remedy
• does she have? What damages does she
have? Can she recover her attorney’s fees?
EFTA 907
. . . A consumer may stop payment of a
preauthorized electronic fund transfer by
notifying the financial institution orally or in
writing at any time up to three business days
preceding the scheduled date of such transfer.
The financial institution may require written
confirmation to be provided to it within fourteen
days of an oral notification if, when the oral
notification is made, the consumer is advised of
such requirement and the address to which
such confirmation should be sent.
EFTA 910(c)
In the case of a failure described in subsection
(a) of this section which was not intentional and
which resulted from a bona fide error,
notwithstanding the maintenance of procedures
reasonably adapted to avoid any such error, the
financial institution shall be liable for actual
damages proved.
Problem 8-3
(d) If Linda Liable in Problem 8-2 had made
purchases with point of sale (POS) EFTs, would
she be able to assert her defenses against her
bank under the EFTA?
Problem 8-4
Jane Austen owned a bookstore and handled
the store’s financial affairs through a checking
account with Octopus National Bank (ONB). If
ONB grants the store an ability to pay its debts
by EFTs, does the EFTA apply? See §903(2);
Regulation E §205.2(b).
EFTA 903
(2) the term “account” means a demand
deposit, savings deposit, or other asset account
(other than an occasional or incidental credit
balance in an open end credit plan as defined in
section 1602(i) of this title), as described in
regulations of the Board, established primarily
for personal, family, or household purposes,
but such term does not include an account held
by a financial institution pursuant to a bona fide
trust agreement;