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Payment Systems
South Texas College of Law Houston
Worley, John J.



All payment systems are concerned with:

Mechanics of value transfer

Incurring and satisfying the obligation to pay

Enforcing the obligation to pay

Allocating the risks of errors and wrongdoing


What are the risks of currency

Government could collapse – Holder bears risk

Counterfeiting – Holder bears risk

Stolen – Holder bears risk

Destroyed – Holder bears risk

Fluctuation in value – Holder bears risk


Barry: Even though currency is personal property, when it is stolen the person from whom it is stolen bears the risk, UNLESS it is specifically identifiable. HOWEVER, even if the currency can be specifically ID’d, if a 3rdparty obtains the currency in good faith for value, the original owner cannot get the $ from the 3rdparty.

Credit Cards (contract between user and merchant)

System of payment governed in large part by contractual agreement between the parties


Incurs an obligation to the issuer of the credit card to pay the issuer when the issuer bills the cardholder

Card issuing entity

Has a contractual relationship with a clearinghouse (Mastercard, Visa)

Has a contractual relationship with cardholder

Clearing house

Has a contractual relationship with the merchant’s bank


Cardholder uses the card

Info on card is communicated electronically through the network maintained by a clearinghouse for approval

Once approved merchant communicates the transaction information to its bank

Merchant’s bank generally makes the funds available to the merchant, takes a 2% fee

M.B. send transaction info to the clearinghouse association which directs transaction information to the entity that issued the card


Merchant bank takes a fee from merchant

Issuing entity takes a fee from merchant bank

Both MC and issuing entity pay fees to the association


Cardholder disputes a charge, it will be charged back through the system from the merchant

Truth in Lending Act (TILA)

Regulation Z implements TILA (USE BOTH)

Only governs the contract between card issuer and card holder, the merchants and banks are all under contract law

Need to make sure that the transaction in question falls into the definitions of Credit Card, Cardholder, Credit, Creditor, and Person

Reg Z applies to:

Individuals or businesses that offers or extends credit when four conditions are met:

The credit is offered or extended to consumers

The offering or extension of credit is done regularly

The credit is subject to a finance charge or is payable by a written agreement in more than 4 installments

The credit is primarily for personal, family, or household purposes

Reg Z does NOT apply to

Business, commercial, agricultural, or organizational credit

Credit over $25K not secured by real property

Public utility credit

Securities or commodities accounts

Home fuel budget plans

Student loan programs

Initial Disclosures: must be on the application form or solicitation.


Willfully or knowingly gives false info, fails to provide required info

$5K fine or one year imprisonment

Initial Issuance: Can only be in response to oral or written request or application. No unsolicited, pre-activated cards!!!

Liability of a card holder for unauthorized use – 226.12b

You are liable for the lesser of $50 or the charges incurred before you give notice of the unauthorized use.

Unauthorized use means the use of a credit card by a person, other than the cardholder, who does not have actual, implied, or apparent authority for such use, and from which the cardholder receives no benefit.

Business Credit Cards + Unauthorized Use: liability is on the business to actively monitor the cards and have the statements sent to them unless the credit card company agrees to be liable for unauthorized uses. Agent = authorized user for whatever is charged. Dispute will be between business and agent, not business and credit card company.

Billing Error Resolution – 12 CFR 226.13

Credit Card Dispute and Billing Dispute are independent rights for the creditor.

12 CFR 226.12(c): Credit Dispute regarding delivered products (got but unsatisfactory item)

12 CFR 226.13(c): “Billing Dispute” for undelivered products (never got it)


You must give written notice to the creditor no later than 60 days after the creditor transmitted the first periodic statement

Then the creditor shall mail or deliver written acknowledgement to the consumer within 30 days of the notice

Consumer may withhold the disputed amount

Right of cardholder to assert claims – §226.12(c)

Cardholder may assert claim against card issuer if person who honors the card fails to resolve a dispute satisfactorily

Cardholder may withhold payment up to the amount of the dispute

Negotiable Instruments


Is this a note or a draft?

Promiseto pay = Note

Order to pay = Draft(check)

The Banking System

Article 4governs drafts and notes collected through the banking system

Regulation CC– limitations on how long a bank can take to give a depositor access to funds in the bank account when funds are deposited to that account

Regulation J– Governs checks that pass through a Federal Reserve Bank

Regulations trump Article 4 and Article 4 trumps Article 3

Is the instrument a negotiable instrument?

Is the piece of paper a negotiable instrument?

Yes – Article 3, 4 apply

Is it a promise or order

Written and signed

Signature admitted unless specifically denied in the pleadings

Email is not a writing

Is it unconditional?

No express conditions to payment

Promise or order can be subject to/governed by another record

Rights or obligations can be stated in another record

For a fixed amount of money

W or w/o interest

Doesn’t have to be US dollars

Payable to bearer or order at time of issue, or comes into possession of a holder


Payable to bearer or person in possession

Does not state payee

Payable to cash


he rep is liable to a holder in due course, or to any other PETE unless they can show the original parties did not intend for the rep to be liable

On checks: rep is not liable if he signs a check and the check is payable from the represented parties account who is identified on the check

Has there been a dishonor


Note (promise) that is payable

On demand – dishonored if presented to maker and not is not paid on day of presentment

Not on demand but payable at/through bank or note requires presentment – dishonored if presentment is duly made and the note is not paid on the day it becomes payable or day of presentment, whichever is later

Not on demand – note is dishonored if not paid on the day it becomes payable

Draft (order)

Unaccepted draft

If check is presented to drawee, the check is dishonored if the payor bank makes timely return of the check or sends timely notice of dishonor or becomes accountable under 4-302

If “a” does not apply, a draft is dishonored if presentment is made to the drawee and the draft is not paid on day of presentment

Payable on a date: dishonored if presentment is made to drawee and payment is not made on day of presentment or day draft becomes due, whichever is later OR presentment for acceptance is made before the day the draft becomes payable and the draft is not accepted on the day of presentment

If draft is payable on elapse of a period of time after sight/acceptance: dishonored if presentment for acceptance is made and draft is not accepted on that day

In b-d, the payment may be delayed w/o dishonor for three days

Accepted Draft

Payable on demand: dishonored if presentment is made and acceptor does not pay draft that day

Not payable on demand: dishonored if presentment for payment is made to acceptor and payment is not made on the day it becomes payable or day of presentment, whichever is later

If presentment is required for dishonor but presentment is excused under 3-504, then dishonor occurs w/o presentment if not paid or accepted

If dishonor occurs because timely acceptance was not made, as long as PETE consents to late acceptance, there is no dishonor

Presentment 3-501

Ask: Is it required?, Was it proper?, Was there a refusal to pay?

It is a demand made by a PETE to pay instrument or demand to accept a draft made to the drawee

The following are subject to change by parties:

May be made by any commercially reasonable means