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Payment Systems
University of Nebraska School of Law
Wilson, Catherine Lee

PAYMENT SYSTEMS
I. Overview
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

II. Currency

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

Recovery

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 3rd party obtains the currency in good faith for value, the original owner cannot get the $ from the 3rd party.

III.Credit Cards (contract between user and merchant)

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

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

Process

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

Fees

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

Disputes

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)

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

i. Individuals or businesses that offers or extends credit when four conditions are met:
1. The credit is offered or extended to consumers
2. The offering or extension of credit is done regularly
3. The credit is subject to a finance charge or is payable by a written agreement in more than 4 installments
4. The credit is primarily for personal, family, or household purposes

Reg Z does NOT apply to

i. Business, commercial, agricultural, or organizational credit
ii. Credit over $25K not secured by real property
iii. Public utility credit
iv. Securities or commodities accounts
v. Home fuel budget plans
vi. Student loan programs

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

i. Liability
1. Willfully or knowingly gives false info, fails to provide required info
2. $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!!! – 226.12(a); TILA 132
Liability of a card holder for unauthorized use – 226.12(b); TILA 133

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

i. Credit Card Dispute and Billing Dispute are independent rights for the creditor.
1. 12 CFR 226.12(c): Credit Dispute regarding delivered products (got but unsatisfactory item)
2. 12 CFR 226.13(c): “Billing

d in it 3-108(a)
b. Definite time – payable on elapse of a definite period of time after sight(first sees instrument), or acceptance, or fixed date 3-108(b)
i. Subject to: prepayment, extension
c. Definite time or demand – payable on demand up to the definite time, then due 3-108(c)
6. States no other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money
a. Place of payment, interest, date = OK 3-111, 3-112, 3-113
b. Parties may agree to make an instrument non-negotiable 3-104(d)
b. If it is not a Negotiable instrument it may still be governed by contract law
Contract Liability on an Instrument

When is the person who incurred the liability obligated to pay and to whom?

a. When: Demand or definite time
b. Who: PETE or Indorsor who paid
c. Not paid = dishonor
Considerations for analyzing Obligations Owed/Due (D’s Capacity and signature)

Is the instrument a note or draft? §3-104

Note = promise to pay
Draft = order to pay

What capacity has each potential D signed in?

a. Maker: makes a note (promise to pay) 3-103(a)(7)
i. Obliged to pay the note according to its terms at the time it was issued or first came into possession of a holder 3-412
ii. Obligation is owed to a person entitled to enforce OR indorsor who paid 3-412
b. Drawer: makes a draft (order to pay) 3-107(a)(5)
i. If Draft is DISHONORED obliged to pay according to its terms at the time of issuance REGARDLESS of notice of dishonor 3-414(b)
ii. Obligation is owed to a PETE or an indorser who paid 3-414(b)
iii. If draft has been accepted by a bank, drawer is discharged 3-414(c)
iv. If not a bank, drawer is obliged to pay the draft same as an indorser 3-414(d)
v. Draft drawn without recourse will limit liability on draft UNLESS it is a check 3-414(e)
c. Issuer 3-105(c)