Electronically Created Payment Orders

An electronically created payment is a new retail payment practice in which a merchant takes payment instructions for goods and services and places them in an electronic template that creates an electronic file for processing through the check clearing networks.  Unlike traditional checks or RCCs, electronically created payment orders do not begin with a paper item.  However, they are similar to RCCs in that they are typically initiated with Internet or telephone instructions from the consumer and bear no direct evidence of the customer's authorization.  Because these transactions are not originally captured from paper check items, the laws and regulations pertaining to check collection do not apply.

Ordinarily, electronic debits that a consumer uses to acquire goods or services are cleared through the ACH network, which includes a transaction code that clearly indicates the nature and source of the transaction.  When a financial institution permits the creation of electronic payment orders, substantial risk-management oversight for unauthorized returns and other unlawful activity is lost because the check-clearing networks do not provide the level of technological and organizational controls of those in the ACH network.  This lack of systemized monitoring of the electronically created payment orders increases the susceptibility to fraud by Web-based vendors and telemarketers.

The Federal Reserve Banks handle electronic check images only if they were created from an original paper check.  On June 15, 2008, the Federal Reserve Banks revised Federal Reserve Bank Operating Circular 3 (Circular 3) See www.frbservices.org/files/regulations/pdf/operating_circular_3.pdf for Operating Circular No. 3: Collection of Cash Items and Returned Checks, effective July 15, 2008. to clarify that a depository institution that sends an electronic check file to the Reserve Banks is liable for the legitimacy of the items in that file.  Reserve Banks only accept applicable liability and offer certain warranties for Check 21 transactions that begin with an original paper check item.  Because electronically created payment orders generally are indistinguishable from electronic images of paper checks, collecting banks, such as the Reserve Banks, may not be able to avoid accepting the electronically created payment orders.  However, pursuant to the revised Circular 3, the bank that sends the item to the Reserve Bank ultimately assumes liabilities and provides warranties for its legitimacy.


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