While the conventional form of payment for retail products and services includes coins and currency, checks, money orders, and credit cards, there are also electronic fund transfer systems that have been used for over a decade including automated teller machines, debit cards used to automatically pay merchants by debiting customer‘s accounts, and point of sale systems which debit or credit customer accounts. There are a number of federal laws which apply to any entity providing such services including the Truth in Lending Act (“TILA”) and the Electronic Fund Transfer Act (“EFTA”). The TILA and the EFTprotect consumers with paper-less transactions involving telephones, electronics, and computers. Other federal laws address financial privacy issues related to electronic cash payment systems including the Right to Financial Privacy Act of 1978.
Rapidly developing electronic cash technologies may challenge the traditional banking rules and regulations. It is not yet clear how these new technologies might mesh with existing payment systems and what laws will control. Legal issues concerning bank regulations, consumer protection, financial privacy and risk allocation all must be considered by any business that is considering utilizing some form of electronic cash payment technology.
Newer Electronic Cash Payment Systems
The newer electronic cash payment systems store monetary value in the form of electronic signals on a plastic card, on a computer drive or on a disk. There are also digital cash systems which allow electronic cash to be used over computer networks without use of a plastic card -sometimes called “digital cash.” An example of a digital cash transaction would be as follows:
- A digital cash account is opened by a customer by depositing funds in a “Cyberbank”
- The customer’s funds are held in trust by the Cyberbank
- When the customer purchases a product or service over the Internet, the customer transmits an encrypted electronic e-mail message with the customer’s unique digital signature to the Cyberbank requesting release of customer’s funds.
- The customer‘s account is debited and the digital cash is transmitted via phone lines to the customer’s computer
- The customer then transmits the digital cash to the merchant who can verify authenticity of the customer‘s digital signature, credit the digital cash amount to merchant’s account with the Cyberbank, or transmit the digital cash to another party
- The Cyberbank may charge the customer or merchant a fee to participate in such an electronic payment system
The Federal Reserve Board’s Regulation “E”
The Federal Reserve Board’s Regulation “E” governs online payment systems which provide digital substitutes for cash and electronic funds transfers. This federal law defines electronic funds transfers as any transfer of funds initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account. business contemplating use of such an online payment system should verify that it complies with the requirements of Regulation “E.”