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 VOL 6 PART 1

Ina Meiring

Electronic funds
transfers
Alegal update
paper, the document must be transferred physi-
Introduction cally or delivered between the parties and/or their
banks to obtain payment. The disadvantage of this
Our payment system, as the core of our financial type of transfer is, of course, that the movement of
system, enables the circulation of money or the paper is troublesome and time-consuming.
transfer of value. The customer is the end-user of
the payment system. When he makes a payment, What is an Electronic Funds Transfer (EFT)?
he will either hand over cash or issue a payment
instruction to his bank. The transfer of value is An electronic funds transfer has been defined as 'a
then accomplished either through cash or deposit funds transfer effected through the banking system
balances held at banks or financial institutions. So by electronic techniques, with input and output
any method of payment has as its primary goal the methods being largely or completely in electronic
transfer of value. form' (BankingServices:Law andPracticeReport
My aim here is to give a brief overview of the by the Review Committee (chaired by Professor
RB Jack CBE) Cm 622 (1989) 75). Electronic funds
different methods of payment, and then to discuss
in more detail, electronic funds transfers as a transfers therefore include all payment instruc-
method of payment. tions which are transmitted through magnetic
material (such as magnetic tapes, disks, or cas-
Methods of payment settes) or purely electronic media (such as tele-
phones and telex), or by the use of electronic
Payment methods have evolved from money to transmissions between computers or between a
paper money to electronic fund transfers. This computer and a terminal. The most wide-ranging
development makes it possible for the customer definition is perhaps that found in Uncitral's Legal
today to choose a payment method suited to the Guide on ElectronicFunds Transfers(A/CN 9/SER
transaction, his own circumstances, and the avail- B/i (1987) at 12). There the term is defined as 'a
ability of new technology. Currently, payment funds transfer in which one or more of the steps in
methods or instruments can be classified as paper- the process that were previously done by paper-
based or electronic. based techniques are now done by electronic
Paper-based instruments (such as cheques, bills, techniques'.
debit orders, stop orders, travellers' cheques, and For present purposes this definition is too wide,
documentary letters of credit) are still the major since it encompasses not only electronic funds
component of our payment system. The distinctive transfers in the narrow sense of the term but also
characteristic of a paper-based transfer is that it devices such as electronic presentment and pay-
embodies transactions in a permanent form. The ment of cheques. It is for this reason that I prefer
payment instruction is given in words and figures, the definition given in section 205.2(g) of regula-
and is authenticated by a signature which also tion E (12 CFR 205) implementing the Electronic
serves to identify the instructing party. Paper- Fund Transfer Act ('EFTA') 15 USC 1693 (1978):
based transfers cannot be altered easily without
any trace of the alteration being left on the 'Electronic fund transfer means any transfer of
document. As the instruction is embodied in funds, other than a transaction originated by

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 VO 6 PART

VOL 6 PART 1

check, draft, or similar paper instrument, that is instruction is almost immediate. The clearing
initiated through an electronic terminal, tele- system causes a delay, because the payment
phone, or computer or magnetic tape for the instructions have to be sorted and batched before
purpose of ordering, instructing, or authorizing they are forwarded.
a financial institution to debit or credit an
A payment, whether paper-based or electronic,
account. The term includes, but is not limited to,
effects a credit or debit transfer. In the case of a
point-of-sale transfers, automated teller machine
credit transfer, the payer (debtor) instructs the
transfers, direct deposits or withdrawals of
bank to transfer the funds to the account of the
funds, and transfers initiated by telephone. It beneficiary at the same or another bank. So with a
includes all transfers resulting from debit card credit transfer funds are pushed through the
transactions, including those that do not involve banking network or system from debtor to credi-
an electronic terminal at the time of the transac- tor. An example of a credit transfer is the direct
tion. The term does not include payments made payment of salaries through the Automated Clear-
by check, draft, or similar paper instrument at an ing Bureau (ACB). The Automated Clearing Bureau
electronic terminal.' (Pty) Ltd was established by the South African
clearing banks in 1973 to provide for computer-
In certain jurisdictions a distinction is drawn ized facilities and collection of cheques. In a debit
between client-initiated transactions and credit transfer the creditor claims the money from the
transfers initiated by banks. In the United States, financial institution which holds the debtor's
for example, the EFTA expressly excludes from its account. In this way funds are pulled by the
ambit any 'instruction that funds be transferred creditor from the debtor. The most common
from one bank to another, either for its own example of a debit transfer is, of course, the
account or that of third parties'. Transfers of this cheque.
kind (credit transfers) are regulated by section 4A
of the Uniform Commercial Code, which likewise The EFT communication flow
excludes from the ambit of this section any An electronic funds transfer (a credit transfer in
transfer regulated by the EFTA (see s 4A-108). this instance) is initiated where the sender (the
I believe that in South African law there is no merit payer/client) delivers the payment instruction to
in this distinction, and that the same legal conse- his bank (the sending bank/originator's bank).
quences should flow from and attach to the Instructions can be delivered orally by telephone,
transfers of either kind. However, for the sake of on paper or in disks and tapes. Instructions may
completeness, the following client-initiated trans- also be communicated directly to the bank's
actions can be distinguished in South Africa: computer from an ATM, through an EFTPOS
transaction or through the Internet or any other
* automated teller machines (ATMs); homebanking service where the sender or client
* electronic funds transfers at point of sale uses his own computer. These instructions are, as a
(EFTPOS); and rule, authenticated by means of a security proce-
dure.
* home-banking services such as those provided
through Beltel and the Internet. Having received the payer's instructions and deb-
ited his account, the payer's bank forwards the
With an electronic funds transfer, whether it is a instructions to the beneficiary's bank, which then
proceeds to credit the beneficiary's account. The
client-initiated transaction or a credit transfer
electronic transmission from the sending bank to
initiated by a bank, the message or instruction is
the receiving bank can be carried out either off-line
not carried in a permanent form. The payment
by physical delivery of tapes or disks, or on-line,
instruction or mcssagc is expressed in computer over telecommunication lines. Where an interme-
language. The handwritten signature is replaced diary bank is used, the originator's (payer's) bank
by an electronic key which is used to authenticate will execute the payer's instructions by issuing its
the message. The time taken for the delivery of the own payment order to the intermediary bank. An
payment instruction depends on whether it is a intermediary bank will issue its own payment
bilateral transfer between banks or has to be order either to the beneficiary's bank or to another
routed through a clearing system before the intermediary bank that will do the same, until a
transfer is transmitted to the recipient bank: with a final payment order is issued to the beneficiary's
bilateral transfer, the delivery of the payment bank.

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 VOL 6 PART 1

A credit transfer may be either in-house or out- (electronic funds transfers not covered by the Act)
house. Where the originator's and the beneficiary's are controlled by article 4A of the Uniform Com-
accounts are in the same bank the transaction is mercial Code, where it has been adopted as State
in-house. In this case no interbank payment order law.
is required to execute the originator's payment
The issue whether electronic funds transfers in the
order. If the credit transfer is out-house, interbank
United Kingdom require regulation was addressed
settlement is either bilateral or multilateral.
by the Report of the Review Committee on
Bilateral settlement takes place between two cor- Banking Services Law in 1989 (the Jack Report).
respondent banks, where one maintains an ac- This report recommended a two-tier approach to
count with the other. An interbank payment order regulation - statutory regulation restricted to a
is issued by one correspondent bank to another few key issues common to electronic funds trans-
and payment of the payment order is then carried fer systems, and standards of best practice to
out at this account. Bilateral settlement is carried regulate more-detailed issues relating to specific
out on the basis of the payment messages transmit- electronic funds transfer systems. In its White
ted from one bank to another. Multilateral settle- Paper responding to the Review Committee's
ment takes place on the books of a common report, the Government accepted most of the
correspondent, which may or may not be the Review Commitee's recommendations. The bank-
central bank in which the banks all maintain ing industry has since drawn up a voluntary code
accounts. In a central switch system, in cases of best practice for the provision of electronic
where the central switch is operated by the funds transfer services to personal customers. No
common correspondent (such as the central bank) legislation is currently pending before Parliament.
multilateral settlement is effectuated on the basis
of the payment messages transmitted through the There are similar codes of practice in Australia and
central switch. Otherwise, multilateral settlement New Zealand. All these codes are policed by a
can be carried out on the basis of settlement Banking Ombudsman to whom complaints may be
messages transmitted to the common correspon- referred by customers if not satisfactorily resolved
dent either by participating banks or the central by the senior management of the bank.
switch. A complex transfer, requiring the partici-
In Europe, the European Commission has adopted
pation of intermediary banks, may involve a clear-
a code of conduct in relation to electronic pay-
ing-house facilitating multilateral interbank com-
ment systems which governs the relationship
munication and settlement on the books of a
between financial institutions, traders and con-
central counterparty, with whom they all hold
accounts, such as a central bank. This is the case in sumers (EC Commission Recommendation on a
South Africa, where the ACB is such a clearing- European Code of Conduct relating to Electronic
house facilitating settlement on the books of the Payment (87/598/EEC), OJ No 365/72, 24 Decem-
Reserve Bank. ber 1987). The code is designed to ensure fair
practice and to promote inter-operability of elec-
Regulation of Electronic Funds Transfers tronic payment systems amongst different member
states. In relation to electronic funds transfer
The rights and obligations of parties to cheque consumer protection the Commission issued a
transactions are mainly governed by the Bills of Recommendation to payment card-issuers, espe-
Exchange Act 34 of 1964. There is no similar cially banks, establishing a set of minimum stan-
statutory regime for funds transfer operations. The dards for the protection of consumers in member
absence of legislative intervention in this country, states (Commission Recommendation Concerning
especially in the field of electronic funds transfers, Payment Systems and in Particular the Relation-
stands in marked contrast to the position in some ship between Cardholder and Card Issuer (88/
other countries. 590EEC), OJ No L317/55, 24 November 1988). In
March 1990, the three European Credit Sector
In Denmark, the Act on Payment Cards (No 284 of
Associations (ECSAs) issued a Code of Best Prac-
6 June 1984) covers all debit and credit cards used
tice in response to the Recommendation. The
to pay for services and goods. In the United States,
United Kingdom's Code of Banking Practice largely
consumer electronic funds transfer transactions
follows the ECSAs' Code.
are regulated by the Electronic Funds Transfer Act,
a federal act enacted in 1978, and credit transfers In relation to the transfer of funds on an interna-
between corporations and financial institutions tional basis the Working Group on International

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 VOL 6 PART 1

Payments of the United Nations Commission in In Nedcor Bank Ltd (t/a Nedbank) v H Bhyat
International Trade Law (Uncitral) has drafted a Wholesalers CC & Bank of Lisbon International
Model Law on International Credit Transfers. The Ltd (WLD 21 February 1994 (case no 31228/29)
Model Law applies to credit transfers where the unreported) at 11, Duke J said:
sending bank and the receiving bank are in
'The relationship between banker and customer
different states (branches or separate offices of the
vis-t-vis a cheque is in my view in principle no
bank in different states are treated as separate
different to the relationship between a banker
banks), but it does not apply to debit transfers. In and customer in regard to a telegraphic transfer.
May 1992 the Model Law was adopted by Uncitral
It is just another means of withdrawing the
and the United Nations has passed a resolution money out of the customer's account in order
encouraging United Nations member states to that the payee, who is designated in the tele-
enact legislation passed on it (Resolution 47/34, graphic transfer receives the credit in respect of
adopted on 25 November 1992). I am not aware of such transfer.'
any plans to do so.
Also, the use of any method of payment will
The legal nature of payment usually flow from an agreement to accept the type
Unless cash is handed over, payment usually of payment concerned. In the end, payment
comprises two basic steps: discharges the underlying obligation for which the
payment method was used. The rights of the
* The payment instruction is given by the person creditor in terms of the underlying obligation is
who wishes to effect or accept payment, to the suspended until payment is finalized.
financial institution which holds the funds.
Moment of payment
* The financial institution concerned will transfer
the funds to the account of the beneficiary at the Clarity about principles governing the completion
same or another institution. (finality) of payment is the cornerstone of the
whole payment system:
These underlying principles stay the same, irre-
spective of whether the procedure is paper-based 'Clarifying the legal rules about completion of
or purely electronic in nature. The relationship payment may assist the taking of critical deci-
sions by banks in the event especially, of the
between the customer and the bank therefore
stays the same: the bank acts as mandatary of the sudden insolvency of one or more of the parties
to a current transactions; also, perhaps in the
customer, so that their legal relationship is gov-
event of systems failure, error, or fraud; it may
erned by the contract of mandate. In Royal
even be a factor of new payment systems' (Jack
ProductsLtd v MidlandBank Ltd [ 1981] 2 Lloyd's
Report para 12.04).
Rep 194, the court said the following of instruc-
tions given by the customer to his bank to transfer Two situations should be distinguished: where the
money by way of telex: accounts are kept at different banks, and where
'What, then, are the legal implications of those they are kept at the same bank. It should be noted
instructions? How are they to be regarded, as a that although the relevant legal principles were
matter of law? In my judgement they are to be established in court decisions concerning the
regarded simply as an authority and instruction, payment of cheques, these principles should apply
from a customer to its bank, to transfer an with equal force to electronic funds transfers,
amount standing to the credit of that customer since they are also effected through the medium of
with that bank to the credit of its account with the Automated Clearing Bureau (ACB).
another bank.., the instructions did not bring In terms of the clearing agreement banks have a
into existence, as between Royal Products and specified period (a deadline) after they have
Midland, any separate or distinct contract of any received their cheques from the clearing bureau in
kind. ... Given that this was an ordinary banking which to decide whether they wish to dishonour
operation, as I hold it was, it follows that in cheques. In Volkskas Bank v Bankorp Bpk (h/a
carrying out its part of the transaction Midland Trust Bank) 1991 (3) SA 605 (A), where the
owed Royal Products a duty to use reasonable accounts were kept at different banks, the ACB
care and skill.' agreement was applied to its letter. The court

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 VOL 6 PART 1

decided that payment becomes final on the expiry 'A credit transfer is completed when the benefi-
of the period within which it can be counter- ciary's bank accepts a payment order for the
manded. As far as these banks are concerned, then, benefit of the beneficiary. When the credit
in practice payment is complete at the moment the transfer is completed, the beneficiary's bank
provisional entries on the accounts of the banks becomes indebted to the beneficiary to the
involved at the Reserve Bank become final. extent of the payment order accepted by it.
In Rosen v Barclays National Bank 1984 (3) SA Completion does not otherwise affect the rela-
974 (W), where the accounts were kept at the tionship between the beneficiary and the benefi-
same bank, the court decided that payment is ciary's bank.'
completed the moment the bank makes its deci-
sion to give effect to the order to pay. This will Between branches of the same bank (an in-house
apply even where the accounts are kept at differ- transfer), payment becomes final when the receiv-
ent branches of the bank concerned. This decision ing bank makes its decision or intention clear to
was not overruled by the Appellate Division in accept transfer (Eyles v Ellis (1827) 4 Bing 112
Volkskas Bank v Bankorp Bpk (h/a) Trust Bank. [130 ER 710]; Momm & others (t/a Delbrueck &
Co) v Barclays Bank InternationalLtd 1977 QB
I believe that there is no justification for this 790; The Brimnes; Tenax Steamship Co Ltd v The
distinction, and that the ACB agreement should be Brimnes (Owners) 1975 QB 929 (CA)). In these
applied to its letter in both situations. It is clear cases the particular branch acts both as sender and
from the judgment in the Rosen case that the receiver of payment. The intention to accept one
clearing agreement is intended to apply between customer in the place of the other as creditor with
two branches of the same bank as well. This will respect to the particular amount must therefore
mean that the principle set out in the first situation also determine the moment of payment. This looks
should apply with equal force in the second like a classic example of novation with a substitu-
situation, namely that where payment is effected
tion of creditors.
through the medium of the ACB, the ACB agree-
ment should be applied in order to determine the From the above it is clear that in the final result one
moment of payment. should distinguish between two situations: where
payment takes place through an electronic system
Similar provisions apply to international credit
(such as the ACB or CHIPS), and where it does not.
transfers. Where the transfer takes place between
Where payment takes place through an electronic
different banks through an EFT system (such as
system, the completion of payment is determined
CHIPS) the rules of the system may determine the
by the rules of the system, and there is no need or
moment payment is completed (Delbrueck & Co v
room for specific provisions in the agreement
ManufacturersHanover Trust Co 464 F Supp 989
between the bank and its client.
(1979) affd F 2d 1047 (2nd Cir 1979)).
Is is only where payment does not take place
Where the transfer is not effected through an EFT
through an electronic system that legal certainty
system, payment is complete when the funds are
requires that the position be regulated in the
made available to the beneficiary's bank and that
agreement bctwccn the bank and its customer. In
bank accepts the transfer for the benefit of the
the absence of such agreement the courts will look
beneficiary (Royal ProductsLtd v Midland Bank
at banking practice to answer the question relating
Ltd and Bank of Valetta Ltd [1981] 2 Lloyd's LR
to completion of payment (Afovos Shipping Co SA
194). The preferred view in most decisions seems
to be that payment occurs on the accrual in the vRPagnan & FLl [1983] 1 WLR 195 (HL)).
payee's hands, as against the payee's own bank, of
Countermand of payment
an 'unconditional right to the immediate use of the
funds concerned' (Tenax Steamship Co v The The question of finality of payment cannot be
Brimnes (Owners) [1973] 1 All ER 769 at 782; divorced from the question of the possibility of
[1974] 3 All ER 99 (CA); see also A/S Awilco v countermand of payment. As a general rule pay-
Fulvia Spa Di Navigazione (the Chikuma) ment can be countermanded only until it has
[1981] 2 Lloyds' Rep 371 375 (HL)). This position become final (until it has been completed).
is also adhered to by Article 4A and the same
position obtains under article 19(1) of Uncitral's One may question the need for a mechanism to
Model Law on International Credit Transfers: countermand payment in the EFT context:

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 VOL 6 PART 1

'[T]here is no operational requirement for a its supporting or sharing network resulting from
payment system to include a right of counter- circumstances beyond its reasonable control
mand; where that right does exist, it may work nor shall the bank be liable to make good or
against the efficiency of the system, and the compensate the cardholder for any damages,
more so the further it is extended into the loss or expense which the cardholder may suffer
payment process' (Jack Report para 12.04). as a result thereof.'

Because of the instantaneous nature of EFT I feel Whatever the original justification for such exclu-
that any instruction to pay, given by a customer to sion, the continuation of this practice cannot be
the bank concerned, should be irrevocable. This is justified:
particularly important in the EFTPOS context,
since third parties are involved in the transaction, '[I]t was understandable that, in the very early
and a situation should be avoided where the bank days of EFT equipment when performance was
uncertain, banks should have wished to protect
is dragged into a dispute between its customer and
the merchant. This situation is analogous to pay- themselves in this kind of way. But the reliability
of most systems is well tested now, and it is
ment by credit card, where the customer is
similarly denied the right to countermand any indeed the subject of proud claims by the banks.
payment made or to be made by the bank as a Banks cannot have it both ways: in today's
conditions, their standard terms and conditions
result of the use of the card.
must be construed as somewhat unfair on
Perhaps an exception to the above principle customers. It needs to be recalled that it is the
should be contemplated in the case of credit banks who have chosen to introduce new
transfers. The agreement between the receiving technology: it is unreasonable that the cus-
bank and its customer may provide that a payment tomer, who had no part in that decision, should
order may not be countermanded by the sender be penalized for its consequences, except in
unless the countermand is received and accepted special circumstances' (Jack Report para 10.45).
by a receiving bank other than the beneficiary's
bank at a time and in a manner sufficient to afford Similar sentiments were expressed in Uncitral's
the receiving bank reasonable opportunity to act. Legal Guide on Electronic Funds Transfers (at
127). Effect was given to these sentiments in
This would be in line with article 12(1) of
section 22 of the Danish Act on Payment Cards,
Uncitral's Model Law on International Credit Trans-
fers and section 4A-211 of the Uniform Commer- section 910 of the EFTA, paragraph 6 of the
cial Code. Article 12(1) determines the following: Australian Code of Conduct, paragraph 16. 1(ii) of
the New Zealand Code of Conduct, and paragraph
'A payment order may not be revoked by the 18. 1(c) of the British Code of Conduct.
sender unless the revocation order is received
I believe that banks should assume liability for
by a receiving bank other than the beneficiary's
general damages caused by the malfunctioning of
bank at a time and in a manner sufficient to
the system after a transaction has been initiated by
afford the receiving bank a reasonable opportu-
nity to act before the later of the actual time of the cardholder or the customer. But where the
customer was aware of the fact that the system was
execution and the beginning of the day on
malfunctioning or not functioning at all, the
which the payment order ought to have been
institution should not assume any liability for
executed ....'
damages but should be liable only to rectify any
Liability for proven loss as a result of systems error that may have occurred on the account
malfunction record of its customer.

Is seems standard practice for banks to exclude

liability for any loss suffered as a result of systems
failure. For example, the agreement between the
bank and its customer may provide that -
'[tihe Bank shall not be responsible for any
failure, malfunction or delay of any EFT unit or Ina Meiring: University of South Africa

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