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Does online commerce mean curtains for cash?

Item: As reported in USA Today, a recent statistical projection shows that over the next five years there will be more than a fifteenfold increase in the number of U.S. households expected to use online home-banking services. The estimate figures an increase from 754,000 households today to nearly 13 million by the turn of the century.
Item: The American Banker reported recently that 800 customers of First National Bank of Chicago received an unexpected windfall–to the tune of $925 million–that was credited to their checking accounts through a computer-programming error.
Item: The Federal Trade Commission’s Bureau of Consumer Protection announced in May that it had halted a pyramid investment scheme run over the Internet by a Washington state firm that advertised on the World Wide Web. The scheme, which allegedly collected “investments” from Web surfers of $250 to $1,750 and repaid early investors from the proceeds received from later investors, had taken in more than $6 million before it was halted by court order.
Dramatic new technological advances in microchip technology, improved techniques of encryption and digital signatures, and, of course, the explosive growth of the Internet as a worldwide bazaar of information and goods for sale, all have combined to produce what is nothing short of a revolution in the way financial services are being delivered to businesses and consumers.
The U.S. financial-services industry has become captivated by the technological possibilities of what no megamerger or amount of corporate downsizing could accomplish: the elimination of cash, with the cumbersome expense of counting it, protecting it, transporting it and ultimately destroying it. As if this were not enough, there is the equally tantalizing prospect of eliminating bank branches and their attendant real estate and personnel overhead.
Most observers who have been around long enough to witness other “technological breakthroughs” in the banking industry tend to be skeptical of such dramatic predictions. But there is something about the Internet–and the fact that using it for commercial transactions requires a form of electronic payment–that suggests we really are standing on the threshold of important breakthroughs in the banking industry.
Not to worry; your federal government is right there. At any rate, it appears that federal banking regulators are taking these developments seriously. This spring, the Federal Reserve Board issued two long-awaited revisions to Regulation E, which interprets the Electronic Fund Transfer Act, the principal federal statute that regulates electronic consumer transactions.
In March, the Fed’s Division of Consumer and Community Affairs issued a proposed rule that would address the application of Regulation E to so-called “stored-value” cards. A stored-value card looks like a credit card, but has a microchip processor embedded in it that can be programmed to hold a specified dollar value that is loaded into the card; it then keeps track of debits to the stored balance resulting from purchases made with the card.
Simple versions of such cards are used to allow consumers to prepurchase long- distance calling time or gasoline; more sophisticated versions are used by many colleges and universities to disburse funds for everything from meal payments to books to library fines.
Increasingly, banks are eyeing the stored-value-card market as a means of weaning their customers from using cash, encouraging more point-of-sale applications, and capturing the float generated when consumers pay up front for a card whose value will be drawn down slowly.
The Fed’s stored-value proposal divides these cards into four categories: cards with a maximum value of $100, “off-line unaccountable cards,” “off-line accountable cards” and “online systems.”
The three latter categories apply only to cards with values above $100. Each category is identified not by the type of card (a prepaid phone card, for instance), but rather by the route used for transmitting and verifying information.
The first category would be exempt from Regulation E on the basis of its de minimis value, the second because off- line unaccountable cards are self-contained in that they do not clear through a network or record the data pertaining to the transaction.
The last two categories would be subject to Regulation E, however, because they do involve transmission of information to a central network. Off-line accountable cards would be subject only to the initial-disclosure provisions of Regulation E. But the last category– where verification and authentication would be done online–would be subject to all of the requirements of Regulation E.
Because most types of stored-value cards would be exempt from Regulation E under this proposal, it is generally viewed as being favorable to banks. Similar cause for good cheer (among bankers, at any rate) can be found in the recently published Official Staff Commentary to Regulation E.
Banks have been concerned about whether telephone-initiated bill-paying or -purchasing programs are covered by the disclosure, written authorization and liability limitations of Regulation E. In such transactions, a consumer makes an oral authorization via phone to debit his or her checking account and provides the account number; this results in a draft being created using a facsimile of the customer’s signature.
Although the regulation itself seems to suggest that such transactions are covered, the commentary appears to conclude that one-time transfers that are not preauthorized or recurring are not subject to the written-authorization requirements of Regulation E. Score another one for banks.
The proposed stored-value regulation and the Official Staff Commentary suggest that the Fed, while paying close attention to technological developments, does not want to risk inhibiting the growth of alternative technologies by overregulating them. Time will tell whether this is the proper approach to take.
(Justin P. Doyle is a partner with Nixon, Hargrave, Devans & Doyle LLP. His colleague, Bruce Baker, assisted with this article.)

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