There are a variety of these new "check by phone" operations advertising on the Internet; I decided to check some of them out this afternoon. Most of them seem to use the same breathless prose immortalized in "Make Money Fast", along with generous use of the Netscape "blink" attribute, which immediately sent alarm bells ringing, especially when coupled with referral programs that border on a pyramid scheme. Furthermore, it's clear that these operations are highly vulnerable to fraud and abuse, as was mentioned in a thread on the list a few weeks back. Quoting from http://www.pixi.com/morgan_group/checks/by_phone.html: --------- TELEPHONE CHECKS (PAPER DRAFTS) ARE COMPLETELY LEGAL! Paper drafts are established as a legal method of payment as provided in the Uniform Commercial Code, Title 1, Section 1-201 [39] and Title 3, Sections 3-104, 3-401, and 3-403; Code of Federal Regulations, Title 12 Chapter II, Part 210; and Regulation J, Federal Reserve Bank, Part 2, Sections 4A-201 to 4A-212. Only verbal agreement is required for authorization. Also see Romani v Harris, 255 Md 389. --------- Any lawyers feel like checking this stuff out? (I've got the UCC at home, but not the rest of the materials.) When I called the phone number given at: http://www.Village.com/business/enterprise, I got a guy who was obviously at home, "watching the ball game"; he was quite pushy and focused on the system of "referrals" for people who sign up. Among other things, he had never heard of an ACH debit and was therefore unable to compare the conflict resolution processes for the two methods. (ACH debits are what your health club uses to deduct fees from your checking account each month -- the transactions are reversible solely on the customer's say-so.) The folks at http://www.redichek.com/redichek/redifaq.htm seem a bit more professional. They admit in e-mail that there is a security problem here (no kidding), especially wrt sending routing and account information over the Internet. I enclose our correspondence at the end of this posting, for your reading enjoyment. It seems plain from the nature of the folks who are offering these check printing services that they are not regulated or licensed. Also, it seems that these services are really just preparing the drafts, any liability for submitting bogus drafts rests on the merchant into whose account the drafts are deposited. Question: has anyone seen more legitimate folks offering this type of service? Also, it seems that for the fees that these folks are charging, it would be worth it for a merchant to do this in-house. When this topic came up before, I recall people mentioning sources of magnetic ink and check paper; is this stuff really widely available? Another puzzling factor is that all the services seem to base the fees on the amount of the transaction, when, as near as I can tell, the check printer has no exposure, and costs are in no way proportional to transaction size (basically they're collecting data and running a laser printer.) Proably due to their positioning themselves wrt credit card companies. Joe-Bob sez: Check it out. ========================================================================= Date: Wed, 11 Oct 95 18:13:57 -0600 X-Sender: msumsion@mail.redi-check.com Mime-Version: 1.0 To: cman@communities.com (Douglas Barnes) From: msumsion@optical.fiber.net (Michael Sumsion) Subject: Re: Legal basis Douglas, Thanks for the inquiry. Before I answer your questions, I would like to make you aware that we are in the process of building a completely new, completely secure system using this same check-draft service. It will be arriving within the next couple of weeks. This new system will allow online customers to make purchases, using their checking account, without the need to transmit their account information over the Internet. On to your questions:

Hi, our company may be a potential customer of your service, but I have questions about the legalities involved in printing drafts on people's accounts. In particular, this system seems especially vulnerable to fraud. I just spoke with our banker, who had not heard of these services, and was quite concerned.

Many bankers have not heard of the system, although it has been in use now for over 3 years. We get calls from bankers on a regular basis who are curious about the service. After explaining it to them, they are generally very supportive. As far as the legalities, it is perfectly legal to print a draft, drawn on a customer's account, with the authorization of the customer. In fact, the legal basis for this is printed on the bottom of each of our drafts.

For instance, wouldn't it be possible for any recipient of a check from someone to copy down the routing information and account number, and then use that to defraud the account holder and the merchant?

Yes, this is possible. We have never run into this situation, however. We are not stating that this system is any more secure (with the current system) than credit cards. What we WILL say is that this system is as safe as walking into any store and handing the clerk one of your checks. (The new system will eliminate the need to transmit this information.)

Also, I'm curious where the liability rests in the event that a charge is disputed -- that is, the customer claims that they didn't authorize the transaction. How readily are the charges reversed? I'm familiar with ACH debits, which are extremely easy for customers to reverse; how does this system compare with ACH debits?

Since there is no standard or regulation regarding this in the banking industry, this differs from bank to bank. Some banks will allow you to go back as far as two years to dispute a check. Others will only go back 30-60 days from the date of receipt. I hope that I've been able to answer completely. If you would like to speak with someone about specific processes, please give Allen a call at 801.298.1212. Thanks, Michael Sumsion _/_/_/ _/_/_/ _/_/ _/ _/_/_/ _/ _/ _/_/_/ _/_/_/ _/ _/ TM _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/_/ _/_/ _/ _/ _/ _/_/ _/ _/_/_/ _/_/ _/ _/_/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/ _/_/_/ _/_/ _/ _/_/_/ _/ _/ _/_/_/ _/_/_/ _/ _/ Internet Commerce Solutions - (800) 607-2001 Fax (801) 298-9789 email: msumsion@redi-check.com http://www.redi-check.com/redi-check Referral Program: http://www.redi-check.com/redi-check/referral.htm ======================================================================