The Hindu Business Line : Is there a law governing electronic fund transfers?

ON MONDAY, the Reserve Bank of India (RBI) commenced the live operation of the National Electronic Funds Transfer (NEFT). Though currently only eight banks are on the NEFT network and there is only one settlement a day, the system assures instant fund transfer for retail customers, instead of the usual week for inter-city transfers, and half that time for intra-city ones.

It was only weeks ago that the RBI Governor, Mr Y.V. Reddy, said, in his Mid-term Review of Annual Policy for 2005-06 that NEFT would be implemented in phases. "By end-December 2005, NEFT would be operationalised in 34 banks. By end-June 2006, the remaining banks are expected to be part of the system," he added.

Three years earlier, his predecessor Mr Bimal Jalan had spoken about the proposal to commence NEFT "using the facilities available under the Structured Financial Messaging Solution (SFMS) over the Indian Financial Network (INFINET)". The Annual Policy Statement of April 2002 emphasised the usage of EFT on a large scale to bring about greater efficiency in the movement of funds, and reduction in risks in funds transfer, Mr Jalan had noted.

The objective of NEFT is to establish an EFT system to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer between banks in the banking sector using the SFMS backbone, explains a recent RBI press release on www.rbi.org.in. The RBI is hopeful that the NEFT initiative, "as a part of payment system reforms" aimed at reducing "risks, especially settlement and systemic risks, in payment systems" will become `the major clearing system for all retail payments'

EFT defined

What is an EFT? "Any transfer of funds that is initiated by electronic means, such as an electronic terminal, telephone, computer, ATM or magnetic tape," defines www.investorwords.com. "Electronic banking, also known as EFT, uses computer and electronic technology as a substitute for cheques and other paper transactions," says www.ftc.gov. EFT is `transfer of funds electronically rather than by cheque or cash,' states www.bloomberg.com. It is "the use of telecommunications networks to transfer funds from one financial institution, as a bank, to another, or to withdraw funds from one's own account to deposit in a creditor's," according to www.infoplease.com.

"The use of EFT results in the instantaneous movement of money. The additional time that the funds are available to earn income can more than offset the fees charged by institutions for this service. Also called wire transfer," informs http://dictionary.reference.com, drawing from `Wall Street Words'.

EFT is "a standard mechanism for electronically transmitting funds between two parties," states the Glossary of Statistical Terms on http://stats.oecd.org. EFT is a system of transferring money from one bank account directly to another without any paper money changing hands, explains a `whatis.com definition' on http://searchwin2000.techtarget.com. An example of widely used EFT application that it cites is `Direct Deposit', in which pay is deposited straight into an employee's bank account.

"Transactions are processed by the bank through the Automated Clearing House (ACH) network, the secure transfer system that connects all US financial institutions. For payments, funds are transferred electronically from one bank account to the billing company's bank, usually less than a day after the scheduled payment date," explains the Web site.

The Electronic Clearing System (ECS) is the Indian version of the ACH in other countries for catering to bulk payments, notes `Payment Systems in India — Vision 2005-08' dated May 3, 2005, available on www.rbi.org.in.

Safe, secure, sound and efficient

The Vision document declares as its mission statement, `The establishment of safe, secure, sound and efficient payment and settlement systems for the country.' And its glossary explains ECS (Credit) as credit clearing that ensures "multiple repetitive credits to the accounts of constituents of banks situated at various branches of banks on the basis of a single debit to the account of a corporate customer called the `user'," as for instance in payroll that `Direct Deposit' speaks about.

RBI introduced the ECS credit scheme to reduce the pressures on the cheque clearing and settlement process, and to improve customer service, especially for high volume, low value clearing, explains an article on www.gtnews.com. "An ECS debit scheme was also brought to market to facilitate payment of charges to utility services."

A common example is of paying one's telephone bills through ECS debit. These are also called `preauthorised transfers'. ECS is the ACH system in India, while EFT is the system for single/individual payments. EFT is safe, secure, efficient, and less expensive than paper cheque payments and collections, states the Web site of Financial Management Service, `the US government's money manager' www.fms.treas.gov. FMS collects more than $2.3 trillion per year in payments to the government, with nearly $1.9 trillion collected electronically.

FMS highlights the benefit of EFT thus: "While it costs the US government $.83 to issue each cheque payment, it costs only $.08 to issue an EFT payment." Today, the cost of moving cheques through the banking system is estimated to be about $3.00 per cheque, including the costs of paper, printing, and mailing, states www.federalreserve.gov in `Consumer Handbook to Credit Protection Laws: Electronic Fund Transfers'.

This publication draws on the law contained in the Electronic Fund Transfer Act to answer `several basic questions consumers have about using EFT services'. Such as: What record will I have of my transactions? How do I correct errors? What about loss or theft? How will I know that a preauthorised deposit has been made? How do I stop a preauthorised payment? And do the EFT Act protections apply to all preauthorised plans? As per the Act, a creditor cannot compel the debtor to repay a loan or other credit by EFT.

EFT compliance is monitored through Regulation E of the US Federal Reserve Board, which implements the EFT Act. "Regulation E governs financial transactions with electronic payment services, specifically with regard to disclosure of information, consumer liability, error resolution, record retention, and receipts at electronic terminals," informs http://searchwin2000.techtarget.com.

"To understand your legal rights and responsibilities regarding your EFT account, read the documents you receive from the financial institution that issued your `access device', that is, a card, code or other means of accessing your account to initiate electronic fund transfers," advises www.ftc.gov, the Web site of Federal Trade Commission. It may be interesting to take a look at the 1996 BIS (Bank for International Settlements) paper titled `Implications for Central Banks of the Development of Electronic Money' on www.bis.org. `Electronic money' is often used loosely to refer to a wide variety of proposed retail payment mechanisms, it notes, and defines the phrase as `stored-value' or `prepaid' products in which a record of the funds, or `value' available to a consumer is stored on an electronic device in the consumer's possession. "E-money as just defined differs from so-called `access products', which are products that allow consumers to use electronic means of communication to access otherwise conventional payment services (for example, use of a standard personal computer and a computer network such as the Internet to make a credit card payment or to transmit instructions to make funds transfers between bank accounts).

The significant novel feature of these access schemes is the communication method (for example the use of a computer network rather than a visit to a bank branch) and so, although they are of interest, they do not raise the same concerns as e-money schemes and are not considered further in this report." But that was a decade ago.

Lack of legal clarity

"The shift towards electronic modes of payments has revealed inadequacies in the present legal structure and consequently there is lack of legal clarity about the products designed using information technology," rues the May 2005 Vision document in a section titled `Legal framework for payment and settlement systems'. This lacuna is more pronounced in respect of the `instruction' based payments, i.e. the now prominent `credit transfer' systems, adds the document.

"Lack of an apposite provision in law for regulation and supervision of these entities reduces the scope of having a monitoring mechanism leading to apprehension of participants and end-users alike on the safety and security of the payment systems," it points out about what may well be the soft underbelly of EFT. As a first step, the RBI has recently set up a Board for Payment and Settlement Systems.

For those interested, there is the Model Law on International Credit Transfers (1992) from UNCITRAL (the United Nations Commission on International Trade Law), available on www.jus.uio.no. "The Committee on Payment and Settlement Systems of the G-10 countries (CPSS) set up under the auspices of the Bank for International Settlements (BIS) has formulated best practices in the form of Core Principles for Systemically Important Payment Systems (SIPS)," informs the Vision document.

There is a highly useful bibliography compiled in 2001 by Gregor C. Heinrich, Head of Secretariat CPSS, on `international initiatives towards harmonisation in the field of funds transfers, payments, payment systems, and securities settlements'. You can see `Model/Illustrative Payment and Settlement Systems Bill' in a report of the Committee on Payment Systems dated November 28, 2002. Till a new law is in place to govern EFT, the good old Negotiable Instruments Act, 1881, will hold the fort.

ZeroBase@TheHindu.co.in

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