Introduction
Can someone debit my checking account if I haven't written a check?
This is a question more consumers are asking because of the growing
practice of debiting checking accounts based on information given over
the phone. Consumers have gotten used to the ease and convenience of
purchasing over the phone. Using this procedure to access a checking
account is easier than sending a check through the mail, and allows
consumers without credit cards to benefit from phone transactions.
However, some consumers get more than they bargain for. For example,
one consumer authorized payment for a $12.95 product, only to find that
more than $80 had been debited, which in turn caused her to overdraw
her account and accumulate $60 in insufficient funds penalties.
While automatic debiting is legal, some firms are abusing the
practice and victimizing consumers. Since this is a relatively new
procedure, the laws are not always clear about what is legal. There are
two ways someone can access your account without you writing a check: paper drafts and electronic fund transfers (EFTs).
This report will summarize those methods and the laws that regulate
them, as well as outline the abuses of the practice and the steps you
can take to protect yourself from fraud.
Paper drafts
A paper draft (also called a "sight draft," or a "demand draft") is
much like a check, except that you never sign it. If a company is using
a paper draft to debit your checking account, it will ask for your
account number and the number of your next unused check over the phone.
You are then asked to mark that check as "VOID." A third party verifies
your account information and, as your agent, prepares a draft for the
amount to be withdrawn. In several ways, this document closely
resembles a check. For instance, the magnetic account information
appears at the bottom. This draft goes to your bank, which treats it as
if it were a check you wrote. The canceled draft appears with your next
checking account statement.
This practice is covered by your state's Uniform Commercial Code
(UCC). The UCC allows other forms of authorization to substitute for
your signature, and allows a third party to act as your agent for this
limited transaction. Currently there is no regulation that requires
written authorization for a paper draft debit conducted over the phone.
Electronic Fund Transfers (EFTs)
An EFT, as the name denotes, is an electronic transfer of funds
between accounts which appears on your monthly statement without the
more substantial paper trail of a check or paper draft. With this kind
of transaction, the debit is made electronically with the account
information you provide over the phone to a company.
EFTs are regulated by the Federal Reserve Board Regulation E. This
regulation is primarily concerned with regular debits from your
account, like if your insurance company regularly withdraws your
premium from your account. These kinds of preauthorized
transfers require written authorization. However, the law does not
specifically address the type of authorization needed for transfers
that occur only once. Such a transfer would be used by a mail-order
company you order merchandise from, and the regulation does not appear
to require written authorization.
How are companies abusing these systems?
Many consumers are unaware that their checking accounts can be
debited without written authorization. Thus, they may unwittingly give
information over the phone, before they are prepared to pay for
anything. The company involved should explain what is going to happen,
and answer any questions you have about the transaction.
One of the main reasons businesses are eager to accept checks over
the phone is that it is much faster than receiving checks in the mail.
Unfortunately, however, this increase in speed gives consumers less of
a chance to change their minds about a transaction. This practice could
be used by less reputable companies anxious to cash in quickly on their
products and services, and who then disappear from the marketplace.
Overcharging is one of the biggest abuses encountered by the Bureau
thus far. In our experience, companies are more likely to overcharge
than to charge you for something you never ordered. The latter is a
clear case of fraud, while the former could be more difficult to prove
without written evidence.
How am I protected against fraud?
With both of these methods, you are unlikely to find out about fraud
until you receive your monthly statement or your checks start bouncing.
Banks do not, as a rule, verify authorization until you dispute it.
This is due to the high volume of debits processed by a bank each day.
It is simply not efficient or cost-effective for banks to verify every
debit, especially the small ones.
You have a right to stop payment on a transaction before it is
presented to your bank. If you are having second thoughts about a debit
you authorized, you may stop payment either orally or in writing.
If there is a problem with any transaction, you must dispute it with
your bank. While the company that debited your account and its bank are
primarily at fault for the transaction, the BBB believes your bank
should play an active role in the recovery of your money.
Under Regulation E, an EFT is considered unauthorized only if no
benefit is received by the consumer. Therefore, the consumer is
vulnerable to overcharging. If a consumer orders an item for $5 and is
charged $25, the Federal Reserve does not consider that an unauthorized
transaction took place, as long as the consumer has received the
product. In the case of an unauthorized transaction, a bank is required
to investigate, and if fraud did occur, the consumer's liability is
generally limited to $50.
A Final Note
Perhaps the best advice about automatic debiting is not to give any
account information to a company you're unsure about. If they really
want your business, they can wait for a check in the mail or an
alternate form of payment. A credible company accepting checks over the
phone should answer any questions you have about the transaction. In
general, credit cards are still the best way to pay for a product or
service, since they offer the most consumer protection. If any company
is asking for your checking account number over the phone, check with
your local Better Business Bureau to verify that company's credibility.
