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Checks can open door to fraud as electronic debits grow

By Jonathan P. Decker
The Christian Science Monitor

WASHINGTON — When Mary Ellen Corbett recently scanned her bank statement, she noticed deductions from her checking account that she never authorized. It wasn't just one merchant — and it didn't happen just once.

"At first, I was just curious as to why this was happening," says Corbett, a journalist from Silver City, N.M. "But then I became angry. I see this as an invasion of my privacy and I question the legality of any creditor accessing my account electronically without my authorization."

Corbett's experience is not unusual.

As banks move away from paper-based transactions, their customers are bumping into the same problem. The checks they write become, instead, an electronic debit. And the practice is perfectly legal, unless accountholders object.

Worse, it and other industry measures that take effect this fall could boost checking-account fraud. Even the check-processing industry now suggests you guard account numbers as closely as any sensitive personal information.

If you don't know the merchant, don't use a check, industry officials warn, because it doesn't offer the protections of a credit card.

"These automatic deductions are obviously much more efficient for the bank and the creditor. It saves them money but it also creates more opportunities for checking-account fraud," says Mark Budnitz, a professor at Georgia State University College of Law and a board member of the National Consumer Law Center.

Under federal law, creditors must disclose any automatic deductions to a customer's checking account.

Electronic payments can be authorized by signing a form or attaching a voided check. But as Corbett learned, a creditor does not have to get written authorization from a consumer. Instead, it is up to the consumer to object (preferably in writing) to the proposed transaction.

And the electronic trickle is becoming a flood. Because of the nation's wide acceptance of online banking and the huge increase in automated checking-account withdrawals and deposits, the system that processes these requests is clearing 10 billion electronic transactions a year.

Because of these changes, the Federal Reserve warned banks last year that "dishonest persons are using the automated clearing house to originate unauthorized debits."

Consumers have some legal protection against checking-account fraud. For electronic debits, provided you notify the bank right away, the bank typically is required to "recredit" your account with the missing funds within 10 business days while it investigates.

"The law makes it necessary for consumers to check their bank statements often, so that any instance of checking-account fraud can quickly be brought to the bank's attention," says Budnitz.

While banks are supposed to refund any unauthorized checking-account withdrawals, there are fewer consumer protections compared with credit-card fraud. And if the bank decides the charge is valid, it can take the money out again.

Consumer advocates warn that checking-account fraud will grow after the Check Clearing for the 21st Century Act or "Check 21," takes effect Oct. 28.

The new law represents a death knell for the fading practice of banks returning original checks to consumers with their monthly statements or when there is a problem with a particular check.

If consumers want to inspect checks for forgeries or alterations or to present a canceled check as proof of payment, they usually will have to be content with a new payment instrument called a "substitute check"(based on a digital image of the original check).

The main goal of Check 21 is to avoid paper checks being transported all over the country and to aid the electronic transfer of an image or other information about a check.

For consumers, the major disadvantages are two: It will become more difficult to spot and prove forgeries and check alterations, the speed of electronic transfers will decrease the "float" that enables consumers to keep money in their account until the check clears.

Experts say that the provisions of the act, while providing a type of recredit for consumers who dispute a charge, may be weak.

Bankers call Check 21 the biggest change they have seen in 30 years and hope it goes smoothly. But even some industry leaders are concerned.

"It could lead to an increase in checking-account fraud — especially with corporate accounts," says George Thomas, president of the Electronic Payments Network, a division of the Clearinghouse, the largest private check-processing system.

That's one reason NACHA — The Electronic Payments Association recommends on its Web site that consumers protect their checking account.

"It's fine to use your checking-account information on the Web or over the phone to pay bills or to pay companies you know and trust," says Michael Herd of NACHA.

"But you should safeguard your checking-account information, just as you would your address, phone number, Social Security number and other account numbers."

Banking-industry leaders and consumer advocates agree that the days are long gone when only banks had access to account numbers.

"There's no way of stopping this steamroller," Budnitz says. "In fact, there will be more efforts by the banking industry to increase this paperless society. We're always hopeful that we can roll something back."




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