Automatic Debiting



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 A third party verifies your account information and, as your agent, prepares a draft for the amount to be withdrawn.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.