Legal Developments in Commercial On-Line Banking

September 2012
E-Commerce Law Reports

The state of on-line banking law in the United States has been clarified by two cases that have set legal precedent: the Bench Trial Opinion in Experi-Metal Inc. v. Comerica Bank, Case No. 2:09-cv-14890, and Patco Construction v. Peoples United Bank, 684 F.3d 197 (1st Cir. 2012), decision by the First Circuit Court of Appeals.

In Patco Construction v. Peoples United Bank, a lawsuit arising after a cyber account take-over of a commercial customer's bank account, the First Circuit Court of Appeals ruled that a financial institution's electronic banking contract did not employ a commercially reasonable security procedure. The state of on-line banking law in the US is examined.

Businesses are increasingly turning to on-line and mobile functionality for their banking needs, and banks and non-banks are rapidly moving to meet expectations. Understanding the legal rules of the road permits all participants to evaluate their investments and the risks in the migration to cyber banking. The normative legal playing field on which financial institutions and their commercial customers interact is set forth in the United States primarily by the Uniform Commercial Code1 (UCC). The UCC's rules governing electronic funds transfers are found in Chapter 4A2. One of the most important areas of commercial interaction relates to the parties' authentication of the electronic instructions communicated. The ultimate inquiry is whether the payment order received from one party, which is to be acted upon by the other, actually originates from a customer, and not an imposter. On this issue the UCC's 4A-202, primarily, supplies the operative authentication guidelines.

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