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Legal Issues Regarding Electronic Payment Products

The following comments are excerpts from a presentation made by R. David Whitaker, Esq.

Mr. Whitaker identified the following items as some of the key legal issues that should be considered regarding any electronic payment product.

Authorization Process Considerations

Establishing identity requirements
  • When setting up an account
  • To authorize a transaction

What procedure is used for establishing identity?
  • Use of validation techniques
  • Use of hardware or software "tokens"
What is the risk of identity theft?
  • Does the product present the opportunity for account creation by impostors?
  • Does the product present the opportunity for account access by impostors?
Finality of Payment Issues

Payer Considerations
  • Is underlying obligation suspended when payment is tendered?
  • When is payer released from liability for the underlying obligation?
Payee Considerations
  • Does Payee continue to have recourse against Payer after payment is tendered?
  • When does payee's payment become final with respect to:
    • Authorization risk
    • Credit risk
    • Disputed performance of the underlying contract
Distribution of Risk for Unauthorized Transactions

  • Under what circumstances does each of the following parties bear the risk that a transaction is unauthorized?
    • Payer
    • Payee
    • Payer's financial institution or service provider
    • Payee's financial institution or service provider
    • Other intermediaries
Distribution of Cost

  • Who pays the freight
    • Payer virtually always pays the freight eventually
    • Direct vs. indirect models
      • Direct
        • Direct fee to payer from payee's service provider for initiating transaction
        • Surcharge by payee
      • Indirect
        • Fee from payee to payer's service provider/intermediary
        • Fee from payee to payee's service provider
        • Fee may be subsidized by other customers (e.g. credit card)
Distribution of Float

  • Who earns interest while the transaction is in process?
    • Is the value in "two places at once"?
    • For how long?
    • Who's holding the value?
      • Payee
      • Payer
      • Intermediary
© Goodwin Procter 2001

Mr. Whitaker is of counsel in the Washington D.C. office of GoodwinProcter LLP and is a member of its Financial Services Practice. He specializes in electronic commerce issues and financial services law and has extensiveexperience with practical application of laws governing electronic banking, letters of credit, payment systems and commercial and consumer financing.

First published on BankersOnline.com 3/18/02


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