How Important is Proof and Transit?
If you ask the First National Bank of Boston-they'll tell you Proof and Transit are VERY important-$90,000 worth at a time, as a matter of fact!
It seems a customer deposited a $100,000 check and was credited in the same amount.
The check was encoded correctly, went through the work, out through Federal Reserve, to the paying bank?and bounced!
Not enough money.
The check went back to First National.
Now, everything went wrong!
Instead of charging back the customer, First National just "stripped" the check and put it through again.
But when their Proof and Transit encoded the strip, they did it for $10,000, instead of $100,000.
This time there was no problem paying the check against the account at the paying bank.
After the final presentation and payment of $10,000 for the check, both customers went "belly-up" broke.
First National was out $90,000.
They tried to recover from the paying bank, but the U.S. District Court upheld the Uniform Commercial Code, which preserves the "right of the payor bank to hold the encoding bank liable for any 'under' encoding error".
For the lack of one zero in the encoding done by Proof and Transit, the bank lost the $90,000.
How important is Proof and Transit? Ask The First National Bank of Boston!
Copyright © 1990 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 1, No. 2, 2/90
First published on 02/01/1990