The McFadden Act and Remote Electronic Banking: The Classification Quandry



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Texas Tech Law Review


The greatest impact of electronic technology in the banking community has been on the process of transferring funds. The most attractive alternative is electronic transfer of funds. When electronics are substituted for paper, funds can be transferred and recorded instantly. Account holders communicate with the bank by various types of terminals including "customer to bank communication terminals" (CBCT's). CBCT's located at the bank or in remote locations allow bank customers to obtain current account balances, transfer funds between accounts, withdraw fixed sums of cash, and make deposits. "Point of sale" terminals enable the customer to authorize payments to third parties. Merchants can transfer funds from a customer's account to the store's account instantly, and thereby eliminate bad check losses. Refinements of the electronic funds transfer system include the use of telephones as communication terminals to transmit customers' instructions directly to the bank's computer. Although electronic funds transfer represents a needed advance in the payments system, its success may be retarded by existing banking law. Rapid conversion to a national electronic payments system depends in part on whether the terminals which give the public access to the system are classified as "branches" under the National Bank Act. If customer to bank communication terminals are held to be "branches," national and state banks must look to the law of each state for permission to locate terminals apart from their chartered premises. Congress tied the ability of national banks to establish branches to state law in order to maintain equality between national and state banks. The result is that states can enforce their anti-branch bank laws on national as well as state banks to prohibit remote electronic banking if the federal courts hold that terminals are "branches" under the Act. If a suit by a state results in CBCT's being found to be "branches" within the meaning of the National Bank Act, their use will be restricted to the national bank's premises and their only value will be extending banking hours. If, however, CBCT's are not found to be branches, remote terminals can be used and the advantages of electronic banking can be realized free from state regulation. It is, therefore, vitally important to national banks and the development of an electronic payments system to understand what constitutes a "branch" under federal law. The resolution of the branch status of CBCT's involves an analysis of the National Bank Act's branch bank provision, known as the McFadden Act, and judicial interpretations of the statute.



McFadden Act, Customer to bank communication terminals, CBCTs, Electronic funds transfer, Transferring funds, Payment system, National electronic payment system, National Bank Act, Branches, National banks, State banks


8 Tex. Tech L. Rev. 661