Written by The moment you open an account with a banker, you automatically become a customer of the bank.
There exists a special relationship between the banker and its customer.
However, to truly understand the nature of this relationship, it is important to first define what constitutes a banker and a bank customer.
Definition of Key Terms
Who is a banker?
To a layman, ”A banker is a person who works in a bank”.
However, from a legal perspective, the definition of a banker is more nuanced.
According to Section 2 of the UK Bills of Exchange Act 1882, “Banker” is defined as a body of persons whether incorporated or not who carry on the business of banking.
This definition highlights that a banker can be any group of people, but they must be engaged in the business of banking to be considered as such.
In essence, while a banker, in layperson’s terms, can be broadly described as someone who works in a bank, the legal definition of a banker is more specific and tied to the business of banking.
What is banking?
Even though the scope of banking has expanded to include a wider range of financial services, one definition of banking that is still relevant today is that of the Paton Commission of 1948.
In the 1948 Paton Commission report, banking was defined as “the business of receiving from the public on current account money which is to be repayable on demand by cheque and on making advances to customers.”
This definition provided a clear and concise description of the core activities of a bank.
It emphasized that banks accept deposits from the public on a current account basis, or any other form of bank account.
Based on the definition of banking, we can infer that anyone who engages in the business of banking is a banker.
Who is a Bank Customer
The term “bank customer” does not have a legal definition.
However, It is widely accepted among banking professionals and educators that a bank customer is a person who opens an account with the bank and for whom the bank continuously undertakes banking dealings.
A bank customer may also be defined as an individual, business, or organization that has established a banking relationship with a bank or other financial institution.
This relationship can be in the form of a deposit account, loan, or other financial service provided by the bank.
Another accepted definition of “bank customer” is as follows: any person (individual, corporate entities) whose dealings with the banker relate to the business of banking is referred to as a bank customer
From the above definition, it could be seen that a bank customer is anybody:
- Who has opened a bank account (savings, current, or fixed account) with a bank.
- Whose dealings with the banker relate to the banking business.
Relationship Between Banker and Customer
The relationship between the banker and the customer can exist in many forms:
1. Relationship as debtor and creditor
When you open an account with a bank, you become its debtor and the bank become becomes your creditor.
As a result, the banker is required to repay a corresponding amount of money when you request it.
So, if you feel like withdrawing all your money from the bank at once, you can do so easily.
However, it is important to note that the debtor-creditor relationship between a banker and a customer differs in the following ways from that of a similar relationship in commercial transactions.
- Creditors must demand payment: In ordinary commercial debts, the debtor is required to repay the money on a specific date or within a specified timeframe, without any prompting or reminders from the creditor. However, the debtor-creditor relationship in the case of a bank deposit is quite different. When a customer deposits money into a bank account, he becomes a creditor, and the bank becomes the debtor. But unlike ordinary commercial debts, the bank is not under any obligation to repay the deposited amount on its own accord. Instead, the customer (the creditor) must make a demand for payment, either by initiating a withdrawal or transfer of funds or by making a formal request to the bank. Because of this, bankers are not considered ordinary debtors, as they are not required to initiate the repayment process. Instead, they are obligated to repay the deposited amount only when a valid demand for payment is made by the customer.
- Demand of payment must be done at a proper place: In ordinary commercial transactions, money can be demanded at any time and from any location. In the case of bank deposits, however, the customer (the creditor) can only demand payment in the bank’s branch or by electronic means. In addition, the customer must request payment within working hours of the bank, otherwise, such request may be delayed. Furthermore, the bank may also impose certain limits on the amount and frequency of demands for payment, as specified in the deposit agreement between the bank and the customer.
These differences between the debtor-creditor relationship in banking and commercial transactions highlight the unique nature of the banking business.
It is also worth noting that the debtor-creditor relationship between a banker and a customer can be reversed in certain circumstances.
For example, when a bank grants a loan or overdraft to a customer, the customer becomes the debtor, while the banker assumes the role of the creditor.
In these cases, the customer has an obligation to repay the loan or overdraft, along with any interest and fees charged by the bank, within the agreed-upon timeframe.
2. Relationship as Trustee and Beneficiary
The relationship between a banker and a customer is not limited to that of a debtor and creditor.
The banker-customer relationship can also be viewed as a trustee-beneficiary relationship, with the banker entering a fiduciary relationship with its customers.
A trustee is a person who holds money or assets for the benefit of some other person called the beneficiary.
In our society today, It is a common practice for people to entrust their valuable possessions, such as jewellery or important documents, to their bankers for safekeeping.
In this scenario, the banker holds the possessions as a trustee for the customer, who is the beneficiary of this arrangement.
As the trustee, the banker will ensure the safekeeping of the valuables and return them to the customer upon request.
Agent and Principal Relationship
The relationship between a banker and their customer can also be described as an agent and principal relationship.
An agent is a person or entity that acts on behalf of another person or entity, known as the principal, based on the authority granted to them by the principal.
In the case of a banker and their customer, the banker can act as an agent for the customer in several ways.
Firstly, a bank acts as an agent when it pays money to others in honour of its customer checks.
A customer may write a check authorizing the banker to pay the amount specified in the check to the recipient.
The banker honours the check by transferring the funds from the customer’s account to the recipient’s account, thereby acting as the agent of the bank.
Secondly, the bank act as an agent of the customer when it collects checks and other negotiable instruments on behalf of the customer.
In this case, the customer gives the banker the authority to receive and deposit the check into the customer’s account.
The banker then acts as an agent for the customer by collecting checks on his behalf and depositing the funds into the customer’s account.
Lastly, a bank also acts as an agent for its customers when it buy and sell securities on their behalf. In this case, the customer entrusts the banker with the responsibility of buying or selling securities in the financial markets. The banker acts as an agent for the customer by carrying out the investment transaction on his behalf.
Duties of a Banker to its Customers
1. A banker takes money, checks, and other negotiable instruments from his customers and deposits them into his account for collection. This duty is important as it allows customers to safely store their money and other valuables with the banker.
2. Repaying the money in full or in part upon presentation of written authorization or instruction from the customer during banking hours and at the bank where the account is housed. This duty of a banker is important as it allows the customers to have easy access to their funds whenever they need them.
3. Giving his customer reasonable notice before closing a credit account so that the consumer has enough time to make new arrangements. It also protects the bank from having to return checks that the customer has already written, avoiding any legal action or reputational damage.
4. Maintaining the confidential relationship or duty of secrecy about his customer’s accounts and affairs. This duty of secrecy is, however, limited by the following conditions:
- The obligation of secrecy does not apply where there is a legal compulsion. For instance, if there is a legal compulsion or court order requiring the banker to disclose certain information, the banker must comply.
- When the public’s interest is at stake, the duty of secrecy is no longer valid. For example, if there is suspicion of money laundering or terrorist financing, the bank may be required to disclose certain information to regulatory authorities because non-disclosure could go against the public interest.
- When a customer instructs the banker to reveal a specific aspect of his bank dealings to a third party, the obligation of secrecy is instantly terminated.
Rights of the Banker
Accompanying this duty are some rights of the banker. Here are a few of them.
1. A bank has an implied right to charge a reasonable commission for services rendered to its customers as determined by banking conventions.
The banker also has the right to charge interest on loans and advances provided to the customers, as determined by the Monetary Policy Rate (MPR).
However, it is to remember that the banker’s right to charge interest terminates in case of the death or bankruptcy of the customer.
2. The banker has a general lien over the customer’s securities such as bills, or checks, promissory notes, dividend warrants in its possession, which were deposited by the customer.
The general lien implies that the banker can retain any of its customer’s securities until the customer pays off his outstanding debts to the bank, regardless of the nature of the debt.
3. The banker has the right to set off any debt owed by the customer against any credit balance in the customer’s account.
So, if a customer has an outstanding debt with the bank, the bank can use the funds available in the customer’s account to pay off the debt, without seeking the customer’s permission.
4. In a situation where the customer breaches the banker’s terms of service, the banker has the right to close the customer’s account.
Rights and Duties of a Bank Customer
1. When drawing a check or other instrument, the customer has the responsibility to take reasonable and proper precautions to avoid facilitating fraud or forgery.
This means that the customer must ensure that their signature is genuine and that he write the correct amount in words and figures.
The customer must also keep his cheque book in a secure place and not give access to unauthorized persons
2. A bank customer has the right to ask the bank about the status of his account. Consequentially. he should receive periodic account statements from his banker on his current account and any other pertaining account.
3. He has a duty to pay a reasonable price or charges for the banker’s services. He must pay any fees or charges relating to their account or transactions, such as ATM fees or wire transfer fees.
4. Before issuing a payment order, he must ensure that he has sufficient funds in his account.
Otherwise, the banker may refuse to honour such payment.
5. The bank customer has the responsibility to seek out the banker anytime he needs his money.
So, instead of the banker seeking him out, the bank customer is to seek out the banker anytime he needs money.
Termination of a Banker-customer Relationship
Like every other relationship, the banker-customer relationship can also be terminated. The following are some conditions that can result in the termination the banker-customer relationship.
1. The death of the customer automatically terminates the relationship.
This is because the relationship between the banker and customer is a personal one, and it is not assignable to a third party.
Therefore, upon the customer’s death, the banker-customer relationship comes to an end.
2. The relationship may be terminated if one party files for bankruptcy.
If the customer becomes bankrupt, for example, the relationship may be terminated as the bank would definitely not want to continue business relationship with a customer who is unable to meet his financial obligations.
Similarly, if a bank fails, then the deposit insurance agency will steps in to reimburse customers of the bank up to a particular amount, after which the bank and the customer relationship terminates.
3. Mutual consent between the banker and the customer can potentially end the banker-customer relationship. This, however, is contingent on both parties meeting all legal requirements.
4. in the event of a war, the relationship between the banker and the customer could be severed or placed on hold. This is due to the unstable and unpredictable nature of war, which could make it difficult for the bank to continue providing services to its customers or for customers to access their accounts.
