Chapter 4 Payment Systems

Collecting Bank (presenting bank)

(1) In the check clearing process, this is the bank that accepts a check for deposit and collects the funds from the payee's bank. The bank is also referred to as the bank of first deposit or depository bank. (2) In a documentary collection process, this is the bank (the buyer's bank) that presents the documents to the buyer. The bank is also referred to as the presenting bank. 4

Originator

1) The party that creates the ACH transaction 2) In investment banking, A subset of trading professionals who are charged with evaluating, pricing, and managing the placement of new security issues. Also known as an origination desk. 4

Ledger Balance

A bank balance that reflects all entries to a bank account, regardless of whether the deposited items have been collected and are available for withdrawal. 4

Clearing House Interbank Payments System (CHIPS)

A bank-owned, large-dollar funds transfer network operated by The Clearing House Payments Company. 4

ACH

A batch processing clearinghouse that traditionally has been used for high-volume, low value transactions. 4

Transit Check

A check deposited with a financial institution that is drawn on another financial institution. 4

Open Loop Card

A credit card-either bank-issued credit card, American Express, or Discover-that is accepted anywhere the card logo is displayed. 4

Magnetic ink character recognition (MICR)

A data capture process that translates the machine-readable information on a check into a digital data entry. See also MICR line. 4

Single Use Card

A disposable credit card number that looks like a regular credit card number, but includes an embedded expiration date and security code, and will only work for a single use. 4

Society for Worldwide Interbank Financial Telecommunication (SWIFT)

A financial industry-owned, cooperative, interbank telecommunication network that enables banks and corporations to send authenticated electronic messages in standard formats. 4

Fedwire

A large-value, real-time gross settlement (RTGS) transfer system operated by the US Federal Reserve. 4

Availability Schedule

A schedule that specifies, for each drawee endpoint, when a bank grants available credit or collected balances for deposited items. 4

FedGlobal Automated Clearinghouse Payments (FedGlobal ACH Payments)

A service offered by the US Federal Reserve Bank to provide a framework for sending cross-border ACH transactions to countries around the world (over 35 countries as of 2013). 4

Trans-European Automated Real-time Gross settlement Express Transfer 2 (TARGET2) system

A system that provides real-time settlement for cross-border electronic payments in euros. 4

Cutoff Time

A time by which a specific process, such as depositing payments, must be completed for processing in the current cycle. For example, checks deposited after the current day's cutoff time will typically be processed the next day. 4

Fixed-to-Variable Currency

A transaction currency option available as part of the FedGlobal automated clearinghouse (ACH) payments service, in which US dollars are converted to a variable amount of a destination currency based on a competitive exchange rate. Settlement is between participating US financial institutions and the Federal Reserve Banks, in US dollars. 4

Fixed-to-fixed-US dollar to US dollar

A transaction currency option available as part of the FedGlobal automated clearinghouse (ACH) payments service, in which payments are both transferred and received in US dollars. Settlement is between participating US financial institutions and the Federal Reserve Banks, in U.S. dollars. 4

On Us Check Clearing

A type of check-clearing process that involves a single bank and occurs when a payee deposits a check in an account at the same bank on which it is drawn. 4

On We Check Clearing

A type of check-clearing process that occurs when checks are deposited at a financial institution that are drawn on related financial institutions or on financial institutions that share a common check-processing system, thus eliminating the need to clear the checks through another bank. 4

Stored Value Card (SVC)

A type of debit card that may be offered by financial institutions, retailers, and other service providers, and can be a branded, open-loop card (e.g., Visa or MasterCard), or a private-label, closed-loop card (e.g., Starbucks or other merchant gift card). Generally, an open-loop card can be used almost anywhere while a closed-loop card can only be used at one selected merchant or group of merchants. Gift cards are one of the most commonly used types of SVC. 4

Real-Time Gross Settlement System (RTGS)

A type of payment system in which each transaction results in a separate value transfer between the payor and payee, and the payment to the payee is final and irrevocable at the time the receiving bank's account is credited or at the time the receiving bank is notified of the payment, whichever is earlier. 4

Department (unnamed) Card

A variation on the purchasing card in which each department is given its own purchasing card for general use by that department. 4

Value-dated automated clearinghouse (ACH) transactions

ACH transactions where the payment instructions include settlement dates. 4

EMV

Acronym for Europay, MasterCard, and Visa that refers to a global standard for the use of smart cars as either debit or credit cards. 4

Collected Balance

Aggregate of bank account balances that is calculated as the average ledger balance minus the deposit float. 4

ACH Credit Transaction

An electronic message that instructs the originating depository FI to move funds from the originator's account to the receiver's depository FI. 4

ACH Debit Transaction

An electronic message that instructs the originating depository FI to move funds from the receiver's account to the originator's account. 4

Proof of Deposit (POD)

Availability assignment method used in banking in which availability is assigned to each check as it is processed. 4

Depository Bank

Bank of FI in which a check is deposited for processing and clearing. AKA as the bank of first deposit or collecting bank. 4

Time Draft

Draft payable at some future date, provided all terms of the draft have been met. As with sight drafts, time drafts are often presented in combination with other docs, such as titles or bills of lading. If all the documentation is in order, then the draft is payable at the specified future date. 4

Sight Draft

Draft payable upon presentment, provided all the terms of the draft have been met. Often presented in combination w/ other docs, such as titles or bills of lading. If the docs are in order, then the draft is payable upon presentment. 4

Available Balance

Eg - Investable Balance - balances in the customer's account that the bank was able to invest in income-producing assets during the account analysis period. It is also defined as the amount of funds available for withdrawal from an account, based on the bank's availability schedule and/or local regulations that require specific availability for certain funds. 4

Customer Transfer Plus (CTP)

Fedwire format implemented in late 2010 that provides the ability to send large amounts of remittance data in wither a structured or unstructured format along with the payment. 4

Settlement Risk

Form of counterparty credit risk that is related to the probability that a party funding a particular transaction will default on the actual payment or settlement obligation. 4

Cash Letter

In a check-clearing process, a file of check images or a bundle of checks accompanied by a list of individual items and other control documents. 4

Correspondent Bank

In a payment clearing process, this is one of two banks that have bank accounts with each other for the purpose of clearing and settlement of payment items between the banks. 4

Receiving Bank

In a payment clearing process, this is the bank or financial institution where the payee's account resides. It processes the transaction on behalf of the payee. 4

Settlement

In a payment system, this is the actual movement of funds from the payor's acct to the payee's acct. 4

Settlement Mechanism

In a payment system, this is the mechanism or operation used to complete the transfer of value from the payor to the payee. 4

Clearing Channel

In a payment system, this is the method used to move either the payment instrument or information related to the instrument between parties involved in the transaction, as well as their banks. 4

Finality

In a payment system, this is the point in time when a payment can no longer be taken back or retracted by a payor, and the payee has full use of the funds. 4

Availability

In a payment system, this is the point in time when the payee can use the funds provided by the payment, even though the payment may not be final. 4

receiving Depository Financial Institution (RDFI)

In an ACH transaction, this is the FI that acts as an intermediary between the originator and the receiver, on the receiver's side of the transaction. 4

Originating depository financial institution (ODFI)

In an ACH transaction, this is the FI that initiates the transaction on the originator's behalf. 4

Debit Transfer

In an electronic payment system, this is the process of a payor authorizing payees to initiate value transfers from the payer's account to the account of the payee. 4

Credit Transfer

In an electronic payment system, this is the process of a payor pushing funds from its account to the acct of the payee, 4

Remote Deposit Capture (RDC)

In an over-the-counter field deposit system, this is a process that allows an organization to scan and image checks, then transmit those images to its depository bank for posting and clearing, instead of having to deposit physical checks. In the United States, the bank then transmits the images to the Federal Reserve or another image exchange network for clearing. 4

Government Warrant

In govt finance, this is an order to pay that instructs a treasurer to pay the warrant holder on demand or after a maturity date. Warrants deposited in a bank are routed (based on MICR line info) to a collecting bank that processes them as collection items. The collecting bank presents the warrants to the government entity's treasury dept for payment each business day. 4

Bank of First Deposit

In processing checks, this is the bank in which a check is initially deposited as part of the clearing process. EG - Collecting Bank. 4

American Bankers Association (ABA) Number

In the United States, the ABA # is a 9 digit number that identifies the paying bank for a check and provides the depository bank with the information it requires to route the check back to the paying bank through the clearing system. 4

Image Replacement Document (IRD)

In the United States, this is a paper reproduction of the original check that contains an image of the front and back of the original check and is the legal equivalent of the original check. 4

Paying Bank

In the payment clearing process, the bank of FI where the payor's account resides. The payee bank processes the value transfer in the payor's behalf. 4

Giro

Method of transferring money by instructing a bank to directly transfer funds from one banka cct to another w/o the use of checks. Initiated by the payor and can be 1 time payments or reoccurring standing instructions for a series of payments. It is a functional equivalent of an ACH Credit. 4

receiver

Party whose account is affected by the ACH transaction. 4

Payable through Draft (PTD)

Payment instrument resembling a check that is drawn against the payor rather than the bank. It is handled like a check through the clearing process, but the responsibility for paying the draft lies with the payor, referred to as the drawee in the case of drafts. 4

Pre-authorized Draft

Payment instrument that authorizes the payee to draw/draft against the payor's account. AKA - remotely created check. 4

Payroll Card

Prefunded stored value card used to replace payroll checks or ach direct deposits. 4

Money Order

Prepaid instrument issued by banks, postal services, etc, where the purchaser is the instrument's payor and the money order is the obligation of the issuer. 4

Direct Exchange

Process in which collecting banks arrange to send cash letters directly to a paying bank or to a nonlocal Federal Reserve Bank rather than using typical clearing channels. This process, also referred to as direct presentment, enables banks to meet various deposit deadlines and achieve faster clearing times. AKA Direct Send. 4

Continuous linked settlement (CLS)

Process that allows a simultaneous exchange of payments for both sides of underlying financial transactions (foreign exchange contracts, non-deliverable forward contracts, and OTC derivative contracts), thereby eliminating settlemnt risk. 4

Optical character recognition (OCR)

Processing method for data entry that reads preprinted info on remittance documents and creates a digital data file.. 4

Image Processing

Processing of a document, such as a check, using an electronic image of the document in place of the original physical instrument. 4

Credit Scheme

Term used in the SEPA initiative to describe a pre-authorized credit program in which one person or company authorizes another to automatically credits its bank account for payments that are due. 4

Payor

The one making the payment 4

Payee

The one receiving the payment. 4

As of Adjustments

The practice of a bank adding additional time as part of the collected balance calculation when a check takes longer to clear than the initial availability that was granted. 4

Clearing

The process in which FIs use the information contained in a payment instruction, such as a check or wire transfer, to transfer money between themselves on behalf of the payor and the beneficiary, either directly or through some external network. 4

Debit Scheme

The term used in the Single Euro Payments Area (SEPA) initiative to describe a pre-authorized debit program in which one person or company authorizes another to automatically debit its bank account for payments that are due. 4

Ledger Cutoff

The time of day when a bank deposit must be received in order to be posted to the ledger balance of the depositor's account. 4

Deposit Deadline

Time within the banking day when an item must be ready for transit at the depository bank's processing center to qualify for the availability stated in the availability schedule. 4

Fixed-to-Fixed-Foreign Currency to Foreign Currency

Transaction currency option available as part of the FEdGlobal ACH Payments service, in which payments are both transferred and received in foreign currency. The foreign exchange rate and settlement are managed and processed by participating US financial institutions and the respective foreign gateway operators via their foreign correspondent banks. 4

Gross Settlement

Type of settlement in a payment system in which each transaction results in a separate value transfer between the payor and payee. In most gross settlement systems, the settlement is on a real time basis, resulting in a real time gross settlement (RTGS) system. 4

Smart Card

Typical payment card w/ addition of a computer chips with related circuitry that can be used to store information for security or transaction processing. Transactions made w/ smart card can update the card's memory and be stored for future processing. Smart cards are used w/ special card readers that can read and write to the card. AKA Chip Card 4

NACHA

US membership org of FIs and other stakeholders that establishes and administers rules, standards, and procedures that enable members to exchange ACH payments in a national basis. It levies fines for violations. Membership includes a number of regional ACH associations that provide various educational, rules guidance, and other support services to their local members. 4

Ghost Card

Variation on the purchasing card that does not involve the use of an actual card. W/ a ghost card system, a number is given to a specific vendor and is then used for electronic purchasing and billing purposes. AKA Virtual Card. 4

Payment Card Industry Data Security Standard (PCI DSS)

Worldwide info security standard defined by the PCI Security Standards Council. Created to help orgs that process card payments prevent payment card fraud through increased controls around the data they hold and exchange. The standard applies to all orgs that store, process, or transmit cardholder info from any card branded with the logo of one of the major card brands. 4