CTP - Chapter 4

Open loops card

Visa, master card, AMEX

Primary bank-issued cards in US

- Visa and master card

Cash payments

- The use of currency or coin to complete transfer value primarily used by consumers for small transaction amounts. - Cash is the payment instrument and the physical transfer of the cash is both the clearing network and the final settlement.

Continuous Linked Settlement

- Allows a simultaneous exchange - payment for payment - of both sides of underlying financial transactions. - Eliminates the settlement risk (the risk that one party to an FX transaction pays out the currency it sold but does not receive the currency it bought) - Managed by CLS Group Holding AG and includes the CLS Bank International (CLS bank) - Regulated by central banks (Fed) in the countries it operates.

Participants in Credit card process

- Cardholder - Card issuer - Merchant - Merchant acquirer - Acquiring processor - Issuer processor - Network operator

Foreign Checks

- Checks deposited into a bank in one country that are drawn on a bank in another country. - May also be drawn in a foreign currency - Treated as collection items and processed separately from the normal check clearing system. - Can take days to weeks to clear - Can clear for significantly less than the face amount of check due to exchange rates.

Four major categories of payments other than cash

- Checks or drafts - RTGS - ACH - Card-based payments

Four major clearing channels in the US for processing transit checks

- Clearinghouse - Correspondent bank - Direct send/exchange - Fed

Society for Worldwide Interbank Financial Telecommunication

- Communication system used by bank around the world to transmit payment instructions. - Industry-owned, cooperative, interbank telecommunication network that enables banks to send authenticated electronic messages in standard formats. - Play an important role in the clearing of payments (but it is not a payment system) - Created in Brussels in 1973

EFTPOS

- Debit cards - Access funds directly from a cardholder's checking or saving account.

Automated Clearing House

- Electronic network for the exchange of smaller payment instructions among FIs - BACC in UK, ECG in Hong Kong and ACH in US. - Small-value, non-urgent systems that often include both credit and debit types of transfers. - Generally batch-processed, valued-dated EFTs.

US ACH operators

- Federal Reserve Bank - the private operator, the Electronic Payment Network (EPN).

Where does the value is subtracted from the paying banks' account through?

- Federal Reserve bank, correspondent bank or some other clearing channel. - Paying bank has a limited amount of time to review check images, and authorize final payment or refuse payment and return check to the bank of first deposit.

Examples of RTGS

- Fedwire in US - CHAPS in UK - LTVS in Canada - CNAPS in China

RTGS

- Large-value transfer electronic payments => wire transfer

ACH

- Low-value electronic payments => small value electronic payment that are value dated, processed in batches, and take one or two days to settle.

Check-based payment

- Paper check is the oldest non-cash payment instrument in US. - Still primary way for B2B payments to be made in US ( though use is declining). - Process begins when check drawn on US bank is deposited into payee's account. - Check may be deposited physically or using RDC (remote deposit control) - If payee has not already scanned check, the check will be scanned at teller counter or batched and sent through a reader at the bank of first deposit which captures MICR line information and image of the check. - Checks/images are sorted according to the clearing channel and sent to the clearing system as cash letters.

Settlement (or availability)

- Refers to the actual movement of funds from the payor's account to the payee's account. - Settlement can be handled between FIs using common accounts at their central banks (common for domestic transfer). - Settlement can also take place through correspondent accounts (common for cross-border transfer).

Availability Schedules

- Specify when a bank grant available credit or collected balances for deposited items. - Fed has availability schedules for banks. - Correspondent banks availability schedules for other banks. - Banks availability schedules for customers - Checks are generally assigned between 0 and 2 days' availability for businesses. - Availability schedules depend on the customer and volume of business.

CHIPS

- US-based privately owned wire transfer system that settle its transaction through the Fed. - As of 2013, 46 member banks from 19 countries.

Real-Time Gross Settlement

- means that the clearing and settlement of each transaction occur continuously throughout the processing day. - payment is unchanged when the RTGS processor credits the amount of payment order to receiving bank's account or sends notice to receiving bank, whichever is earlier.

FedGlobal Service

- provides this service called FedGlobal ACH payments - offers a range of transaction currency options.

B2B

...

B2C

...

B2G

...

C2B

...

C2C

...

G2B

...

G2C

...

Credit card transaction process

1) Authorization 2) Clearing 3) Settlement

Parties to ACH includes

1) Originator (note can be payor or payee) 2) Receiver (note can be payor or payee) 3) ODFI (financial institution for originator is the originating depository financial institution) 4) RDFI (financial institution for receiver is the receiving depository financial institution)

Four key elements in Payment Process

1) Payment instructions - information contained in the electronic transfer or a check. 2) Payment generation - where the instructions are entered into payment system itself. 3) Clearing - the process where the FIs use the payment information to transfer money between themselves on the behalf of payor or beneficiary. 4) Settlement - last step in process where payee or beneficiary's bank is credited and payor's bank is charged.

Four basic participants in a payment

1) Payor - the one making the payment. 2) Payee - the one receiving the payment 3) Payor's beneficiary institution (paying bank) - processes the value transfer on behalf of the payor. 4) Payee's financial institution - processes the transaction on behalf of payee and hold a value in an account.

Cash letter

A file of check images with related control information (but still can be a bundle of physical checks with related control information).

Requires the use a "gateway" bank or service provider who receives transaction in one country and forwards it to ACH system of other country

ACH

ACH debit

ACH transaction created by the payee to take money from the payor.

ACH credit

ACH transaction created by the payor to send money to the payee.

Cross-border ACH transactions

ACH transactions between countries

Main non-bank card

American Express

When was SWIFT created?

Brussels 1973

Who is regulated by central bank?

CLS

Close loops card

Card issued by gas companies and department stores

CLS

Continuous Linked Settlement

Authorization process

Credit card is presented to merchant for purchase, authorization request, hold place on credit limit and authorization granted.

Available schedule depends on

Customer and volume of business

Value Dating

Debiting or crediting a transaction on some date other than the processing date.

Large Value Electronic Funds Transfer

EFT

Fed

Fed acts as a clearing agent.

Sigh Draft

Is presented in combination with other document to verify that the terms of the transaction have been met.

Time Draft

It will be the same except it it not payable until a specified future date.

What is payment system?

Payment system is a series of processes and technologies that transfer monetary value from one party to another.

What kind of payment will be the vulnerable point to fraud?

RCC

Finality

Refers to the point in time when the payee knows that the money involved cannot be taken back or retracted by the payor.

What thing does play an important role in clearing of payment?

SWIFT

SWIFT

Society for Worldwide Interbank Financial Telecommunication

TARGET 2

The European RTGS system (went operational in November 2007)

On-us check

The check happens with a single bank because payor and payee both have accounts there.

On-we check

The check involves a group of banks that use a common third party vendor for check processing.

Key event in clearing process

The presentment of the check to the paying bank.

The ledger cutoff time

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

The deposit deadline

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

As-of-Adjustments

When a check takes longer to clear than the initial availability that was granted, a bank may add additional time as part of the collected balance calculation (affects float calculation)

Money order

a prepaid instrument issued by third parties such as banks, postal services, or consumer outlets.

Settlement risk

a risk that one party to an FX transaction pays out the currency it sold but does not receive the currency it bought.

Government warrant

an order to pay that instructs a treasurer to pay the warrant holder on demand or after a maturity date.

Giros

are functional equivalents to ACH credits.

Collected balances

average ledger balance minus average deposit float

Ledger balances

bank balances that reflect all entries to a bank account, regardless of whether the deposited items have been collected and are available to withdraw.

Direct send/exchange

banks arrange to send cash letters directly to paying bank or to a non-local Federal Reserve bank.

Merchant

business that accept credit cards as method of payment

Clearing process

charges sent from clearing by merchant, transaction routed to issuing bank, and hold converted to charge

Correspondent bank

collecting bank maintains depository account with another bank.

Card issuer

underwrites and issues cards to individuals who meet credit standards

Clearing house

formal or informal associations formed by banks in a geographic area to permit the exchange of items drawn on the member participants.

Available balances

funds that can be withdrawn from an account.

Cashier's check

is a check drawn on bank's own funds (official bank check).

Certified check

is drawn on a depositor's account at certification so payment is guaranteed (cashier's checks have replaced certified checks at most banks).

Debit cards

is issued against a deposit account held by a business or consumer.

Credit cards

is issued against the line of credit that the institution or merchant has extended.

MICR

is printed with a special magnetic ink and contains all the information necessary to process the check (at the bottom of the check)

RDC/Image capture

items that have been preprocessed using RDC receive faster availability, a later cutoff time and /or lower service charges for the customer.

What does RTGS use for?

large and time-sensitive transaction.

Endpoints

location of the paying bank where the final settlement occurs.

Network operator

maintains communication network to support card transaction activities

Gross Settlement

occurs when each transaction results in a separate value transfer between payor and payee.

Net Settlement

occurs when many transaction are combined and then sorted by sending and receiving banks. At the end of the day, the net amount owed by or owned to each bank is determined and the net amount is transferred.

Checks or drafts

one party writes a check to pay another.

NACHA

oversees the development, administration and governance of the ACH system

Payable through Draft (PTD)

payment instrument resembling a check that is drawn against the payor rather than the bank (used by insurance companies, preserves the right to review prior the final payment)

Card-based payments

payments that settle through one of the large card-processing network such as Visa, master card.

Traveler's check

prepaid instrument where purchaser's signature are required at issuance and when the check is used to pay for goods/services.

Payee's financial institution

processes the transaction on behalf of payee and hold a value in an account.

Payor's beneficiary institution (paying bank)

processes the value transfer on behalf of the payor.

Issuer processor

provides a system for issuers to board accounts, provide authorization, and offer risk management tools

Merchant acquirer

provides merchants with credit card terminals and maintains deposit accounts through which credit card payment settle.

Cardholder

receives card from issuing bank

SEPA

the initiative the EU intended to ensure that electronic payments within the euro zone are handled in a standardized and inexpensive manner across the euro zone

Acquiring processor

third party processors who manage the daily settlement as well as the information flow related to credit card transactions

Remote Created Check (RCC)

type of check used to draw or draft against a payor's account that is initiated by payee (also called pre-authorized drafts, unsigned and vulnerable to fraud, many banks refuse to deposit).

Settlement process

where the funds are remitted through network to merchant.