Chapter 4: Payment Systems

Collected Balances

Refer to the average ledger balance minus the deposit float

The components of a business check

1. Auxiliary on US-Field 2. External Processing code (EPC) 3. Routing Number 4. On-US/Account number 5. Encoded Amount of Check

payments can also be differentiated based upon the identities of the parties involved in the payment transactions

1. Business to business (B2B) 2. Business to consumer (B2C) 3. Consumer to business (C2B) 4. consumer to consumer (C2C) 5. business to government (B2G) 6. government to business (g2B) 7. government to consumer (G2C) 8. Consumer to government (C2G)

types of payments

1. checks 2. rtgs 3. Small value electronic payments 4. card based payments 5. emerging payments

ON-US/Account number

Contains the customer account number as assigned to the payor by the drawee bank

Routing number

AKA the American Banking Association (ABA) number or routing transit number. Identifies which financial institution is drawn upon.

main non bank card

American express (Amex), issued primarily by Amex itself

Three steps of a credit card transaction

Authorization process Clearing process Settlement process

EMV transaction vs Magnetic stripe

EMV are more secure than using a magnetic stripe. When a payment is initiated with a magnetic strip card, the terminal reads data that are stored on the magnetic strip nd routes the information through the payment networks for authorization. A Criminal can copy the magnetic strip data and produce counterfeit cards. An EMV chip, on the other hand can process information and determine the rules of the transaction through communication with the terminal. This dynamic authentication reduces the possibility of fraud.

FedGlobal service transaction currency options

Fixed to Variable Fixed to Fixed USD to USD Fixed ot fixed (Foreign currency to Foreign currency)

NACHA

National automated clearing house association, is a trade organization that is responsible for managing the development, administration, and governance of the ACH system. NACHA is a membership of organizations of financial institutions and other stakeholders in the ACH system. They are also responsible for enforcing the rules and various risk management processes.

Network operator

Network operators maintain communication networks to support card transaction activities, such as authorization, clearing, and settlement

Fixed ot fixed (Foreign currency to Foreign currency)

Payments are both transferred and received in foreign currency. The FX rate and settlement are managed and processed by participating US financial institutions and the respective foreign gateway operators via their foreign correspondent banks

Fixed to Fixed USD to USD

Payments are both transferred and received in the USD. Settlement occurs in USD and is between participating US financial institutions and Fed Banks.

External processing code (EPC)

Single digit optional field for special purposes sucha as image processing codes. Located to the immediate left of the routing number

Clearing process

Step 1: charges sent for clearing by merchant step 2: transaction data routed to issuing bank Step 3: hold converted to charge

Settlement process

Step 1: funds remitted through network to merchant

Target2

Target2 is based on a common operating platform developed and operated by the bank of Italy, France, and Germany on behalf of the Eurosystem

Auxiliary on US-Field

The check number, it is necessary to prevent check conversion.

The two act operators in the US

The fed processes most of the ACH transactions while a private operator, the Electronic Payments Network (EPN) processes the remainder.

What's the difference between an acquiring bank and a credit card processor?

The term credit card processor literally refers to a company that submits bankcard transaction information to a card association computer network (Visa, MasterCard, etc.) where it is then routed among acquiring and issuing banks. An acquiring bank supplies the financial backing to support the risk of merchant processing and to fund merchants for sales.

Encoded amount of check

This number should agree with the amount written on the check by the payor. The amount is typically encoded on the check by the depository bank and appears in the lower right hand corner of the processed check.

single euro payments area (SEPA)

an initiative of the european union, ensures that electronic payments within the eurozone are handled in a standardized and inexpensive manner across all countries of the eurozone.

Fixed to Variable

US dollars are converted to a variable amount of a destination currency based on a competitive exchange rate. Settlement occurs in USD between participating US institutions and Fed banks.

Sight draft/time draft

Usually presented in combination with other documents that verify the terms of a transaction have been met. if all the documentation is in order, then the draft is payable upon presentment (at sight) A time draft is the same as a sigt draft except it is not payable until a specified future date. Used primarily to support international trade

who are the primary bank issued cards in the US

Visa and Mastercard.

can you send each transactions between countries?

Yes they are called cross border ACH transactions. This is accomplished through the use of a gateway bank or service provider who will receive transactions in one country and then forward them to the ACH system of another country. The US Federal Reserve provides this service, called the FedGlobal ACH Payments, to over 35 countries as of2015. And many global banks provide a similar service.

What is a bank issued card?

a card issued by a bank, that gives the client access to funds

government warrants

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

ledger balances

are bank balances that reflect all entries to a bank account. Ledger balances are important for accounting but not for funds availability. A negative ledger balance results in ledger overdraft, for which charges can occur.

Debit cards

access funds directly from a cardholders checking or savings deposit account

who does the bank rely on to account fraudulent checks?

account holders

remote deposit capture (RDC)

allows a payee to scan a check received as payment and transmit the scanned images to a bank for posting and clearing.

Account to receiver option

also offered and allows funds from accounts at a US depository FI to be retrieved by any receiver either at a participating bank location or at a trusted third party provider in certain receiving countries.

Purchasing cards

are credit cards use by businesses for the purchase of supplies, inventory equipment, and service contracts. The benefit of these systems is the replacement of the traditional time consuming, labor intensive, paper based requisition process.

Traverlers check

are prepaid instruments similar to money orders. Two signatures are usually required by the purchaser: one at issuance and one at the time the check is used to pay for goods and services.

check based payment systems

are the primary payment method used for B2B payments in the US. Finality can take several weeks or longer, due to stop payment orders and overdraft returns by the paying bank.

Proof of deposit method of availability

availability is assigned to each check as it is processed. Some banks negotiate special availability for selected, high volume customers. This affects float balances

Giro payment

available in some countries is the functional equivalent of an ACH payment. the payor, typically the consumer, authorizes his bank to pay the payee, typically a business, through a direct transfer.

real time gross settlement systems(RTGS)

payment systems that offer immediate and irrevocable value.

daylight overdrafts

occur when financial institutions permit corporations to make payments that exceed the available balance.

Describe what happens when a check is used

begins with the deposit or paying in of a check. The payee scans the check, during this process the amount of the check is added to the MICR line. The check is then sorted by the collecting or payee's bank and is sent through the clearing channel as cash letters.

what is the check payment system

begins with the deposit or paying in of a check. Then it is deposited into the payee's bank by the teller by scanning the magnetic ink character recognition line (MICR) information and captures the image of the check.

Merchant

businesses that accept cards as a method of payment.

gross settlement

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

participants in a credit card transaction

cardholder card issuer merchant merchant acquire acquiring processor issuer processor network operator

Open loop cards meaning

cards are accepted anywhere the card logo is displayed.

cashiers check

certified checks is a check drawn on bank funds. Cashiers check is withdrawn on the depositors account at the time of certification. Payment to the payee is guaranteed by the bank. Due to higher processing costs of certified checks, banks have gone to cashiers checks.

the key elements of electronic funds transfers

clearing and settlement

payment instructions

consist of the information contained in an electronic transfer payment card transaction or a check. these instructions are from the payor and tell the paying bank to transfer value to the payee through the receiving bank.

payment generation

occurs when the payment instructions are entered into the payment system

value dating

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

Foreign checks

deposited at a bank in one country that are drawn on a bank in another country. Because these checks are subject to both FX costs and extra processing fees, the bnak of the first deposit typically will not credit payees account until it receives and converts the proceeds of the check to its base currency. AS A RESULT FOREIGN CHECKS CAN TAKE DAYS OR WEEKS TO CLEAR FOR SIGNIFICANTLY LESS THAN THE FACE AMOUNT OF THE CHECK. most banks do not accept foreign checks

payees bank

depository bank, process the transaction on behalf of the payee and generally holds the value in an account

Availability schedules

each bank sets its availability schedule based on its processing schedules, capabilities, and pricing decisions. If the deposit deadline is missed, then availability is delayed. Checks are generally assigned somewhere between zero and one day availability for businesses.

Pin based

facilitates consumer authorization and authentication through he entry of a PIN at the PIS terminal. Authorization and clearing are generally immediate and are facilitated by the network operation such as Mastercard, or VISA.

clearinghouse

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

Historical context of a cash letter

historically for settlement to occur, the original check had to be presented to, and be accepted by the bank on presentment-the physical deliver of a check to the paying bank. This resulted in the creation of a logistical system to physically transport a large number of checks from one bank to another, every night. The term cash letter refers to the bundles of physical checks that are sent to a paying bank in exchange for "cash" or some form of bank credit.

Merchant acquirer

in addition to issuing cards, banks can also act as acquiring banks for businesses that accept credit card payments. The merchant acquiring bank qualifies businesses that accept credit card payments. The merchant acquiring bank provides merchants with credit card terminals which may be purchased or leased, and merchant deposit accounts through which the credit card payments settle

How long does it take to cash a check?

in the US many checks clear the same day with a remainder settling in one day. Finality however, can take several weeks due to various types of returned items.

What is a chip card?

is a card with a computer chip with related circuitry that can be used to store information for security or transaction. This system is called EMV or (Europay, Mastercard, and Visa).

Money order

is a prepaid instrument issued by various third parties such as banks, postal services, consumer outlets. The purchaser is the instruments payor, and the money order is the obligation of the issuer.

settlement

is the final step in the process and occurs when the beneficiary's bank account is credited and the payor's bank account is charged.

Endpoints

is the location of the paying bank where the final settlement occurs the endpoint is displayed in the routing information such as the RTN or sort code on the check.

payee or beneficiary

is the receiver of the payment whose account is credited. (increased)

card issuer

issuing banks underwrite and issue cards to individual and business cardholders who meet credit standards, or in the case of debit cards, hold bank accounts with that financial institution The issuing bank maintains the individual card accounts, bills, and collects payments from cardholder, and monitors the performance of credit card receivable portfolios.

cash letter

made up of physical bundles of checks and related documents. The cash letter form includes information such as the depositing institution's routing number, the total dollar amount of items deposited, and the number of items deposited.

MICR line

magnetic ink character recognition line, during the scanning the amount of the check is captured and added to the information contained in the micr line on the bottom of each check.

Small value transfer systems

many countries have small value transfer systems, ACH in the US, BACs in the UK, and electronic clearing (ECG) in Hong Kong. Typically batch processed, value dated electronic funds transfers between originating and receiving FI's. They can either be credits, such as payroll payments, that are originated by the account who is sending funds. Or they can be debits, such as mortgage where the originator is the accountholder who is receiving the funds.

Acquiring processor

many merchants and merchant acquiring banks use third party processors to manage the daily settlement as well as the information flows, related to credit card activities

RDC/image capture

may receive faster availability, a later cutoff time, a later deposit deadline, and a lower service charges because the customer is performing the labor intensive task for the bank.

Real time gross settlement systems (RTGS)

means that the clearing and settlement of each transaction occur continuously during the processing day. Payment to the receiving participant is final and irrevocable when the RTGS processor either credits the amount of the payment order to the receiving banks' account or sends notice to the receiving bank. Whichever is earlier. Examples of this are Fedwire, CHAPS

Society for worldwide interbank financial telecommunication (SWIFT)

not a payment system, SWIFT is a communication system used by most banks to transmit payment instructions. It is a industry owned, cooperative, interbank telecommunication network that enables banks to send authenticated electronic messages in standard formants. The information that moves through SWIFT ultimately results in value being transferred from one party to another. Through the SWIFT network, a company can request a bank to initiate a balance transfer or foreign payment.

Remotely created check (RCC)

pre authorized drafts, are used to draw or draft against a payor's account. The check is unsigned, and the payee, rather than the payor, initiates the transaction are typically created for a one time payment. Because RCC's do not bear a signature they can be created without the knowledge of the payor. they are vulnerable to the fraud. As a result many banks do not accept them for deposit.

Signature based debit card

processed in the same manner as credit card transactions using the network operators. Customer signs a receipt at checkout

Cardholder

receives a card from the issuing bank

Available balances

reflect the amount of funds available for withdrawal from an account. May also include overdraft lines of credit

Reject items

rejected items are checks that a banks auto check processing equipment are likely to miss.

payable through draft (PTD)

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 draft lies with the payor, referred to as the drawee in the case of drafts.

returned items

returned checks

how long does a bank have until they can't return a check?

roughly 36 hours in the US

cash payments are

self settling, for this reason it is not considered a separate payment system. A popular misconception is that cash payments are less expensive than other types of payments, cash is a security risk and needs to be transported and safeguarded.

Direct send or direct exchange

send cash letters directly to a paying bank this is referred as a direct presentment, achieves faster clearing times. Avoids clearing house??

payor

sends a payment and the payor's account is debited for the value of the transaction

difference between settlement and finality of payment

settlement refers to the movement of funds from the payor's account to the payee's account. In other words, the payee can use the money involved at settlement. For this reason, the term availability can also refer to settlement. Finality refers tot he point in time which the funds cannot be taken bank or retracted by the payor or the payor's bank. Settlement transitions to finality when a payment is irrevocable.

Where the payor and payee termed as in small value transactions?

since they can be originated as either credits or debits, the term payor and payee are not used to identify the parties to the transaction. Instead, originator and receiver are used. FI's are not called depository and paying banks either, they are called originating depository financial institution and the receiving depository financial institution. Unlike checks, both the originator and the receiver can send money and take money from the payor.

Authorization process

step 1: credit card presented to merchant for purchase step 2: authorization request to merchant acquirer step 3: hold placed on credit limit step 4: authorization granted

Federal reserve systems

the fed also acts as a check clearing agent.

Issuer processor

the issuer processor provides a system for card issuers to board accounts, provides authorizations, and offers risk management tools to issuers to manage their card portfolios effectively.

payor's bank

the paying bank. process the value transfer on the payors behalf

clearing

the process in which banks use the payment information to transfer money between themselves on behalf of the payor and the beneficiary, either directly or through some external network.

Account transfer

the standard option for distributing cross border payments between deposit accounts.

clearing

the transfer and confirmation of information between the payor's bank and the payee's bank

Types of deadlines (page 82)

there are two check deposit related deadlines established by banks that determine when funds become available the ledger cutoff time and the deposit deadline.

Correspondent bank

type of clearing, the collecting bank maintains a depository account with another bank, called a correspondent bank. The collecting bank sends cash letters to the correspondent bank, which presents the items to the paying bank through a local clearing house or Fed. The collecting banks depository account at the correspondent bank is the then credited with the proceeds of the checks.

Clearing house interbank payment systems (CHIPS)

us based privately owned wire transfer system that settles its transactions through the fed

Continuous linked settlements (CLS)

was developed to reduce the risks of working with counterparts. Beginning in the mid 1990s, central banks became increasingly concerned that the high level of settlement risk existing practice, coupled with an unexpected event or failure, could trigger serious disruption of the global FX markets and financial system liquidity. In an FX transaction, settlement risk is the risk that tone party to the transaction provides the current it agreed to sell but does not receive the currency it agreed to buy. Thus the transaction is not settled. The exposure to a single counterpart, even if for a limited time, can have substantial negative consequences for the parties involved. The solution to eliminate settlement risk was the development of CLS. CLS is a multi currency FX settlement service that allows a simultaneous exchange of the payments for both sides of the underlying financial transactions.

as of adjustments

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

When are large value RTGS payment systems used?

when major transactions are time sensitive and where the irrevocable receipt of value is required.

net settlement

when transactions are combined and sorted by sending and receiving banks