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FIN4320_Lecture_5_US_Payments_System(44p) - The U.S...

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Unformatted text preview: The U.S. Payments System The Payment System Basics Payment Need: – Policies and Procedures – A medium of storing and transmitting payment medium information information – Intermediaries to carry out transfer instructions – Security Types of Payments Systems Types Paper-Based Instruments Electronic Payment Instruments Paper-Based Payment System Paper-Based Domestic Check System – Payor – Payee – Drawee Bank – Depository Bank – Provisional Credit – Return Item Components of a Check Components Signature MICR Line Transit Routing Number Encoded Check Amount Components of a Check Components – 12 is Fed Bank Number – 5 is the Fed Branch Number – 1 is the Availability Code – 0545 is the ABA# – 3 is a check figure – On-Us Field is the Account Number – 1195 is the Check # Domestic Check System Requires Presentment To And Acceptance Requires Of The Check By The Payor's (Drawee) Bank Bank Presentment Of A Check Through A Presentment Clearing Agent Clearing Check Clearing Process Check Firm 1 mails check to Firm 2. Firm 2 deposits check in Bank 2 (Depository Firm Bank). Bank) Bank 2 credits Firm 2’s account, processes Bank the check, and sends to clearing system. the Clearing system physically presents the Clearing check to Bank 1 (Drawee Bank), subtracts value (Drawee subtracts from Bank 1 and gives value to Bank 2. from Bank 1 debits Firm 1’s account. Check Clearing Process Check Role of Drawee Bank (Bank 1) – Before Final Settlement, Drawee Bank Must Before Inspect Check And Review Status Of The Payor's Account Payor's Signature Date Stop Payments Alterations Check Clearing Process Check Role of Drawee Bank (Bank 1) – Return Items Are Checks Rejected By The Return Drawee Bank Drawee Return Items: Check must be reviewed by midnight Return of the day following presentment. If the check is over $2,500 and there are insufficient funds, drawee (Bank 1) must notify bank of first deposit (Bank 2) by 4:00 P.M. on the 2nd business day following presentment. presentment. Check Clearing Process Check Role of Depository Bank (Bank 2) – Encode amount of check on MICR line – Sort checks by transit routing number – Forward checks to the check clearing system Check Clearing Process Check Cash Letters Clearing Channels: – On-Us Check Clearing – Clearing Houses – Federal Reserve Bank – Correspondent Bank Direct Sends Check Clearing Process Check Factors Influencing The Selection Of The Factors Clearing Channel Clearing – Bank Processing Time Bank – Geographical Location – Availability Schedule Availability Check Clearing Process Check Drawee Endpoints – City Items – Fed Regional Check Processing Centers Fed (RCPC) (RCPC) – Country Items Checks drawn on banks outside of a Fed or RCPC Checks area area Check Clearing Process Check Drawee Endpoints – Transit Items Checks drawn on banks that do not participate in the Checks local clearing house. local – High Dollar Group Sort Items Drawn on RCPC or Country bank 2nd presentment if more than $10 million of checks 2nd per day from outside bank’s Fed district Check Clearing Process Check Deposit Deadlines – For Availability Same-Day Settlement – Any bank can present to any other bank – Present check by 8:00 A.M. local time – Must be settled in same day funds by 6:30 P.M. Must EST (Fedwire close) EST – Designed to improve competition Check Clearing Process Check Electronic Check Presentment – MICR data is transmitted to drawee bank before MICR checks are physically presented. Speeds clearing. clearing. MICR Capture at Point-of-Sale – Convert MICR data at register to create an ACH Convert debit. debit. Funds Availability Funds Ledger Cutoff Time Deposit Deadline – Determined by check’s endpoint. Availability Schedule Funds Availability Funds Ledger and Collected Balances – Ledger Balance Balance the bank shows in the account. If ledger Balance balance is negative, account is overdrawn. balance – Deposit Float Sum of deposits in the collection process. Dollar amount of check times availability in days. – Collected Balance Difference between Ledger Balance and Deposit Difference Float. Float. – Available Balance Check Clearing Process Check Availability Schedules – Proof of Deposit Availability is based on time of deposit and endpoint. – Factors Determining Availability Drawee Location Time of Deposit Encoding Reject Items As-of Adjustments Fractional Availability Check Clearing Process Check Availability Schedule Endpoint Chicago St. Louis L.A. 9:00 a.m. Endpoint Chicago St. Louis L.A. Ledger Balance Monday Monday Monday Availability Deposit Deadlines 0 10:00 a.m. 1 6:00 a.m. 2 1:00 a.m. Deposit Monday Available Balance Monday W ednesday Thursday 6:00 p.m. Ledger Balance Tuesday Tuesday Tuesday Deposit Monday Available Balance Tuesday W ednesday Thursday Check Clearing Process Check Federal Reserve Float – Occurs when Fed gives value to one bank Occurs before receiving value from another. Significantly reduced due to DIDMCA of 1980. Priced by Fed. Priced Check Clearing Process Check How the Fed has Reduced Fed Float – Check Truncation – High Dollar Group Sort – Inter-District Transportation System – Later Presentments and Deadlines Other Check-Like (Paper) Payment Instruments Instruments Payable Through Draft Pre-Authorized Draft/Check – Payee initiates the transaction. Money Order and Travelers Checks – Prepaid draft. Other Check-Like (Paper) Payment Instruments Instruments Depository Transfer Checks (DTC) – Used to move funds within a company – No signature is required – There is a restricted payee – Not used much today Other Check-Like (Paper) Payment Instruments Instruments Sight Draft – Used in foreign trade – Usually requires documentation Time Draft – Like a sight draft, but payable in the future Other Check-Like (Paper) Payment Instruments Instruments Cashier’s Check – Check drawn by bank against the bank’s own Check funds funds Certified Check – Check drawn by a customer against his/her own Check funds. Bank guarantees payment. funds. Government Warrant – Draft payable through government treasury Draft office. Acts just like a check for all practical purposes purposes Electronic Payment Methods Electronic Automated Clearing House (ACH) – Network of regional and inter-bank associations Network and private sector processors. and – Most regional association are operated by the Most Fed. Fed. – National Automated Clearing House Association National (NACHA) sets standards. (NACHA) – Processing: Batch process, store-and-forward Processing: electronic exchange system. electronic Electronic Payment Methods Electronic Automated Clearing House – Participants Originator Originating Depository Financial Institution (ODFI) Originating ACH Receiving ACH Receiving Depository Financial Institution (RDFI) Receiver Electronic Payment Methods Electronic Automated Clearing House – How ACH Differs From Checks Electronic versus Paper-Based ACH can also include additional payment ACH information, check is limited in this regard. information, Parties are Originator/Receiver with ACH and Payor/ Payee with checks. ACH can debit or credit either the originator’s or ACH receiver’s account. Check can only debit the payor’s account and credit the payee’s account. account Electronic Payment Methods Electronic Automated Clearing House – Steps in an ACH transaction Originator transmits information to ODFI. ODFI merges originators transactions with other ODFI company's transaction involving the same RDFI. company's Local originating ACH either settles in their area or Local sends transactions to other receiving ACH. sends ODFI sends value, RDFI receives value, and ODFI originator’s account is debited. originator’s Receiver’s account is credited. Electronic Payment Methods Electronic Automated Clearing House – Risk Issues Credit Risk – If the originator sends and ACH and it overdraws his/her If account, the ODFI is exposed to risk. If the originator declares bankruptcy prior to settlement, the ODFI is out the funds. funds. Large-Value Payment Risk – Due to the credit risk involved with ACH transfers, ODFIs Due are limiting the size of ACH transactions and pricing the ACH transactions for the additional risk. ACH Electronic Payment Methods Electronic Automated Clearing House – ACH Payment Formats Prearranged Payments or Deposits (PPD) – PPD Credits – PPD Debits – Consumer transactions Cash Concentration or Disbursement (CCD) – Usually used for cash concentration – Only corporate format without space for addenda Cash Concentration or Disbursement Plus Cash Addendum (CCD+) Addendum – 80 character space for free-form data – Used for reporting federal and state tax payments (TXP) Electronic Payment Methods Electronic Automated Clearing House – Corporate Trade Exchange Corporate-to-corporate payments Standard ACH payment information Variable-length addendum in accordance with Variable-length ACS X12 standards ACS – Re-Presented Check Entries (RCK) ACH debit replaces a paper check after the paper ACH check has been returned for insufficient funds. The amount must be less than $2,500 and drawn on a consumer account. Consumer must be informed NSF checks can be collected in this manner. Limited to two re-presentments. to Electronic Payment Methods Electronic Automated Clearing House – Settlement Credits are entered into the system one or two Credits business days prior to settlement. business Debits are entered into the system one Debits business day prior or settlement business Memo Posting Some weekend processing – Prenotification Zero-dollar test transactions Optional since 9/96 – Authorization Electronic Payment Methods Electronic Automated Clearing House – Advantages of ACH Reduced banking costs – Per item costs can be 50 – 90% less expensive Reduced reconciliation costs Faster inflows Control of outflows Increased accuracy of cash flow forecasts Reliable Reduced fraud Improved customer service Electronic Payment Methods Electronic Automated Clearing House – Disadvantages of ACH Reduction of disbursement float Loss of control on timing direct debits System start-up costs – High fixed costs but relatively low variable costs. Lack of uniform notification practices. Electronic Payment Methods Electronic Fedwire – Federal Reserve transfers funds Real-time: Funds are moved instantaneously Transaction is final once receipt is confirmed by the Transaction Fed. If the sending bank does not settle, the Fed guarantees the funds. guarantees Also serves as a communications system, aligned Also with CHIPS and SWIFT. with Available from 12:30 A.M. to 6:30 P.M. ET. Wire transfers security is covered by UCC4A. Must Wire have security procedures in place. have More expensive than ACH transactions. Electronic Payment Methods Electronic Fedwire – Types of Fedwire Transfers Repetitive: Only date and dollar amount change. Repetitive: Debit & Credit parties, account numbers, and descriptions remain the same. Most control. descriptions Semi-Repetitive: Date, dollar amount, and Semi-Repetitive: descriptions may change. Some control. descriptions Non-Repetitive: Everything may change, including Non-Repetitive: the parties involved. Least amount of control. the Drawdown: Often use in a firm’s cash concentration Drawdown: system. system. Electronic Payment Methods Electronic Fedwire – Mechanics of a Fedwire Transfer Sender initiates wire transfer Sender’s bank debits sender’s account Sender’s bank sends funds via Fedwire Fed debits sender’s bank and credits receiver’s bank Fed notifies receiver’s bank Receiver’s bank credits receiver’s account and Receiver’s notifies receiver wire complete notifies Electronic Payment Methods Electronic Clearing House Interbank Payments System Clearing (CHIPS) (CHIPS) – Used to clear payments between foreign and U.S. Used banks banks – Operated by the New York Clearing House Association – Transfers are batched and net amounts are settled at Transfers the end of the day the – Receiving bank bears risk if funds are made available Receiving before settlement at the end of the day before – CHIPs can now transmit up to 9,000 characters of data CHIPs with a payment (ASC X12, EDIFACT or XML). with Electronic Payment Methods Electronic Society for Worldwide Interbank Financial Society Telecommunications (SWIFT) Telecommunications – International information network – Does not transfer value, although it may carry Does instructions to transfer value through Fedwire, CHIPS, or some other method CHIPS, Electronic Payment Methods Electronic Payments System Risk – Types of Risk Systematic Risk Credit Risk Operational Risk Fraud Risk – Daylight Overdrafts Fed prices daylight overdrafts on a minute-by-minute Fed basis basis Questions? Questions? ...
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  • Spring '08
  • Cheque, drawee bank, Automated Clearing House, Check clearing process, electronic payment methods, Clearing Process Check

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