Yes the issuer makes a profit costs include hiring

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Yes, the issuer makes a profit. Costs include hiring people to verify transactions, need people to convert mobile money and cash and the fixed cost of infrastructure Revenue- charging transaction fee o People signing up for the services Big economies of scope iv. What potential source of revenue is the issuer (mobile phone company) passing up? Why is it passing it up? Mobile phone companies are now teaming up with banks: what are the potential benefits? Issuer could loan out the deposit but it passes this up because doing so would qualify it as a bank (would have to face regulations) Benefits of partnership: company could offer additional banking services to customer. Also, will improve reputation of mobile company o Bank and company could work together to make loans o Company could put deposits at bank and earn interest on them o Benefit to customer is that they now can receive loans in bank and company partner. Bank can work to help assess customers creditworthiness
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D. Electronic systems for large payments. i. How do Fedwire and CHIPS work? Fedwire: o Links computers at bank to computers at Fed for a communication network o Used by Banks to transfer fed dollars in the form of a deposit at fed o Payment is final and can’t be canceled o More expensive than check- so only used for large payments. The cost is a monthly fee and a high charge (&10) per transaction o Electronic equivalent to paying in cash CHIPS: o Clearing house interbank payment system o Payments are netted to minimize the need for final payments between banks o If at the end of the day you have a net debt to another bank or institution you send funds through Fedwire o Electronic equivalent to check ii. Suppose you (a bank) need to make an immediate payment but currently lack the funds, how do each of the two systems accommodate you? With Fedwire, if bank does not have funds in its deposits, the fed will automatically allow the bank an overdraft loan to cover payment and recipient is immediately paid. bank must repay amount by end of business day so it is called daylight overdraft and it is free (charged no interest). You can use CHIPS to send the message because it is not an immediate payment, but it is a promise to pay at the end of the day. iii. What risk does this create and how does the system deal with this risk in each case? Fedwire- daylight draft is a credit risk. The fed covers the payment for the bank but if the bank fails the Fed will just have to take the loss. If bank can’t pay by the end of the day the Fed is now loaning to that bank o To help, Fed sets limits for each bank on charging and borrowing rates for overdraft loans CHIPS- risk of default o To help, stringent admission standards, set bilateral credit limits on net position, banks have debit cap on net position based on bilateral limits, if participant does fail, CHIPS has loss sharing arrangement to protect failed banks creditors on chips (other participants cover failed banks debt, each participants’’ liability proportional to its bilateral credit limit to failed bank)
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iv. What are the special problems of large payments in the foreign exchange
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  • Fall '19
  • Credit card, Cheque, Fed

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