What are the special problems of large payments in

This preview shows page 5 - 7 out of 12 pages.

iv. What are the special problems of large payments in the foreign exchange market? What are the different ways of addressing these problems? Herstatt risk: risk a counterparty will fail in the middle of an exchange of securities. Both banks (i.e. one in Japan, and one in NY) are not open at the same time. If one bank acts first, other could fail in the mean time. o Multicurrency netting is a solution. o Another is the creation of the Continuous Linked Settlement Bank. Also, dollar payments in Asian interbank market are cleared through books of Tokyo branch of NY bank. During Tokyo business day, customer payments go through resulting in debits and credits on branch’s books. payments are final and guaranteed by branch, backed by loss-sharing arrangement. net positions need to be cleared over CHIPS when NY opens for business. o how to insure the deposits at the Tokyo branch of NY bank? maybe buy us treasury securities CLSB: members have multicurrency accounts at bank w balances in each currency they use to settle. CLSB completes transaction only when it can simultaneously execute both parts. CLSB has correspondent accounts at central bank in each country with which members do business. Major central banks have extended hours of their electronic payment system so there is now short daily overlap across major countries. Also exchange rate risk. central banks maintain stability of exchange rates. E. Read “Merchants’ Ire Flares Over Fees On Credit Cards” (Item 8.3) and “Visa's Strategy In Debit Cards: Push Up Costs” * (Item 8.2) and answer the following questions: i. What is the justification for the fees charged merchants for credit card payments? Be precise. Credit card companies charge higher rates to the merchants because it gives banks a higher profit. o Credit card companies want to sway banks so they chose to work with their company as opposed to another. o Merchants will not stop using the credit card company despite the higher fees because credit cards are used by all customers and bring in a lot of business. Credit card companies justify the rate by saying there is a risk involved. o Merchants are paid immediately but the bank is not. So, the merchants receive a discounted amount (2-7%) because of risk of loss and float. Also covers cost of identity theft/fraud that bank must face. risk of fraud/cost of processing payment interchange fee: paid each time card is swiped, sent to bank, to cover costs and promote issuance of cards ii. What is the justification for fees charged for debit card payments? Should fees for debit cards be higher or lower than those for credit cards? Why?
Image of page 5

Subscribe to view the full document.

Fees are charged because of the transaction costs of setting up the infrastructure or business and the cost of doing business. Fees should be much lower than those for credit cards. With credit cards, a line of credit is extended and there is a risk the person will not repay. With debit cards, payment is immediate and almost like cash. With a pin number, it is harder to have fraud as well with a debit card.
Image of page 6
Image of page 7
  • Fall '19
  • Credit card, Cheque, Fed

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes