All Exam Topic Areas Flashcards
Risk that a party to a transaction cannot provide the necessary funds as contracted for settlement to take place on the scheduled date.
Credit Risk
Risk that a transaction is altered or delayed due to an unintentional error.
Operational Risk
Risk that a payment transaction will be initiated or altered in an attempt to misdirect or misappropriate funds.
Fraud Risk
Risk that the inability or unwillingness of one funds transfer system participant to settle its commitments will cause other participants to be unable to settle their commitments.
Systemic Risk
Risk that occurs when a party to a transaction fails to comply, either knowingly or inadvertently, with payment system rules and policies, regulations and applicable U.S. and state law.
Compliance Risk
Risk that occurs when an ODFI permits an Originator or Third-Party to use its routing number to send files directly to the ACH Operator.
Direct Access Risk
Risk that occurs when a negative publicity regarding a financial institution’s business practices leads to a revenue loss or litigation.
Reputation Risk
Risk that arises from a financial institution relying upon outside parties to perform services or activities on its behalf.
Third-Party Risk
Risk that occurs from an institution’s failure to enact appropriate policies, procedures or controls to ensure it conforms to laws, regulations, contractual arrangements and other legally binding agreements and requirements.
Legal Risk
Risk associated with foreign exchange.
Transaction Risk
Current and potential risk to earnings or capital arising from a financial institution’s inability to settle an obligation for full value when it is due.
Liquidity Risk
Risk might arise from making poor business decisions, from the substandard execution of decisions, from inadequate resource allocation or from failure to respond well to changes in the business environment.
Strategic Risk
Risk that occurs because of theft from deposit accounts by way of multiple access points.
Cross-Channel Risk
Risk to each party of a contract that the counterparty will not live up to its contractual obligations.
Counterparty Risk
Process of planning, organizing, leading and controlling the activities of an organization to minimize the effects of risk on that organization.
Enterprise Risk Management (ERM)
Voluntary private-sector organization formed in 1985 dedicated to improving the quality of financial reporting.
Committee of Sponsoring Organizations (COSO)
Governs the provisions of intraday credit (daylight overdrafts) in accounts at the Reserve Banks.
Federal Reserve Board’s Payments System Risk (PSR) Policy
Examples of operational risk with ACH payments.
(1) Missed transmission deadlines; (2) Hardware/software failures and loss of power; (3) Clerical errors; (4) Inadequate procedures; (5) Inadequate training
Examples of operational risk with card payments.
(1) Processing risks; (2) Employee and/or service provider errors; (3) Hardware and software failure, including service provider
Examples of operational risk with check payments processed through Remote Deposit Capture (RDC).
(1) Faulty equipment; (2) Inadequate procedures; (3) Inadequate training; (4) Poor image quality; (5) Resubmission of file or redeposit of physical items; (6) Technology-related issues, such as failure to maintain compatible and integrated IT systems; (7) Reliability of RDC vendor
Examples of operational risk with wire payments.
(1) System failure caused by breakdown in hardware/software; (2) System disruption; (3) System compromise; (4) Inadequate procedures; (5) Inadequate training
Examples of operational risk with emerging payments.
(1) Inadequate procedures; (2) Inadequate training; (3) Reliability of vendor; (4) Employee or end user errors
Examples of fraud risk with ACH payments.
(1) Misappropriation of funds; (2) Misdirect payment; (3) Account takeover; (4) Business email compromise scam; (5) Vendor impersonation fraud
Examples of fraud risk with card payments.
(1) Lost or stolen cards; (2) Phishing scams; (3) Skimmers; (4) Data breaches; (5) Counterfeit or altered cards; (6) Unauthorized use of a Cardholder’s card number for card-not-present transactions
Examples of fraud risk with check payments.
(1) Lost or stolen checks; (2) Alteration of deposited items; (3) Forged or missing endorsement; (4) Deposit of counterfeit items; (5) Check kiting; (6) Redeposit of items/duplicate presentment through RDC; (7) Proper disposal of deposited items by RDC customers; (8) Insider fraud
Examples of fraud risk with wire payments.
(1) Malware, spyware and viruses; (2) Business email compromise; (3) Money laundering; (4) Dishonest employees; (5) Lack of dual controls or segregation of duties
Examples of fraud risk with emerging payments.
(1) Speed of processing; (2) Reduced reaction time to fraud; (3) Breaches/data security; (4) Malware, spyware and viruses
Examples of credit risk with ACH credit payments.
(1) Originator fails to fund ODFI for credit entries initiated; (2) RDFI posted credit entry prior to Settlement Date
Examples of credit risk with ACH debit payments.
(1) ODFI is unable to recover funds from Originator for returned debit entries; (2) RDFI is untimely in returning debit entries
Maximum timeframe an ODFI is exposed to credit risk for ACH credit origination.
Up to two banking days
Maximum timeframe an ODFI is exposed to credit risk for ACH debit origination.
(1) Up to 60 days from the Settlement Date for consumer Standard Entry Class (SEC) codes per the ACH Rules; (2) Up to 60 days from the consumer’s statement date per Regulation E
Examples of credit risk with card payments.
(1) Merchant declares bankruptcy, commits fraud or is otherwise unable to pay its chargebacks causing the Acquiring Financial Institution to pay the Card Issuer; (2) With EMV, the Card Issuer may encounter credit risk due to fallback transactions
Examples of credit risk with check payments.
(1) Bank of First Deposit (BOFD) credits the account holder provisionally and settlement does not occur for several days; (2) Paying Bank misses deadline for processing returns and adjustments
Examples of credit risk with emerging payments.
(1) Failure or bankruptcy of entity initiating payment; (2) Funds availability prior to receiving final settlement; (3) Per-transaction dollar limits being set too high; (4) Funds unavailable to satisfy debit return
Examples of credit risk with wire payments.
(1) Originating/Sender Bank makes an irrevocable payment on behalf of a customer through an extension of credit; (2) Beneficiary Bank does not post the payment properly
Card payment system is governed by these rules and regulations.
(1) Regulation E; (2) Regulation Z; (3) Card Association Rules
Wire payment system is governed by these rules and regulations.
(1) UCC 4A; (2) OFAC; (3) Bank Secrecy Act (BSA); (4) Regulation E, Subpart B; (5) Regulation J; (6) Regulation CC; (7) Federal Reserve Operating Circulars 1, 5 & 6
Check payment system is governed by these rules and regulations.
(1) Regulation CC; (2) UCC Article 3; (3) UCC Article 4; (4) Regulation J, Subpart A; (5) Federal Reserve Bank Operating Circular 3; (6) ECCHO Rules
ACH Network is governed by these rules and regulations.
(1) ACH Rules; (2) EFTA and Regulation E; (3) Regulation CC; (4) Regulation D; (5) 31 CFR Part 203, 208, 210 & 370; (6) UCC Articles 4 & 4A; (7) BSA/AML; (8) State EFT Acts; (9) FRB Operating Circular 4; (10) Private Sector ACH Operator Rules; (11) OFAC
Emerging payments are governed by these rules and regulations.
Generally, these are ACH or card transactions; therefore, the respective payment system rules and regulations would apply.
A company or individual that has been authorized by the Receiver to initiate either a credit or debit ACH entry to their account.
Originator
An individual or company that has authorized an Originator to initiate an ACH entry to their account with the RDFI.
Receiver
A financial institution that receives payment instructions from Originators and forwards the entries to the ACH Operator.
Originating Depository Financial Institution (ODFI)
A financial institution that receives ACH entries from the ACH Operator and posts the entries to the accounts of its depositors.
Receiving Depository Financial Institution (RDFI)
The central clearing facility for ACH transactions.
ACH Operator
A third-party that processes ACH files and/or entries on behalf of financial institutions and/or Originators.
Third-Party Service Provider
A third-party that provides ACH services to the Originator, and, in that capacity, acts as an intermediary between the Originator and ODFI.
Third-Party Sender
An entity that issues a credit or debit card to the Cardholder.
Card Issuer
The financial institution that contracts with a merchant to initiate payment requests to a card association or company in the context of credit and debit card payments.
Acquirer (Processor, Merchant Bank or Merchant Processor)
A person or entity that is issued a credit or debit account that is accessed using a card.
Cardholder
Network which provides switching facilities for the routing of credit, debit and ATM card transactions between Acquirers and Card Issuers
POS/ATM/Credit Card Network
Financial institution identified by the routing number encoded on the MICR line of a check.
Paying Bank (Payor’s Depository Financial Institution)
The party to whom a check is made payable.
Payee
The first bank to which a check is deposited or transferred.
Bank of First Deposit (Payee’s Depository Financial Institution)
The party obligated to pay on a check.
Payor (Check Writer, Maker or Drawer)
A voluntary association of depository institutions that facilitate the clearing of checks or electronic items through the direct exchange of funds between members.
Clearing House
Private depository institution, Bankers’ Bank or Federal Reserve Bank providing clearing or settlement services to a Paying Bank or Bank of First Deposit.
Correspondent Bank
Financial institution that creates the image of the original check.
Truncating Bank
Financial institution that produces the Substitute Check or Image Replacement Document (IRD).
Reconverting Bank
Sender of the payment order in a funds or securities transfer.
Originator
Financial institution that initiates a funds transfer on behalf of the Originator.
Originating/Sender Bank
Entity that processes and settles Fedwire Funds.
Federal Reserve Bank
Financial institution identified in a funds transfer to be credited pursuant to the payment order.
Beneficiary’s Bank
Person or entity to be paid in a funds transfer.
Beneficiary
Type of retail processing where a card payment is expected after the goods or services have been received; typically refers to credit payments (e.g., credit card).
Pay Later
Type of retail processing where a card payment is expected when the goods or services are received; generally associated with debit payments (e.g., debit card).
Pay Now
Type of retail processing where a card payment is made for goods or services with prepaid or stored-value cards.
Pay Before
Delivery system that enables paper checks to be processed remotely.
Remote Deposit Capture (RDC
Check created by a Payee based on the account holder’s authorization that does not bear a signature.
Remotely Created Check (RCC)
A check that never appears in paper form.
Electronically Created Item (ECI)
An entry to the record of an account to represent the transfer or removal of funds from the account.
Debit Entry
An entry to the record of an account that represents the transfer or placement of funds into the account.
Credit Entry
A payment card issued to a person for purchasing goods and services through an electronic transfer of funds from a demand deposit account rather than using cash, checks or drafts at the point-of-sale.
Debit Card
A card indicating the holder has been granted a line of credit to make purchases or withdraw cash up to a prearranged ceiling.
Credit Card