Chapter 3: Banks and the Payment System

Question 1

Describe the provision of payment services by banks

Answer 1

• provide system for depsots, collections and safe keeping of cash
• Administrative processing of cashless payments

Question 2

What is a cash withrawl or deposit

Answer 2

• Banks allow consumers to deposit or withdraw cash
• converts cashless currency into cash
• Banks order cash and coins from DNB but not too much, would increase security too much and bank doesn’t earn interest on cash

Question 3

What are the main functions of a payment account

Answer 3

• Making payments
• Receiving payments
• Bank statements

Question 4

Payment function

Answer 4

• Fulfilled online or via paper
• Bank carries out an authenticity check and bank balance first

Question 5

Receiving function

Answer 5

Banks credit account for incoming payments

Question 6

Bank statement

Answer 6

Bank of payer and of receiver get an overview of all debit or credit entires

Usually online, can be on paper

Question 7

What are the procedures to settle payments

Answer 7

• Intra-group transactions
• Interbank Euro payment transactions
• Interbank global payment transactions

Question 8

Intra-group transactions

Answer 8

Payer and receiver have the same bank

All done internally

Question 9

Interbank Euro payment transactions

Answer 9

• payer and receiver have two different banks
• Clearing houses process these transactions (Pan-European Clearning Houses = PE-ACHs)

Question 10

EquensWorldline

Answer 10

NL interbank clearing institution

(interbank) Banks pass payment orders from their account holders to EquensWorldline

Question 11

What is the clearing process

Answer 11

When a clearing house collects sorts and bundles payment orders per bank

Question 12

Settlement process (EU)

Answer 12

• Bank uses outgoing and incoming payment orders to calculate net amounts and batch them with the interbank payment obligations using TARGET2

Question 13

TARGET2

Answer 13

Collective settlement system for Euro payments

Question 14

Interbank global payment transactions

Answer 14

• For non Euro, banks use correspondent banks

e.g. NL bank contacts an american bank to fulfill the transaction using a local clearing house, US bank is the correspondant bank

Question 15

Nostro account

Answer 15

**The foreign bank account
**
‘NOSTRO’ = ‘OUR’ in Italian.
a bank account opened by any commercial bank of a country in any bank of a foreign country with a denomination of foreign currency.

Ex: if HDFC Bank (India based bank) operates a bank account in the City Bank (USA based bank) with the $ (Dollar) denomination, it would be a Nostro Account for HDFC Bank

Question 16

Loro account

Answer 16

**Foreign bank’s account locally
**
LORO = Italian “their”
used when a domestic bank uses the account of a third-party bank, which holds a Nostro account, to settle foreign exchange transactions.

e.g. if a domestic bank who possesses a bank account in a foreign bank clears the due of foreign trade on behalf of third-party banks, then this is called Loro account transactions