Chapter 4 - Payment Instruments and Systems Flashcards
Four Basic Elements in Payments Process
Payment Instructions
Payment Generation
Clearing
Settlement
Settlement vs. Finality
Settlement = funds have been credited
Finality =payment is no longer revocable
RTGS
Real-time gross settlement
Two Types of Individual Electronic Transfers
RTGS
RTP
Three broad trends in payment systems developments:
Move from paper to electronic and digital
Shortening of retail payment settlement cycles
Increased use of digital payment instruments
Is cash a high cost payment method?
Yes!
It costs a lot of infrastructure to support holding cash.
Alternative names for check payors
Drawers
Makers
What system do banks use to settle the net settlement due for check clearing?
RTGS
What does it mean when a check has been truncated?
MICR line is captured along with image of check
IRD (Checks)
Image Replacement Document (scanned check)
MICR
Magnetic Ink Character Recognition
What are batches of checks sent for clearing called?
Cash letters
US Check Clearing Process
- Check deposit
- Conversion to electronic image
- Clearing
- Check exchange
- Value subtracted from paying bank
- Paying bank review
On-We Check Clearing
Similar to On-Us clearing but for a group of banks that use the same third-party for check processing
Transit Checks
Checks to be drawn on other financial institutions
Trends for Settlement and Finality for Checks
Settlement occurs faster
Finality can still take weeks
Foreign checks are processed as ______ items?
Collection
Make take weeks to settle
Exceptions to Foreign Check Processing
US dollar checks drawn on Canadian banks with US MICR lines
Checks for negotiation
Check for Negotiation
Depository bank will advance funds to payee, with recourse to withdraw funds if funds fail to settle
Endpoint (Checks)
The location of the paying bank where final settlement occurs
ABA Routing Number
Ledger Cutoff vs. Deposit Deadline
Ledger Cutoff = deadline by which deposits must be made to hit the ledger balance
Deposit Deadline = deadline when an item must be ready for transit to quality for the availability stated in the availability schedule
Availability Proof of Deposit Method
Availability is assigned to each check as it is processed
Deposit Float
Deposited items that are listed on the ledger but not yet available
Not a regulatory term, but used for EAC
Collected Balances
Average ledger balance minus the deposit float
Not a regulatory term, but used for EAC
Most common check rejection reason
MICR line physical defect
As-Of Adjustments
Bank makes an adjustment to availability due to prolonged clearing
Cashier’s Check vs. Certified Check
Cashier’s Check (Official Bank Check) = check drawn on a bank’s funds
Certified Check = drawn on depositor’s checking account, balance drafted by bank already
Are cashier’s checks or certified checks more common?
Cashier’s checks
less expensive
Government Warrants
Order to pay the warrant holder on demand or after a maturity date
Similar to check
Money Order
Prepaid instrument where no bank account is needed
Purchaser is the payor
Order is obligation of issuer
Payable-Through-Draft
Responsibility for paying the draft lies with the payor, instead of the bank
Often used by insurance companies
Pre-authorized Drafts
AKA Remotely Created Checks (RCCs)
Payee initiates the transaction
No signature
Common for utilities
Subject to fraud
Sight Draft / Time Draft
Usually presented in combination with other documents
Time drafts are used for transactions that call for delayed payment
Clearing vs. Settlement
Clearing = transfer and confirmation of information
Settlement = actual transfer of funds
Finality
Irrevocable and unconditional
Are most checks and cards settled on a gross or net basis?
Net basis
Gross vs. Net Settlement
Gross Settlement = separate value transfer, final
Net Settlement = netted, credits are final, debits may be reversible
Do most systemically important systems settle using RTGS or net settlement?
RTGS
Lynx
Canada’s RTGS system
CHIPS
Clearing House Interbank Payment System
Used to clear international USD funds for international banks in the US
Banks must have a US presence to access CHIPS
EURO1
Private owned same-day net settlement system (similar to CHIPS)
Settles transactions via TARGET2
STEP2
Pan-European Automated Clearing House
Used to facilitate SEPA payments and other low-value payments in the EUR area
ODFI vs. RDFI
Originating Depository Financial Institution
Receiving Depository Financial Institution
Most ACH transactions in the US are processed by?
The Fed via FedACH
NACHA
Trade organization that is responsible for managing development, administration, and governance of the US ACH system
ACH payments are usually settled via gross settlement or net settlement?
Net settlement paid via RTGS
Giro Payments
Low value payments that are the equivalent of an ACH
Instructing the transfer of funds from one bank to another without a check
Standard SEPA Payment Instruments
SEPA credit transfer
SEPA direct debit
SEPA Instant Credit Transfers
SEPA card payments
TIPS (SEPA)
TARGET Instant Payment Settlement
Which systems are used to clear and settle SEPA payments?
ECB?
Regional?
National?
ECB – TARGET2, TIPS
Regional Level – EURO1 and STEP2 (EBA Clearing)
National Level – CORE (France as example)
IAT
(These transactions also require what kind of bank to work?)
International ACH Transaction
Requires gateway banks
FedGlobal Service
Facilitates international ACH transactions
Account-to-account transfer or account-to-receiver
FedGlobal Transaction Currency Options
Fixed-to-variable (USD to FCY)
Fixed-to-fixed (USD to USD)
Fixed-to-fixed (FCY to FCY)
Nonbank Payment Service Providers for International Payments
Western Union
SWIFT gpi
SWIFT global payments innovation
Aimed at increasing visibility and the ability to track international payments
UETR
Open Loop vs. Closed Loop Cards
Open Loop = can be used wherever the logo is
Closed Loop = can only be used at that store
EFTPOS
EFT at the Point of Sale
Used commonly throughout the world to refer to debit transactions
MCC
Merchant Category Code
What can P-Cards help to reduce the existence of at a company?
Petty cash
One Card Program
Combines P-cards and T&E cards
Department Cards vs. P-Cards
Department cards will not have a name on them as they are issued to the entire department
SVC Examples
Gift cards (most common)
Payroll card
Employee benefit program cards
What new process do credit cards introduce?
Authorization
Authorization Equivalent
Combination of payment instruction and generation
Three Steps in Card Transaction Processing
Authorization
Clearing
Settlement
Card Issuer
Issuing banks that underwrite and issue cards
Merchant Acquirer
Qualifies businesses that accept credit cards
Provide credit card terminals
Maintains deposit accounts through which credit card payments settle
Acquiring Processor
Third-party utilized by merchant / merchant acquirer to process and management daily settlement, information flows
Issuer Processor
Provides system for cad issues to board accounts, provides authorizations, offers risk management tools
Network Operator
Maintain communication networks to support authorization, clearing, and settlement
E.g Visa, Mastercard, Discover, etc.
Payment Gateway
Link between the payment’s point of sale and the merchant acquirer
Who makes the authorization decision in a card transaction?
The issuing bank via the Issuer Processor
Open-to-Buy
(Card Transactions)
Hold on the cardholder’s limit or the account’s available funds if a debit card
Describe the Card Payment Process
Authorization
Card swiped at terminal
Merchant sends information to merchant acquirer via gateway
Merchant acquirer sends information through card network to issuing bank
Issuing bank gives authorization decision
Hold placed on credit (or decrease available funds if debit card)
Clearing
Merchant submits all transaction activity to merchant acquirer typically at the end of the day
Merchant acquirer will send information via payment network to issuing bank
Charge or debit is reflected for customer
Settlement
Network operator establishes net positions
Network operator receives funds from issuing banks and forwards funds to merchant acquirer
Merchant acquirer settles funds to merchant, net or gross
Terms and conditions related to refunds and chargebacks are contained in which document?
Merchant agreement
PCI DSS
Payment Card Industry Data Security Standard
Payment Card Industry Security Standards Council
Develop PCI compliance rules
For PIN-based card authorization, authorization and clearing happen _______?
(How soon?)
Immediately
EMV
Europay, Mastercard, Visa
Collaborated to create the chip technology
Dynamic Authentication
Answer questions to verify identity
Tokenization
Google Pay or Apple Pay
Does not provide card information to merchant
Three major components of merchant card fees
Interchange
Assessments
Processor fees or markups
Interchange
(What conditions will make it lower or higher?)
Charged by the issuer of the card
Generally lower for card present and higher for card not present
Assessments
Charged by the network operator
Percentage of transaction amount
Processor Fees
Fees assessed by merchant acquirer to process transaction
Only portion of merchant fees that are negotiable
Bundled Pricing vs. Interchange-Plus
Bundled = one rate, but typically higher to cover variation
Interchange-Plus = interchange + assessment + stated fee
Merchant Discount
(Cards)
Bundled fees
Typically subtracted from card settlement amount
Is TARGET2 considered a local system or is it used by central banks?
Provides central banks a way to move real-time gross settlements through the Euro system
Electronic Fund Transfer Act (EFTA) (1978)
Rights and responsibilities for EFT services EXCEPT WIRES
Limits liability to unauthorized transactions involving ATMs and POS terminals
Depository Institutions Deregulation and Monetary Control Act (DIDMCA) (1980)
Requires all deposit-taking institutions to maintain reserves at Fed
Fed services such as the discount window and check clearing available to all deposit-taking institutions
Fed must reduce and/or price payment system float
Fed must price previously free Fed services
Regulation E
Implements provisions of the EFTA
Regulation J
Implements check collection and settlement provision of Federal Reserve Act
Regulation Z
Truth in Lending Act of 1968
Credit Card Accountability Responsibility and Disclosure Act of 2009
Promotes informed use of credit by consumers
Primarily impacts treasury through cards offered to customers
Things Prohibited under Credit CARD Act / Regulation Z
Cannot increase rate in first year
Cannot increase rate that applies to an existing balance
Can be under 21 only if they can make required payments or cosigner can
Consumer’s consent before charging fees for transactions above limit
Limits high fees for subprime credit cards
Bans two-cycle billing
Cannot allocate payments to maximize interest charges
Two-Cycle Billing
Calculate interest charges based on the average balance of the account over two billing periods
Banned as part of CARD Act
Regulation CC
Implements provisions of the Expedited Funds Availability Act of 1987
Rules to speed collection and return of checks
Endorsement standards for banks
Regulation II
Implements provision of the Durbin Amendment to the Dodd-Frank Act of 2010
Limit debit card interchange fees and increase competition in payment processing
Article 3 of the UCC deals primarily with what two concepts for checks?
Accord and satisfaction
Amended to allow for 90 day period due to use of lockboxes
Bank’s failure to examine forged signature does not result in failure to exercise ordinary care
Article 4A of the UCC
Electronic funds transfers
Two Primary Provisions of Article 4A of the UCC
Security procedures – commercially reasonable for verifying payment
Consequential damages – typically the bank won’t be liable, unless in writing; incorrectly executes is responsible for interest and incidental expenses
PSD1 (2007)
Payment Services Directive 1
Legislative framework for SEPA
SEPA Two Primary Concepts
Creation of standard credit and debit payment schemes (high and low value)
Creation of a common payment card framework
PSD2 (2018)
Updates PSD1 to recognize the growth in mobile and internet payment services
Limit interchanges fees on consumer credit and debit card transactions
Prohibits use of surcharges
Legal basis for open banking in the EU
AISP
Account Information Service Provider
Authorized to connect to banks and collect reporting information
PISP
Payment Initiation Service Provider
Entitled to connect to a customer’s bank and to initiate payments on the customer’s behalf
Average Deposit Float
Sum of all items in the process of collection divided by the number of calendar or business days in the account analysis period
Near Field Communication
Allows for contactless authorization
Smart Card
Card with an integrated computer chip
Cryptocurrency is also known as?
Virtual currency
What types of payments are the most common method for C2B payments other than at the point of sale?
Electronic payments
In a RTGS transaction, when is the transaction considered final?
The receiving bank is notified by the RTGS processor
or
Central bank credits the amount
SWIFT questions will never include the term
Settle
Availability can also refer to what term in the payment process?
Settlement
Checks can be made available, but finality can still take weeks
Settlement transitions to what to complete the payment process?
Finality
Collection Item
(and do they count as float?)
An item such as a check or other negotiable instrument that bank will not provide credit for until funds have been received
Collection items do not count as float
Do banks have to have a US presence to participate in the CHIPS network?
Yes
Which party is responsible for providing authorizations as it relates to card transactions?
Issuer Processor
