Chapter 4 - Payment Systems Flashcards
Elements of the Payments Process
1) Payment Instructions
2) Payment Generation
3) Clearing
4) Settlement
Settlement
refers to the movement of funds from the payor’s account to the payee’s account
availability is key here too
Finality
refers to the point in time at which funds cannot be taken back or retracted by the payor or the payor’s bank
Real Time Gross Settlement (RTGS) Systems
Payment systems that offer immediate and irrevocable value
e.g. Wire transfer system
Small Value Electronic Payments ( Automated Clearinghouse (ACH))
value dated and processed in batches
originally intended for smaller transactions
self settling
meaning the physical transfer of cash provides the clearing network that leads to final settlement (ie no banking network is used)
cash payments are self settling
Clearing House
formal or informal associations formed by banks in a geographic area to permit the exchange of items drawn on the member participants
Correspondent Bank
the collecting bank maintains a depository account with another bank called a correspondent bank
Direct Send or Direct Exchange or Direct Presentment
collecting banks may arrange to send cash letters directly to a paying bank or non local Fed branch
Ledger Balances
bank balances that reflect all entries to a bank account, regardless of whether the deposited items have been collected and are available for withdrawal
collected balances
the average ledger balance minus the deposit float
Cashier’s Check/Certified Check
AKA an official bank check, a check that is drawn on bank’s funds. Certified check is drawn on depositor’s checking account
Government Warrants
a warrant is an order to pay that instructs a treasurer to pay the warrant holder on demand
Money order
a prepaid instrument issued by various third parties such as banks. the purchaser is the instrument’s payor and the money order is the obligation of the issuer
Paybale Through Draft (PTD)
a payment instrument resembling a check that is drawn against the payor rather than the bank. provide a right to review items prior to final payment
used by insurance companies
Remotely created checks (RCC)
aka pre-authorized drafts. used the draw against a payor’s account. the payee rather than payor initiates transaction. high level of fraud
Sight Draft
a draft that is payable upon presentment, provided all of the terms of the draft have been met. if all documents are in order then the draft is payable upon presentment (ie at sight)
used to support international trade
Time Draft
a draft that is payable at some future date, provided all of the terms of the draft have been met. often presented in combination with other documents such as titles or bills of landing. If all documentation is in order then the draft is payable
used to support international trade
Real Time Gross Settlement (RTGS) Systems
all clearing and settlement of each transactions occurs continuously during the processing day
payment is final and irrevocable once processed
Clearing House Interbank Payments System (CHIPS)
US based privately owned wire transfer system that settles transactions through the Fed.
handles the actual settlement of funds along with the transmission of instruction messages
TARGET2
related to Single Euro Payment Area (SEPA) creates a standard handling of
Continuous Linked Settlement (CLS)
developed to reduce the risks of working with counterparties. multi currency FX settlement service that allows a simultaneous exchange of payments on both sides
Settlement Risk
Mostly in FX transactions, the risk where you provide onside of the FX trade but never receive the other side from your counterparty. the risk that your counter party defaults on payment
Society for Worldwide Interbank Financial Telecommunications (SWIFT)
a communication system used by banks all over the world to transmit payment instructions
not a payment system
Small Value Transfer Systems
electronic networks for the exchange of smaller payment instructions among FIs typically on behalf of customers. typically batch processed
ACH in the US
account to account transfer
the standard option for distributing cross border payments between deposit accounts
FedGlobal
provided by the Federal Reserve
cross border ACH transaction gateway service standard option for distributing payments between accounts is an account-to-account transfer
range of currency transactions available
- fixed to variable (US dollars are converted to a variable amount, settlement occurs in US dollars)
- fixed to fixed (US dollar to US Dollar payments are both transferred and received in US dollars
- Fixed to fixed (foreign currency to foreign currency)
Open loop vs closed loop credit cards
open loop cards are visa, master card, amex etc. that are accepted at various merchants as long as the logo is displayed
closed loop like a nordstrom card is only accepted at nordstrom
Merchant CC Net Settlement
merchant receives the transaction value is less the fees
Merchant CC Gross Settlement
merchant receives the full transaction value and a period invoice is received for the amount of fees due to respective parties
EFTPOS
Electronic Funds Transfer (EFT) at the point of sale (POS)
aka debit card
Purchasing Cards or Procurement Cards (P-Cards)
credit cards used by businesses for the purchase of supplies, inventory, equipment etc.
Payment Card Industry Data Security Standard (PCI DSS)
created by the card industry after several system breaches and compromises of card network data
it is a worldwide information security standard defined by the payment card industry security standard council
failure to comply can result in fine and possible termination of acceptance of cards
Merchant Card Fees
components:
- Interchange Fees: a fee that is paid to the issuing bank for each transaction
- Assessments: intended to reimburse the network operators for their services and for brand management. typically calculated as a percentage of the transaction amount and set by network operators (Visa, MC)
- Processor Fees or Markups: aka transaction fees. fee charged to process the transaction on the merchant’s behalf. set by individual card processor or merchant acquirer (IS NEGOTIABLE) very from processor to processor
Merchant Fees - Bundle Pricing
merchant is charged one fee by card processor that covers all of the cost components of the transaction
refereed to a merchant discount
typically is subtracted directly from any card-settlement
Merchant Fees - Interchange Plus
merchant pays the actual amount of any interchange or assessment fees plus a stated fee to the card processor
Large Value Electronic Funds Transfer (EFT) or Wire Transfer systems
Final settlement is irrevocable and unconditional. consist of RTGS systems or net settlement systems. in gross settlement occurs through RTGS and considered final when processed.
