Payments System in the US

Question 1

Payments systems can operate on a variety of models

Answer 1

The two most common models are referred as Open Loop and Closed Loop

Question 2

Open Loop

Answer 2

Banks as the intermediate layer

Question 3

Closed Loop

Answer 3

Original Amex and Discovery are closed loop
Some of them are envolving toward more open loop
Paypal or Western Union are closed loop but they are users of open loop, often on an aggregated basis.

Question 4

5 Core payments systems in US

Answer 4

1. Cash
2. Checking system
3. Card system
4. ACH (Automated Clearing House)
5. Wire Transfer

Question 5

Push Payment vs Pull Payment

Answer 5

Depends on whether it’s debit or credit
Card networks are fundamentally pull payment networks. They are guaranteed pull transactions, they accomplished this by adding a separate message flow, called the authorization.

Question 6

Net Settlement Systems

Answer 6

Checking, card payments systems and ACH are all net settlement systems in US

Question 7

State Banking Authorities

Answer 7

State law and regulations by state banking authorities apply mostly to non-bank providers of payment services.

Question 8

What is interchange?

Answer 8

The payments system sets the interchange prices but does not itself receive the value of interchange. Interchange creates an incentive for one side of the transaction to participate by having the other side reimburse some of the costs incurred.

Question 9

What is a float?

Answer 9

Float is the value earned from money held over a period of time. It’s a benefit to a party that holds funds for a period of time before needing to pay them out. it’s a cost to a party that need to pay out funds prior to receiving them.

Question 10

Demand deposit account

Answer 10

The more formal name for what we think of as checking account

Question 11

Check 21 law

Answer 11

Rather than mandating image clearing, check 21 law states that a printed copy of the original check (substitute check or image replacement document IRD) is the legal equivalent of the original paper check

A bank may still refuse to accept images, but it must accept a printed copy of the image

Question 12

The Fed

Answer 12

The Federal Reserve Board and the Federal Reserve Banks together

Question 13

3 roles from the Fed

Answer 13

1. Payments industry regulator
2. Provider of payments services. Operate the larges check and check imaging clearing house, operates 1 of the 2 ACH switches and 1 of the 2 wire transfer systems. Sole provider of cash and currency to banks. Sell those services only to banks
3. As the manager of the National Settlement Service

Question 14

The New York Clearing House

Answer 14

It’s the major competitor to the Fed.
Offering check and imaging clearing, ACH processing and through CHIPS, wire transfer processing.

Question 15

ACH system

Answer 15

It focused on having the electronic transaction replace the paper transaction entirely

Question 16

ODFI

Answer 16

Originating depository financial institution

Question 17

RDFI

Answer 17

Receiving depository financial institution

Question 18

The 2 ACH operators

Answer 18

The Federal Reserve Bank and Electronic Payment Network (EPN) owned by the clearing house

Question 19

ACH settlement

Answer 19

ACH operators calculate the net settlement totals then submit it to the Fed which manages the actual settlement process using its National Settlement Service

Question 20

ACH: Regulation E

Answer 20

Regulation E is the key regulation that specifies consumers’ right to return unauthorized transactions

A business receiving an unauthorized ACH debit doesn’t have the Reg E protections that a customer has

Question 21

Check conversion to ACH

Answer 21

Most business to business checks and government to consumer checks are not yet eligible for conversion to ACH

Question 22

Echeck

Answer 22

They start as native electronic ACH transactions

Question 23

OFAC

Answer 23

Office of Foreign Assets Control

Question 24

Same day ACH

Answer 24

Same Day ACH enables ODFI to send a batch of ACH transactions which will settle among the two banks that same day.

A very significant part of same day ACH is the institution of ACH interchange. The ODFI will pay the RDFI a flat fee of $0.52 per transaction.

It relies on the same batch processing protocols that are used in the normal ACH transactions.

Question 25

ACH cards

Answer 25

Private label debit cards
With card network account numbering schemes and follow mag stripe and chip configurations to allow them to be used at POS

But they are not sent to card networks, but rather to the store’s ODFI, who creates a POS ACH Debit

Question 26

Merchant discount fee

Answer 26

A blend of fixed and percentage costs paid by the merchants, billers and it’s determined in large part by the card network’s interchange fee schedule.

Question 27

Signature debit card and PIN debit card

Answer 27

Signature debit routed through the Visa and Mastercard networks (riding the credit card rails) and PIN debit routed through one or more of the ATM or PIN debit networks

Question 28

Card not present debit card transaction

Answer 28

They are always classified as signature debit

Question 29

Who produces cashes

Answer 29

Cash is physically produced by the US Treasury’s Bureau of Engraving and Printing (Bank Notes) and the US Mint (coins)

Question 30

The two wire transfer systems in the US

Answer 30

Fedwire: owned by Federal Reserve Bank
CHIPS (Clearing House Interbank Payments System): owned by the clearing house

Question 31

SWIFT

Answer 31

SWIFT is not a payments system, but a global financial services messaging system, frequently used in conjunction with the large value systems

Question 32

Wire transfer fully guaranteed payments

Answer 32

A wire transfer can not be repudiated, reversed or charge back without the agreement of the recipient

Question 33

Wire transfer - consumer side

Answer 33

Consumers rarely use wire transfers with the exception of transactions such as real estate purchases.