PREP Guide - Other Payment Systems Flashcards
What is the Automated Clearing House (ACH)?
A funds transfer system governed by the rules of Nacha.
What does the ACH provide?
It provides for the inter-financial institution clearing of electronic entries for participating financial institutions.
Who is the Originator in an ACH transaction?
The Originator is the originating company or individual who agrees to initiate ACH entries into the payment system.
What role does the Originator play?
The Originator directs the transfer of funds to or from a receiver’s account, and may also be a merchant.
What is the ODFI?
The Originating Depositary Financial Institution (ODFI) receives payment instructions from the Originator and forwards them to the ACH Operator.
What is the responsibility of the ODFI?
The ODFI is responsible for all entries originated through it, including compliance with ACH rules.
What is the role of the ACH Operator?
The ACH Operator is a central clearing facility that receives entries from ODFIs, distributes them to the appropriate RDFIs, and performs settlement functions.
Who are the two organizations that act as ACH Operators?
The Federal Reserve bank and the Electronic Payments Network (EPN) of The Clearing House (TCH).
What is the RDFI?
The Receiving Depositary Financial Institution (RDFI) receives ACH entries from the ACH Operator and posts them to the accounts of its depositors.
What must DFIs participating in the ACH network agree to?
They must agree to receive all types of ACH entries.
Who is the Receiver in an ACH transaction?
The Receiver is the company, employee, or customer that has authorized an Originator to initiate an ACH entry to their account with the RDFI.
What types of transactions can an ACH entry represent?
An ACH entry may either be a credit or a debit transaction
Unlike a check, which is a debit instrument or a demand draft.
What are some applications of ACH credit transactions?
- Annuities
- Dividends
- Interest payments
- Payrolls (private and government)
- Pensions (private and government)
- Social Security payments
- Tax payments
- Vendor/corporate to corporate payments
- Others
These applications highlight the versatility of ACH credits.
What are some applications of ACH debit transactions?
- Association dues
- Cash concentration
- Insurance payments
- Mortgage/installation loan payments
- Point of sale purchases
- Utility payments
- Tax payments
- Charitable donations
- Others
These applications illustrate various uses for ACH debits.
What is Check Conversion in the context of ACH?
Transforms a payment initiated by paper check that has not been negotiated to an electronic payment, into an ACH transaction
The payment is no longer under check law but covered by provisions of electronic banking regulations.
What is the status of a check after it has undergone Check Conversion?
The check is no longer a check but is considered a source document
This change reflects the shift from physical to electronic transactions.
What are the entries for check conversion products?
- Back Office Conversion Entry (BOC)
- Point of Purchase Entry (POP)
- Accounts Receivable Entry (ARC)
These entries are specific types of ACH transactions resulting from check conversions.
Where can more detail on Nacha rules and Check Conversion be found?
Refer to part E. Rules and Agreements in this Section for more detail on Nacha rules and the Check Conversion chart in Exhibit 1
This reference is crucial for understanding the regulatory framework.
What is a wire transfer?
Refers to large dollar, immediate electronic funds transfers
Wire transfers are used for transferring cash value from one bank to another.
What are the characteristics of wire transfers?
- Large dollar transactions with immediate availability
- Irrevocable payments
These characteristics make wire transfers suitable for significant financial transactions.
What does it mean to wire funds?
To transfer cash value from one bank to another with generally immediate availability of the funds
This process ensures that the funds can be accessed quickly.
What is the Clearing House Interbank Payments System (CHIPS)?
An electronic payments system operated by The Clearing House that transfers funds and settles transactions in U.S. dollars
CHIPS is designed for high-value transactions between banks.
What is Fedwire?
A funds transfer system operated by the Federal Reserve banks used to make large-value, time-critical payments
Fedwire provides a secure and efficient way to transfer large amounts of money.
What governs wire transfers?
- UCC Article 4A – Funds Transfer
- Regulation J (for FRB Wire)
- The Clearing House Interbank Payments System (CHIPS) Rules and Administrative Procedures
These regulations ensure proper handling and processing of wire transfers.
What is a Debit Card Network?
A system that generally uses shared ATM networks offering payment services associated with financial institution’s DDA systems
DDA stands for Demand Deposit Account.
What are Debit networks also known as?
Debit networks
This term refers to the systems that facilitate debit card transactions.
What is the primary function of a debit card?
To allow users to purchase goods and services from merchants who accept the card
Debit cards access funds directly from a user’s checking account.
What type of account does a debit card access for funding?
User’s depositary account (checking account)
This means transactions are funded by the money available in the user’s checking account.
Fill in the blank: A debit card is a device issued by a _______ allowing the user to purchase goods and services.
[financial institution]
Financial institutions typically issue debit cards to their customers.
What is a Credit Card Network?
System that uses a card issued by a company that allows the user to purchase goods and services from merchants who accept the card.
Define a Credit Card.
Payment card issued to a person for purchasing goods and services and obtaining cash against a line of credit established by the issuer.
What are the two types of credit cards?
Those issued by merchants and vendors, and those issued by banks.
Give examples of banks that issue credit cards.
VISA and MasterCard.
What additional services may cardholders receive?
Other bankcard services.
How can a cardholder pay their account balance?
Over time, generally with added interest on revolving account balances.
Fill in the blank: A credit card allows the user to purchase goods and services from _______.
merchants who accept the card.
True or False: All credit cards are issued by banks.
False.
Who is the Originator in a typical ACH transaction?
The Originator is the originating company or individual directing the transfer of funds to or from a receiver’s account.
What role does the ODFI play in an ACH transaction?
The ODFI, or Originating Depositary Financial Institution, receives payment instructions from the Originator and forwards them to the ACH Operator.
What is the function of the ACH Operator?
The ACH Operator is a central clearing facility that receives entries from ODFIs, distributes them to the appropriate RDFIs, and performs settlement functions for financial institutions.
Name the two organizations that act as ACH Operators.
- Federal Reserve
- Electronic Payments Network (EPN) of The Clearing House (TCH)
What is the role of the RDFI in an ACH transaction?
The RDFI, or Receiving Depositary Financial Institution, receives ACH entries from the ACH Operator and posts them to the accounts of its depositors.
Who is the Receiver in an ACH transaction?
The Receiver is the receiving company, employee, or customer that has authorized an originator to initiate an ACH entry to their account with the RDFI.
Fill in the blank: The _______ is the entity that receives ACH entries from the ACH Operator.
[RDFI]
True or False: The Originator may also be a merchant.
True
Fill in the blank: The _______ is the entity that forwards payment instructions to the ACH Operator.
[ODFI]
What are the dollar limits for ACH check conversion?
Depends on the SEC code. Generally, it is $25,000 with $2,500 limit for some items
SEC codes refer to the Standard Entry Class codes used in ACH transactions, which dictate the rules and limits for different types of electronic payments.
What is a wire transfer?
Wire transfer refers to large dollar, instantaneous electronic funds transfers.
What characterizes wire transfers?
Large dollar transactions with immediate availability that are irrevocable payments.
What does it mean to ‘wire funds’?
To transfer cash value from one bank to another with almost immediate availability of the funds.
What governs wire transfers?
• UCC Article 4A
• Regulation J (for FRB Wire)
• CHIPS Rules and Administrative Procedures
What are examples of domestic payment systems offering wire transfer services?
• Clearing House Interbank Payments System (CHIPS)
• Fedwire of the Federal Reserve
True or False: Wire transfers are revocable payments.
False
Fill in the blank: Wire transfers are characterized by large dollar transactions with _______ availability.
immediate
What type of transactions are typically involved in wire transfers?
Large dollar transactions
