Chapter 8 Quiz Flashcards
What are the five non-cash payment systems?
- Checks
- Credit, Debit, and other types of cards
- ACH
- Fedwire
- CHIPS
A “substitute check” - a negotiable instrument used in the United States to represent the digital reproduction of an original paper check.
Image Replacement Document (IRD)
The information coded at the bottom of the check in magnetic ink and used by the clearing agent, often a Federal Reserve bank, branch, or RCPC, to process the check.
Magnetic Ink Character Recognition (MICR)
ECP
Electronic Check Presentment- a process that allows financial institutions to exchange digital images of checks instead of paper to increase the speed of the check clearing process.
POD
Proof of Deposit- The verification that the dollar amount of a check or draft being deposited is correct. Compared to the amount on the deposit slip.
An electronic network for financial transaction in the United States that processes large volumes of credit and debit transactions in batches. There are two such networks, one operated by the Federal Reserve and the other a private network.
Automated Clearing House (ACH)
National Automated Clearinghouse Association
A non-profit membership association charged with overseeing the ACH system, which operates the largest EPN in the world.
The only private sector ACH operator in the U.S.
Electronics Payment Network (EPN)
POP
Point of Purchase- checks converted at check-out terminal at retailers.
ARC
Accounts Receivable Conversion- used at lockbox site.
BOC
Back Office Conversion-converted at back office of retailers.
RCK
Re-Presented Check Entries- used to transmit ACH debit entries instead of returning physical checks.
A process in which a check is deposited as many times as necessary in order for it to clear.
Check Re-Presentment
ARC
Accounts Receivable Conversion- A process that allows paper checks received in payment for an account receivable to be electronically scanned and converted into an electronic payment through the Automated Clearing House.
4 ways ACH differ from checks.
- Paper (checks) vs. Electronic (ACH)
- Payment info only (checks) vs. payment plus additional info (ACH)
- Payer and Payee (checks) vs. originator and receiver (ACH)
- Value Dated (ACH) - No float
CHIPS
Clearing House Interbank Payments System-For international transactions
RTGS
Real Time Gross Settlement- funds transfer systems where transfer of money or securities takes place from one institution to another on a “real time” and on a “gross” basis. Settlement in “real time” means payment transactions are not subject to an waiting period.
SWIFT
Society for Worldwide Interbank Financial Telecommunications-transmits payment instructions, not value. Settlement occurs via Fedwire, CHIPS, ect.
Two primary bank-issued cards.
VISA and MasterCard
Three major credit card processes.
- Authorization-seeks approval and places a hold on account
- Clearing-Issuing bank charges cardholder account
- Settlement-funds transfered
Four types of cards.
- Bank cards (debit, ATM)
- Credit Cards
- Stored Value Card (SVC)(gift card, payroll card)
- Smart cards (may be used for physical and system access)
PSR
Payment System Risk
Systemic Risk
Risk that failure of one bank could cause other failures and collapse of payment system.
Credit Risk
Risk that party funding transaction will default on the settlement obligation.
Fraud Risk
Greatest risk is checks followed by credit cards.
Collection float components
- Mail float
- Processing float
- Availability float
(measured in dollar days)
Lockbox
A centralized collection system in that deposited funds are transferred on a frequent basis from the lockbox collection sites to the corporate headquarters bank.
Wholesale lockboxes
Corporate to corporate payments (small volume, large dollar payments)
Retail lockboxes
Consumer to corporate payments (large volume, small dollar payments)
Hybrid lockboxes
Combines aspects of wholesale and retail lockboxes
EBPP
Electronic Bill Presentment and Payment (Consumer)
EIPP
Electronic Invoice Presentment and Payment (Corporate) B2B billion online
EDT
Electronic Depository Transfer
DTC
Depository Transfer Check- A check used by a designated collection bank for depositing the daily receipts of a corporation from multiple locations. ACH has gradually replaced DTC.
Minimum transfer=
(Wire Cost -EDT Cost)/(Days Accelerated X Opportunity Coast/356)
ZBA
Zero Balance Account- A checking account in which a balance of zero is maintained by automatically transferring funds from a master account in an amount only large enough to cover checks presented.
Positive Pay
A cash management service employed to deter check fraud. BANKS use positive pay to match the checks a company issues with those it presents for payment.
Reverse Positive Pay
A cash management service employed to deter check fraud. Banks sent presentment lists to the COMPANY to match the drafts a company issues with those that have been presented for payment.
The Competitive Equality Banking Act of 1987
Allowed existing non-bank banks to continue to operate but prohibited the establishment of new non-bank banks after May 4, 1999.
Financial Institutions Reform, Recovery and Enforcement Act
Mainly dealt with the disposition of insolvent S&Ls, further blurred the lines between depository institutions by allowing bank holding companies to buy healthy S&Ls. 1989
Financial services Modernization Act
1999(Gramm-Leach-Bililey)-Repealed the Banking Act of 1933 (Glass-Steagall) by allowing banks to affiliate with investment and insurance firms. Created a new organizational form, called a financial holding company.