Chapter 4 - Payment Systems

Question 1

Elements of the Payments Process

Answer 1

1) Payment Instructions
2) Payment Generation
3) Clearing
4) Settlement

Question 2

Settlement

Answer 2

refers to the movement of funds from the payor’s account to the payee’s account

availability is key here too

Question 3

Finality

Answer 3

refers to the point in time at which funds cannot be taken back or retracted by the payor or the payor’s bank

Question 4

Real Time Gross Settlement (RTGS) Systems

Answer 4

Payment systems that offer immediate and irrevocable value

e.g. Wire transfer system

Question 5

Small Value Electronic Payments ( Automated Clearinghouse (ACH))

Answer 5

value dated and processed in batches

originally intended for smaller transactions

Question 6

self settling

Answer 6

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

Question 7

Clearing House

Answer 7

formal or informal associations formed by banks in a geographic area to permit the exchange of items drawn on the member participants

Question 8

Correspondent Bank

Answer 8

the collecting bank maintains a depository account with another bank called a correspondent bank

Question 9

Direct Send or Direct Exchange or Direct Presentment

Answer 9

collecting banks may arrange to send cash letters directly to a paying bank or non local Fed branch

Question 10

Ledger Balances

Answer 10

bank balances that reflect all entries to a bank account, regardless of whether the deposited items have been collected and are available for withdrawal

Question 11

collected balances

Answer 11

the average ledger balance minus the deposit float

Question 12

Cashier’s Check/Certified Check

Answer 12

AKA an official bank check, a check that is drawn on bank’s funds. Certified check is drawn on depositor’s checking account

Question 13

Government Warrants

Answer 13

a warrant is an order to pay that instructs a treasurer to pay the warrant holder on demand

Question 14

Money order

Answer 14

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

Question 15

Paybale Through Draft (PTD)

Answer 15

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

Question 16

Remotely created checks (RCC)

Answer 16

aka pre-authorized drafts. used the draw against a payor’s account. the payee rather than payor initiates transaction. high level of fraud

Question 17

Sight Draft

Answer 17

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

Question 18

Time Draft

Answer 18

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

Question 19

Real Time Gross Settlement (RTGS) Systems

Answer 19

all clearing and settlement of each transactions occurs continuously during the processing day

payment is final and irrevocable once processed

Question 20

Clearing House Interbank Payments System (CHIPS)

Answer 20

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

Question 21

TARGET2

Answer 21

related to Single Euro Payment Area (SEPA) creates a standard handling of

Question 22

Continuous Linked Settlement (CLS)

Answer 22

developed to reduce the risks of working with counterparties. multi currency FX settlement service that allows a simultaneous exchange of payments on both sides

Question 23

Settlement Risk

Answer 23

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

Question 24

Society for Worldwide Interbank Financial Telecommunications (SWIFT)

Answer 24

a communication system used by banks all over the world to transmit payment instructions

not a payment system

Question 25

Small Value Transfer Systems

Answer 25

electronic networks for the exchange of smaller payment instructions among FIs typically on behalf of customers. typically batch processed

ACH in the US

Question 26

account to account transfer

Answer 26

the standard option for distributing cross border payments between deposit accounts

Question 27

FedGlobal

Answer 27

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)

Question 28

Open loop vs closed loop credit cards

Answer 28

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

Question 29

Merchant CC Net Settlement

Answer 29

merchant receives the transaction value is less the fees

Question 30

Merchant CC Gross Settlement

Answer 30

merchant receives the full transaction value and a period invoice is received for the amount of fees due to respective parties

Question 31

EFTPOS

Answer 31

Electronic Funds Transfer (EFT) at the point of sale (POS)

aka debit card

Question 32

Purchasing Cards or Procurement Cards (P-Cards)

Answer 32

credit cards used by businesses for the purchase of supplies, inventory, equipment etc.

Question 33

Payment Card Industry Data Security Standard (PCI DSS)

Answer 33

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

Question 34

Merchant Card Fees

Answer 34

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

Question 35

Merchant Fees - Bundle Pricing

Answer 35

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

Question 36

Merchant Fees - Interchange Plus

Answer 36

merchant pays the actual amount of any interchange or assessment fees plus a stated fee to the card processor

Question 37

Large Value Electronic Funds Transfer (EFT) or Wire Transfer systems

Answer 37

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.