Presented by: The Northern Trust Company Dan Carey
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Transcript of Presented by: The Northern Trust Company Dan Carey
© 2012 Northern Trust Corporation
Presented by: The Northern Trust CompanyDan Carey
Windy City Summit CTP Review
Chapters 10
Service Expertise Integrity
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Chapter 10
Payment Systems, Collections and Disbursements
Dan Carey
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Overview of Payment Methods
Payment Systems Payment Instrument/Method+Clearing Channel Settlement Mechanism that transfers money Payment System
Cash- coin and currency Paper- checks, draftsElectronic-
Business Electronic Payment Systems- wire, ACH Consumer Electronic Payment Systems- ACH or giros
Payment Card- debit and credit cards, smart cards
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Payment Systems
Key Participants in the Payments Clearing ProcessPaying Bank- payor’s bankReceiving Bank- payee’s bankCorrespondent Bank- “partner” bankCentral Bank or Monetary/Banking Authority- runs
clearing systemBanking Clearinghouse- groups of banks agreeing to
exchange paymensThird-Party Clearing Entity- third-party that handles
clearing, but not settlement, process (CHIPS and credit card networks)
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Overview of Payment Systems
SettlementSettlement occurs when depository bank account is credited and
drawee bank account is debitedPayee’s and payor’s account credited and debitedProvisional credit: credit may be reversedReal- time settlement: transaction processed when initiated;
settlement may be transaction by transaction (gross), intraday, or netSettlement is final when payment unconditional and irrevocable-
returns not accepted
Settlement MethodsExchange of value between banksCorresponding bank accountsReserve accounts at banking authority (Fed accounts)
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Common Payment Practices and Issues
Society for Worldwide Interbank Financial Telecommunication (SWIFT)Interbank network that allows banks to send electronic
payment-related information in standard formats
Cash PaymentsSecurity and integrity issues and costly
Paper-Based International PaymentsSlow, complicated and expensive
Industry-Based Net Settlement SystemsAirlines, oil and gas, telecommunications and securities
Electronic Payment SecurityEncryption, Authentication, Security Tokens
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Global Banking Systems and Practices
Identification of Bank Accounts Bank Identification Code (BIC): international standard for
identifying banks International Bank Account Number (IBAN): international
standard for identifying bank accounts European Payment Systems
Economic and Monetary Union (EMU): to integrate the economies of all them members
European Central Bank (ECB): sets policy for EU members that have accepted the euro as their currency (in “euro zone”)
Advantages of euro include elimination of exchange rate risk, lower transaction costs, consolidation of banks and simplification of treasury management techniques
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Global Banking Systems and Practices
Settlement MechanismsTARGET2Correspondent BankingInternal Networks and Local Clearing ChannelsEuro Bankers Association (EBA)
Single Euro Payments Area (SEPA)Straight-thru electronic payment system that allows cashless
transactions be made in euro zone using only one bank and one set of instructions
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Global Banking Systems and Practices
Bank of Canada is the central bank 5 major banks and 60 other smaller financial institutionsAutomated Clearing Settlement System (ACSS)The Large Value Transfer System (LVTS)
Banco de Mexico (Banxico) is central bank Two major clearing/settlement channels
Sistema de Pagos Electronicos Interbancarios (SPEI)Sistema de Camara (SICAM)
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Global Banking Systems and Practices
Anti-money laundering (AML):legal constraints requiring financial institutions to prevent or report suspected money laundering activities
Financial Action Task Force (FAFT): set policies aimed at combating money laundering and terrorist funding (travel rule)
Office of Foreign Assets and Control (OFAC): U.S. office that administers and enforces economic and trade sanctions (provides list of specially designated individuals)
Continuous Linked Settlement (CLS): a simultaneous exchange of both sides of financial transactions eliminating settlement risk
Straight-Thru Processing (STP): allows for information that is electronically entered in the settlement process to be processed without manual intervention.
International Organization for Standardization (ISO) 20222 Global Standards: global messaging standard related to SEPA and is the next generation of SWIFT messaging
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Paper-based Payments
Check/IRD Clearing Process
Deposit of check at Bank of First Deposit (Payee Bank)
Bank encodes amount then runs checks on a reader/sorter which captures images (IRD) and processes physical checks based on MICR line information
Checks/Images are sorted based on clearing channel, cash letters /image files are prepared and sent to the clearing system for presentment to the paying bank
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Check Clearing Process
Check 21:Created Image Replacement Document (IRD) allowing banks
to exchange images rather than paper documentsAllowed for the introduction of Remote Deposit Capture (RDC)
Return deadlines Clearing Channels
On-Us vs Transit Check Clearing
Endpoints: location of the paying bankDeposit Deadlines and Timing
Ledger cut-off: time a check must be received in order for it to be posted for ledger (provisional) credit that day
Deposit deadline: time it must be received to qualify for availability stated in availability schedule
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Check Settlement and Funds Availability
Availability SchedulesStates, by endpoint, when the bank grants available
credit for collected items (generally 0-2 days)
Balances and FloatLedger Balances: reflect all entries, available or notAvailable Balances: funds available for withdrawalCollected Balances: Average ledger – deposit float
used to determine earnings credit
Other Factors Influencing AvailabilityPre-encoding/RDC/Image CaptureReject ItemsAs-of Adjustments
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Other Paper-Based Instruments
Payable Thru Drafts (PTD)
Pre-Authorized Draft
Remotely Created Check (RCC)
Money Order
Traveler’s Check
Sight and Time Draft
Cashier’s Check/Certified Check
State Warrants
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U.S. Payment Systems and Instruments
Check Conversion: converts MICR line into electronic debit transaction
Point-of-Purchase (POP) Check Conversion: information captured and check returned to customer at time of purchase
Accounts Receivable Conversion (ARC): Lockbox checks converted, with prior authorization
Back Office Conversion (BOC): conversion after sale if stated on the receipt
Ineligible for Check ConversionGreater than $25,000
If Aux on-us field (business checks)
Third-party checks, credit card checks, money orders, traveler’s checks, cashiers checks
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Electronic Funds Transfers (EFT)
The Automated Clearing House (ACH)Clearinghouse for high-volume, low-dollar electronic transactions
NACHA establishes and administers rules and standards, UCC Article 4A covers credit transactions and Reg E governs consumer debit entries
Parties involved in ACH entries include: the originator, receiver, originating depository financial institution (ODFI) and the receiving depository financial institution (RDFI) and the operator (Fed or EPN)
ACH credits: instruct the ODFI to move funds from the originators account to the receiver’s account with the RDFI (e.g. direct deposit of payroll, benefit payments, tax and vendor payments)
ACH debits: instruct the ODFI to take funds from the receivers account at the RDFI and deposit them into the originator’s account at the ODFI (e.g. mortgage payments, insurance premiums, check conversions)
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U.S. Payment Systems and Instruments
ACH Transaction ProcessingBatch, store and forward systemTransactions are value dated (settlement dates)Simultaneous settlement between originator and recieverMemo posting commonRisk associated with the ODFI’s obligation to settle credits once credit
file is released, regardless of originator’s account statusReturns allowed (unauthorized vs. authorized)Same-day settlement of on-us and possibly other entriesStandard ACH formats (by SEC code) including addenda record
formatsPrenotes optional but recommendedAuthorization required for certain transactions (usually consumer)
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Payment Format
SEC Code
Payment Type
Definition Examples Addenda included?
Prearranged Payment and Deposit
PPD Consumer Consumers authorize a company/bank to credit/debit for recurring payments in fixed amounts
Credit: direct deposit of payroll, tax refundsDebit: membership dues, utility payments
No
Corporate Credit or Debit/CCD Plus Addendum
CCD, CCD+
Corporate Concentration or disbursement of funds between companies
Vendor payments; CCD+ for tax payments
CCD: NoCCD+: Yes,
one
Corporate Trade Exchange
CTX Corporate For payments with a lot of invoice detail
List bill payment Yes, up to 9,999 records
Represented Check Entry
RCK Consumer Used to collect for checks returned NSF or uncollected
Must be under $2,500 and with permission
No
International ACH Transaction
IAT Business/ Consumer
Debit/credit entry that is part of an int’l transaction
U.S. Company paying payroll to employee living abroad
Yes- mandatory
U.S. Payment Systems and Instruments
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U.S. Payment Systems and Instruments
Payment Format
SEC Code
Payment Type
Definition Examples Addenda included?
Check conversion formats
ARC, BOC, POP
Consumer Conversion of paper check entries to electronic payments
MICR line extracted at grocery store- check returned to consumer
No
Customer-Initiated Entry
CIE Consumer Pre-authorized payments initiated via telephone bill paying services
Telephone investments, redemptions
No
Telephone-Initiated Entry
TEL Consumer Payments initiated via phone, approved over the phone vs. pre-authorized
Ticket sales No
Internet-Initiated Entry
WEB Consumer Single or recurring entries initiated via Internet, that are not. pre-authorized, and provide debit authorization
On-line purchase No
Destroyed Check Entry
XCK Consumer Used to settle checks lost or destroyed due to catastrophe
Check destroyed in flood, fire…
No
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U.S. Payment Systems and Instruments
IATs: any transaction that is sent to, or received from, a foreign source and includes domestic transactions funded internationallyMust include mandatory addenda records to comply with OFAC
Fed Global ACH Payments:Credit payments 35 countries, debits to CanadaAccount to account or Account to ReceiverFixed to variable: U.S. dollar to destination currencyFixed to fixed: U.S. dollar to U.S. dollar or foreign currency to
foreign currencies
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U.S. Payment Systems and Instruments
FedwireFedwire transfers settle individually and continuously –gross
settlement
Large dollar and/or urgent transactions
Federal Reserve guarantees finality of payment
Funds and information transferred together
Expanded Fedwire format aligns with CHIPS, SWIFT and combats money laundering
Relatively expensive
Regulated by Federal Reserve Regulation J and UCC4A
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U.S. Payment Systems and Instruments
Fedwire Types
Repetitive transfers (pre-defined debit and credit parties)
Semi-Repetitive transfers (adds description)
Non-Repetitive transfers (free-form)
Drawdown (Used for concentration)
Standing (Used for concentration)
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U.S. Payment Systems and Instruments
Clearing House Interbank Payments System (CHIPS)Operated by The Clearing House AssociationFor international transactions, letter of credit and documentary
collections payments and third-party transferClears over 95% of international payments made in U.S. dollarsSpecific CHIPS format accommodates extensive informationReal-time intraday net settlement systemSettles in U.S. dollars via Fedwire
Alternative Payment InstrumentsMoney transfer via Check cashing storeOn-linePaypal
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U.S. Payment Systems and Instruments
Credit CardsTwo primary bank-issued cards are VISA and MasterCard
(AMEX main non-bank card)
Three main steps in the credit card transaction: authorization, clearing and settlement
Merchant charged fees from issuing bank (IRF fees) and network either during settlement process or separately which are set by the network
Fees tied to the swiping of a card at POS are cheaper than internet or phoned in (MOTO) transactions
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U.S. Payment Systems and Instruments
Debit cards - direct access to cardholder accountSignature or PIN based
Purchasing cardsTravel cardsGhost CardDepartmental (Un-named) cardsSingle-Use cardsStored Value cards (SVC)Smart cards
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U.S. Payment Systems and Instruments
Collection Float Components
Mail Float
Processing Float
Availability Float
Measurement
Float is measured in dollar-days
Float is a function of the transaction’s dollar amount and the number of days delay
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U.S. Payment Systems and Instruments
Company Processing CenterPrimary advantages: control of operation, cost savingsPrimary disadvantage: increased float
Lockbox Advantages: reduced float, scalability, efficient processingDisadvantage: loss of control
Wholesale• Small volume, large dollar corporate to corporate
payments with non-standard remittance data Retail
• Large volume, small-dollar consumer-to-corporate payments with standard return document (ICR,OCR,MICR)
Hybrid
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U.S. Payment Systems and Instruments
Cost Benefit Analysis: Reduced Float vs. Incremental Costs
Net Benefit Calculation:
Reduction in Float Opportunity Cost
+ Reduction in Internal Processing Cost
- Lockbox Processing Costs
Float Opportunity Cost is a function ofthe dollar amount of collected itemstotal collection time for the itemscompany’s current investment or borrowing rate
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U.S. Payment Systems and Instruments
Electronic Payment Methods – Three Benefits:
Predictability of settlement improves cash forecasting
Direct payments to any account or financial institution
Ease of transmitting customer remittance information
Check 21
Enhances collection efficiency
Conversion of checks to ACH debits – POS, ARC
Web based – integrated billing and payment
EBPP (Electronic Bill Presentment and Payment) - Consumer
EIPP (Electronic Invoice Presentment and Payment) - Corporate
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Disbursements
GoalsDisburse funds to payees in timely and accurate manner
Communicate information to cash manager for cash forecasting and position management
Disbursement ProductsControlled disbursement – same-day notification of check
clearings
Programs impacting controlled disbursements Payor Bank Services – electronic notification High Dollar Group Sort – second presentment to banks
with more than $ 10 million in daily presentments Same Day Presentment – by 8:00 am
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Disbursement Products
Payable Through Drafts (PTD)Drawn against payor, not bankUsed by insurance companies
Positive PayPayee matchReverse positive pay
Multiple Drawee Check/Payable-If-Desired (PID)Imprest or Petty Cash AccountAccount reconciliation services
Full or partial reconciliationStop payments and high-order prefix
Image-based Services
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Electronic Disbursement Methods
Direct Deposit
Purchasing/Procurement Cards (P/Cards)
Issued to designated employees
Authorized for pre-specified types of purchases
Cost savings:
Reduce check volumes
Negotiated terms with major suppliers
Rebates from card providers
Electronic Benefit Transfers and Payroll Cards
Tax Payments (TXP) Format
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Questions for Chapter 10
1. What is the Automated Clearing House(ACH) system?2. Discuss the obligations of the originating depository financial institution and the
receiving depository financial institution regarding ACH settlement and returns.3. What is same-day ACH? 4. What are prenotes and why are they used?5. What is the Fedwire? What Federal Reserve regulation governs Fedwire transfers?
How does Fedwire clear and settle funds transfers?6. What are the three steps(and substeps) in the credit card transaction process?7. How long do consumers have to dispute a credit card transaction and what can a
merchant do to respond to this chargeback?8. What is a lockbox processing system? What is the primary advantage of an
lockbox? What is the major advantage of a traditional check/mail-based lockbox system over a company processing center?
9. Define dollar-days. How are dollar-days relevant when deciding whether to switch from in-house processing to the use of a lockbox system?
10. What is the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and what does it do?