Service
Expertise
Integrity
Windy City Summit
CTP Review
Chapters 10
Presented by: The Northern Trust Company
Dan Carey
© 2012 Northern Trust Corporation
Chapter 10
Payment Systems, Collections and
Disbursements
Dan Carey
2
Windy City Summit CTP Review
Service
Expertise
Integrity
Overview of Payment Methods
Payment Systems
Payment Instrument/Method
+Clearing Channel
Settlement Mechanism that transfers money
Payment System
Cash-
coin and currency
Paper-
checks, drafts
Electronic-
 Business Electronic Payment Systems- wire, ACH
 Consumer Electronic Payment Systems- ACH or giros
Payment
3
Card- debit and credit cards, smart cards
Windy City Summit CTP Review
Service
Expertise
Integrity
Payment Systems
Key Participants in the Payments Clearing Process
Paying
Bank- payor’s bank
Receiving
Bank- payee’s bank
Correspondent
Bank- “partner” bank
Central
Bank or Monetary/Banking Authority- runs
clearing system
Banking
Clearinghouse- groups of banks agreeing to
exchange paymens
Third-Party
Clearing Entity- third-party that handles
clearing, but not settlement, process (CHIPS and credit
card networks)
4
Windy City Summit CTP Review
Service
Expertise
Integrity
Overview of Payment Systems
 Settlement
 Settlement
occurs when depository bank account is credited and
drawee bank account is debited
 Payee’s
and payor’s account credited and debited
 Provisional
credit: credit may be reversed
 Real-
time settlement: transaction processed when initiated;
settlement may be transaction by transaction (gross), intraday, or net
 Settlement
is final when payment unconditional and irrevocablereturns not accepted
Settlement Methods
 Exchange
of value between banks
 Corresponding
 Reserve
5
bank accounts
accounts at banking authority (Fed accounts)
Windy City Summit CTP Review
Service
Expertise
Integrity
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 Payments
Security and integrity issues and costly
Paper-Based International Payments
Slow, complicated and expensive
 Industry-Based Net Settlement Systems
Airlines, oil and gas, telecommunications and securities
 Electronic Payment Security
Encryption, Authentication, Security Tokens
6
Windy City Summit CTP Review
Service
Expertise
Integrity
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
7
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
Windy City Summit CTP Review
Service
Expertise
Integrity
Global Banking Systems and Practices
 Settlement Mechanisms
TARGET2
Correspondent
Internal
Euro
Banking
Networks and Local Clearing Channels
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
8
Windy City Summit CTP Review
Service
Expertise
Integrity
Global Banking Systems and Practices
Bank of Canada is the central bank
5 major banks and 60 other smaller financial
institutions
Automated
The
Clearing Settlement System (ACSS)
Large Value Transfer System (LVTS)
 Banco de Mexico (Banxico) is central bank
 Two major clearing/settlement channels
9
Sistema
de Pagos Electronicos Interbancarios (SPEI)
Sistema
de Camara (SICAM)
Windy City Summit CTP Review
Service
Expertise
Integrity
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
10
Windy City Summit CTP Review
Service
Expertise
Integrity
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
11
Windy City Summit CTP Review
Service
Expertise
Integrity
Check Clearing Process
 Check 21:
Created
Image Replacement Document (IRD) allowing banks
to exchange images rather than paper documents
Allowed
for the introduction of Remote Deposit Capture (RDC)
 Return deadlines
 Clearing Channels
On-Us
vs Transit Check Clearing
Endpoints: location of the paying bank
Deposit 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
12
Windy City Summit CTP Review
Service
Expertise
Integrity
Check Settlement and Funds Availability
Availability Schedules
States, by endpoint, when the bank grants available
credit for collected items (generally 0-2 days)
Balances and Float
Ledger Balances: reflect all entries, available or not
Available Balances: funds available for withdrawal
Collected Balances: Average ledger – deposit float
used to determine earnings credit
 Other Factors Influencing Availability
Pre-encoding/RDC/Image Capture
Reject Items
As-of Adjustments
13
Windy City Summit CTP Review
Service
Expertise
Integrity
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
14
Windy City Summit CTP Review
Service
Expertise
Integrity
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 Conversion
Greater than $25,000
If Aux on-us field (business checks)
Third-party checks, credit card checks, money orders,
traveler’s checks, cashiers checks
15
Windy City Summit CTP Review
Service
Expertise
Integrity
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)
16
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
ACH Transaction Processing
 Batch,
store and forward system
 Transactions
are value dated (settlement dates)
 Simultaneous
settlement between originator and reciever
 Memo
posting common
 Risk
associated with the ODFI’s obligation to settle credits once credit
file is released, regardless of originator’s account status
 Returns
allowed (unauthorized vs. authorized)
 Same-day
 Standard
settlement of on-us and possibly other entries
ACH formats (by SEC code) including addenda record
formats
 Prenotes
optional but recommended
 Authorization
17
required for certain transactions (usually consumer)
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Payment
Format
Payment
Type
Definition
Examples
Addenda
included?
Consumer
Consumers authorize
a company/bank to
credit/debit for
recurring payments in
fixed amounts
Credit: direct deposit
of payroll, tax refunds
Debit: membership
dues, utility payments
No
Corporate
CCD,
Credit or
CCD+
Debit/CCD Plus
Addendum
Corporate
Concentration or
Vendor payments;
disbursement of funds CCD+ for tax
between companies
payments
Corporate Trade CTX
Exchange
Corporate
For payments with a
lot of invoice detail
List bill payment
Represented
Check Entry
RCK
Consumer
Used to collect for
checks returned NSF
or uncollected
Must be under $2,500
and with permission
International
ACH
Transaction
IAT
Business/
Consumer
Debit/credit entry that U.S. Company paying
is part of an int’l
payroll to employee
transaction
living abroad
Prearranged
Payment and
Deposit
18
SEC
Code
PPD
Windy City Summit CTP Review
Service
CCD: No
CCD+: Yes,
one
Yes, up to
9,999 records
No
Yesmandatory
Expertise
Integrity
U.S. Payment Systems and Instruments
Payment
Format
SEC
Code
Payment
Type
Check
conversion
formats
ARC,
BOC,
POP
Consumer
CustomerInitiated Entry
CIE
TelephoneInitiated Entry
Examples
Addenda
included?
Conversion of paper check
entries to electronic
payments
MICR line
extracted at
grocery storecheck returned to
consumer
No
Consumer
Pre-authorized payments
initiated via telephone bill
paying services
Telephone
investments,
redemptions
No
TEL
Consumer
Payments initiated via
phone, approved over the
phone vs. pre-authorized
Ticket sales
No
InternetInitiated Entry
WEB
Consumer
Single or recurring entries
On-line purchase
initiated via Internet, that are
not. pre-authorized, and
provide debit authorization
No
Destroyed
Check Entry
XCK
Consumer
Used to settle checks lost or
destroyed due to catastrophe
No
19
Windy City Summit CTP Review
Definition
Check destroyed
in flood, fire…
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
IATs: any transaction that is sent to, or received from, a
foreign source and includes domestic transactions
funded internationally
Must
include mandatory addenda records to comply with OFAC
Fed Global ACH Payments:
Credit
payments 35 countries, debits to Canada
Account
Fixed
to account or Account to Receiver
to variable: U.S. dollar to destination currency
Fixed
to fixed: U.S. dollar to U.S. dollar or foreign currency to
foreign currencies
20
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Fedwire
transfers settle individually and continuously –gross
settlement
Fedwire
Large
dollar and/or urgent transactions
Federal
Funds
Reserve guarantees finality of payment
and information transferred together
Expanded
Fedwire format aligns with CHIPS, SWIFT and
combats money laundering
21
Relatively
expensive
Regulated
by Federal Reserve Regulation J and UCC4A
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Fedwire Types
Repetitive
transfers (pre-defined debit and credit
parties)
Semi-Repetitive
Non-Repetitive
Drawdown
Standing
22
transfers (adds description)
transfers (free-form)
(Used for concentration)
(Used for concentration)
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Clearing House Interbank Payments System (CHIPS)
Operated
by The Clearing House Association
For international transactions, letter of credit and documentary
collections payments and third-party transfer
Clears over 95% of international payments made in U.S. dollars
Specific CHIPS format accommodates extensive information
Real-time intraday net settlement system
Settles in U.S. dollars via Fedwire
Alternative Payment Instruments
Money
transfer via Check cashing store
On-line
Paypal
23
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Credit Cards
Two
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
24
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Debit cards - direct access to cardholder account
Signature
or PIN based
Purchasing cards
Travel cards
Ghost Card
Departmental (Un-named) cards
Single-Use cards
Stored Value cards (SVC)
Smart cards
25
Windy City Summit CTP Review
Service
Expertise
Integrity
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

26
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
Company Processing Center
Primary
advantages: control of operation, cost savings
Primary disadvantage: increased float
Lockbox
Advantages:
reduced float, scalability, efficient processing
Disadvantage: 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
27
Windy City Summit CTP Review
Service
Expertise
Integrity
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 of
the
dollar amount of collected items
total collection time for the items
company’s current investment or borrowing rate
28
Windy City Summit CTP Review
Service
Expertise
Integrity
U.S. Payment Systems and Instruments
 Electronic Payment Methods – Three Benefits:
Predictability
Direct
Ease
of settlement improves cash forecasting
payments to any account or financial institution
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
29
Windy City Summit CTP Review
Service
Expertise
Integrity
Disbursements
Goals
Disburse
funds to payees in timely and accurate manner
Communicate
information to cash manager for cash
forecasting and position management
Disbursement Products
Controlled
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
30
Windy City Summit CTP Review
Service
Expertise
Integrity
Disbursement Products
 Payable Through Drafts (PTD)
Drawn
Used
against payor, not bank
by insurance companies
 Positive Pay
Payee
match
Reverse
positive pay
 Multiple Drawee Check/Payable-If-Desired (PID)
 Imprest or Petty Cash Account
 Account reconciliation services
Full
or partial reconciliation
Stop
payments and high-order prefix
 Image-based Services
31
Windy City Summit CTP Review
Service
Expertise
Integrity
Electronic Disbursement Methods
Direct Deposit
Purchasing/Procurement Cards (P/Cards)
Issued
to designated employees
Authorized
Cost
for pre-specified types of purchases
savings:
 Reduce check volumes
 Negotiated terms with major suppliers
 Rebates from card providers
Electronic Benefit Transfers and Payroll Cards
Tax Payments (TXP) Format
32
Windy City Summit CTP Review
Service
Expertise
Integrity
Questions for Chapter 10
1.
2.
What is the Automated Clearing House(ACH) system?
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?
33
Windy City Summit CTP Review
Service
Expertise
Integrity