Global Cash Management CTP Review
TEXPO 2011
Payment Systems, Collections & Disbursements
1
RBS6245d
Jose R. Gomez, CTP
Objectives / Introduction
• Payment Systems
• Disbursements
• Collections
RBS6245d
2
What is Cash Management?
The effective forecasting, monitoring and management of
cash and cash equivalent resources within a multinational
environment with a view to minimize costs and risks,
increase control, maximize returns and optimize liquidity.
RBS6245d
3
Centralizing the Treasury Function
Financial Functions
Centralized
• Invoicing and Purchasing
Shared Service
Center
• Supplier/Customer Mgt
• AP / AR initiation & Recon.
ERP
• Liquidity Mgt. /Accts
• MM - Activities
• Cash Pooling
Payment
Factory
TWS
Centralised
Collections
3
4
Partiallycentralised
Treasury/
• Intercompany Funding
• FX and IRR Mgt.
• Netting (Internal)
• Long Term Financing
Centralised
Treasury
Decentralized
Cash & Treasury
1
2
4
RBS6245d
Degree of Centralization
Principal functions of the treasury department
Foreign exchange risk
and contracts
Manage bank
relationships
Interest Rate Risk
Liquidity management
Interface with
TREASURY
Accounting
Department
Investments and
Financing
Domestic and
Tax issues and
International
“Corporate Finance”
Cash Management
RBS6245d
5
Regulations & Regulators
•AML – Anti Money laundering is the term used to describe the legal controls that
require financial institutions to prevent or report suspected money laundering
•BSA – Bank Secrecy Act requires that due diligence be performed to determine a
client’s identity and monitoring of their transactions for suspicious activities. Suspicious
activities reports are to be filed with the Financial Crimes Enforcement Network
(FinCen) when there is suspicion of money laundering or terrorist financing. In the USA
a cash deposit of $10,000.00 or more requires that a Currency Transaction Report be
filed (CTR). Patterning - calls for using a number of smaller transactions to avoid
suspicion. The EU has a 15,000 Euro reporting threshold for a CTR.
Financial Action Task Force (FATF) – an international body whose job is to develop
and implement policies to combat money laundering and terrorist financing activities.
•Office of Foreign Asset Control (OFAC) – Part of the US DOJ, OFAC administers
and enforces economic and trade sanctions based on US foreign policy and national
security goals. North Korea, Iran and Cuba are permanent residents on the OFAC List
of sanctioned countries but individuals and legal entities are also on the list.
RBS6245d
6
Payment Systems
RBS6245d
7
Basics of Payment Systems
• The party making the payment is the payor
• The party receiving the payment is the payee or the beneficiary
• Most payment systems are defined by the primary payment instrument such as
cash, paper or electronic
• Clearing Channels are the method used to move the payment instrument or the
information related to the instrument.
• Clearing channels vary from payment instruments and from country to country
• Settlement mechanisms complete the transfer of value from the payee to the
beneficiary
RBS6245d
8
Payment Systems
•
Cash Payment Systems
•
•
•
•
•
•
Use of physical coin & currency
Primarily used by consumers for small transactions
Each country can have its own currency (USD, GBP)
Region can have its own currency such as the euro within Europe
Some countries can use another countries currency as its primary currency such as Panama and Ecuador with the USD
Physical transfer of cash represents both the clearing channel and final settlement
• Paper Systems
•
•
•
•
•
•
Use checks, drafts or similar items as payment instruments in order to cause a transfer of value
The party making the payment provides a document to the beneficiary stating the amount of the payment
The payee or her bank must present the document to the payors bank in order to receive value
Settlement mechanism comes into play after presentment
There is usually a well defined system using a central bank, correspondent banks or clearing organizations
Most paper systems are based on a provisional credit arrangement and payment is not considered final until any
specified return periods have elapsed
• Electronic Systems
•
•
•
There are various types of electronic payment systems such as wire transfers which are real time gross settlement with
finality of payment or ACH which are batched non urgent
Electronic payments can be pushed credit type payments or authorized debit type
Clearing and settlements of these tends to be highly automated and can be done on a gross or net settlement
RBS6245d
9
Payment Systems
•
Gross Settlement Systems
•
•
•
•
Each transaction results in a separate value transfer between payor and payee
Settlement is usually real time
Settlement is usually considered final at the time they are processed
Examples of RGTS are FedWire in the USA, TARGET2 in the Euro zone, CHAPS in the UK,SPEI in Mexico,
• Net Settlement Systems
•
•
•
•
•
Net settlement occurs when many transactions are combined and then sorted by sending and receiving banks
At the end of the day or any agreed upon time the net amount either owed by or owed to each participating bank is
determined and only the net amount due is actually transferred
Net settlement systems can work for paper instruments such as bank check clearing house association or CHIPS.
Clearing House Interbank Payment Systems is a bank owned real time large US dollar funds transfer network operated
by the clearing presentment. It is an intra day real time net settlement system. Members settle via Fedwire at the end of
the day.
CHIPS can settle in a variety of forms such as SWIFT, ASC X12, UN EDIFACT or Internet based formats such as XML
• Other Payment Systems
•
10
RBS6245d
•
There are various types of alternative electronic payment systems such as remittance services delivered via store front
locations wire transfers which are real time gross settlement with finality of payment or ACH which are batched non
urgent
Non Financial institutions providers such as PayPal Merchant card services via credit cards and debit
SWIFT and the International
Banking System
RBS6245d
11
The Society for Worldwide Interbank Financial
Telecommunications (SWIFT)
•
Created in 1973, the SWIFT network is property of its members and is utilized by
more than 9,000 banking organizations, security institutions and corporate
customers.
•
It is NOT a clearing system, payments system or method of international payment
settlement.
•
IT IS a communications (messaging) system.
•
Strict norms facilitate the generation of standard messages between users.
•
Automated connections permit the banks’ back office systems to process and direct
the messages directly to branches and clearing systems (“STP”)
RBS6245d
12
SWIFT – Most common message types
MT100 Series (corporates)
• MT101 – third party
Value Dating
• MT103 – Single client
transfer
• MT110 – International
cheque clearing advice
• MT200 – transfer order
from a bank to move
funds from one nostro
account to another
• MT202 – transfer order
from a “nostro” account to
a third party by order of a
client
• MT210 – pre-advice of
funds transfer
RBS6245d
A bank sets a
forward value date
upon which the
value of funds
credited to an
account is
determined and
establishes a back
value date on which
the value of funds
debited from an
account is
determined.
payment order initiated
under bilateral
agreement
MT200 Series (banks)
13
SWIFT – Most common message types
MT300 Series
• Used to settle foreign
exchange transactions
• Money market instruments
MT500 Series
• Transfer of securities
MT900 Series (information)
• MT940 – End-of-day balance
and transaction information
• MT942 – Intra-day statement
as of a certain time of the
day
between FI’s
MT700 Series
• Documentary credit
transactions (trade)
RBS6245d
14
The correspondent banking system
•
Bilateral relationships
between financial
institutions exist similar to
banks and corporates
•
Local, Regional and Global
banks participate
•
Organization
•
•
•
•
“Nostro” accounts
• Accounts opened by banks in
•
•
•
other financial institutions
Lack of presence or clearing
membership
Disaster recovery
Foreign exchange clearing
“Vostro” accounts
• A local currency account
Relationship management
Reciprocity
Credit lines / facilities
Operational contact
maintained with a bank by another
bank. The term is normally applied
to the counterparty's account from
which funds may be paid into or
withdrawn, as a result of a
transaction.
RBS6245d
15
Currency accounts and international payments
•
Banks usually offer offshore currency accounts in various currencies, but the reality is that the
underlying currency never leaves its home country.
•
In principle, unless the client has a specific need (i.e. tax), it is always better to hold the
currency in its home country.
•
The liquidation of these offshore accounts is done via “nostro” and “vostro” accounts at
correspondent banks.
RBS6245d
16
Executing international payments using SWIFT
How do banks use the MT103 and the MT202 message?
Invoice
UK
Company A
US
Company X
Credit Advice
Wire transfer request
London
Bank
BANK
Debit a/c
Company A
Payment order –
MT103 (1st step)
Payment via
CHIPS or
FEDWIRE (3rd
step)
17
Correspondent of
Detroit Bank in
New York
(RBS NY)
RBS6245d
(Joe’s Bank)
Credit a/c
Company X
Credit advice (4th
step)
MT202 Payment
order (2nd step)
London bank’s
correspondent in
New York
BANK
Detroit
Bank
Cross-Border Payments - Costs
With regard to international payments there are three distinct
methods that banks use to collect their commission. They are the
three character alpha-codes that appear in field 71A of a SWIFT
MT103 single payment order:
• BEN – “Licence to kill”. EVERY bank in the chain that touches this
payment has a right to take a commission off the nominal amount of the
payment. The beneficiary receives less money than was sent in the end.
• SHA – Code introduced in 2003 and is now used in the majority of crossborder payments. Each party (remitter and beneficiary) pays their own
bank charges (“share” concept).
• OUR – In this case, the beneficiary always receives the exact amount of
the original payment order. The costs generated by intermediate banks
and the beneficiary bank are charged back later to the remitting financial
institution. The remitting bank, in turn, may or may not choose to recoup
the payment costs from their customer.
RBS6245d
18
Other Banking and Settlement Systems
The UK has a highly developed banking system and CHAPS is Fed and BACS is
ACH. There are other payment systems such as the Faster Payments Services and
the Cheque Clearing & Credit (CC&C) system.
•
Japan – The BOJ or the Bank of Japan is the country’s central bank and performs
functions very similar to the Fed in the USA. Check clearing is done through regional
clearing houses. Domestic wires are done through the Zengin System. This system
is not SWIFT compatible. The FXYCS is used to make payments for non resident
yen. The most important payment instruments in Japan are electronic credit transfers
in terms of value and payment cards in terms of volume.
•
China’s central bank is the People’s Bank of China. China applies central bank
reporting and it is enforced by the State Administration for Foreign Exchange (SAFE).
Renminbi (RMB) accounts may not be held outside of China by anyone. China’s
main interbank payment clearing systems are CNAPS-HVPS, CNAPS-BEPS and the
local clearinghouse system. There is an RTGS system for 8 international currencies
has been available since 2008 and the most important cashless payment instrument
are debit cards among individuals.
19
RBS6245d
•
Other Banking and Settlement Systems
•
CLS – (Continuous Linked Settlement) International system that allows for foreign exchange
transactions to be settled the same day on a payment versus payment operating model .
Operated by CLS Bank which is owned by about 70 of the largest financial institutions in the
world.
•
The Bank of Canada – The country’s central bank, controls monetary policy, supplies
banknotes and promotes the safety of the Canadian banking system.
•
Canadian Payments Association – A non profit association that operates a national system for
the clearing and settlement of checks. It performs electronic funds transfer and manages the
evolution of the national payment system in Canada.
•
The Bank of Mexico – Operates interbank check clearing and SPEI which is like our Fedwire.
•
The Reserve Bank of India – (RBI) manages lending, deposit rates and FX as well as currency
issue and regulations via the Board of Financial Supervision. There is central bank reporting.
There are 32 foreign banks doing business in India. Checks and drafts are the most commonly
used instruments for commercial transactions. Cash is dominant method for medium and small
value transactions. There is an RTGS as well a a number of systems for processing paper
based and retail transactions
RBS6245d
20
Single Euro Payments Area (SEPA)
What is SEPA
Single market for €-payments within and
across Euro-countries under uniform
conditions, rights and obligations
Compare with ACH
System in the USA
Common infrastructure: 2010
Common legal framework: 2008
• Different models under discussion
- local ACH’s + XB-system
- Pan European ACH’s
Credit Transfers
• Common rules for
Direct Debits
Debit Cards
• Uniform pricing principles (no lifting
fees, no value loss, pricing
transparency)
• Huge investment required by banking
industry
• Execution time max 3 days for
XB-payments
RBS6245d
21
Understanding the terminology (SEPA)
• Low-value payment – ACH type payment
• Batch payment – low value, single debit, multiple credit payments
• Single credit transfer – ACH type single credit single debit payments
• High value payment – Equivalent of Fedwire in the US. Normally, real-time gross settlement
(RTGS), TARGET or SWIFT payment executed same day value
• International Lockbox – Wholesale Lockbox-type services available in most European countries
• Lifting Fees – Commissions taken when a bank acts as intermediary or receiving bank. This is
standard practice and is often taken when SHA or BEN charges are listed on a payment.
• Request for Transfer – An outgoing MT101 message being sent to a third-party bank
• Cash Rounds – Client initiated multiple cross-border transfers, usually for tax reasons, which
22
RBS6245d
need to take place within the same value day and therefore monitored by client service.
International payment and collection instruments
Electronic
Non-electronic payments
• Urgent high-value
•
•
•
•
•
payments
•
•
•
•
Non-urgent payments
Direct debits
Credit cards
Debit cards
Cheques
Foreign currency cheques
Eurocheques
Postal giro
Manually initiated funds
transfers (MIFT)
• Bank cheque
RBS6245d
23
Euro Payment Systems
•
TARGET2 The trans European Automated Real Time Gross Settlement Express transfer
System (TARGET) provides real time gross settlements for cross border electronic payments
in euros
•
Correspondent Banking Remains as the most common method of cross border transactions for
low value bulk payments.
•
Internal Networks and Local Clearing Channels Pan European banks use their own internal
branch networks to access local clearing channels
•
Euro Bankers Association Operates a net settlement system used primarily by financial
institutions for inter bank transactions.
•
Monaco, San Marino and Vatican city are countries that use the Euro as their currencies but
are not represented on the board of the European Central Bank (ECB)
•
Great Britain, Sweden and Denmark have elected to keep their original currencies and control
over their monetary policies.
RBS6245d
24
Check Processing
In The United States of America
RBS6245d
25
The Regulatory Environment
Banks within the United States adhere to uniform procedures and timetables that are
essential to the timely and accurate processing of the large volume of checks that flow
through the nation’s financial institutions
RBS6245d
26
Uniform Commercial Code (UCC)
• A set of standardized state laws that govern financial contracts
• Establishes general duty standards for parties to act in Good Faith and exercise
Ordinary Care.
• Together with case law, articles 3 & 4 document legal boundaries for most aspects of
check processing in the United States
• Adopted in 1952; articles 3 & 4 revised in 1990
RBS6245d
27
UCC Article 3: Negotiable Instruments
Covers
• Definition and requirements of a negotiable instrument
• Negotiation, transfer and endorsement of these instruments, and Liability
of the parties
Sample topics:
• Standards of care required for processing checks
• Establishing the identity of the payee
• Negligence of maker in case of forgery or alteration
• Forgery and fraud loss allocation
• Employer’s responsibility for employee fraud
RBS6245d
28
UCC Article 4: Bank Deposits and Collections
Covers check collection, payment, liabilities, time frames and responsibilities
Sample topics:
• When a bank may charge a customer’s account
• Customer’s right to stop payment
• Bank’s option not to pay stale-dated items
• Customer’s obligation to report unauthorized signatures
Any provision under Article 4 may be varied by agreement between bank and
customer, except bank’s duty to act in good faith and to exercise ordinary care.
RBS6245d
29
Federal Reserve Regulations
Federal Reserve system is responsible for implementing procedures to satisfy federal
laws affecting depository financial institutions
Regulations affecting checking accounts and check processing are:
• Reg J – FRB Check Clearing Rules
• Reg CC – Funds Availability
• Check 21- Electronification of checks
RBS6245d
30
Reg J: FRB Check Clearing Rules
• Subpart A – Collection of Checks and Other Items by Federal Reserve Banks
• Provides legal framework for banks to collect checks and settle balances through
the Fed.
• Establishes terms under which Reserve Banks receive items for collection from and
present items to banks.
• Establishes rules for banks that return unpaid items through Fed.
RBS6245d
31
Reg CC -- Funds Availability
Implemented as the Expedited Funds Availability Act of 1987; effective Sept. 1988.
Primary objective:
• To speed up the availability of deposited funds and the return of dishonored checks
Extends Fed’s regulatory powers to all check transactions.
Establishes:
• Time frames for return item processing and holds on deposited items.
• Standards for endorsements to encourage faster return item processing.
RBS6245d
32
Check Clearing for the 21st Century Act – CHECK21
Created new negotiable instrument called an IRD or Image Replacement Document
(IRD)
An IRD is a paper reproduction of the original check and is the legal equivalent of the
original check
Check 21 resulted in the development of the Remote Deposit Capture (RDC) product
• This service allows a company to scan any check it receives as payment and transmits
the scanned image to the bank for posting and
• The Fed now receives 99% of all the checks it processes for clearing as electronic
images. Paper checks are only processed at a single site in Cleveland, Ohio.
RBS6245d
33
MICR
• Magnetic Ink Character Recognition
• Machine-readable characters on the bottom of checks
• Introduced in 1956 to allow for automated sorting and processing
• Rigid standards (ANSI) are in place
RBS6245d
34
The Routing Number
Used for all financial institutions in the U.S.
Each financial institution has a unique number; some have more than one.
Two forms are currently used:
• MICR form
• Fractional form
Both forms appear on most checks, although only MICR form is used in automated item
processing.
RBS6245d
35
Comparison of MICR Form and Fractional Form
WILD WHEELS, INC.
100 Park Street
Phoenix, AZ 85003
2048
19
91-03/1221
PAY TO THE ORDER OF_______________________________________________
$____________
Fractional
Form
dollars
Last National Bank
Phoenix, AZ 85003
Ref:
A122100037A05445D19999C2048
MICR Form
RBS6245d
36
Routing Number: MICR Form
Called the ABA Routing Number
Has 3 components:
• Federal Reserve Routing Symbol (4 digits)
• ABA Institution Identifier (4 digits)
• Check digit (1 digit)
Transit Symbols
A122100037A
Federal Reserve
Routing Symbol
ABA Institution
Identifier
Check Digit
RBS6245d
37
THE FEDERAL RESERVE SYSTEM
Boundaries of Federal Reserve Districts
1
9
2
4
Minneapolis
7
12
San Francisco
10
Kansas City
Chicago
Cleveland
Boston
New York
Philadelphia
St. Louis
Richmond
8
5
3
Atlanta
Dallas
6
11
RBS6245d
38
Approximately 70 Billion Checks are written annually in the U.S.
39
RBS6245d
That’s more than 1 billion checks per week!
The Forward Collection Process
RBS6245d
40
Preparing Transit Items
Checks sorted by destination
Cash letters prepared for each batch
• Transmittal letter or form that accompanies a bundle of checks
• Used to transfer checks from one bank to another
RBS6245d
41
On-us and Transit Items
• In check processing, there are two basic kinds of checks: “on-us” and “transit”.
• “On-us” checks are drawn against accounts at your own financial institution (i.e., the
Depositary Bank and the Paying Bank are one and the same)
• “Transit checks” (aka, off-us or on-other) are drawn against accounts at other
financial institutions
RBS6245d
42
Check Processing Work Flow
INPUTCUSTOMER DEPOSITS & CASHED CHECKS
YOUR BANK BRANCHES & OFFICES
PROOF MACHINE
AREA: PROVE &
ENCODE
Batches & Blocks of
On-Us Checks, Deposit
Tickets, & On-Other
Checks
READER-SORTER:
CAPTURE &
MICROFILM
ON-US TO
ACCOUNTING
CHECK PROCESSING
INPUTINCOMING
CLEARINGS
TRANSIT
AREA
CANCELLED
CHECKS &
BANK
STATEMENTS
Batches & Blocks
of On-Us Checks
Batches & Blocks of
On-Other Checks
RBS6245d
OUTPUTCHECKS FOR COLLECTION
COMPUTER AREA
43
Endorsement Standards
• Defined by Appendix D of Reg CC
• Requires depositary bank to identify itself on the back of a check in a clear and
precise manner and requires all other parties to stay clear of that area
• Essential for the expeditious processing of return items
• However, there are no penalties for failure to meet the endorsement standards
RBS6245d
44
Correspondent as Depositary Bank
• Per Reg CC, correspondent may, by agreement, endorse as depositary bank for its
respondents
• All returned checks and notices of nonpayment will be sent to correspondent who
acts as depositary bank for Reg CC purposes
• Respondent should not endorse as depositary bank; correspondent may require
endorsement elsewhere
RBS6245d
45
Clearing and Settlement for Transit Items
The clearing process includes transporting the physical checks, exchanging or
presenting them for payment and settlement of the dollars.
Direct Presentment
Clearing House
Correspondent
Bank A
Federal Reserve
Payee
Bank B
Maker
Customer
Bank A
Customer
Bank B
RBS6245d
46
Clearing House
• An association of financial institutions which exchange checks drawn on each other.
• Clearing House rules govern exchange times and settlement practices.
• Each financial institution is credited for checks it brings for collection and debited for
checks other financial institutions bring for collection on it.
• Settlement is made on net differences.
RBS6245d
47
Balances and Float
• Ledger Balances – bank balances that reflect all entries to a bank account, regardless
of collection. Ledger balances are important for accounting purposes, but not for funds
availability or bank compensation purposes. A negative ledger balance results in a ledger
overdraft where charges may apply.
• Available Balances – the amount of funds available for withdrawal from an account,
based on the bank’s availability schedule and/or amounts for which availability must be
granted under Reg CC.
• Collected Balances – the average ledger balance minus the deposit float (not
recognized under Reg CC). They are items used by banks to determine earnings credits
on account analysis statements.
RBS6245d
48
Other Paper Based Instruments
• Payable Through Drafts (PTD) – payment instrument resembling a check drawn against the payor, not the bank.
Treated like a check through the clearing process, but payment responsibility is the drawee’s. Drafts primarily used
to preserve the right to review the items prior to final payment.
• Pre Authorized Drafts – payment instrument that authorizes the payee to draw/draft against the payor’s account.
The PAYEE initiates the transaction, not the payor (e.g. mortgage, insurance and recurring payments). Most preauthorized drafts have been replaced by ACH.
• Remotely Created Checks (RCC) – similar to pre-authorized debits, except generally created for a one-time
payment (not recurring payments). These are vulnerable to fraud due to lack of signature or other required
authorizations. According to Reg CC, any bank that transfers or presents a remotely created check warrants that the
check is authorized by the person on whose account the check is drawn. As a result, many banks refuse to accept
these for deposit.
• Money Order – prepaid instrument issued by parties such as companies, banks or the US Postal Service. The
purchaser is the instrument’s payor and the money order is the obligation of the issuer.
• Cashiers’ Check/Certified Check – (aka official bank check) check drawn on a bank’s own funds. A certified
check is drawn on a depositor’s checking account and funds are withdrawn from the depositor’s account at the time
of certification. Assures payment with a guarantee by the bank. Both carry the signature of a bank officer certifying
the bank’s guaranteed payment. Most Certified checks have been replaced by Cashier’s checks due to higher costs.
• Traveler’s Checks – prepaid instruments similar to money orders. Two signatures usually required by the
purchaser: one at issuance and one at the time the check is used.
• Sight and Time Draft – usually presented in combination with other documents that verify the terms of a
transaction have been met. If all documents are in order, then the draft is payable upon presentment. A Time draft is
the same as a sight draft except NOT PAYABLE until a specified Future Date.
49
RBS6245d
• State Warrants – used in government finance as an order to pay that instructs a state treasurer to pay the warrant
holder on demand or after a maturity date.
Check Conversion
• Point of Purchase Conversion (POP) – Many retailers have systems that allow customers to
have checks scanned, capturing the account information from the MICR line at the POP. The MICR
line data are converted into an ACH debit, and the check is voided and returned to the customer, who
then signs a debit authorization in the form of a register receipt.
• Account Receivables Conversion (ARC) – To increase funds availability and reduce check
handling, eligible checks received at a lockbox can be converted into electronic debits and processed
as ACHs. The company receiving the checks must notify the check writer that checks will be
converted, typically via statement on bills or invoices.
• Back office Conversion (BOC) – Retailers can convert eligible checks to ACH debits in the bank
office. Explanatory signage must be present at the point of presentment, and the merchant/originator
must put specific verbiage on the customer receipt indicating the check may be converted and may
clear as soon as the same day.
• NACHA Rules define the types of checks that cannot be converted. Includes checks with “on-us”
field in the MICR line, checks greater than $25,000, third party checks, credit card and lines of credit
checks, obligations of financial institutions (e.g. traveler’s checks, cashier’s checks, money orders..)
• BOC & Check21 are often offered as a combination by many large banks. This allows companies
to scan and electronically transmit all checks received to their bank. The bank then determines the
best/fastest clearing method: BOC through the ACH system, image or Check 21 services, or printing
an IRD.
RBS6245d
50
Availability
• Endpoints – determined by the routing & Transit number on the check. It is the location
of the paying bank where final settlement occurs.
• Availability schedules - They specify for each Drawee endpoint when a bank grants
available credit or collected balances for deposited items. All banks have availability
schedules that.
• Pre encoding - a business can elect to have the amount of the check MICR encoded.
This results in a lower fee, later deposit deadline and faster availability.
• Reject items – Checks that are rejected by the bank’s high speed equipment can miss
critical deadline leading to delayed availability and additional fees. This is usually caused
by a defective or sub standard MICR line.
• As of Adjustment - a bank may add additional time to a check as part of the collected
balance calculation.
RBS6245d
51
Correspondent Bank
• Respondent Bank is a customer of a Correspondent Bank
• Correspondent may offer various check collection services under its terms
• Respondent has account at correspondent which can be used for settlement of items
• Balances in this account may pay for service fees
RBS6245d
52
Federal Reserve Bank
• In addition to its role as a regulator, the Fed also provides correspondent banking
services. It is a major player in check clearing.
• Bank must have an account at the Fed to use its services
• Each Fed district operates under common Operating Circulars for check processing
RBS6245d
53
Sample Mix of Clearing Options
• Clearing House for items drawn on other Clearing House members
• Direct Presentment for a small number of banks with whom you exchange sufficient
volume or dollars
• Federal Reserve for all else
RBS6245d
54
Exception / Return Item Processing
RBS6245d
55
The Pay / No Pay Decision
• When a check is presented for payment, the Paying Bank must decide if it will pay the
check or not
• If the check meets all the requirements for negotiability and all is well with the
account, the item should be paid
• If there is anything amiss, a decision must be made
• Each bank will establish its own criteria and procedures for making this decision
RBS6245d
56
Returned Checks
A returned check is one that the Paying Bank dishonors or refuses to pay and sends
back to a clearing agent who then forwards it on to the Depositary Bank
About 1% of all checks written are returned unpaid!
RBS6245d
57
Return Reasons
The following are common reasons for which a check may be returned:
- Insufficient funds
- Uncollected funds
- Payment Stopped
- Postdated item
- Stale date
- Refer to maker
- Missing signature
- Missing payee
- Closed account
- Signature irregular
- Missing or improper endorsement
RBS6245d
58
Returned Item Processing
• Essentially, the forward collection process in reverse
• However, a different clearing agent may be used for returns than the one used for
forward items
• The Returning Bank must clearly indicate reason for non-payment on the face of the
check
• Return Items are bundled together with a return letter (similar to a cash letter)
RBS6245d
59
Qualified Return Items
• Qualified return items have MICR encoding either on a strip attached to the bottom of
the check or on a carrier envelope to expedite the return to the Depositing Bank
• MICR information includes the ABA routing number of the Depositary Bank, the
amount of the check and the number 2 in position 44 in the MICR band
2A075901231A
B0000109500B
• Return items not prepared for MICR processing are called raw items and are handled
separately from qualified returns
RBS6245d
60
Return Item Deadlines
• If the item was presented timely for regular settlement, the paying bank must return
the item by midnight of the banking day following the banking day of receipt
• Forged signature of maker, counterfeit checks - 1 day
• Altered checks - 1 year
• Checks with missing or forged endorsements - 3 years
RBS6245d
61
Return Item Deadlines
Deadlines may be extended under certain circumstances (Regs J and CC, also UCC)
Examples: interruption of communication or computer facilities, war, suspension of
payments by a bank or nonbank payor, emergency conditions
RBS6245d
62
Late Returns
If a check return is not initiated by the applicable deadline, then the Depositary Bank may
make a claim for reimbursement of the amount of the check
Claim by Depositary Bank may be made only to the extent that a loss is incurred by the
Depositary Bank
–Clearing agents may set dollar limits for late return claims (e.g., a minimum of $100)
–A Paying Bank may dispute the Late Return claim
RBS6245d
63
Large Item Notification
A Paying Bank that determines to return a check of $2500+ must provide notice of
nonpayment to the Depositary Bank.
Notice must be received by the Depositary Bank by 4:00 p.m. (local time) on the 2nd
business day following the banking day on which the check was presented
RBS6245d
64
Disbursements
RBS6245d
65
ZBA
What is ZBA?
•
An automated book transfer between two bank accounts
•
Can be domestic or cross-border (global)
•
Captures true end-of-day position of target account
RBS6245d
66
Controlled Disbursement
• Controlled disbursement is a bank service providing a same day notification to a
company of the checks to clear that day.
• Company’s usually fund controlled disbursement accounts from concentration
accounts via ZBA and sometimes with wires or ACH.
• Primary focus is control, primary advantage is company’s ability to calculate daily
cash position for optimal market rates when borrowing or investing.
• According to Federal Reserve Bank regulations, checks presented directly to
Drawee bank by 8:00 a.m. must be paid on the same day they are presented.
RBS6245d
67
Controlled Disbursement
•Payable Through Draft (PDT) – popular disbursement device for payment of insurance claims
and other payments requiring multiple signers and headquarters' approval.
• Positive Pay – disbursement service used to combat fraud. Company transmits file of issued
check information to disbursement bank prior to physical payment of checks. Bank matches
check serial numbers and dollar amounts of checks presented against database.
– Reverse positive pay is when bank transmits a file of checks presented for payment to the
company daily.
– Positive pay and Reverse Positive Pay do not protect against fraudulent endorsement,
which is when an authorized check is stolen or intercepted by a third party, and then that
party endorses and cashes the check.
– Also, may not protect when a bank or a company accepts or cashes an item in good faith
(Holder in due course) that later turns out to be fraudulent.
RBS6245d
68
Controlled Disbursement
• Multi Drawee Check – aka payable if desired (PID), are checks that can be presented
for payment at more than one bank. Uses include dividend checks, payroll in states with
special regulations, and employees away on assignment.
• Imprest Account – often used for petty cash, is an account maintained at a prescribed
level for a specified purpose or activity. (e.g. Company keeps Imprest account at a
sufficient balance to cover two months’ expenses.)
RBS6245d
69
Electronic Controlled Disbursement
• Direct Deposit – Used since mid 80’s, are transfers made from a company’s account
to the accounts of employees, shareholders, vendors and trading partners using ACH.
• Purchasing/procurements (P-Cards) – used for small-dollar purchases of supplies
and service contracts.
• Federal State Tax Payments – The Electronic Federal Tax Payment System
(EFTPS) is the primary method for collecting and accounting for federal taxes withheld
by employers.
• Electronic Benefit Transfer Payroll Cards – used for food stamp programs. Allows
recipients ability to use ATMs and POS terminals. Many large companies may use for
workers without bank accounts.
RBS6245d
70
Outsourced Accounts Payable
• Freight Payments – mostly manufacturers and wholesaler distributors use this. Some
banks and third parties offer service where specialists pay all freight bills, audit bills for
possible overcharges and duplicate payments.
• Payroll services – many vendors offer payroll services to handle functions including
check and direct deposit file issuance, payroll tax filing and payment, and 401(k).
• Integrated or Comprehensive Accounts Payables (A/P) – allows a company to
outsource all or part of the company’s A/P and/or disbursement functions. There are two
approaches commonly used:,
– Company sends data file to financial services provider (FSP) periodically, with list of payments.
File contains information on when to issue disbursement and to whom, and method of payment.
– The FSP may maintain a database of a company’s payees that includes detailed information.
Under this method, a company only needs to send limited payment information to the FSP.
RBS6245d
71
In-house bank? (Large Corporate)
• Structure by which a primary “treasury” vehicle is established as the in-house bank
– In-house bank entity makes payments and collects receivables “on behalf of” other
group subsidiaries
– Accounting transactions take place on the account(s) of the ERP system
– Transactions placed with the banking system are reduced and use of automation is
increased
• Payment Factory – Centralized A/P processing center
• Multilateral Netting- Reduce number of transactions between subs.
RBS6245d
72
Managing Disbursement Information
• Interface with A/P – Two critical areas interface with treasury and A/P relate to
disbursements.
– First is communication from A/P regarding invoices vouchered for payment
– Second is communication from treasury back to A/P regarding reconciled payments.
• Account Reconciliation Program (ARP) – banks provide account reconciliation
services to meet companies’ information and control requirements. Paper or CD-ROM
report usually shows serial number, dollar amount and date paid for each item. Includes
stop payments which usually last six months and require renewing, if necessary.
•High Order Prefix – Divisional sorting lets a company with multiple units use a single
account. Codes identifying the various units are included in the check serial number.
• Image Technology – both front and back of check may be captured by the Drawee bank
and converted to digital image. Provides company with faster access to disbursement
check information. Primary use is to exchange information between bank and customer.
RBS6245d
73
Electronic Funds Transfer (EFT)
• ACH – Developed by U.S. financial industry in early 1970’s as an electronic alternative
to checks. The ACH system is a batch processing clearinghouse traditionally used for
high-volume, low-value transactions. Payments and information are cleared and settled
electronically. Increases reliability, efficiency and cost-effectiveness. Can transmit more
information that most paper-based instruments. Some cross-border availability through
the Federal Reserve’s FedGlobal ACH Payments program.
• NACHA – a membership organization of financial institutions that establishes and
administers the rules, standards and procedures that enable members to exchange ACH
payments on a national basis. Fines are levied for violations of rules.
• Financial institutions that act as intermediaries between the originator and the receiver
are referred to as the originating depository financial institution (ODFI) and the
receiving depository financial institution (RDFI), respectively.
RBS6245d
74
Electronic Funds Transfer (EFT)
• Other Automated Clearing House (ACH) Considerations:
– ACH Payment Formats: Standardized ACH formats for both consumer and corporate payments.
Appropriate format is determined by the relationship between the parties, information exchanged, and
types of ACH payment services offered by the participating banks. A three letter standard entry class in
the header of the message identifies the format of an ACH payment message and how the transaction
was authorized.
– Prenotifications (Prenotes): Optional zero-dollar entries sent through the ACH system prior to live
entries. Provides verification for receiving bank before entries for settlement are processed. Optional.
– Authorization: NACHA rules require originators to obtain prior consent from the receiver authorizing
the ACH transaction for certain transactions, mostly consumer debits. Originators must be able to
produce a copy of the authorization for at least 2 years.
RBS6245d
75
Electronic Funds Transfer (EFT)
• International ACH (IAT) – There are specific requirements for any ACH transaction that
is sent to, or received from, a foreign source (i.e. an IAT). Indicates if a domestic
transaction is being funded internationally. IAT guidelines apply to banks and corporates
and may be required in the following cases:
–
–
–
–
–
Originating or receiving ACH cross-border transactions
For a U.S. subsidiary of a non-U.S. company
When ACH payments are sent to pensioners or employees living outside the U.S.
When the full amount of the ACH payment is being sent to an account located outside the U.S.
When items are bought or sold over the Internet and if the payment involves a cross-border transaction
• FedGlobal ACH Payments – offered by the Federal Reserve Bank Services to provide a
framework for sending cross-border ACH credit payments to 35 countries around the world,
plus debit payments to Canada only. Services are provided in a range of transaction
currency options.
RBS6245d
76
Electronic Funds Transfer (EFT)
Wire
Classification
• FEDWIRE – large-value, RTGS transfer
system operated by the Fed and is the only
true RTGS wire transfer system in the U.S.
Fedwire online is open 9:00 p.m. to 6:30
pm. EST, but most banks require earlier
cutoff times to allow time for processing.
Fedwire funds transfers are regulated under
the Fed’s Reg J, which adopted UCC Article
4A.
Repetitive
• FedWire Format & Types – The Fedwire
format is designed to interface with CHIPS
and the SWIFT network. The current format
(a customer transfer message [Fedwire
CTR] also includes information required by
federal authorities to combat illegal money
laundering activity. A new Fedwire format
implemented in late 2010 called customer
transfer plus [CTP] provides the ability to
send large amount of data in either a
structured or unstructured format along with
the payment.
Semi-repetitive
Non-repetitive or
free-form
Drawdown
Standing
Uses
The only
information that
can vary is the
date and the
amount
Frequent
transfers to
one receiver
for a
recurring
payment,
such as
dividends
All information
may vary except
sending and
receiving parties
Frequent
transfers to
one party for
various
transactions,
such as
vendor
payments
All information
may vary
Any payment
Request to a
sending bank for
an incoming
transfer
Funds
concentration
Request to
transfer funds
whenever
balances reach a
designated level
Funds
concentration
RBS6245d
77
Description
Electronic Funds Transfer (EFT)
• Cover Payments – Used in correspondent banking, usually to facilitate international
transactions. Payments made through a chain of correspondent banks to settle a credit
transfer message that travels a different route to the ultimate beneficiary’s bank. The
SWIFT message format for cover payments is the MT202 COV, which contains two
special sequences: (i) for basic payment and routing information (ii) for underlying
customer credit transfer details.
–The Fed wire has changed its CTR message and provided the CTP message format to support
a market convention for carrying the underlying customer details related to cover payments
when using the Fedwire.
• Fedwire Book-Entry Securities System – This service provides securities
safekeeping, transfer and settlement service known as the National Book-Entry
System (NBES). NBES is a real-time gross settlement system used for the transfer of
U.S. Treasury, government agency and other securities. Like Fedwire funds transfers,
securities settlement is final at the time of transfer.
RBS6245d
78
Card Based Systems
• Credit Cards – The two primary issued cards in the U.S. are Visa and MasterCard. The Japan
Credit Bureau (JCB) card is bank-issued and used in about 20 countries, including the U.S. Credit
cards are called open-loop cards when they are accepted anywhere the card logo is displayed. Cards
issued by gas companies and retailers are called closed-loop if the card issued is only accepted by
issuing company.
• Credit Card Transaction Participants – Below chart shows the multiple participants in card
transactions and their roles in the credit process.
Participants in a Credit Card Transaction
Cardholder
Card Issuer
Merchant
Merchant Acquirer
Acquiring Processor
Issuer Processor
79
RBS6245d
Network Operator
An individual or business approved by a card issuer.
Issuing banks underwrite and issue cards to individual and business cardholders who meet credit
standards. The issuing bank maintains the individual card accounts, bills and collects payments from
cardholders and monitors the performance of credit card receivable protfolios.
Merchants are businesses that accept cards as a method of payment. This can include e-commerce
merchants or moto merchants (merchants that process orders via mail order or telephone).
Banks can also act as aquiring banks for businesses that accept credit card payments. The Merchant
Acquiring Bank qualifies Merchants that accept credit card payments. The Merchant acquiring bank
provides Merchants with credit card terminals, and maintains deposit accounts through which the credit
card payments settle. They also issue Merchant ID numbers that are used to process transactions via
terminals, web, etc.
Many Merchants and Merchant Acquiring Banks use third-party processors to manage the daily
settlement, as well as the information flows, related to credit card activities.
Provides a system for card issuers to board accounts, provides authorizations, and offers risk
management tools to issuers to manage their card portfolios effectively.
Network operators maintain communication networks to support card transaction activities, such as
authorization, clearing and settlement. Network operators include Visa, MasterCard, and Discover.
Card Based Systems
• Debit Cards – Similar to credit cards; but debit cards access funds directly from a
cardholder’s checking or saving deposit account. Debit cards may be signature-based
and/or personal identification number (PIN)-based.
– Signature-based: bears the logos of Visa, MasterCard or Discover and are processed in the same
manner as credit cards using those network operators.
– PIN-based: Authorization and clearing are generally immediate and are facilitated by network
operators, such as MasterCard, Visa, NYCE, STAR, Interlink and Accel/Exchange.
RBS6245d
80
Card Based Systems
81
RBS6245d
• Purchasing Cards– (aka procurement cards or P
- -cards) are credit cards used by businesses for the
purchase of supplies, inventory, equipment and service contracts
. Spending limits are established on
an individual card basis. Purchases can be limited to approved vendors, suppliers, as determined by the
merchant category code of the vendor or supplier. Companies maynegotiate a rebate based on charge
volume and average transaction size. Can also delay payment since purchased items are not paid for
until end of billing cycle.
• Travel Card – Credit Cards used by businesses for employee travel purposes. Travel cards may be
incorporated into a company’s
’ p- card program, or they may be issued as a separate card. Work very
similarly to p- cards. Rebates may also be offered.
• Ghost Cards – These are a variation on the p- card that do not involve the use of an actual card. With a
ghost card system, a card number is given to a specific vendor and then used for electronic purchasing
and billing.
• Department (Un- Named) Cards – Another variation of the p- card where each department is given its
own p- card. Linked to department rather than individual.
• Single Use Cards– Provides additional purchasing security with a single
- use or disposable card
number. Look like regular credit card numbers, but will only work for a single use.
• Stored Value Cards– Cards can be offered by banks, retailers, and other service providers
, and they
can be branded, open- loop cards or private- label, closed- loop cards. Gift cards are the most common
stored value cards.
• Smart Cards – Look like credit cards, but contain an embedded microprocessor. Each transaction
updates the card’ s memory. Can be used only with special card readers and are widely used in Europe
and the U.K.
Collections
RBS6245d
82
Collections
• Collection Float – The time interval or delay between payment initiation and when a
company receives good funds. It consists of mail float, processing float and availability
float.
• Mail Based Collection Systems – Companies use either an in-house processing
center or a lockbox to receive and process mailed payments. Deciding which of these
methods to use depends primarily on two factors: the volume and the dollar amount of the
payments.
• Company Processing – In a company processing center, check and payment card
processing, along with deposit preparation, are performed in-house. In-house check
processing usually involves the following:
– Receiving and opening the mail
– Separating the payment from the remittance advice
– Forwarding the remittance advice, amount and date of payment to A/R
– Preparing the check for deposit or possible conversion to ACH debit
– Transporting the check to the organization’s deposit bank, employing remote deposit capture or
converting an eligible check into an ACH debit.
RBS6245d
83
Lockbox Processing Systems
• Wholesale Lockbox – used primarily to process low-volume, large-dollar B2B payments that,
unlike consumer payments, must often be matched to specific invoices. Detailed information about
the invoices paid, discounts taken, returns and allowances are required.
Wholesale lockbox systems also:
– Focus on float reduction
– Offer a combination of manual and semi-automated processing of payments
– Handle detailed, non-standardized remittance documentation
– Provide timely access to company information about funds availability
– Are customized to meet specific customer requirements
• Retail lockbox – used primarily to process high-volume, small-dollar consumer remittances (C2B)
that frequently involve recurring, monthly installment payments. Checks are accompanied by
standardized, machine-scannable remittance documents or coupons. Because of the large volume of
items processed, the focus is on cost reduction more than float time reduction.
Capturing data from checks is enabled through the use of three types of technologies:
– MICR: process that captures the machine readable information on a check.
– Optical Character Recognition (OCR): process that reads pre-printed information on remittance documents.
– Intelligent Character Recognition (ICR): process that reads handwritten or typed information.
RBS6245d
84
Lockbox Processing Systems (cont’d.)
• Hybrid Lockbox – sometimes referred to as wholetail, combines features of wholesale and retail
lockboxes. They are configured, usually on a customized basis, to process both B2B and C2B
payments. They are used by companies such as utilities, whose consumer customers return
standardized remittance documents that can be processed automatically and whose business
customers remit documents that require manual handling.
• Managing Reject Items in Lockboxes – reject items occur primarily in automated retail lockbox
systems and represent payments that cannot be processed. Usually requires manual intervention.
• Electronic Processing and Conversion – Many companies have moved toward converting all
eligible paper checks to ACH debits in an ARC transaction to help reduce processing costs and
collection float.
• Use of Image Technology – can facilitate the processing of both wholesale and retail lockbox
remittance information. Allows paper documents (checks) to be scanned and stored for later
distribution, handling and processing. Benefits include:
Reduced processing costs
Increased productivity
Improved accuracy
Automated updating of A/R
Improved response time to customer inquiries
Faster resolution of lockbox discrepancies
RBS6245d
–
–
–
–
–
–
85
Lockbox Processing Systems (cont’d.)
• Lockbox Cost / Benefit Analysis – Assessing suitability of using lockbox requires a
cost / benefit analysis to determine whether net benefit of reduced float and/or elimination
of in-house processing outweigh the incremental costs of lockbox processing. Three
factors determine the opportunity cost of float:
– The dollar amount of the collected items
– The total collection time for items
– A company’s current opportunity cost of funds (usually short-term investment or borrowing
rate)
• Usually measured in dollar-days and is a function of a transactions dollar amount and
the number of days of float delay.
RBS6245d
86
Collection Process Improvement
• Electronic payments (ACH, wires, and credit card payments) offer the following:
–
–
–
–
Predictability of settlement timing and available funds
Flexibility of directing payments to any account without manual intervention
Ease of transmitting customer remittance information
Reduced risk of fraud
• ACH is used extensively in C2B; but not in B2B environment due to very detailed
remittance information often in non-standard format.
• New developments in Electronic Billing Information Delivery Service (EBIDS). Service is
offered through NACHA and uses open ACH formats and rules making it more efficient
for more billers and banks to offer electronic bill presentment to their customers.
• NACHA is also offering Secure Vault Payments. This allows organizations involved in
collecting consumer payments to offer an alternative to credit card payments.
RBS6245d
87
Help if you need it
Jose R. Gomez
Director
Global Treasury Advisory
Telephone: 713-221-2464
Cell: 832-729-7285
Email: Jose.Gomez@rbs.com
RBS6245d
88