Week 2: Lecture 2 F.S

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LECTURE 2

Chara Charalambous CDA COLLEGE 1

Outline

What are the clearing banks?

What are the services that clearing banks offer?

Which organization in Cyprus is responsible for the clearing cheques?

What is

Customers?

the relationship

What is the money transmission?

between Banks and

What is a flexaccount?

What is a budget account? A save and borrow account?

A credit card? A charge card and traveller’s cheque?

ATM features.

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The Clearing Banks

The Bank of England supervises the clearing and other

Banks which operate in the UK. The term ‘clearing bank’

refers to the very old function of clearing cheques on a daily basis and settling the resulting transfers of money which are outstanding.

The key difference between clearers and the banks is that the clearing provide these clearing services as well as the usual range of banking operations.

Therefore a clearing bank is a commercial bank that is part of a network of banks that can clear cheques for its clients regardless of whether or not the cheque originates from the same commercial bank. Clearing a cheque means

processing it so that funds are deducted from the payer's account and put into the payee's account.

.

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What are the services that clearing banks offer?

The clearing Banks own stakes in hire-purchase companies and also they have estate agency subsidiaries and other subsidiaries that offer stock

exchange services (purchase and sale of securities), financial advices, unit trust

investments and banking services in other

countries.

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Cyprus Clearing House

The Cyprus Clearing House (CCH) was established in June 1964 in order to facilitate the exchange and clearance of cheques and other means.

The CCH operates according to procedures which are agreed by the representatives of the banks on the CCH Committee.

The CCH

Committee consists of one representative of each member and is chaired by the Central Bank of Cyprus (CBC) representative. The decisions at the CCH Committee are taken by majority voting.

Cheques in Cyprus have a uniform format, which was agreed by the members of the CCH and adopts the use of magnetic ink character recognition (MICR) technology in capturing and processing information.

From 26 November 2010, the clearing new system of automatic electronic cheque has been successfully implemented. The system procedures, which have been approved by the Central Bank by virtue of article 74 of the Bills of

Exchange Law (CAP. 262), provide that cheque clearing is based on the

exchange of electronic data and image files amongst the participating banks, instead of physical exchanges (cheque truncation).

The implementation of the electronic cheque clearing aims at reducing the time needed for effecting cheque clearing, with benefits for both the banks and their customers.

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Electronic cheque clearing not the natural exchange of the cheques themselves

Until recently, interbank cheque clearing was a fully manual paper-based operation

.

Reasons: The method was subject to errors and there were delays in the clearing process effecting the financial market operations. Moreover, the increased daily cheque volume requested this change. These problems associated with the manual operations were addressed with the introduction of the Electronic Cheque

Clearing System (ECS). ECS relies on the electronic data read off the cheques, rather than on the physical cheques themselves, for purposes of calculating net clearing positions and customer account posting

.

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Banker and Customer

This relationship is based on debt. The banker is the debtor and the customer is the creditor. The main aspects of the relationship are that the banker undertakes to receive the customer’s

money and cheques for collection, to repay the money on demand and upon written presentation of the customer’s order, to give reasonable notice before closing a credit account or an overdrawn account and to examine secrecy regarding the account.

The customer on the other hand agrees to draw cheques with sufficient care so as not to misinform the banker, to make a proper demand on the banker to repay the balance or any par of his/her account, and to pay charges and interest in accordance with the terms of the account.

The banker is free to use the money of the customer for any purpose. The banker will use the money to earn profit and the customer cannot restrict the banker to do so and also he/she is not entitle share in the profits made by the banker. The customer is of course entitled to repayment of his money on demand.

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Chara Charalambous CDA COLLEGE

Money Transmission Services

The act of moving money between bank accounts or from one person or organization to another.

Any financial institution offering a money transmission service provides the customers, among other services, with the following: o

A cheque book o

An ATM card o

Bill payment facilities o

Standing orders o

Direct debits o

Travel money o

Overdrafts o

Credit cards

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The current account:

The current account is the main account offered by banks upon which a range of further services can be build and offer. A number of building societies provide current account facilities but not all of them.

Current Account and building societies

The Nationwide’s Flexaccount was first offered in May 1987.It pays interest for every day an account is in credit, interest being calculated on an increasing scale with larger balances receiving higher rates . All

flexaccount services are free. There are no transaction charges, no handling charges nor administration charges.

Nationwide Building

Society is a British mutual financial institution and the largest building society in the world

What if an account does overdraft?

If an account goes overdrawn interest is charged on the amount overdrawn for the length of time such a state exists. This interest is deducted from the account monthly and shown on a monthly statement. Interest rates applicable for the overdraft depend upon whether it was agreed with the society or not. A much higher rate is charged for unauthorized overdrawing. If an account holder has a mortgage with the society then it is possible for a secured overdraft facility to be obtained at a lower rate of interest.

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Access to money placed in a flex account can be obtained from a branch of the society via a cheque book or via ATMs.

Other services available on the account include standing orders and direct debits, payment of bills, such as gas, electricity and water rates via a computer facility.

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Cheques and links with other accounts

Cheques which are integral feature of current accounts can be linked to other accounts as well. For instance with a budget account: a bank account for paying household bills, being credited with regular or equal monthly payments from the customer's current account, enabling a customer to make monthly payments to cover his past and future purchases.

A variation (same idea but with different characteristics) on the budget account is the save and borrow account . The customer chooses an amount he/she can save each month. The borrower can then borrow a multiple of this amount.

For example if £20 per month were saved and the multiple used by the bank were 30 then £600 could be borrowed.

The bank will arrange for the savings to be transferred each month to the save and borrow account from a current account with the bank or from elsewhere. A cheque book is issued which enables the customer to pay for goods and to draw money directly from the account. An ATM card might also be issued.

When the account is in credit – positive balance, interest will normally be paid at the bank’s deposit rate. When borrowing takes place an APR will be charged. Bank charges, standing orders and direct debits may also be operated.

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APR

The annual rate that is charged for borrowing, describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate , as applied on a loan, mortgage loan, credit card. This includes any fees or additional costs associated with the transaction.

Loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors. A standardized

computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other potential lenders.

By law, credit card companies and loan issuers must show customers the APR to facilitate a clear understanding of the actual rates applicable to their agreements. Credit card companies are allowed to advertise interest rates on a monthly basis (e.g. 2% per month), but are also required to clearly state the

APR to customers before any agreement is signed.

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Credit Cards

Credit cards are issued to selected customers originally free of charge provided the customer can satisfy acceptable credit rating criteria. Using the credit card the customer is able to shop without cash or cheques at any enterprise which is a member under the credit card company’s scheme.

The customer will be granted a credit limit and the amount will vary from customer to customer and will depend on the individual’s credit rating.

Initially the limit will be low and may be increased over time either by the credit card company itself or upon application by the customer. One important factor for consideration will be the frequency of use and repayment of the initial limit.

Procedure apply: At the end of a certain period, usually a month, a statement of expenditure is sent by the company to the cardholder. The customer then has the options either of settling the account balance in full within a certain period given on the statement and paying no interest charges or by paying a proportion of the amount outstanding and paying the remaining balance over a number of future periods. In this latter case interest is charged on the remainder carried forward at the current interest rates charged by the company.

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Credit cards may also be used to obtain cash from banks within the scheme and at a number of banks abroad. In the case of cash withdraws interest is charged from the day they are obtain.

Credit cards provide a form of revolving credit. If for example a card holder has a credit limit of £500 and during one month uses the card to make purchases of

£350 and then pays £100 of this balance by the due date, then in the next spending period that the card-holder has a further of £250 available. The save and borrow account previously mentioned is another example of revolving credit.

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Advantages

Purchase Power and Ease of Purchase - Credit cards can make it easier to buy things.

If you don't like to carry large amounts of cash with you or if a company doesn't accept cash purchases (for example most airlines, hotels, and car rental agencies), putting purchases on a credit card can make buying things easier.

Protection of Purchases - Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can guarantee for the fact that you have made a purchase if the original receipt is lost or stolen. In addition, some credit card companies offer insurance on large purchases.

Emergencies - Credit cards can also be useful in times of emergency. While you should avoid spending outside your budget (or money you don't have!), sometimes emergencies (such as your car breaking down or flood or fire) may lead to a large purchase (like the need for a rental car or a motel room for several nights.)

Credit Card Benefits - In addition to the benefits listed above, some credit cards offer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance.) While most of these benefits are meant to encourage you to charge more money on your credit card (remember, credit card companies start making their money when you can't afford to pay off your charges!) the benefits are real and can be helpful as long as you remember your spending limits.

A further benefit is that if the amount owing to the credit card company is paid in full within the specified period then no interest is charged and the card holder has effectively received free borrowing for a short while.

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Disadvantages

Blowing Your Budget -- The biggest disadvantage of credit cards is that they encourage people to spend money that they don't have. Most credit cards do not require you to pay off your balance each month, so even if you only have $100, you may be able to spend up to $500 or

$1,000 on your credit card. While this may seem like 'free money' at the time, you will have to pay it off -- and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed.

High Interest Rates and Increased Debt -- Credit card companies charge you an enormous amount of interest on each balance that you don't pay off at the end of each month. This is how they make their money and this is how most people in the United States get into debt (and even bankruptcy.) Consider this: If you have a $100 in savings, most banks will give you at the most

2.0 to 2.5% interest on your money over the course of the year. This means you earn $2.00 -

$2.50 a year on your $100 savings. Most credit cards charge you up to 10 times that amount of interest on balances. This means that if you have $100 balance that you don't pay off, you will be charged 20-25% interest on that $100. This means that you owe almost $30 interest (plus the original $100) at the end of the year. A good way to look at this is in comparison to what you would earn in interest from a bank or owe in interest to a bank loan: Savings accounts may pay you around 2% interest; if you have a loan from a bank you may pay them around 10% interest

(5 times as much as you earn off your savings); if you owe money to a credit card company, you may pay them around 20% interest (10 times as much as you earn off your savings.)

Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone, or from a Web site) and use your card to rack up debts. The good news is that, unlike cash, if you realize your credit card or number has been stolen and you report it to your credit card company immediately, you will not be charged for any purchases that someone else has made. Even if you don't realize your credit card number has been stolen (sometimes you might not know until you receive your monthly statement), most credit card companies don't charge you or only charge a small fee, like $25 or $50, even if the thief has charged thousands of dollars to your card.

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Charge Card

A card that charges no interest but requires the user to pay his/her balance in full upon receipt of the statement, usually on a monthly basis. While it is similar to a credit card, the major benefit offered by a charge card is that it has much higher, often unlimited, spending limits.

Costs associated with a charge card will often be a set fee for the card along with large penalties on any unpaid balances.

This type of card does not allow cardholders to carry a balance from one month to the next as they would with a credit card. American Express and Diner's Club are examples of charge cards.

Although you don't have to pay interest on a charge card, you do have to pay an annual fee. You also pay fees for special services, such as cash advances, and, if you're late paying your bill, you face a penalty fee.

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Other methods of payment except from cheques are:

The Standing orders (S/O):

They are standing instructions given from the customer to the bank to make regular fixed payments from his account to a third party by crediting that third party’s bank account via the computer system. For example paying every month a loan installment or insurance premiums or

Direct debit or autopay:

Is the instruction given by the depositor to his / her creditor’s bank to collect the money with a variable

amount directly from the depositor’s bank account from

time to time. For example paying gas, water, electricity or council charges or mobile bill.

Direct credit:

They are money received from customers directly through the banking system.

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A standing order is an instruction to your bank to make regular payments of a fixed amount, either to someone else or to another account in your name, such as a savings account.

While a direct debit is an authority that you give so that a retailer can claim money from your bank account to meet your bills or repay your loans. For instance, you can often arrange for mobile, gas and electricity bills to be paid in this way. The crucial difference is that with a direct debit, the retailer can make amendments without the need to obtain the customer's signature on each occasion.

This flexibility is the main advantage of the direct debit system – but there is a potential risk that unscrupulous or inefficient retailers might claim money that is not due to them.

To combat this – and to reassure customers – the direct debit system contains several safeguards. First, the direct debit guarantee which ensures that the customer's bank will refund disputed payments without question, until further investigations.

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The other being that a direct debit can only be set up for payments to retailers that are approved "originators" of direct debits. In order to be approved, these retailers are subjected to careful vetting procedures – and, once approved, they are required to give indemnity guarantees through their banks.

Usually, the customer has to sign a direct debit form, although some trusted originators are authorised to set up direct debits where the customer has given authority over the phone. If that sounds a little risky, remember that the originator must have obtained the bank account details from the customer – and that the customer is protected by the direct debit guarantee.

Payments themselves are made by a system that is in some ways based on the cheque clearing system. This means that the process usually starts two working days before the money is due to reach the retailer's bank account.

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Other financial services:

Travel services:

The two main travel services provided by banks – and to increasing extent by building societies – are the provision of foreign currency and travelers' cheques.

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Traveller's Check: Specific checks are given unique check numbers, similar to a normal check. When a lost or stolen check is identified, it is simply cancelled and the individual is re-issued a new check.

Is a pre-printed, fixed-amount cheque designed to allow the person signing it to make an unrestricted payment to someone else as a result of having paid the issuer for that licence.

They were generally used by people on vacation instead of cash as many businesses used to accept traveller's cheques as currency. If a traveller's cheque were lost or stolen, it could be replaced by the issuing financial institution. Their use has been in decline since the 1990’s as alternatives, such as credit cards, debit cards, and automated teller machines became more widely available and were easier and more convenient for travellers.

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What is an A.T.M.?

Automated teller machine

Or

Automatic teller machine,

Other Names: Automatic

Banking Machine, Cash

Machine etc.

“… one of the most influential technological innovations of the

20th century”

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In an effort to extend the availability of banking services

ATMs have been introduced. The original services provided via these services were very basic, with just small cash withdrawals possible and no link to the computer account records. As electronic developments have taken place so the variety of services available has increased such that a customer can now expect to be able to obtain different amounts of cash, to see amounts balances, to order statements and cheque books and make deposit of moneys.

Building societies have also moved into the ATM network provision of services to their customers.

Provision of services has been expanded because of the technological developments that have taken place: on-line systems now offer direct access to the computer records and immediate up-dating of the account from any transactions that take place. Immediate up-dating ensures that the computer is able to verify a transaction being processed. This is essential as significant amounts of cash could be drawn from an account in very little time.

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Joint ATM networks

Customers of one institution-bank can withdraw money from the ATM of another bank-institution. The benefits of joint ATM networks are that customers of any one institution can gain access to their money at a far greater number of locations than would be the case If access were restricted to just the network. An institution will be able to save on installation and service costs of ATMs.

Additionally, those with larger ATM networks will probably find that they are receiving additional income.

Each transaction taking place at a different institution’s

ATM incurs a charge for that customer’s institution, so those with most machines benefit.

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What is the usage of A.T.M.:

The customer is identified by inserting a plastic card with a magnetic strip

Or

A plastic smartcard with a chip that contains the card number and security information.

Upon successful entry of the PIN, the customer may perform a transaction.

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Why do we use an A.T.M.?

Convenient?

Enable us to check our account balance, withdraw cash, or make any type of bank transaction any time?

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Negative aspects:

Unemployment?

Instead of talking to a person we are deal with a machine?

Could be confusing to operate at times?

We could forget our passwords?

We might have questions that it is unable to answer unlike a human would?

Crime?

Robbing?

Stolen or counterfeit (fake) ATM cards?

ATM fraud?

Loss of privacy? Bank knows when we get money – recorded in the system and also cameras are watching.

Error of the computer program?

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Positive aspects:

More job opportunities at a computer store?

How do computers change the work environment and the structure of business?

Customer service?

Banking industries developed may approaches to reducing fraud and ATM crime?

Loss of privacy but helps control crime?

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THANK YOU

Chara Charalambous CDA COLLEGE 31

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