chap 8
TRANSCRIPT
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Chapter 8Chapter 8The Payment System and Financial The Payment System and Financial Institution RelationshipsInstitution Relationships
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The Cash Flow TimelineThe Cash Flow Timeline
OrderOrder Order Order Sale Sale Payment Sent Payment Sent CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Time ==>Time ==> Accounts Disbursement Accounts Disbursement
< Payable > < Float >< Payable > < Float > Invoice Received Payment Sent Invoice Received Payment Sent Cash DisbursedCash Disbursed
OrderOrder Order Order Sale Sale Payment Sent Payment Sent CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >
Time ==>Time ==> Accounts Disbursement Accounts Disbursement
< Payable > < Float >< Payable > < Float > Invoice Received Payment Sent Invoice Received Payment Sent Cash DisbursedCash Disbursed
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Learning ObjectivesLearning Objectives
Explain, understand, and calculate float.Explain, understand, and calculate float. Explain the roles of the two major components of Explain the roles of the two major components of
the payment system.the payment system. Describe the major paper-based and electronic-Describe the major paper-based and electronic-
based payment systems.based payment systems. Understand the ACH and how its fits with the EDI.Understand the ACH and how its fits with the EDI. Use an availability schedule.Use an availability schedule. Explain the uses of an account analysis statement.Explain the uses of an account analysis statement.
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Value of FloatValue of Float
The delay in value transfer from the time a The delay in value transfer from the time a check is written until it finally is charged to check is written until it finally is charged to the payor’s account.the payor’s account.
Value of float is based on differences in Value of float is based on differences in present value based on time delay.present value based on time delay.
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U.S. Payment SystemU.S. Payment System
Banking systemBanking system
Payment mechanismsPayment mechanisms
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Financial InstitutionsFinancial Institutions
Product differences, Exhibit 8.1Product differences, Exhibit 8.1 Geographical restrictionsGeographical restrictions Safety considerationsSafety considerations
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Federal Reserve SystemFederal Reserve System
Organization, Exhibits 8.2, 8-3Organization, Exhibits 8.2, 8-3 Fed’s involvement in payment systemFed’s involvement in payment system Check clearingCheck clearing
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Organization, Exhibit 8.2Organization, Exhibit 8.2
Board of GovernorsBoard of Governors FOMCFOMC Federal Advisory CouncilFederal Advisory Council District banks, Figure 8.2District banks, Figure 8.2 Member banksMember banks
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Fed’s InvolvementFed’s Involvement
Circulate new moneyCirculate new money Check processing, 16 billion checks/yrCheck processing, 16 billion checks/yr Check settlementCheck settlement ACHACH FedWireFedWire Regulate availability schedulesRegulate availability schedules
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Check ClearingCheck Clearing
MICR line, Exhibit 8.5MICR line, Exhibit 8.5 Clearing process, Exhibit 8.4Clearing process, Exhibit 8.4
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MICR Line, Exhibit 8.5MICR Line, Exhibit 8.5
2 digit Fed Bank Code2 digit Fed Bank Code 2 digit Fed Office Code2 digit Fed Office Code 4 digit ABA Code4 digit ABA Code 1 digit verification code1 digit verification code Account numberAccount number Sequence numberSequence number Encoded amountEncoded amount
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MICR CODEMICR CODE
Account NumberAccount Number
ABA Bank#ABA Bank#
Check DigitCheck DigitFed District CodeFed District Code
Fed Bank CodeFed Bank Code
$$Pay to the Pay to the
Order of Order of
DollarsDollars
Encoded FieldEncoded Field
Chk Sequence #Chk Sequence #
xxxxxxxx7.75xxxxxxxx7.75
00003011 101205671 062789392019
December 15, 2005December 15, 2005December 15, 2005December 15, 2005
000000775000000775
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The Clearing Process, Exhibit 8.4The Clearing Process, Exhibit 8.4
writes checkwrites check1. Customer1. Customersends checksends check
2. Supplier (payee) receives2. Supplier (payee) receivescheckcheck
3. Supplier3. Supplierdepositsdepositscheckcheck
6. Supplier’s6. Supplier’saccount is account is creditedcredited
Clearing agent:Clearing agent:““on-us”, or Fed,on-us”, or Fed,or correspondent,or correspondent,or clearinghouse.or clearinghouse.
8. Customer’s8. Customer’sbank account isbank account isdebiteddebited
7. Check is 7. Check is presented forpresented forpayment to payment to customer’scustomer’sbankbank
7. Check is 7. Check is presented forpresented forpayment to payment to customer’scustomer’sbankbank
4. Check4. Checkforwardedforwarded
5. Supplier’s bank is 5. Supplier’s bank is credited credited
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Clearing MechanismsClearing Mechanisms
House/On-us checksHouse/On-us checks Local itemsLocal items Transit itemsTransit items
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““On-us” ItemsOn-us” Items
Payee deposits check in the bank on which Payee deposits check in the bank on which it is drawnit is drawn
Bank credit depositor’s accountBank credit depositor’s account Bank debits payor’s accountBank debits payor’s account
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Local ItemsLocal Items
Checks may be sent by courier to be Checks may be sent by courier to be swapped for checks drawn on itself at swapped for checks drawn on itself at another bankanother bank
Checks may be processed through Checks may be processed through correspondent bank relationshipcorrespondent bank relationship
Local clearing house may be usedLocal clearing house may be used
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Transit ItemsTransit Items
Direct sendDirect send Correspondent bankCorrespondent bank Fed ReserveFed Reserve
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Concept of FloatConcept of Float
Types of floatTypes of float
Components of floatComponents of float
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Types of FloatTypes of Float
Collection floatCollection float
Disbursement floatDisbursement float
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Components of FloatComponents of Float
Mail floatMail float Processing floatProcessing float Clearing floatClearing float
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Fed FloatFed Float
When the Fed grants the depositing bank credit When the Fed grants the depositing bank credit according to a preset availability schedule, but is according to a preset availability schedule, but is not always able to present the check to the drawee not always able to present the check to the drawee bank for payment within the same period.bank for payment within the same period.
Methods used to reduce floatMethods used to reduce float– check truncationcheck truncation
– high-dollar group sorthigh-dollar group sort
– inter-district transportation systeminter-district transportation system
– later presentment and deposit deadlineslater presentment and deposit deadlines
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Paper-Based PaymentsPaper-Based Payments
TypesTypes Ledger balanceLedger balance Collected balanceCollected balance
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Types of Paper-based paymentsTypes of Paper-based payments
ChecksChecks
DraftsDrafts
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Ledger BalanceLedger Balance
All credits and debitsAll credits and debits
Not all spendableNot all spendable
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Collected BalanceCollected Balance
Adjusted ledgerAdjusted ledger
Reg CC (2 and 5 days)Reg CC (2 and 5 days)
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Electronic-Based PaymentsElectronic-Based Payments
Wire transfersWire transfers Automated clearinghousesAutomated clearinghouses POS debit cardsPOS debit cards
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International Payment SystemsInternational Payment Systems
Paper-based systemsPaper-based systems– Giro systemsGiro systems
– Value datingValue dating
Electronic paymentsElectronic payments– Clearing House Interbank Payment System, CHIPSClearing House Interbank Payment System, CHIPS
– Society for Worldwide Interbank Financial Society for Worldwide Interbank Financial Telecommunications, SWIFTTelecommunications, SWIFT
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Managing the Bank RelationshipManaging the Bank Relationship
Objective:Objective:
To ensure that all the company’s banking To ensure that all the company’s banking services are provided reliably at a services are provided reliably at a reasonable cost.reasonable cost.
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Managing the Bank RelationshipManaging the Bank Relationship
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Services ProvidedServices Provided
CollectionsCollections
PaymentsPayments
InformationInformation
CreditCredit
InvestmentsInvestments
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Bank Selection and Relationship Bank Selection and Relationship ManagementManagement
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Bank SelectionBank Selection
LocationLocation Bank/Company FitBank/Company Fit Service Quality and BreadthService Quality and Breadth Bank CreditworthinessBank Creditworthiness Bank SpecialtiesBank Specialties PricePrice
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Managing the RelationshipManaging the Relationship
Account Analysis Statement, Ex 8-14Account Analysis Statement, Ex 8-14 Required Compensating Balance CalculationRequired Compensating Balance Calculation
SC SCRCMP = -----------------RCMP = ----------------- ecr ecr (1-rr)(------)n (1-rr)(------)n 365 365
Balances vs. FeesBalances vs. Fees– Bank’s view: Advantages of BalancesBank’s view: Advantages of Balances
– Corp View: Disadvantages of balancesCorp View: Disadvantages of balances
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Bank’s View: Advantages of Bank’s View: Advantages of BalancesBalances
Effect of increasing deposits for the bankEffect of increasing deposits for the bank
Balances can be lentBalances can be lent
Form a cushion in case of loan defaultForm a cushion in case of loan default
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Corp View: Disadvantages of Corp View: Disadvantages of BalancesBalances
ECR is < investment rateECR is < investment rate
Fees are tax deductibleFees are tax deductible
Fees offer tangible expense that can be monitoredFees offer tangible expense that can be monitored
Fees are generally fixed and thus comparable, Fees are generally fixed and thus comparable, whereas ECR floatswhereas ECR floats
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Daylight Overdrafts and the Daylight Overdrafts and the Availability ScheduleAvailability Schedule
Definition: when a bank’s Federal Reserve Definition: when a bank’s Federal Reserve account book balance is negative during the account book balance is negative during the dayday
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Optimizing the Banking NetworkOptimizing the Banking Network
ChecklistChecklist– what is bank’s compensation rate and how will it be paid, what is bank’s compensation rate and how will it be paid,
fees or balances, etc.?fees or balances, etc.?– if balances, over what time period?if balances, over what time period?– multiyear agreement available with capped price multiyear agreement available with capped price
increases?increases?– compare a proforma account analysis statementcompare a proforma account analysis statement– who is the account officer?who is the account officer?– who is the customer service rep?who is the customer service rep?– how will float be computed?how will float be computed?– what performance guarantees are offered?what performance guarantees are offered?– penalties for customer overdrafts?penalties for customer overdrafts?
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Nonbank Service ProvidersNonbank Service Providers
Pepsico’s loan to MarriottPepsico’s loan to Marriott
Almost half of all consumer and business loans Almost half of all consumer and business loans held by nonbank companiesheld by nonbank companies
Third-party vendors of information between banks Third-party vendors of information between banks and companiesand companies
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Financial System TrendsFinancial System Trends
Nationwide banking in the USNationwide banking in the US Economic unification of EuropeEconomic unification of Europe Both of these will be catalysts for an ongoing drift Both of these will be catalysts for an ongoing drift
toward concentration and globalization in the toward concentration and globalization in the banking industrybanking industry
ImagingImaging Information servicesInformation services Banking on the InternetBanking on the Internet International aspects of banking relationshipsInternational aspects of banking relationships Global bank consolidationGlobal bank consolidation
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SummarySummary
We developed the uniqueness of the US We developed the uniqueness of the US payment system and its major components.payment system and its major components.
We discussed the role the Federal Reserve We discussed the role the Federal Reserve plays.plays.
We discussed the payment system using paper-We discussed the payment system using paper-based and electronic-based methods.based and electronic-based methods.
We discussed bank selection and relationship We discussed bank selection and relationship management.management.
We concluded with financial system trends.We concluded with financial system trends.