copyright 2002 by south-western, a division of thomson learning tm chapter 8 the payment system and...

Copyright Copyright 2002 by South-Western, a division of Thomson Learning 2002 by South-Western, a division of Thomson Learning TMTM

Chapter 8Chapter 8The Payment System and Financial The Payment System and Financial Institution RelationshipsInstitution Relationships


The Cash Flow TimelineThe Cash Flow Timeline

OrderOrder Order Order Sale Sale CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >

Accounts Disbursement Accounts Disbursement Time ==>Time ==>< Payable > < Float > < Payable > < Float > Invoice Invoice Payment Payment CashCash

Received Sent Received Sent PaidPaid

OrderOrder Order Order Sale Sale CashCash PlacedPlaced Received Received ReceivedReceived Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >

Accounts Disbursement Accounts Disbursement Time ==>Time ==>< Payable > < Float > < Payable > < Float > Invoice Invoice Payment Payment CashCash

Received Sent Received Sent PaidPaid


Learning ObjectivesLearning Objectives

Explain, understand, and calculate floatExplain, understand, and calculate float Explain the roles of the two major components of Explain the roles of the two major components of

the payment systemthe payment system Describe the major paper-based and electronic-Describe the major paper-based and electronic-

based payment systemsbased payment systems Understand the ACH and how its fits with the EDIUnderstand the ACH and how its fits with the EDI Use an availability scheduleUse an availability schedule Explain the uses of an account analysis statementExplain the uses of an account analysis statement


Value of FloatValue of Float

The delay in value transfer from the time a check The delay in value transfer from the time a check is written until it finally is charged to the payor’s is written until it finally is charged to the payor’s account.account.

Value of float is based on differences in present Value of float is based on differences in present value based on time delay.value based on time delay.


U.S. Payment SystemU.S. Payment System

Banking systemBanking system Payment mechanismsPayment mechanisms


Financial InstitutionsFinancial Institutions

Product differences, Ex 8.1Product differences, Ex 8.1 Geographical restrictionsGeographical restrictions Safety considerationsSafety considerations


Federal Reserve SystemFederal Reserve System

Organization, Ex 8.2, 8-3Organization, Ex 8.2, 8-3 Fed’s involvement in payment systemFed’s involvement in payment system Check clearingCheck clearing


Organization, Ex 8.2Organization, Ex 8.2

Board of GovernorsBoard of Governors FOMCFOMC Federal Advisory CouncilFederal Advisory Council District banks, Fig 8.2District banks, Fig 8.2 Member banksMember banks


Fed’s InvolvementFed’s Involvement

Circulate new moneyCirculate new money Check processing, 16.5 billion checks/yrCheck processing, 16.5 billion checks/yr Check settlementCheck settlement ACHACH FedWireFedWire Regulate availability schedulesRegulate availability schedules


Check ClearingCheck Clearing

MICR line, Exhibit 8.5MICR line, Exhibit 8.5 Clearing process, Exhibit 8.4Clearing process, Exhibit 8.4


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


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


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


Clearing MechanismsClearing Mechanisms

House/On-us checksHouse/On-us checks Local itemsLocal items Transit itemsTransit items


““On-us” ItemsOn-us” Items

Payee deposits check in the bank on which it is Payee deposits check in the bank on which it is drawndrawn

Bank credit depositor’s accountBank credit depositor’s account Bank debits payor’s accountBank debits payor’s account


Local ItemsLocal Items

Checks may be sent by courier to be swapped for Checks may be sent by courier to be swapped for checks drawn on itself at another bankchecks drawn on itself at another bank

Checks may be processed through correspondent Checks may be processed through correspondent bank relationshipbank relationship

Local clearing house may be usedLocal clearing house may be used


Transit ItemsTransit Items

Direct sendDirect send Correspondent bankCorrespondent bank Fed ReserveFed Reserve


Concept of FloatConcept of Float

Types of floatTypes of float Components of floatComponents of float


Types of FloatTypes of Float

Collection floatCollection float Disbursement floatDisbursement float


Components of FloatComponents of Float

Mail floatMail float Processing floatProcessing float Clearing floatClearing float


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


Paper-Based PaymentsPaper-Based Payments

TypesTypes Ledger balanceLedger balance Collected balanceCollected balance


TypesTypes

ChecksChecks DraftsDrafts DTCsDTCs


Ledger BalanceLedger Balance

All credits and debitsAll credits and debits Not all spendableNot all spendable


Collected BalanceCollected Balance

Adjusted ledgerAdjusted ledger Reg CC, (2 and 5 days)Reg CC, (2 and 5 days)


Electronic-Based PaymentsElectronic-Based Payments

Wire transfersWire transfers Automated clearinghousesAutomated clearinghouses POS debit cardsPOS debit cards


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


Managing the Bank RelationshipManaging the Bank Relationship

ObjectiveObjective

to ensure that all the company’s banking services to ensure that all the company’s banking services are provided reliably at a reasonable costare provided reliably at a reasonable cost


Managing the Bank RelationshipManaging the Bank Relationship


Services ProvidedServices Provided

CollectionsCollections

PaymentsPayments

InformationInformation

CreditCredit

InvestmentsInvestments


CollectionsCollections

Coin & currencyCoin & currency

Standard check processingStandard check processing

Lockbox servicesLockbox services

Electronic collectionsElectronic collections

Deposit reporting serviceDeposit reporting service


PaymentsPayments

Demand deposit accountsDemand deposit accounts

Zero balance accountsZero balance accounts

Controlled disbursementsControlled disbursements

PayrollPayroll


InformationInformation

Balance reporting servicesBalance reporting services

Account reconciliationAccount reconciliation

Electronic delivery systemsElectronic delivery systems

Advisory or consulting servicesAdvisory or consulting services


CreditCredit

Shifting from a direct financing roleShifting from a direct financing role

Moving toward role of risk-sharing or guarantorMoving toward role of risk-sharing or guarantor


InvestmentsInvestments

Repurchase agreementsRepurchase agreements

CDsCDs

Commercial paperCommercial paper

Corporate agency servicesCorporate agency services

TrendsTrends


Bank Selection and Relationship Bank Selection and Relationship ManagementManagement


Bank SelcctionBank Selcction

LocationLocation Bank/Company FitBank/Company Fit Service Quality and BreadthService Quality and Breadth Bank CreditworthinessBank Creditworthiness Bank SpecialtiesBank Specialties PricePrice


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


Bank’s View: Advanatages of Bank’s View: Advanatages 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


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, ECR Fees are generally fixed and thus comparable, ECR floatsfloats


Daylight Overdrafts and the Daylight Overdrafts and the Availability ScheduleAvailability Schedule

Define: when a bank’s Federal Reserve account Define: when a bank’s Federal Reserve account book balance is negative during the daybook balance is negative during the day


Optimizing the Banking NetworkOptimizing the Banking Network

Check listCheck list– what is bank’s compensation rate and how will it be paid, fees what is bank’s compensation rate and how will it be paid, fees

or balances, etc.?or balances, etc.?

– if balances, over what time period?if balances, over what time period?

– multiyear agreement available with capped price increases?multiyear agreement available with capped price 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?


NonBank Service ProvidersNonBank Service Providers

Pepsico’s loan to MarriotPepsico’s loan to Marriot

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


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 industry.banking 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


SummarySummary

We developed the uniqueness of the US payment We developed the uniqueness of the US payment system and its major componentssystem and its major components

We discussed the role the Federal Reserve playsWe discussed the role the Federal Reserve plays We discussed the payment system using paper-We discussed the payment system using paper-

based and electronic-based methodsbased and electronic-based methods We discussed bank selection and relationship We discussed bank selection and relationship

managementmanagement We concluded with financial system trendsWe concluded with financial system trends

copyright 2002 by south-western, a division of thomson learning tm chapter 8 the payment system and...

Documents

v fedwire v

float v

checksyr v check settlement

availability schedule

board of governors v

new money v check processing

paid slide

member banks slide