rbs6245d 1 global cash management ctp review texpo 2011 payment systems, collections &...
TRANSCRIPT
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Global Cash Management CTP ReviewTEXPO 2011
Payment Systems, Collections & Disbursements
Jose R. Gomez, CTP
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Objectives / Introduction
• Payment Systems • Disbursements • Collections
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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.
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• Invoicing and Purchasing
• Supplier/Customer Mgt
• AP / AR initiation & Recon.
• Liquidity Mgt. /Accts
• MM - Activities
• Cash Pooling
• Intercompany Funding• FX and IRR Mgt.• Netting (Internal)
Financial Functions
Centralized
Financial Functions
Centralized
• Long Term Financing Decentralized
Cash & Treasury
Partially- centralised Treasury/
CentralisedTreasury
TWS
Shared Service Center
ERP
Payment Factory
Centralised Collections
1 2 3 4Degree of Centralization
Centralizing the Treasury Function
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Principal functions of the treasury department
Foreign exchange risk and contracts
Manage bank relationships
Liquidity management
Interest Rate Risk Interface with
Accounting
Department
Investments and
Financing Tax issues and
“Corporate Finance”
Domestic and
International
Cash Management
TREASURY
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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.
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Payment Systems
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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
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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
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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• 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
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SWIFT and the International Banking System
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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”)
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SWIFT – Most common message types
MT100 Series (corporates)
• MT101 – third party payment order initiated under bilateral agreement
• MT103 – Single client transfer
• MT110 – International cheque clearing advice
MT200 Series (banks)
• 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
Value Dating
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.
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SWIFT – Most common message types
MT300 Series
• Used to settle foreign exchange transactions
• Money market instruments
MT500 Series
• Transfer of securities between FI’s
MT700 Series
• Documentary credit transactions (trade)
MT900 Series (information)
• MT940 – End-of-day balance and transaction information
• MT942 – Intra-day statement as of a certain time of the day
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The correspondent banking system
• Bilateral relationships between financial institutions exist similar to banks and corporates
• Local, Regional and Global banks participate
• Organization• Relationship management
• Reciprocity
• Credit lines / facilities
• Operational contact
“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
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.
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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.
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Executing international payments using SWIFT
How do banks use the MT103 and the MT202 message?
BANK BANK
Company XCompany A UK US
Wire transfer request
London Bank
Detroit Bank
MT202 Payment order (2nd step)
Debit a/c Company A
Credit a/c Company X
Credit Advice
Payment order – MT103 (1st step)
London bank’s correspondent in New York
(Joe’s Bank)
Payment via CHIPS or FEDWIRE (3rd step)
Correspondent of Detroit Bank in New York
(RBS NY)
Credit advice (4th step)
Invoice
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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 cross-border 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.
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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.
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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
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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
• Different models under discussion- local ACH’s + XB-system- Pan European ACH’s
• Huge investment required by banking industry
Common legal framework: 2008
Credit Transfers
• Common rules for Direct Debits Debit Cards
• Uniform pricing principles (no lifting fees, no value loss, pricing transparency)
• Execution time max 3 days for XB-payments
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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 need to take place within the same value day and therefore monitored by client service.
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International payment and collection instruments
Electronic
• Urgent high-value payments
• Non-urgent payments
• Direct debits
• Credit cards
• Debit cards
Non-electronic payments
• Cheques
• Foreign currency cheques
• Eurocheques
• Postal giro
• Manually initiated funds transfers (MIFT)
• Bank cheque
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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.
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Check Processing
In The United States of America
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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
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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.
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MICR Form
FractionalForm
WILD WHEELS, INC.100 Park StreetPhoenix, AZ 85003
2048
Last National BankPhoenix, AZ 85003
19
dollars
PAY TO THE ORDER OF_______________________________________________ $____________
Ref:
A122100037A05445D19999C2048
91-03/1221
Comparison of MICR Form and Fractional Form
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A122100037ATransit Symbols
Federal ReserveRouting Symbol
ABA InstitutionIdentifier
Check Digit
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)
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Kansas CitySan Francisco
Minneapolis
Chicago
Dallas
St. Louis
Cleveland
Atlanta
Richmond
PhiladelphiaNew York
Boston12
11
9
10
8
7
6
5
4
21
3
THE FEDERAL RESERVE SYSTEMBoundaries of Federal Reserve Districts
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That’s more than 1 billion checks per week!
Approximately 70 Billion Checks are written annually in the U.S.
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The Forward Collection Process
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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
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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
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INPUT-CUSTOMER DEPOSITS & CASHED CHECKS
YOUR BANK BRANCHES & OFFICES
PROOF MACHINEAREA: PROVE &ENCODE
CHECK PROCESSING
TRANSIT AREA
INPUT-INCOMINGCLEARINGS
COMPUTER AREA
READER-SORTER:CAPTURE & MICROFILM
ON-US TO ACCOUNTING
Batches & Blocks of On-Us Checks, DepositTickets, & On-OtherChecks
Batches & Blocksof On-Us Checks
Batches & Blocks ofOn-Other Checks
OUTPUT-CHECKS FOR COLLECTION
CANCELLED CHECKS &BANKSTATEMENTS
Check Processing Work Flow
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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
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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
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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.
CustomerBank A
CustomerBank B
Bank A Bank B
Clearing House
Correspondent
Federal Reserve
Payee
Direct Presentment
Maker
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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.
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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.
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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 pre-authorized 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.
• 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.
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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.
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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.
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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
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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
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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
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Exception / Return Item Processing
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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
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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!
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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
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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)
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2A075901231A B0000109500B
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
• Return items not prepared for MICR processing are called raw items and are handled separately from qualified returns
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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
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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
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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
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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
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Disbursements
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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
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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.
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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.
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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.)
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Electronic Funds Transfer (EFT)
• 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.
• 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.
Wire Classificatio
n Description Uses
Repetitive
The only information that can vary is the date and the amount
Frequent transfers to one receiver for a recurring payment, such as dividends
Semi-repetitive
All information may vary except sending and receiving parties
Frequent transfers to one party for various transactions, such as vendor payments
Non-repetitive or free-form
All information may vary
Any payment
Drawdown
Request to a sending bank for an incoming transfer
Funds concentration
Standing
Request to transfer funds whenever balances reach a designated level
Funds concentration
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• 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.
Electronic Funds Transfer (EFT)
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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.
Cardholder An individual or business approved by a card issuer.
Card IssuerIssuing 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.
Merchant 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).
Merchant Acquirer
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.
Acquiring Processor 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.
Issuer ProcessorProvides a system for card issuers to board accounts, provides authorizations, and offers risk management tools to issuers to manage their card portfolios effectively.
Network OperatorNetwork operators maintain communication networks to support card transaction activities, such as authorization, clearing and settlement. Network operators include Visa, MasterCard, and Discover.
Participants in a Credit Card Transaction
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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.
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Card Based Systems• 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 may negotiate 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 verysimilarly 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.
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Collections
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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.
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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.
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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
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• 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.
Lockbox Processing Systems (cont’d.)
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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.
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Help if you need it
Jose R. Gomez
Director
Global Treasury Advisory
Telephone: 713-221-2464
Cell: 832-729-7285
Email: [email protected]