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Global Cash Management CTP Review TEXPO 2011 Payment Systems, Collections & Disbursements


Version 1.0 (PowerPoint 2003) Jan 2008 ... TEXPO 2011 Payment Systems, Collections & Disbursements Jose R. Gomez, CTP – PowerPoint PPT presentation

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Title: Global Cash Management CTP Review TEXPO 2011 Payment Systems, Collections & Disbursements

Global Cash Management CTP ReviewTEXPO
2011Payment Systems, Collections

Jose R. Gomez, CTP
Objectives / Introduction
  • Payment Systems
  • Disbursements
  • Collections

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.
Centralizing the Treasury Function
Principal functions of the treasury department
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 clients
    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.

Payment Systems
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
  • 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

Payment Systems
  • Cash Payment Systems
  • Use of physical coin currency
  • Primarily used by consumers for small
  • 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
  • The payee or her bank must present the document
    to the payors bank in order to receive value
  • Settlement mechanism comes into play after
  • There is usually a well defined system using a
    central bank, correspondent banks or clearing
  • Most paper systems are based on a provisional
    credit arrangement and payment is not considered
    final until any specified return periods have
  • 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

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
  • 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

SWIFT and the International Banking System
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)

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.
SWIFT Most common message types
  • MT300 Series
  • Used to settle foreign exchange transactions
  • Money market instruments
  • MT500 Series
  • Transfer of securities between FIs
  • MT700 Series
  • Documentary credit transactions (trade)
  • MT900 Series (information)
  • MT940 End-of-day balance and transaction
  • MT942 Intra-day statement as of a certain time
    of the day

The correspondent banking system
  • Nostro accounts
  • Accounts opened by banks in other financial
  • 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
  • Bilateral relationships between financial
    institutions exist similar to banks and
  • Local, Regional and Global banks participate
  • Organization
  • Relationship management
  • Reciprocity
  • Credit lines / facilities
  • Operational contact

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
  • 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.

Executing international payments using SWIFT
How do banks use the MT103 and the MT202 message?
Company X
Company A
Credit Advice
Wire transfer request
London Bank
Detroit Bank
Credit a/c Company X
Payment order MT103 (1st step)
Debit a/c Company A
MT202 Payment order (2nd step)
Credit advice (4th step)
London banks correspondent in New York
Correspondent of Detroit Bank in New York
Payment via CHIPS or FEDWIRE (3rd step)
(Joes Bank)
Cross-Border Payments - Costs
  • With regard to international payments there
    are three distinct methods that banks use to
    collect their commission. They are the three
    character alpha-codes that appear in field 71A of
    a SWIFT MT103 single payment order
  • BEN Licence to kill. EVERY bank in the chain
    that touches this payment has a right to take a
    commission off the nominal amount of the payment.
    The beneficiary receives less money than was
    sent in the end.
  • SHA Code introduced in 2003 and is now used in
    the majority of 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.

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 (CCC)
  • Japan The BOJ or the Bank of Japan is the
    countrys 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.
  • Chinas central bank is the Peoples 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.
    Chinas 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

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
  • The Bank of Canada The countrys central bank,
    controls monetary policy, supplies banknotes and
    promotes the safety of the Canadian banking
  • 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
  • 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

Single Euro Payments Area (SEPA)
What is SEPA
Single market for -payments within and across
Euro-countries under uniform conditions, rights
and obligations
Compare with ACH System in the USA
Common infrastructure 2010
Common legal framework 2008
  • Different models under discussion
  • - local ACHs XB-system
  • - Pan European ACHs
  • Huge investment required by banking industry
  • 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

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.

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

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.

  • Check Processing
  • In The United States of America

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 nations
    financial institutions

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

UCC Article 3 Negotiable Instruments
  • Covers
  • Definition and requirements of a negotiable
  • 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
  • Forgery and fraud loss allocation
  • Employers responsibility for employee fraud

UCC Article 4 Bank Deposits and Collections
  • Covers check collection, payment, liabilities,
    time frames and responsibilities
  • Sample topics
  • When a bank may charge a customers account
  • Customers right to stop payment
  • Banks option not to pay stale-dated items
  • Customers obligation to report unauthorized
  • Any provision under Article 4 may be varied by
    agreement between bank and customer, except
    banks duty to act in good faith and to exercise
    ordinary care.

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

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.

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 Feds regulatory powers to all check
  • Establishes
  • Time frames for return item processing and holds
    on deposited items.
  • Standards for endorsements to encourage faster
    return item processing.

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 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.

  • Magnetic Ink Character Recognition
  • Machine-readable characters on the bottom of
  • Introduced in 1956 to allow for automated
    sorting and processing
  • Rigid standards (ANSI) are in place

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.

Comparison of MICR Form and Fractional Form
WILD WHEELS, INC. 100 Park Street Phoenix, AZ



PAY TO THE ORDER OF_______________________________
Last National Bank
Phoenix, AZ 85003
Routing Number MICR Form
  • Called the ABA Routing Number
  • Has 3 components
  • Federal Reserve Routing Symbol (4 digits)
  • ABA Institution Identifier (4 digits)
  • Check digit (1 digit)

Transit Symbols
Federal Reserve Routing Symbol
ABA InstitutionIdentifier
Check Digit
Reserve Districts
New York
Kansas City
San Francisco
St. Louis
Approximately 70 Billion Checks are written
annually in the U.S.
Thats more than 1 billion checks per week!
The Forward Collection Process
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

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

Check Processing Work Flow
Batches Blocks of On-Us Checks,
DepositTickets, On-OtherChecks
Batches Blocksof On-Us Checks
Batches Blocks ofOn-Other Checks
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

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

Clearing and Settlement for Transit Items
  • The clearing process includes transporting the
    physical checks, exchanging or presenting them
    for payment and settlement of the dollars.

Direct Presentment
Clearing House

Federal Reserve
Bank A
Bank B
Bank A
Bank B
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.

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 banks 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.

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 drawees. 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
    payors 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 instruments payor
    and the money order is the obligation of the
  • Cashiers Check/Certified Check (aka official
    bank check) check drawn on a banks own funds. A
    certified check is drawn on a depositors
    checking account and funds are withdrawn from the
    depositors account at the time of certification.
    Assures payment with a guarantee by the bank.
    Both carry the signature of a bank officer
    certifying the banks guaranteed payment. Most
    Certified checks have been replaced by Cashiers
    checks due to higher costs.
  • Travelers 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.

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. travelers checks, cashiers
    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.

  • 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
  • Reject items Checks that are rejected by the
    banks 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

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

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
  • Each Fed district operates under common
    Operating Circulars for check processing

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
  • Federal Reserve for all else

Exception / Return Item Processing
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
  • Each bank will establish its own criteria and
    procedures for making this decision

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

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

Returned Item Processing
  • Essentially, the forward collection process in
  • 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)

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
  • Return items not prepared for MICR processing
    are called raw items and are handled separately
    from qualified returns

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

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

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
  • 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

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
    400 p.m. (local time) on the 2nd business day
    following the banking day on which the check was

  • What is ZBA?
  • An automated book transfer between two bank
  • Can be domestic or cross-border (global)
  • Captures true end-of-day position of target

Controlled Disbursement
  • Controlled disbursement is a bank service
    providing a same day notification to a company of
    the checks to clear that day.
  • Companys usually fund controlled disbursement
    accounts from concentration accounts via ZBA and
    sometimes with wires or ACH.
  • Primary focus is control, primary advantage is
    companys 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 800
    a.m. must be paid on the same day they are

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

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.)

Electronic Controlled Disbursement
  • Direct Deposit Used since mid 80s, are
    transfers made from a companys 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
  • 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

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 companys A/P and/or disbursement
    functions. There are two approaches commonly
  • 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
  • The FSP may maintain a database of a companys
    payees that includes detailed information. Under
    this method, a company only needs to send limited
    payment information to the FSP.

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
  • 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
  • Multilateral Netting- Reduce number of
    transactions between subs.

Managing Disbursement Information
  • Interface with A/P Two critical areas
    interface with treasury and A/P relate to
  • 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

Electronic Funds Transfer (EFT)
  • ACH Developed by U.S. financial industry in
    early 1970s 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 Reserves
    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.

Electronic Funds Transfer (EFT)
  • Other Automated Clearing House (ACH)
  • 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.

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
  • 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
  • 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.

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 900 p.m. to 630 pm. EST, but most banks
    require earlier cutoff times to allow time for
    processing. Fedwire funds transfers are regulated
    under the Feds Reg J, which adopted UCC Article
  • 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.

Electronic Funds Transfer (EFT)
  • Cover Payments Used in correspondent banking,
    usually to facilitate international transactions.
    Payments made through a chain of correspondent
    banks to settle a credit transfer message that
    travels a different route to the ultimate
    beneficiarys 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

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

Card Based Systems
  • Debit Cards Similar to credit cards but
    debit cards access funds directly from a
    cardholders 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
  • PIN-based Authorization and clearing are
    generally immediate and are facilitated by
    network operators, such as MasterCard, Visa,
    NYCE, STAR, Interlink and Accel/Exchange.

Card Based Systems
  • 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
  • Receiving and opening the mail
  • Separating the payment from the remittance
  • 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 organizations
    deposit bank, employing remote deposit capture or
    converting an eligible check into an ACH debit.

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
  • Provide timely access to company information
    about funds availability
  • Are customized to meet specific customer
  • 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
  • Intelligent Character Recognition (ICR)
    process that reads handwritten or typed

Lockbox Processing Systems (contd.)
  • 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
  • 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
  • Reduced processing costs
  • Increased productivity
  • Improved accuracy
  • Automated updating of A/R
  • Improved response time to customer inquiries
  • Faster resolution of lockbox discrepancies

Lockbox Processing Systems (contd.)
  • 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 companys 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.

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
  • 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.

Help if you need it
Jose R. Gomez Director Global Treasury Advisory
Telephone 713-221-2464 Cell
832-729-7285 Email