NEGOTIABLE INSTRUMENTS

Transcription

1 NEGOTIABLE INSTRUMENTS 6.1 Types of Negotiable Instruments 6.2 Presenting Checks for Payment 6.3 Processing Checks 6.4 Changing Forms of Payment Slide 1 Cengage/South-Western

2 GOALS 6.1 TYPES OF NEGOTIABLE INSTRUMENTS Define the term negotiable instrument. Identify different types of negotiable instruments. Slide 2 Cengage/South-Western

3 TERMS Negotiable instrument Bearer instrument Draft Bill of exchange Promissory note Slide 3

4 NEGOTIABLE INSTRUMENTS Negotiable instrument A written order or promise to pay a sum of money, either to a specified party or to the person who holds it Slide 4

5 WHAT IS NEGOTIABLE? Negotiable means transferable. Endorsing Transferring the title of a check Negotiability may be restricted. Slide 5

6 WHAT IS AN INSTRUMENT? Almost any agreed-upon medium of exchange could be considered a negotiable instrument. In day-to-day banking, a negotiable instrument usually refers more narrowly to checks Drafts Bills of exchange Some types of promissory notes Slide 6

7 checkpoint What is a negotiable instrument? What is the most common form of negotiable instrument? Slide 7

8 FORMS OF NEGOTIABLE INSTRUMENTS Bearer instrument Payable to the bearer (whoever holds it) Slide 8

9 CHECKS Slide 9

10 DRAFTS Draft An order signed by one party (the drawer, or drafter) that is addressed to another party (the drawee) directing the drawee to pay to someone (the payee) the amount indicated on the draft Slide 10

11 BILLS OF EXCHANGE Bill of exchange A negotiable and unconditional written order addressed by one party to another Check Draft Trade agreement Often used internationally Slide 11

12 PROMISSORY NOTES Promissory note A written promise to pay at a fixed or determinable future time a sum of money to a specified individual Commercial paper A short-term (270 days or fewer) note or draft issued by a corporation or government Slide 12

13 checkpoint List the standard features of a personal check. Slide 13

14 GOALS 6.2 PRESENTING CHECKS FOR PAYMENT Identify bank requirements for honoring checks. List common forms of check endorsements. Slide 14 Cengage/South-Western

15 TERMS Elements of negotiability Holder in due course Blank endorsement Restrictive endorsement Full endorsement Qualified endorsement Slide 15

16 ELEMENTS OF NEGOTIABILITY Elements of negotiability The legal requirements that every check is required to meet A written, signed, unconditional promise or order to pay a fixed amount on demand or at a defined time to the holder in due course Holder in due course This is the person or financial institution that acquires a check or promissory note received in good faith as payment and who is entitled to payment by the drawer of the check or note Slide 16

17 WRITTEN The first requirement for a negotiable instrument is that it must be written. There is no legally prescribed form for a check. Slide 17

18 SIGNATURE A document must be signed by a person capable of making the order or promise for it to be a negotiable instrument. A check is not payable if it does not bear the drawer s genuine signature. Slide 18

19 UNCONDITIONAL PROMISE OR ORDER To be negotiable, an instrument must make an unconditional promise or order to pay. Slide 19

20 SUM CERTAIN A negotiable instrument must state clearly on its face the principal amount to be paid. It must be a monetary value. Slide 20

21 PAYABLE ON DEMAND OR AT A DEFINED TIME If a negotiable instrument bears no instruction as to when it is due, it is payable on demand. Immediately Slide 21

22 WORDS OF NEGOTIATION Pay to the order of Keshia Smith Lets the instrument be negotiated by Keshia Smith with her endorsement or to whomever she may later assign it Pay to the order of Cash Makes the instrument a bearer instrument, valuable to anyone who has it regardless of endorsement Bank representatives check for all six elements of negotiation. Slide 22

23 checkpoint What is meant by elements of negotiability? Slide 23

24 ENDORSEMENT AND IDENTIFICATION Endorsement Allows the instrument to be negotiated Cash back transaction When you use a check to either get cash or make a partial deposit (and get the remaining balance in cash) Slide 24

25 TYPES OF ENDORSEMENT Blank endorsement (open endorsement) The signature of the holder The least secure of the four main types of endorsement Restrictive endorsement Limits the use of the instrument to a means specified by the endorser Split deposit When a depositor designates that a single check should be divided to have portions of it deposited in different accounts Slide 25

26 Full endorsement (special endorsement) Transfers the check to another specified party Limits neither the transferability nor the further negotiability of the check Accommodation endorsement When a check endorsement involves a bank other than the original bank Slide 26

27 Qualified endorsement An attempt to limit the liability of the endorser without limiting an instrument s further negotiability Slide 27

28 IDENTIFICATION AND CHECK ACCEPTANCE Check fraud is a serious issue for banks. To protect against fraud, banks require adequate identification. Fingerprinting may be required to cash a check. Slide 28

29 checkpoint Name the four main types of check endorsement. Slide 29

30 GOALS 6.3 PROCESSING CHECKS Identify key laws that make today s check-clearing process possible. Explain the sequence of events as a check is processed for payment. Slide 30 Cengage/South-Western

31 TERMS Float Transit number Returned check Slide 31

32 A NATIONAL SYSTEM OF PAYMENT Electronic payments and checks are far safer and more convenient than cash for bill payment. The legal status of electronic payments and checks makes them a dominant force in the economic life of the nation. Slide 32

33 THE LEGAL STRUCTURE OF THE CHECK PAYMENT SYSTEM Federal Reserve Act of 1913 Uniform Commercial Code of 1958 Expedited Funds Availability Act of 1987 Check 21 Electronic Check Conversion Slide 33

34 checkpoint Why does the check processing and collection system depend on the Federal Reserve? Slide 34

35 CHECK PAYMENT AND PROCESSING Correspondent banks Large private banks that clear checks Float When two banks count the same funds Malfunction float Caused by machine breakdown Slide 35

36 Transportation float Delays that occur when moving checks from one location to another Holdover float When banks are slow in processing transactions Slide 36

37 Slide 37

38 TRANSIT NUMBER Transit number A 9-digit number that identifies the bank that holds the checking account and is responsible for payment Issued to only federal or state chartered financial institutions that are eligible to hold an account at a Federal Reserve Bank Slide 38

39 OTHER TYPES OF CHECK PROCESSING Postdated check A check that is dated later than the date on which it is actually written Returned check (bounced check) A check written on an account that does not have adequate funds to cover it and which is returned unpaid to the person who deposited it Slide 39

40 checkpoint What is float? What causes it? Slide 40

41 GOALS 6.4 CHANGING FORMS OF PAYMENT List modern forms of payment systems. Explain how banks and other financial institutions use automated forms of payment. Slide 41 Cengage/South-Western

42 TERMS Charge cards Credit cards Cash cards Debit cards Smart cards Person-to-person payments (P2P) Radio frequency identification (RFID) Slide 42

43 CONSUMER PAYMENTS The growth of varied forms of payment is a product of two phenomena. The entrepreneurial spirit Advancing technology Slide 43

44 CHARGE CARDS Charge cards A consumer purchases but must pay the account in full at the end of the month Slide 44

45 CREDIT CARDS Credit cards Allow consumers to pay all or part of their bills each month and finance the unpaid balance Slide 45

46 CASH CARDS Cash cards Are commonly used at an automated teller machine (ATM) Can be used to perform most banking functions Personal identification number (PIN) Slide 46

47 DEBIT CARDS Debit cards Transfer money from a person s designated account to the account of the retailer Point-of-sale (POS) transaction Slide 47

48 SMART CARDS Smart cards Credit, debit, or other types of cards with embedded microchips The microchips store values and use the embedded logic to change values and record transactions Electronic purse Slide 48

49 BILL PAYMENT SERVICES There are multiple ways for consumers to streamline the way they pay businesses. Bill pay option offered by banks Third party services Credit card preauthorization for repetitive monthly payments Slide 49

50 PERSON-TO-PERSON PAYMENTS (P2P) Person-to-person (P2P) Online systems that allow consumers to pay each other directly for a product Use an Internet platform for payment transfers Slide 50

51 CONTACTLESS PAYMENTS Radio frequency identification (RFID) Uses a transponder to convey identifying information The account holder s account or balance information The fees being assessed to the account by the business for products or services Slide 51

52 DEFERRED PAYMENTS PROCESSED BY AN INTERMEDIARY Slide 52 Electronic (online) wallets For consumers who don t want to use their credit cards online or who do not have a traditional credit card or bank account Intermediaries provide services including Allowing a consumer to preload a card that is later activated online to pay for merchandise Letting a consumer make a purchase that the intermediary bills for later Helping a consumer make a direct payment for an online purchase by using the funds in their online banking account

53 BIOMETRICS Biometrics refers to using a distinct individual characteristic to uniquely identify a specific person. Fingerprints Retina scans Voice recognition Slide 53

54 THE NEED FOR CAUTION Experts recommend using a credit card as the source for online payments. Offer limited liability for false or disputed charges Be sure that any networks used to authorize online bill payment are secure. Slide 54

55 checkpoint Name ten payment systems other than cash or check. Slide 55

56 BANK PAYMENTS Electronic funds transfer (EFT) Direct deposit Most federal payments are made by EFT GoDirect A FMS marketing campaign designed to encourage recipients of federal funds to receive payments by EFT Slide 56

57 AUTOMATED CLEARING HOUSES Automated clearing houses (ACHs) Magnetic tapes exchanged among banks read streams of data into computers Ideal for large volumes of smaller payments Although ACH technology is older and slower than online transfer, the cost per transaction is considerably less. Slide 57

58 ONLINE TRANSFERS Fedwire The funds transfer system run by the Federal Reserve Clearing House Interbank Payment System (CHIPS) An online system for private-sector transactions that specializes in large-dollar transactions for international business Slide 58

59 CHECK 21 A digital photo of the check becomes the document of record. Significant cost savings are achieved by eliminating steps associated with paper checks. Storage Recordkeeping Postage Labor costs Slide 59

60 checkpoint Name three systems banks use for funds transfers. Slide 60