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NEGOTIABLE INSTRUMENTS. 5. 5.1 Types of Negotiable Instruments 5.2 Presenting Checks for Payment 5.3 Processing Checks 5.4 Changing Forms of Payments 5.5 Security Issues. Lesson 5.1 TYPES OF NEGOTIABLE INSTRUMENTS. GOALS. Define the term negotiable instrument

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negotiable instruments

NEGOTIABLE INSTRUMENTS

5

5.1 Types of Negotiable Instruments

5.2 Presenting Checks for Payment

5.3 Processing Checks

5.4 Changing Forms of Payments

5.5 Security Issues

lesson 5 1 types of negotiable instruments

Lesson 5.1TYPES OF NEGOTIABLE INSTRUMENTS

GOALS

Define the term negotiable instrument

Identify different types of negotiable instruments

negotiable instruments3
NEGOTIABLE INSTRUMENTS
  • What is negotiable?
    • Negotiable means transferable.
    • The negotiation that goes on refers to the transfer of the instrument between two people, or from one bank to another, or even from one country to another.
  • What is an instrument?
    • In the broadest sense, almost any agreed-upon medium of exchange could be considered a negotiable instrument.
    • In day-to-day banking, a negotiable instrument usually refers to checks, drafts, bills of exchange, and some types of promissory notes.
forms of negotiable instruments
FORMS OF NEGOTIABLE INSTRUMENTS
  • A negotiable instrument is a written order promising to pay a sum of money.
  • It may be a bearer instrument, which is payable to the bearer, or it may be an instrument with highly specified terms.
checks
CHECKS
  • Most common form of negotiable instrument
  • Preferred method of payment for many debts
  • Offer convenience, safety, and a record of transactions
standard features of personal checks
Account Number

801

Maria Mills

12 River Street

Pettisville, OH 43553-0177

56-25

412

Date

Pay to the order of

$

Dollars

Pettisville Bank

Pettisville, Ohio

For simulation use only

For

000801

103

7943

041200257

STANDARD FEATURES OF PERSONAL CHECKS

Check Number

Date

Payee

Amount

Amount

Signature

Memo

Identification Numbers

drafts
DRAFTS
  • A draft is a three-party instrument similar to a check.
  • A draft is 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.
  • The payment may be at sight or at some defined time.
  • Most drafts are used for the purchase of goods and services when the transaction goes beyond the bounds of U.S. banking law.
bills of exchange
BILLS OF EXCHANGE
  • A bill of exchange is a negotiable and unconditional written order, such as a check, draft, or trade agreement, addressed by one party to another.
  • The receiver of the bill must pay the specified sum or deliver specified goods on demand or at a specified time.
  • Bills of exchange are a common form of internationally negotiable instruments.
promissory notes
PROMISSORY NOTES
  • A promissory note is a written promise to pay at a fixed or determinable future time a sum of money to a specified individual.
  • These two-party instruments are legally binding documents with many specified terms that vary widely.
  • Commercial paper, a short-term (270 days or fewer) note or daft issued by a corporation or government, is a common investment instrument.
lesson 5 2 presenting checks for payment

Lesson 5.2PRESENTING CHECKS FOR PAYMENT

GOALS

Identify bank requirements for honoring checks

List common forms of check endorsements

elements of negotiability
ELEMENTS OF NEGOTIABILITY
  • Written
  • Signature
  • Unconditional promise or order
  • Sum certain
  • Payable on demand or at a defined time
  • Words of negotiation
types of endorsement
TYPES OF ENDORSEMENT
  • Blank endorsement
  • Restrictive endorsement
  • Full endorsement
  • Qualified endorsement
identification and check acceptance
IDENTIFICATION AND CHECK ACCEPTANCE
  • Banks may require as much or as little identification to cash or deposit a check at they wish.
  • Banks may have different rules for customers and noncustomers.
lesson 5 3 processing checks

Lesson 5.3PROCESSING CHECKS

GOALS

Identify three key laws that make today’s check-clearing process possible

Explain the sequence of events as a check is processed for payment

the check payment system
THE CHECK PAYMENT SYSTEM
  • Federal Reserve Act of 1913
  • Uniform Commercial Code of 1958
  • Expedited Funds Availability Act of 1987
check payment and processing
CHECK PAYMENT AND PROCESSING

Drawer

Payee

A National Bank

B National Bank

Federal Reserve(or other intermediary)

lesson 5 4 changing forms of payments

Lesson 5.4CHANGING FORMSOF PAYMENTS

GOALS

List modern forms of payment systems

Explain how banks and other financial institutions use automated forms of payment

consumer payments
CONSUMER PAYMENTS
  • Charge cards
  • Credit cards
  • Cash cards
  • Debit cards
  • Smart cards
charge cards
CHARGE CARDS
  • With a charge card, a consumer makes purchases but must pay the account in full at the end of the month.
  • Charge cards, in effect, lend the amount of purchases for a month.
  • Originally charge cards were store cards, but eventually third-party companies formed networks of participating businesses to expand the market.
  • American Express is the most prominent national charge card.
credit cards
CREDIT CARDS
  • Credit cards allow consumers to pay all or part of their bills each month and finance the unpaid balance.
  • Using a credit card involves two banks—the bank that issued the card and the retailer’s bank.
steps in credit card purchase
STEPS IN CREDIT CARD PURCHASE
  • A consumer uses a credit card.
  • The retailer sends the credit slip to its own bank.
  • The retailer’s bank pays the retailer, records the transaction, and sends credit slip to a clearing system.
  • The clearing system routes the credit slip to the issuing bank.
  • The issuing bank pays the retailer’s bank and collects from the consumer.
cash cards
CASH CARDS
  • Cash cards are commonly used at an automated teller machine (ATM).
  • Consumers can get cash, make transfers and deposits, or perform other banking functions by inserting the card and entering a personal identificationnumber (PIN).
debit cards
DEBIT CARDS
  • Debit cards transfer money from a person’s designated account to the account of the retailer.
  • A debit card allows an immediate point-of-sale (POS) transaction.
smart cards
SMART CARDS
  • Smart cards are 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.
future payment systems
FUTURE PAYMENT SYSTEMS
  • E-checks
  • Electronic tokens
bank payments
BANK PAYMENTS
  • Electronic funds transfer (EFT)
    • Direct deposit
    • Automatic payments
  • Automated clearing houses (ACHs)
  • Online transfers
    • Fedwire
    • Clearing House Interbank Payment System (CHIPS)
the leading edge
THE LEADING EDGE
  • Digital imaging
  • Electronic check presentment (ECP)
lesson 5 5 security issues

Lesson 5.5SECURITY ISSUES

GOALS

Identify security issues that banks face

List ways that banks and other financial institutions can combat fraud

security issues in banking
SECURITY ISSUES IN BANKING
  • Physical security
  • Technology security
  • Fraud
physical security
PHYSICAL SECURITY
  • Building design
  • Surveillance and alarm technology
  • Employee training
  • Transportation security
technology security
TECHNOLOGY SECURITY
  • Security technology
  • Physical security
  • Administrative policies
fraud
FRAUD
  • Check fraud
  • Credit card fraud
  • Loan fraud
fraud prevention
FRAUD PREVENTION
  • Bank administration
  • Employee training
  • Consumer education
consumer tips
CONSUMER TIPS
  • Use checks with built-in security features.
  • Do not have your social security number printed on checks.
  • Do not endorse a check until just before you cash or deposit it.
  • Do not leave spaces on checks.
  • Reconcile your account regularly.
  • Shred documents.
  • Be careful on the telephone, in person, and on the Web.