negotiable instruments n.
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  1. NEGOTIABLE INSTRUMENTS 5 5.1 Types of Negotiable Instruments 5.2 Presenting Checks for Payment 5.3 Processing Checks 5.4 Changing Forms of Payment

  2. Lesson 5.1TYPES OF NEGOTIABLE INSTRUMENTS GOALS Define the term negotiable instrument Compare and Contrast different types of negotiable instruments

  3. NEGOTIABLE INSTRUMENTS • What is negotiable? • Negotiable means transferable – between two people • What is an instrument? • Any agreed-upon medium of exchange - usually refers to checks, drafts, bills of exchange, promissory notes • Negotiable Instrument – commonly referred to as commercial paper

  4. Commercial Paper • Defined as unconditional written orders or promises to pay money • Checks, drafts, bills of exchange are all considered commercial paper • Legitimacy and use governed by the Uniform Commercial Code (UCC) • May be a bearer instrument or it may be an instrument with highly specified terms

  5. FORMS OF NEGOTIABLE INSTRUMENTS • Checks • Drafts • Bills of Exchange • Promissory Notes

  6. CHECKS • Most common form of negotiable instrument • Preferred method of payment for many debts • Offer convenience, safety, and a record of transactions

  7. DRAFTS • Three-party instrument – similar to a check • 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 immediately or at some defined time

  8. BILLS OF EXCHANGE • Negotiable and unconditional written order addressed by one party to another • Receiver of the bill must pay the specified sum or deliver specified goods on demand or at a specified time • Common form of internationally negotiable instrument

  9. PROMISSORY NOTES • Written promise to pay at a fixed or determinable future time a sum of money to a specified individual – legally binding • Two-party instruments - legally binding documents with many specified terms that vary widely

  10. Specialized Forms of Commercial Paper • Certified Check • Personal check that has been accepted by the bank before payment • Cashier’s Check • Check bank draws on itself • Money Order • Draft issued by a post office, bank, or telegraph company • Traveler’s Checks

  11. Lesson 5.2PRESENTING CHECKS FOR PAYMENT GOALS Identify elements of negotiability Identify and explain common forms of check endorsements

  12. ELEMENTS OF NEGOTIABILITY • Written • Signature • Unconditional promise or order • Sum certain • Payable on demand or at a defined time • Words of negotiation

  13. ENDORSEMENT • Endorsement of the instrument allows it to be negotiated • Type of endorsements • Blank endorsement • Restrictive endorsement • Special or full endorsement • Qualified endorsement

  14. 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 non-customers

  15. 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

  16. THE CHECK PAYMENT SYSTEM • Three key legislative acts • Federal Reserve Act of 1913 - Created a national check collection system and other rules for payments • Uniform Commercial Code of 1958 - Established consistent code for transactions, adopted by all 50 states, eliminated wide variation of legal regulation that could hamper national payment system • Expedited Funds Availability Act of 1987 - Regulation CC - combat float abuse practiced by some banks

  17. 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

  18. CHECK PAYMENT AND PROCESSING Drawer - You Payee – Best Buy Bank of America Wachovia Federal Reserve(or other intermediary)

  19. Transit Number • Created in 1910 by the ABA • 9 digit number identifies the bank where account is held • Aids in check processing procedure • Printed at the bottom left-hand corner of a check • A/K/A routing number, transit/routing number and ABA number

  20. Other Terms • Postdated check • Stale check • Returned check – bounced check • NSF check – non-sufficient funds • Stop Payment

  21. Lesson 5.4CHANGING FORMSOF PAYMENT GOALS Identify modern forms of payment systems Identify and explain how banks and other financial institutions use automated forms of payment

  22. CONSUMER PAYMENTS • Charge cards • Credit cards • Cash cards • Debit cards • Smart cards

  23. CHARGE CARDS • Account must be paid 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.

  24. CREDIT CARDS • Consumers allowed 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.

  25. 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).

  26. 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 • Consumer swipes card through a magnetic reader, enters a PIN, and authorizes transfer

  27. SMART CARDS • Credit, debit, or other types of cards with embedded microchips • Microchips store values and use the embedded logic to change values and record transactions

  28. FUTURE PAYMENT SYSTEMS • E-checks • Digitally guaranteed type of electronic check to be transmitted on the Internet • Obstacles – security issues and mutual acceptability networks • Electronic tokens • Monetary system based on the exchange of digital money • Obstacles – counterfeiting and resistance

  29. BANK PAYMENTS • Electronic funds transfer (EFT) • Common form - direct deposit • Automatic payments – bank makes payments to specified recipient (reverse of direct deposits) • Automated clearing houses (ACHs) – magnetic tapes with data exchanged between banks • Online transfers • Fedwire – run by Fed Reserve, handles transfers for federal funds, interbank dealings, and securities transactions • Clearing House Interbank Payment System (CHIPS)

  30. THE LEADING EDGE • Digital imaging • Potential to save banks millions per year in storage, record keeping, postage, and labor costs • Electronic check presentment (ECP) • Device reads account info from magnetic ink • Info immediately transmitted to the paying bank • Process virtually eliminates bad checks and float