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  1. 1. 5 NEGOTIABLE INSTRUMENTS 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 IssuesSlide 1 © South-Western Publishing
  2. 2. Lesson 5.1 TYPES OF NEGOTIABLE INSTRUMENTS GOALS Define the term negotiable instrument Identify different types of negotiable instrumentsSlide 2 © South-Western Publishing
  3. 3. 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.Slide 3 © South-Western Publishing
  4. 4. 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.Slide 4 © South-Western Publishing
  5. 5. CHECKS Most common form of negotiable instrument Preferred method of payment for many debts Offer convenience, safety, and a record of transactionsSlide 5 © South-Western Publishing
  6. 6. STANDARD FEATURES OF PERSONAL CHECKS Maria Mills Check Number 801 12 River Street 56-25 Pettisville, OH 43553-0177 Date Date 412 Pay to the Payee order of $ Amount Amount Dollars Pettisville Bank Pettisville, Ohio For simulation use only For Memo Signature 000801 041200257 103 7943 Identification Numbers Account NumberSlide 6 © South-Western Publishing
  7. 7. 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.Slide 7 © South-Western Publishing
  8. 8. 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.Slide 8 © South-Western Publishing
  9. 9. 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.Slide 9 © South-Western Publishing
  10. 10. Lesson 5.2 PRESENTING CHECKS FOR PAYMENT GOALS Identify bank requirements for honoring checks List common forms of check endorsementsSlide 10 © South-Western Publishing
  11. 11. ELEMENTS OF NEGOTIABILITY Written Signature Unconditional promise or order Sum certain Payable on demand or at a defined time Words of negotiationSlide 11 © South-Western Publishing
  12. 12. TYPES OF ENDORSEMENT Blank endorsement Restrictive endorsement Full endorsement Qualified endorsementSlide 12 © South-Western Publishing
  13. 13. 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.Slide 13 © South-Western Publishing
  14. 14. Lesson 5.3 PROCESSING 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 paymentSlide 14 © South-Western Publishing
  15. 15. THE CHECK PAYMENT SYSTEM Federal Reserve Act of 1913 Uniform Commercial Code of 1958 Expedited Funds Availability Act of 1987Slide 15 © South-Western Publishing
  16. 16. CHECK PAYMENT AND PROCESSING Drawer Payee A National Bank B National Bank Federal Reserve (or other intermediary)Slide 16 © South-Western Publishing
  17. 17. Lesson 5.4 CHANGING FORMS OF PAYMENTS GOALS List modern forms of payment systems Explain how banks and other financial institutions use automated forms of paymentSlide 17 © South-Western Publishing
  18. 18. CONSUMER PAYMENTS Charge cards Credit cards Cash cards Debit cards Smart cardsSlide 18 © South-Western Publishing
  19. 19. 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.Slide 19 © South-Western Publishing
  20. 20. 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.Slide 20 © South-Western Publishing
  21. 21. 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.Slide 21 © South-Western Publishing
  22. 22. 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 identification number (PIN).Slide 22 © South-Western Publishing
  23. 23. 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.Slide 23 © South-Western Publishing
  24. 24. 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.Slide 24 © South-Western Publishing
  25. 25. FUTURE PAYMENT SYSTEMS E-checks Electronic tokensSlide 25 © South-Western Publishing
  26. 26. BANK PAYMENTS Electronic funds transfer (EFT) Direct deposit Automatic payments Automated clearing houses (ACHs) Online transfers Fedwire Clearing House Interbank Payment System (CHIPS)Slide 26 © South-Western Publishing
  27. 27. THE LEADING EDGE Digital imaging Electronic check presentment (ECP)Slide 27 © South-Western Publishing
  28. 28. Lesson 5.5 SECURITY ISSUES GOALS Identify security issues that banks face List ways that banks and other financial institutions can combat fraudSlide 28 © South-Western Publishing
  29. 29. SECURITY ISSUES IN BANKING Physical security Technology security FraudSlide 29 © South-Western Publishing
  30. 30. PHYSICAL SECURITY Building design Surveillance and alarm technology Employee training Transportation securitySlide 30 © South-Western Publishing
  31. 31. TECHNOLOGY SECURITY Security technology Physical security Administrative policiesSlide 31 © South-Western Publishing
  32. 32. FRAUD Check fraud Credit card fraud Loan fraudSlide 32 © South-Western Publishing
  33. 33. FRAUD PREVENTION Bank administration Employee training Consumer educationSlide 33 © South-Western Publishing
  34. 34. 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.Slide 34 © South-Western Publishing