negotiable instruments and sales of good act

1. © South-Western Publishing
Slide 1
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 Issues
5

2. © South-Western Publishing
Slide 2
Lesson 5.1
TYPES OF
NEGOTIABLE
INSTRUMENTS
Define the term negotiable instrument
Identify different types of negotiable
instruments
GOALS

3. © South-Western Publishing
Slide 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.

4. © South-Western Publishing
Slide 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.

5. © South-Western Publishing
Slide 5
CHECKS
Most common form of negotiable instrument
Preferred method of payment for many debts
Offer convenience, safety, and a record of
transactions

6. © South-Western Publishing
Slide 6
STANDARD FEATURES OF PERSONAL CHECKS
For simulation use only
Maria Mills
12 River Street
Pettisville, OH 43553-0177
Pettisville Bank
Pettisville, Ohio
801
56-25
412
103 7943
000801 041200257
$
Pay to the
order of
Dollars
Date
For
Account Number
Check Number
Date
Amount
Amount
Signature
Memo
Identification Numbers
Payee

7. © South-Western Publishing
Slide 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.

8. © South-Western Publishing
Slide 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.

9. © South-Western Publishing
Slide 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.

10. © South-Western Publishing
Slide 10
Lesson 5.2
PRESENTING CHECKS
FOR PAYMENT
Identify bank requirements for honoring
checks
List common forms of check endorsements
GOALS

11. © South-Western Publishing
Slide 11
ELEMENTS OF NEGOTIABILITY
Written
Signature
Unconditional promise or order
Sum certain
Payable on demand or at a defined time
Words of negotiation

12. © South-Western Publishing
Slide 12
TYPES OF ENDORSEMENT
Blank endorsement
Restrictive endorsement
Full endorsement
Qualified endorsement

13. © South-Western Publishing
Slide 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.

14. © South-Western Publishing
Slide 14
Lesson 5.3
PROCESSING
CHECKS
Identify three key laws that make today’s
check-clearing process possible
Explain the sequence of events as a check
is processed for payment
GOALS

15. © South-Western Publishing
Slide 15
THE CHECK PAYMENT SYSTEM
Federal Reserve Act of 1913
Uniform Commercial Code of 1958
Expedited Funds Availability Act of 1987

16. © South-Western Publishing
Slide 16
CHECK PAYMENT AND PROCESSING
Drawer Payee
A National Bank B National Bank
Federal Reserve
(or other intermediary)

17. © South-Western Publishing
Slide 17
Lesson 5.4
CHANGING FORMS
OF PAYMENTS
List modern forms of payment systems
Explain how banks and other financial
institutions use automated forms of
payment
GOALS

18. © South-Western Publishing
Slide 18
CONSUMER PAYMENTS
Charge cards
Credit cards
Cash cards
Debit cards
Smart cards

19. © South-Western Publishing
Slide 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.

20. © South-Western Publishing
Slide 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.

21. © South-Western Publishing
Slide 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.

22. © South-Western Publishing
Slide 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).

23. © South-Western Publishing
Slide 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.

24. © South-Western Publishing
Slide 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.

25. © South-Western Publishing
Slide 25
FUTURE PAYMENT SYSTEMS
E-checks
Electronic tokens

26. © South-Western Publishing
Slide 26
BANK PAYMENTS
Electronic funds transfer (EFT)
Direct deposit
Automatic payments
Automated clearing houses (ACHs)
Online transfers
Fedwire
Clearing House Interbank Payment System (CHIPS)

27. © South-Western Publishing
Slide 27
THE LEADING EDGE
Digital imaging
Electronic check presentment (ECP)

28. © South-Western Publishing
Slide 28
Lesson 5.5
SECURITY ISSUES
Identify security issues that banks face
List ways that banks and other financial
institutions can combat fraud
GOALS

29. © South-Western Publishing
Slide 29
SECURITY ISSUES IN BANKING
Physical security
Technology security
Fraud

30. © South-Western Publishing
Slide 30
PHYSICAL SECURITY
Building design
Surveillance and alarm technology
Employee training
Transportation security

31. © South-Western Publishing
Slide 31
TECHNOLOGY SECURITY
Security technology
Physical security
Administrative policies

32. © South-Western Publishing
Slide 32
FRAUD
Check fraud
Credit card fraud
Loan fraud

33. © South-Western Publishing
Slide 33
FRAUD PREVENTION
Bank administration
Employee training
Consumer education

34. © South-Western Publishing
Slide 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.