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NEGOTIABLE INSTRUMENTSNEGOTIABLE INSTRUMENTS
5.1 Types of Negotiable Instruments5.2 Presenting Checks for Payment5.3 Processing Checks5.4 Changing Forms of Payments5.5 Security Issues
5
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Lesson 5.1
TYPES OF NEGOTIABLE INSTRUMENTS
Lesson 5.1
TYPES OF NEGOTIABLE INSTRUMENTS
Define the term negotiable instrumentIdentify different types of negotiable instruments
GOALS
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NEGOTIABLE INSTRUMENTSNEGOTIABLE 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.
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FORMS OF NEGOTIABLE INSTRUMENTSFORMS 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.
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CHECKSCHECKS
Most common form of negotiable instrumentPreferred method of payment for many debtsOffer convenience, safety, and a record of
transactions
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STANDARD FEATURES OF PERSONAL CHECKSSTANDARD FEATURES OF PERSONAL CHECKS
For simulation use only
Maria Mills12 River StreetPettisville, OH 43553-0177
Pettisville BankPettisville, Ohio
80156-25412
103 7943000801 041200257
$Pay to the order of
Dollars
Date
For
Account Number
Check Number
Date
AmountAmount
SignatureMemo
Identification Numbers
Payee
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DRAFTSDRAFTS
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.
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BILLS OF EXCHANGEBILLS 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.
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PROMISSORY NOTESPROMISSORY 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.
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Lesson 5.2
PRESENTING CHECKS FOR PAYMENT
Lesson 5.2
PRESENTING CHECKS FOR PAYMENT
Identify bank requirements for honoring checksList common forms of check endorsements
GOALS
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ELEMENTS OF NEGOTIABILITYELEMENTS OF NEGOTIABILITY
WrittenSignatureUnconditional promise or orderSum certainPayable on demand or at a defined timeWords of negotiation
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TYPES OF ENDORSEMENT TYPES OF ENDORSEMENT
Blank endorsementRestrictive endorsementFull endorsementQualified endorsement
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IDENTIFICATION AND CHECK ACCEPTANCEIDENTIFICATION 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.
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Lesson 5.3
PROCESSING CHECKS
Lesson 5.3
PROCESSING CHECKS
Identify three key laws that make today’s check-clearing process possibleExplain the sequence of events as a check is processed for payment
GOALS
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THE CHECK PAYMENT SYSTEMTHE CHECK PAYMENT SYSTEM
Federal Reserve Act of 1913Uniform Commercial Code of 1958Expedited Funds Availability Act of 1987
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CHECK PAYMENT AND PROCESSINGCHECK PAYMENT AND PROCESSING
Drawer Payee
A National Bank B National Bank
Federal Reserve(or other intermediary)
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Lesson 5.4
CHANGING FORMSOF PAYMENTS
Lesson 5.4
CHANGING FORMSOF PAYMENTS
List modern forms of payment systemsExplain how banks and other financial institutions use automated forms of payment
GOALS
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CONSUMER PAYMENTSCONSUMER PAYMENTS
Charge cardsCredit cardsCash cardsDebit cardsSmart cards
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CHARGE CARDSCHARGE 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.
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CREDIT CARDSCREDIT 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.
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STEPS IN CREDIT CARD PURCHASESTEPS 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.
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CASH CARDSCASH 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).
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DEBIT CARDSDEBIT 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.
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SMART CARDSSMART 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.
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FUTURE PAYMENT SYSTEMSFUTURE PAYMENT SYSTEMS
E-checksElectronic tokens
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BANK PAYMENTSBANK PAYMENTS
Electronic funds transfer (EFT)Direct depositAutomatic payments
Automated clearing houses (ACHs)Online transfers
FedwireClearing House Interbank Payment System (CHIPS)
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THE LEADING EDGETHE LEADING EDGE
Digital imagingElectronic check presentment (ECP)
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Lesson 5.5
SECURITY ISSUESLesson 5.5
SECURITY ISSUES
Identify security issues that banks faceList ways that banks and other financial institutions can combat fraud
GOALS
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SECURITY ISSUES IN BANKINGSECURITY ISSUES IN BANKING
Physical securityTechnology securityFraud
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PHYSICAL SECURITYPHYSICAL SECURITY
Building designSurveillance and alarm technologyEmployee trainingTransportation security
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TECHNOLOGY SECURITYTECHNOLOGY SECURITY
Security technology Physical securityAdministrative policies
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FRAUDFRAUD
Check fraudCredit card fraudLoan fraud
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FRAUD PREVENTIONFRAUD PREVENTION
Bank administrationEmployee trainingConsumer education
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CONSUMER TIPSCONSUMER 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.