1. NEGOTIABLE INSTRUMENTS
Banking
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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 Payment
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2. Lesson 5.1 TYPES OF NEGOTIABLE INSTRUMENTS
Banking
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Lesson 5.1 TYPES OF NEGOTIABLE INSTRUMENTS
GOALS
Define the term negotiable instrument
Compare and Contrast different types of negotiable instruments
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3. NEGOTIABLE INSTRUMENTS
Banking
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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
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4. Defined as unconditional written orders or promises to pay money
Banking
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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
Bearer instrument – payable to the bearer - bearer is whoever holds the instrument
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5. FORMS OF NEGOTIABLE INSTRUMENTS
Banking
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FORMS OF NEGOTIABLE INSTRUMENTS
Checks
Drafts
Bills of Exchange
Promissory Notes
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6. Most common form of negotiable instrument
Banking
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CHECKS
Most common form of negotiable instrument
Preferred method of payment for many debts
Offer convenience, safety, and a record of transactions
Check use per person is beginning to decline – According to the FR – in 1979 approximately 85%of non-cash payments were made by check. In % of non-cash payments were made by check
Why? Use of electronic payments (i.e. have car payment or mortgage payment deducted from your checking account monthly – do not write a check.
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7. Three-party instrument – similar to a check
Banking
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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
A check is special type draft.
Terms for writers and receivers of drafts are the same as those used for checks
Credit Unions often provide “share drafts” instead of checks for their members
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8. Common form of internationally negotiable instrument
Banking
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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
Examples of Bills of Exchange: check, draft, trade agreement
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9. Banking
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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
Promissory Note – is a written promise to pay that is legally binding on the parties. (show bullet 1 first)
Example of a promissory note – student loans
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10. Specialized Forms of Commercial Paper
Banking
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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
Certified Check – Ahead of time bank takes funds from depositors account and sets them aside until certified check presented for payment
Cashier’s Check – individual would use if they did not have a checking account – you would pay the bank the amount and the bank would write a check from their account to the individual/business you specify
Money Order – again used if you do not have a checking account or you need to send money to individual where a check would not be accepted. Example – traveling in a foreign country
Traveler’s Checks – drawn by a well-known financial institution. Purchaser signs 2X – when buy them and when spend them. Payee has the ability to compare the two signatures. Reduces risk of carrying large of amount of cash and also reduces risk of payee not accepting a good check
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11. Lesson 5.2 PRESENTING CHECKS FOR PAYMENT
GOALS
Identify elements of negotiability
Identify and explain common forms of check endorsements

12. ELEMENTS OF NEGOTIABILITY
Banking
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ELEMENTS OF NEGOTIABILITY
Written
Signature
Unconditional promise or order
Sum certain
Payable on demand or at a defined time
Words of negotiation
Did you know….there is no legally prescribed form for a check. Can write a check on a piece of toilet paper or a t-shirt
However – would be difficult to process in automated check processing systems – therefore, the American Bankers Association and the American national Standards Institute govern the size and placement of information on checks, as well as paper thickness, color, and security features.
Signature – must be signed by a person capable of doing so – must be valid (can be done by machine/rubber stamp)
Unconditional – no strings attached
Sum Certain – must clearly state principal amount to be paid and it must be a monetary value
Words of Negotiation – Pay to the order of…. Remember negotiation applies to the ability of the holder to obtain its value
STOP – got to page 122 TEACH – Words of negotiation can affect the way in which an instrument’s value is obtained. How do these words of negotiation differ in the way they affect eh negotiation of the instrument.
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13. Endorsement of the instrument allows it to be negotiated
Banking
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ENDORSEMENT
Endorsement of the instrument allows it to be negotiated
Type of endorsements
Blank endorsement
Restrictive endorsement
Special or full endorsement
Qualified endorsement
Blank – aka open endorsement – least secure – simply the signature of the holder
Restrictive – limits the use of the instrument to a means specified by the endorser – example, For Deposit Only
Special – transfers check to another specified party
Qualified – Attempts to limit the liability of the endorser without limiting the negotiability of the instrument – example, Pay to the order of Mary Smith without recourse. In other words, if the check “bounces” the original payee is not liable to pay
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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 5.3 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 payment

16. THE CHECK PAYMENT SYSTEM
Banking
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THE CHECK PAYMENT SYSTEM
Three key legislative acts
Federal Reserve Act of Created a national check collection system and other rules for payments
Uniform Commercial Code of 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 Regulation CC - combat float abuse practiced by some banks
Three key legislative acts critically affect the check processing system
Float abuse – checks deposited – banks did not credit customer accounts until long after the checks had been paid by the banks on which they were drawn. Known as float – banks used to their advantage
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17. STANDARD FEATURES OF PERSONAL CHECKS
Banking
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STANDARD FEATURES OF PERSONAL CHECKS
For simulation use only
Maria Mills
12 River Street
Pettisville, OH
Pettisville Bank
Pettisville, Ohio
801
56-25
412
103
7943
000801 $
Pay to the order of
Dollars
Date
For
Check Number
Date
Payee
Amount
Amount
Turn to page 116 for definition of parts
Person writing the check is the drawer
The bank is the drawee – funds are in that bank
Like a draft the drawer directs the drawee to pay the payee
Memo
Signature
Identification Numbers
Account Number
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18. CHECK PAYMENT AND PROCESSING
Banking
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CHECK PAYMENT AND PROCESSING
Drawer - You
Payee – Best Buy
Bank of America
Wachovia
You go to Best Buy and purchase a couple of CD’s – you pay for them by writing a check
Best Buy deposits your check in their Wachovia account
Wachovia sends your check to the Federal Reserve – the Federal Reserve credits Wachovia’s account for the amount of the check (NOTE: at this point Wachovia has been credited the amount of the check but Bank of America has not yet subtracted or deducted it from their funds – for a brief period both banks count the same funds – known as float)
Federal Reserve sends the check to Bank of America and BOA pays the Federal Reserve the check amount
BOA deducts the amount from your account
Wachovia credits or adds the amount to Best Buy’s account
Process can take 2 to 5 days
Make sure students understand the concept of float
Federal Reserve (or other intermediary)
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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 5.4 CHANGING FORMS OF 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
Banking
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CONSUMER PAYMENTS
Charge cards
Credit cards
Cash cards
Debit cards
Smart cards
Don’t copy – more info to follow
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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 identification number (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)
Banking
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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)
EFT – example is direct deposit of payroll check – saves the overhead cost of processing checks
Fedwire – In 2003 Fedwire handles about 430,000 transactions per day averaging 3.5 million each
CHIPS – specializes in large-dollar transactions for international business.
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30. Electronic check presentment (ECP)
Banking
4/17/2017
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
Digital Imaging – digital photo of check saved versus saving the actual processed check
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