Payment Systems Flashcards

What is the purpose of the 'funds availability' rules under Regulation CC in the US?

Answer: To define how quickly deposited funds must be made available to depositors by financial institutions

Regulation CC (Expedited Funds Availability Act) sets deadlines by which banks must make deposited check and electronic funds available for withdrawal.

In payment risk management, what is 'velocity checking'?

Answer: Monitoring the frequency of transactions from a single account or card to detect unusual patterns

Velocity checking flags accounts or cards that generate an unusually high number of transactions in a short period, which is a common indicator of fraud.

What distinguishes 'gross settlement' from 'net settlement' in payment systems?

Answer: Gross settlement transfers full face value of each transaction individually; net settlement transfers only the difference after offsetting opposing obligations

In gross settlement, each transaction settles individually and immediately (e.g., Fedwire); in net settlement, obligations are offset and only net positions are transferred at day-end.

Which of the following best describes a 'correspondent banking' arrangement as it relates to cross-border payments?

Answer: An arrangement where a bank holds accounts at another bank to facilitate international transactions on its behalf

Correspondent banking allows financial institutions without direct relationships to route international payments through a correspondent bank that maintains accounts in both currencies or jurisdictions.

What is a 'return code' in the ACH system and when is it used?

Answer: A standardized code that an RDFI uses to inform the ODFI why a transaction could not be processed

ACH return codes (e.g., R01 Insufficient Funds, R02 Account Closed) are standardized codes used by the RDFI to return entries it cannot post and explain the reason.

How does a 'chargeback' differ from a 'refund' in the card payment ecosystem from a risk management perspective?

Answer: A chargeback is initiated by the issuer or cardholder through the network and can result in penalties for the merchant; a refund is initiated by the merchant directly

A chargeback bypasses the merchant and is adjudicated through the card network, potentially resulting in fees, fines, or program termination; a refund is a voluntary merchant-initiated credit.

What is the significance of a BIN (Bank Identification Number) in card payment fraud risk management?

Answer: It identifies the card issuer and card type, enabling risk systems to assess transaction patterns by issuer and card category

The BIN (first 6-8 digits of a card number) identifies the issuing institution and card type, allowing fraud detection systems to build risk models based on issuer behavior and card category patterns.