5

NEGOTIABLE
INSTRUMENTS

5.1
5.2
5.3
5.4
5.5
Slide 1

Types of Negotiable Instruments

Presenting Checks for Payment
Processing Checks
Changing Forms of Payments
Security Issues
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Lesson 5.1

TYPES OF
NEGOTIABLE
INSTRUMENTS

GOALS

Define the term negotiable instrument

Identify different types of negotiable
instruments

Slide 2

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NEGOTIABLE
NEGOTIABLE INSTRUMENTS
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
FORMS OF
OF NEGOTIABLE
NEGOTIABLE INSTRUMENTS
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

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CHECKS
CHECKS
Most common form of negotiable instrument
Preferred method of payment for many debts
Offer convenience, safety, and a record of
transactions

Slide 5

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STANDARD
STANDARD FEATURES
FEATURES OF
OF PERSONAL
PERSONAL CHECKS
CHECKS

Check Number

Maria Mills
12 River Street
Pettisville, OH 43553-0177

Date Date

Pay to the
order of

Payee
Amount

Pettisville Bank
Pettisville, Ohio

56-25
412

$ Amount
Dollars

For simulation use only

Signature

For Memo
000801

801

041200257

103

7943

Identification Numbers Account Number

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DRAFTS
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.
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BILLS
BILLS OF
OF EXCHANGE
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
PROMISSORY NOTES
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

GOALS

Identify bank requirements for honoring

checks
List common forms of check endorsements

Slide 10

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ELEMENTS
ELEMENTS OF
OF NEGOTIABILITY
NEGOTIABILITY
Written
Signature
Unconditional promise or order
Sum certain
Payable on demand or at a defined time
Words of negotiation

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TYPES
TYPES OF
OF ENDORSEMENT
ENDORSEMENT
Blank endorsement
Restrictive endorsement
Full endorsement
Qualified endorsement

Slide 12

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IDENTIFICATION
IDENTIFICATION AND
AND CHECK
CHECK ACCEPTANCE
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

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Lesson 5.3

PROCESSING
CHECKS

GOALS

Identify three key laws that make todays

check-clearing process possible
Explain the sequence of events as a check
is processed for payment

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THE
THE CHECK
CHECK PAYMENT
PAYMENT SYSTEM
SYSTEM
Federal Reserve Act of 1913
Uniform Commercial Code of 1958
Expedited Funds Availability Act of 1987

Slide 15

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CHECK
CHECK PAYMENT
PAYMENT AND
AND PROCESSING
PROCESSING
Drawer

Payee

A National Bank

B National Bank
Federal Reserve
(or other intermediary)

Slide 16

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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
payment

Slide 17

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CONSUMER
CONSUMER PAYMENTS
PAYMENTS
Charge cards
Credit cards
Cash cards
Debit cards
Smart cards

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CHARGE
CHARGE CARDS
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
CREDIT CARDS
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 banksthe
bank that issued the card and the retailers bank.

Slide 20

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STEPS
STEPS IN
IN CREDIT
CREDIT CARD
CARD PURCHASE
PURCHASE
A consumer uses a credit card.
The retailer sends the credit slip to its own bank.
The retailers 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 retailers bank and
collects from the consumer.
Slide 21

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CASH
CASH CARDS
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

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DEBIT
DEBIT CARDS
CARDS
Debit cards transfer money from a persons
designated account to the account of the retailer.
A debit card allows an immediate point-of-sale
(POS) transaction.

Slide 23

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SMART
SMART CARDS
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
FUTURE PAYMENT
PAYMENT SYSTEMS
SYSTEMS
E-checks
Electronic tokens

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BANK
BANK PAYMENTS
PAYMENTS
Electronic funds transfer (EFT)
Direct deposit
Automatic payments

Automated clearing houses (ACHs)

Online transfers
Fedwire
Clearing House Interbank Payment System (CHIPS)

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THE
THE LEADING
LEADING EDGE
EDGE
Digital imaging
Electronic check presentment (ECP)

Slide 27

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Lesson 5.5

SECURITY ISSUES

GOALS

Identify security issues that banks face

List ways that banks and other financial
institutions can combat fraud

Slide 28

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SECURITY
SECURITY ISSUES
ISSUES IN
IN BANKING
BANKING
Physical security
Technology security
Fraud

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PHYSICAL
PHYSICAL SECURITY
SECURITY
Building design
Surveillance and alarm technology
Employee training
Transportation security

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TECHNOLOGY
TECHNOLOGY SECURITY
SECURITY
Security technology
Physical security
Administrative policies

Slide 31

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FRAUD
FRAUD
Check fraud
Credit card fraud
Loan fraud

Slide 32

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FRAUD
FRAUD PREVENTION
PREVENTION
Bank administration
Employee training
Consumer education

Slide 33

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CONSUMER
CONSUMER TIPS
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

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