Account Balancing Monitoring System (ABMS)

The Federal Reserve’s computing system providing reserve account information to the Federal Reserve Banks and depository institutions (DI) on an intraday basis.  ABMS serves both as an informational source and a monitoring tool.  This information includes opening balances, funds and security transfers, accounting activity, and DI cap and collateral limits.

Acquirer fee

Fee paid to the acquirer of the merchant sales draft.  The acquirer of the sales draft collects a merchant discount fee (or processing fee) from the merchant for the costs associated with processing the transaction.

Acquiring bank and acquirer

See Merchant acquirer.

Address verification service (AVS)

Bankcard association service that verifies the customer provided billing address matches the billing address on their credit card account.  The bankcard associations will not support merchants that opt not to use AVS if those transactions are disputed and will charge the merchant an additional 1.25 percent on those sales.

Agent bank

A member of a bankcard association that agrees to participate in an acquirer’s merchant processing program.  The agent may or may not be liable for losses incurred on its merchant accounts.  An agent is usually a small community financial institution that wants to offer merchant processing services as a customer service.  Agent banks that only refer merchants to an acquiring financial institution’s program are known as referral banks. 

Authentication

The process of verifying the identity of an individual user, machine, software component, or any other entity.

Authorization for ACH

A written or oral agreement between the originator and a receiver that allows payments processed through the ACH Network to be deposited in or withdrawn from the receiver’s account at a financial institution.

Automated clearinghouse (ACH)

An electronic clearing system in which a data processing center handles payment orders that are exchanged among financial institutions, primarily through telecommunications networks.  ACH systems process large volumes of individual payments electronically.  Typical ACH payments include salaries, consumer and corporate bill payments, interest and dividend payments, and Social Security payments. 

Automated clearing house (ACH) operator

A central clearing facility that depository financial institutions use to transmit and receive ACH entries.  ACH operators are typically a Federal Reserve Bank or a private-sector organization that operates on behalf of a depository financial institution (DFI).

Automated teller machine (ATM)

An electronic funds transfer (EFT) terminal that allows customers using a PIN-based debit (ATM) card to initiate transactions (e.g., deposits, withdrawals, account balance inquiries).

Bank Identification Number/Interbank Card Association (BIN/ICA)

A series of assigned numbers used to identify the settling financial institution for both acquiring and issuing bankcard transactions.

Bankcard

A general-purpose credit card, issued by a financial institution under agreement with the bankcard associations (Visa and MasterCard), that customers can use to purchase goods and services and to obtain cash against a line of credit established by the bankcard issuer.

Bankcard associations

Visa U.S.A. and MasterCard International Inc. are bankcard associations established as bank service companies.  Financial institutions must be members of an association in order to offer their credit card services.  The associations have established membership rights and obligations and membership is limited to financial institutions.

Batch processing

The transmission or processing of a group of related payment instructions.

Card issuer

A financial institution that issues general-purpose credit cards carrying one of the two bankcard association logos.  The issuing financial institution establishes the credit relationship with the consumer.

Card verification code (CVC2)

Numeric security code printed on the back of MasterCard credit cards.  CVC2 reduces credit card fraud and chargeback instances significantly when used in conjunction with AVS.  See Address verification service (AVS).

Card verification value (CVV2)

Three-digit security number that is printed on the back of most Visa credit cards.  CVV2 reduces credit card fraud and chargeback instances significantly when used in conjunction with AVS.  See Address verification service (AVS).

Cash letter

A group of checks accompanied by a paper listing sent to either a clearinghouse, Federal Reserve, or another financial institution.  A cash letter contains a number of negotiable items, usually checks, accompanied by a letter listing the amounts and instructions for transmittal to another financial institution (may also be called a transmittal letter).  An incoming cash letter is received by a financial institution from a clearinghouse, Federal Reserve, or another financial institution and contains checks written on accounts at the institution that were cashed elsewhere.  An outgoing cash letter is sent to a clearinghouse, Federal Reserve, or another financial institution and contains checks deposited at the institution which are written on accounts at other institutions.

Chargeback

A transaction generated when a cardholder disputes a transaction or when the merchant does not follow bankcard association procedures.  The issuer and acquirer research the facts to determine which party is responsible for the transaction.  The acquirer will have to cover the chargeback if the merchant is unable to pay.

Check

A written order from one party (payer) to another (payee) requiring the payer’s financial institution to pay a specified sum on demand to the payee or to a third party specified by the payee.

Check clearing

The movement of a check from the depository institution at which it was deposited back to the institution on which it was written.  The funds move in the opposite direction, with a corresponding credit and debit to the involved accounts.

Check truncation

The practice of holding a check at the institution at which it was deposited (or at an intermediary institution) and electronically forwarding the essential information on the check to the institution on which it was written.  A truncated check is not returned to the writer.

Clearance

The process of transmitting, reconciling, and in some cases, confirming payment orders or financial instrument transfer instructions prior to settlement.

Clearing corporation

A central processing mechanism whereby members agree to net, clear, and settle transactions involving financial instruments. Clearing corporations fulfill one or all of the following functions:

Clearinghouse associations

Voluntary associations, formed by financial institutions that establish an exchange for checks drawn on those institutions.  Typically, institutions participating in check clearinghouses use the Federal Reserve’s national settlement service for the checks exchanged each business day.

Clearinghouse for Inter-Bank Payment Systems (CHIPS)

A “real time”, multilateral final payments system for large dollar value business-to-business payment transactions between domestic or foreign institutions that have offices located in the United States.  CHIPS is run by CHIP Co. L.L.C., a subsidiary of the Clearing House.

Commercially reasonable

Hardware and software made available by a reputable firm for use in a commercial environment.  Practices and procedures in widespread use in the business community generally considered to represent prudent and reasonable business methods.

Consumer account

A deposit account held by a participating DFI and established by a natural person primarily for personal, family, or household use and not for commercial purposes.

Consumer

Usually refers to an individual engaged in noncommercial transactions.

Correspondent bank

An institution, acting on behalf of other institutions, that can settle the checks they collect for other institutions (respondents) by using accounts on their books or by sending a wire transfer.  Generally, a provider of banking and payment services to other financial institutions.

Credit card

A card indicating the holder has been granted a line of credit.  It enables the holder to make purchases or withdraw cash up to a prearranged ceiling.  The credit granted can be settled in full by the end of a specified period or can be settled in part, with the balance taken as extended credit.  Interest is based on the terms of the credit card agreement and the holder is sometimes charged an annual fee.

Credit entry

An entry to the record of an account to represent the transfer or placement of funds into the account.

Daylight overdraft

A daylight overdraft occurs at any point in the business day when the balance in an institution’s account becomes negative.  Daylight overdrafts can occur in accounts at Federal Reserve Banks as well as at private financial institutions.  Daylight credit can also arise in the form of net debit positions of participants in private payment systems.  A daylight overdraft occurs at a Federal Reserve Bank when there are insufficient funds in an institution’s Federal Reserve Bank account to cover outgoing funds transfers or incoming book-entry securities transfers. An overdraft can also be the result of other payment activity processed by the Federal Reserve Bank, such as check or automated clearinghouse transactions. 

Debit card

A payment card issued as either a PIN-based debit (ATM) card or as a signature-based debit card from one of the bankcard associations.  A payment card issued to a person for purchasing goods and services through an electronic transfer of funds from a demand deposit account rather than using cash, checks, or drafts at the point-of-sale. 

Debit entry

An entry to the record of an account to represent the transfer or removal of funds from the account.

Deferred net settlement

See National Settlement Service

Depositary bank

The institution at which a check is first deposited.

Depository

An institution that holds funds or marketable securities for safekeeping.  Depositories may be privately or publicly operated and allow securities transfers through book-entry and offer funds accounts permitting funds transfers as a means of payment. 

Depository bank

An institution that accepts deposits.

Direct debit

Electronic transfer, usually through ACH, out of an individual's checking (or savings) account to pay bills, such as mortgage payments, insurance premiums, and utility payments.  Also referred to as “direct payment.”

Direct deposit

Electronic deposits or credit usually through ACH to an individual’s deposit account.  Common uses of direct deposit include payroll payments, Social Security benefits, and income from investments such as CDs, annuities, and mutual funds.

Direct presentment

Depositary banks can present checks directly to the paying institution.  The paying institution may be the depositary bank (no settlement is needed), or, if not, may settle on the books of the Federal Reserve, using the Federal Reserve’s national settlement service.

Electronic benefits transfer (EBT)

A type of EFT system involving the transfer of public entitlement payments, such as welfare or food stamps, through direct deposit or point-of-sale technology (see POS).  The recipient can be given an identification card, similar to a benefit card, and a PIN allowing access to the benefits through an electronic network.

Electronic bill presentment and payment (EBPP)

An electronic alternative to traditional bill payment, allowing a merchant or utility to present its customers with an electronic bill and the payer to pay the bill electronically.  EBPP systems usually fall within two models: direct and consolidation-aggregation.  In the direct model, the merchant or utility generates an electronic version of the consumer’s billing information, and notifies the consumer of a pending bill, generally via e-mail.   The consumer can initiate payment of the electronically presented bill using a variety of payment mechanisms, typically a credit card.  In the consolidation-aggregation model, the consumer’s bills are consolidated by a consolidator acting on behalf of merchants and utilities (or aggregated on behalf of the consumer), combining data from multiple bills and presenting a single source for the consumer to initiate payment.  Some consolidators present bills at their own web sites, typically most support the aggregation of bills by consumer service providers such an Internet portals, financial institutions, and brokerage web sites.  

Electronic check presentment (ECP)

Check truncation methodology in which the paper check’s MICR line information is captured and stored electronically for presentment.  The physical checks may or may not be presented after the electronic files are delivered, depending on the type of ECP service that is used.

Electronic commerce (e-commerce)

A broad term encompassing the remote procurement and payment by businesses or consumers of goods and services through electronic systems such as the Internet.

Electronic data capture (EDC)

Process used for capturing and transferring the encoded information on the magnetic strip from a bankcard or debit card at the point-of-sale (POS) to the processor’s database.

Expedited Funds Availability Act (EFAA)

See Regulation CC.

Electronic funds transfer (EFT)

A generic term describing any transfer of funds between parties or depository institutions through electronic data systems.

Electronic Funds Transfer Act (EFTA)

The Electronic Funds Transfer Act and Regulation E are designed to ensure adequate disclosure of basic terms, costs, and rights relating to electronic fund transfer (EFT) services provided to consumers. Institutions offering EFT services must disclose to consumers certain information, including: initial and updated EFT terms, transaction information, periodic statements of activity, the consumer’s potential liability for unauthorized transfers, and error resolution rights and procedures. EFT services include automated teller machines, telephone bill payment, point-of-sale transfers in retail stores, fund transfers initiated through the Internet, and preauthorized transfers to or from a consumer’s account.

Encryption

A data security technique used to protect information from unauthorized inspection or alteration.  Information is encoded so that data appears as a meaningless string of letters and symbols during delivery or transmission.  Upon receipt, the information is decoded using an encryption key.

Exposure limit

Referring to the settlement of operating services, the maximum amount an ACH originator is allowed to originate.  This amount can be based on the originator’s credit rating, historical or predicted funding requirements, and the type of obligation.

Federal Reserve Banks

The Federal Reserve Banks provide a variety of financial services including retail and wholesale payments.  The Federal Reserve Bank operates a nationwide system for clearing and settling checks drawn on depository institutions located in all regions of the United States.

Fedwire®

The Federal Reserve Bank’s nationwide real time gross settlement electronic funds and securities transfer network.  Fedwire® is a credit transfer system.  Each funds transfer is settled individually against an institution’s reserve or clearing account on the books of the Federal Reserve.  The transaction is considered an irrevocable payment as it is processed.

Finality

Irrevocable and unconditional transfer of payment during settlement.

Financial EDI (FEDI)

Financial electronic data interchange.  An instrument for settling invoices by initiating payments, processing remittance data and automating reconciliation, through the exchange of electronic messages.

Float

Funds held by an institution during the check-clearing process before being made available to a depositor.  Interest may be earned on these funds. 

Independent sales organizations(ISO)

A nonfinancial institution organization that provides a variety of merchant processing functions on behalf of the acquirer.  These functions include soliciting new merchant accounts, arranging for terminal purchases or leases, and providing backroom services.  An ISO is also referred to as a member service provider (MSP).  The acquirer must register all ISO/MSPs with the bankcard associations. 

Interbank checks

Checks that are not “on-us.”  They are cleared and settled either by direct presentment, a clearinghouse association, a correspondent bank, or a Federal Reserve Bank.

Interchange

Exchange of transactions between financial institutions participating in a bank card network, based on a common set of rules.  Card interchange allows a financial institution’s customers to use a bank credit card at any card honoring merchant and to gain access to multiple ATM systems from a single ATM.

Interchange (fees)

Fees paid by one financial institution to another to cover handling costs and credit risk in a bank card transaction.  Interchange fees generally flow toward the institution funding the transaction and assuming risk in the process.  In a credit card transaction, the interchange fee is paid by the merchant acquirer accepting the merchant’s sales draft to the card-issuing institution, and in turn passes the fee to its merchants.  In EFT/POS transactions, interchange flows in the opposite direction: the card-issuing institution (or customer) pays the fee to the terminal-owning institution.  When a transaction is an off-line debit sale, the card-issuing institution collects an interchange fee from the merchant, rather than from the customer, unlike in an EFT/POS transaction, where the customer pays the interchange fee.  Interchange revenue is derived from fees set by the card associations.  Depending on the card association, fees can range from 1.0 to 3.0 percent of the value of the transaction.  Interchange revenue is recognized as a card issuer’s second largest revenue line item.

Internet

A worldwide network of computer networks, governed by standards and protocols developed by the Internet Engineering Task Force (IETF).

Large-value transfer system

A wholesale payment system used primarily by financial institutions in which large values of funds are transferred between parties. FedwireÒ and CHIPS are the two large-value transfer systems in the United States.

Lockbox

Deposit mechanism used by commercial firms and businesses to facilitate their deposit transaction volume.  Typically, commercial firms and businesses direct customers to send payments directly to a financial institution address or post office box controlled by the institution.  Financial institution personnel record payments received and prepare deposit slips, and subsequent processing proceeds as with other deposit taking activities.

Merchant acquirer

Bankcard association members that initiate and maintain contractual agreements with merchants for the purpose of accepting and processing bankcard transactions.

Merchant processing

Activity for the acceptance and settlement of bankcard products and transactions from merchants through the payment system.

MICR-line information

Refers to data characters at the bottom of a check.  The magnetic ink character recognition (MICR) line includes the routing number of the payer bank, the amount of the check, the number of the check, and the account number of the customer.

Multi-factor authentication

Strong authentication mechanism relying on more than one type of authentication.  A PIN or password alone is representative of single factor authentication.  Adding additional authentication mechanisms would result in multi-factor authentication.

Multilateral netting settlement system

Multilateral netting is an arrangement among three or more parties to net their obligations. In these settlement systems transfers are irrevocable but are only final after the completion of end-of-day-settlement.

National Automated Clearing House Association (NACHA)

The national association that establishes the rules and procedures governing the exchange of automated clearinghouse payments.

National Settlement Service (NSS)

(Also referred to as Deferred net settlement).  The Federal Reserve’s settlement service.  A type of payments system in which financial institutions continually send payment instructions over a period of time with final transfer occurring at the end of the processing cycle.  During the period, a record is kept of net debits and credits.

Net debit cap

The maximum dollar amount of uncollateralized daylight overdrafts that an institution is authorized to incur in its Federal Reserve account. The net debit cap is generally equal to an institution’s capital times the cap multiple for its cap category.

Office of Foreign Assets Control (OFAC)

The Office of Foreign Assets Control, Department of the Treasury, administers and enforces economic sanctions programs primarily against countries and groups of individuals such as terrorists and narcotics traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

On-us checks

Checks that are deposited into the same institution on which they are drawn.

Originating depository financial institution (ODFI)

A participating financial institution that originates entries at the request of and by agreement with its originators in accordance with the provisions of the NACHA rules.

Originator

A person that has authorized an ODFI to transmit a credit or debit entry to the deposit account of a receiver with an RDFI, or, if the receiver is also the RDFI, to such receiver.

Paying bank

A paying bank is the institution where a check is payable and to which it is sent for payment.

Payment

A transfer of value.

Payment system

The mechanisms, rules, institutions, people, markets, and agreements that make the exchange of payments possible.

Payments System Risk policy (PSR)

The Federal Reserve’s Payments System Risk (PSR) policy addressing the risks that payment systems present to the Federal Reserve Banks, the banking system, and to other sectors of the economy.

Person-to-person (P2P) payment

On-line payments using electronic mail messages to invoke a transfer of value between the parties over existing proprietary networks as on-us transactions.

Point-of-sale (POS) network

A network of institutions, debit cardholders, and merchants that permit consumers to make direct payment electronically at the place of purchase.  The funds are withdrawn from the account of the cardholder.

Presentment fee

A presentment fee is a fee that an institution receiving a check may impose on the institution that presents the check for payment.  For checks presented by 8 a.m. local time, however, no presentment fee may be charged.

Private label card

See Store card.

Real time gross settlement (RTGS) system

A type of payments system operating in real time rather than batch processing mode.  It provides immediate finality of transactions.  Gross settlement refers to the settlement of each transfer individually rather than netting.  FedwireÒ is an example of a real time gross settlement system.

Receiver

An individual, corporation, or other entity that has authorized a company or an originator to initiate a credit or debit entry to a transaction account belonging to the receiver held at its RDFI.

Receiving depository financial institution (RDFI)

Any financial institution qualified to receive debits or credits through its ACH operator in accordance with the ACH rules.

Regulation CC

A regulation (12 CFR 229) promulgated by the Board of Governors of the Federal Reserve System regarding the availability of funds and the collection of checks.  The regulation governs the availability of funds deposited in checking accounts and the collection and return of checks.

Regulation E

A regulation (12 CFR 205) promulgated by the Board of Governors of the Federal Reserve System to ensure consumers a minimum level of protection in disputes arising from electronic fund transfers.

Reserve Account

A non-interest-earning balance account institutions maintain with the Federal Reserve Bank or with a correspondent bank to satisfy the Federal Reserve’s reserve requirements.  Reserve account balances play a central role in the exchange of funds between depository institutions.

Reserve requirements

The percentage of deposits that a depository institution may not lend out or invest and must hold either as vault cash or on deposit at a Federal Reserve Bank.  Reserve requirements affect the potential of the banking system to create transaction deposits.

Retail payments

Payments, typically small, made in the goods and services market.

Return (ACH)

Any ACH entry that has been returned to the ODFI by the RDFI or by the ACH operator because it cannot be processed.  The reason for each return is included with the return in the form of a “return reason code.”  (See the NACHA “Operating Rules and Guidelines” for a complete reason code listing.)

Routing number

A nine-digit number (eight digits and a check number) that identifies a specific financial institution (also referred to as the ABA number).

Settlement

The final step in the transfer of ownership involving the physical exchange of securities or payment.  In a banking transaction, settlement is the process of recording the debit and credit positions of the parties involved in a transfer of funds.  In a financial instrument transaction, settlement includes both the transfer of securities by the seller and the payment by the buyer. Settlements can be “gross” or “net.”  Gross settlement means each transaction is settled individually.  Net settlement means parties exchanging payments will offset mutual obligations to deliver identical items (e.g., dollars or EUROS), at a specified time, after which only one net amount of each item is exchanged.

Settlement date (ACH)

The date on which an exchange of funds with respect to an entry is reflected on the books of the Federal Reserve Bank(s).

Single-entry (ACH)

A one-time transfer of funds initiated by an originator in accordance with the receiver’s authorization for a single ACH credit or debit to the receiver's consumer account.

Standard entry class (SEC) Code

Three-character code in an ACH company/batch header record used to identify the payment type within an ACH batch.

Store card

A credit card issued by a financial institution for a specific merchant or vendor that does not carry a bankcard association logo.  Store cards can only be used at the merchant or vendor whose name appears on the front of the card.

Stored- value card

A card-based payment system that assigns a value to the card.  The card’s value can be stored on the card itself (i.e., on the magnetic stripe or in a computer chip) or in a network database.  As the card is used for transactions, the transaction amounts are subtracted from the card’s balance.  As the balance approaches zero, some cards can be "reloaded" through various methods and others are designed to be discarded. These cards are often used in closed systems for specific types of purchases.

Third-party service provider (for ACH)

A third party other than the ODFI or RDFI that performs any function on behalf of the ODFI or the RDFI related to ACH processing. These functions would include the creation and sending of ACH files or acting as a sending or receiving point on behalf of a participating DFI.

Truth in Lending Act (TILA)

Regulation Z (12 CFR 226) promulgated by the Board of Governors of the Federal Reserve System prescribing uniform methods for computing the cost of credit, for disclosing credit terms, and for resolving errors on certain types of credit accounts.

WEB SEC Code

An ACH debit entry initiated by an originator resulting from the receiver’s authorization through the Internet to make a transfer of funds from a consumer account of the receiver.