Welcome » IT Booklets » Retail Payment Systems » Appendix B: Glossary
A B C D E F G I L M N O P R S T U W
AAccount 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. Account-To-Account Payment (A2A) - Payment system that allows the consumer to direct transfer of funds from one account to another account at a different financial institution. 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between the originator and a receiver that allows payments processed through the ACH Network to be deposited in or withdrawn from the receiver’s account at a financial institution.Automated Clearing House (ACH) - An electronic clearing system in which a data processing center handles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.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).BBack Office Conversion (BOC) - Under NACHA rules, BOC allows retailers and billers that accept checks at the point-of-sale or at manned bill payment locations to convert eligible checks to ACH debits in the back-office.Bank Secrecy Act - The Currency and Foreign Transactions Reporting Act, also known as the Bank Secrecy Act (BSA), and its implementing regulation, 31 CFR 103, is a tool the U.S. government uses to fight drug trafficking, money laundering, and other crimes. Congress enacted the BSA to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity.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 Companies - 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.CCard 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).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 company procedures. The issuer and acquirer research the facts to determine which party is responsible for the transaction. If the merchant is unable to pay, the acquirer will have to cover the chargeback.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 21 - The Check Clearing for the 21st Century Act (Check 21) which became effective on October 28, 2004. Check 21 authorizes the use of a new negotiable instrument called a substitute check and facilitates the broader use of electronic check processing without mandating that a financial institution change its current check collection practices.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 Image - Electronic or digital image of an original check that is created by a depositor, a bank or other participant in the check collection process. Check images can be exchanged electronically by financial institutions, printed for customer statement purposes, displayed on Internet banking websites, and used to create substitute checks.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 - Also known as a clearing house or clearing house association. 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:
Net many trades so that the number and the amount of payments that have to be made are minimized, determine money obligations among traders, and guarantee that trades will go through by legally assuming the risk of payments not made or securities not delivered. The latter function is implied when it is stated that the clearing corporation becomes the “counterparty” to all trades entered into its system.
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. LLC, a subsidiary of The Clearing House Payments Company, LLC.Commercially Reasonable - Practices and procedures in widespread use in the business community generally considered to represent prudent and reasonable business methods. Consumer - Usually refers to an individual engaged in noncommercial transactions.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.Correspondent Bank - A financial institution, acting on behalf of other financial institutions (respondents) that can settle the checks they collect from them by using accounts on their books or by sending a wire transfers. 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 charged 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.DDebit 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 (Check 21) - Also known as Bank of First Deposit (BOFD). The first bank to which a check is transferred even though it is also the paying bank or the payee. A check deposited in an account is deemed to be transferred to the financial institution holding the account into which the check is deposited, even though the check is physically received and endorsed first by another financial institution. 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.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.EElectronic 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 Conversion - The process by which a check is used as a source of information for the check number, the customer’s account number, and the number that identifies the financial institution. The information is used to make a one-time electronic payment from the customer’s account -- an electronic fund transfer. The check itself is not the method of payment.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 to the processor’s database.Electronic Funds Transfer (EFT) - A generic term describing any transfer of funds between parties or depository institutions through electronic data systems.Electronically Created Payment Orders - These are payment orders received by merchants from consumers, typically by telephone or the Internet. These payment orders are processed through the check processing system although they were not initiated as paper checks. These payment orders are not subject to check law and are not warranted by the Federal Reserve Banks. 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.Expedited Funds Availability Act (EFAA) - See "Regulation CC".FFederal 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. GGramm-Leach-Bliley Act - The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, (Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999), repealed part of the Glass-Steagall Act of 1933, allowing commercial banks, investment banks, securities firms and insurance companies to consolidate.IImage Archive (Check 21) - Database for storage and easy retrieval of check images.Image Capture (Check 21) - The process of digitizing both sides of physical items and their assorted MICR information as they are processed at the Federal Reserve Bank. Also includes storage of the images for up to 60 days.Image Exchange (Check 21) - Exchange of some or all of the digitized images of a check.Indemnifying Bank (Check 21) - A financial institution that transfers, presents, or returns a substitute check or a paper or electronic representation of a substitute check for which it receives consideration. The financial institution shall indemnify the recipient and any subsequent recipient (including a collecting or returning financial institution, the depository financial institution, the drawer, the drawee, the payee, the depositor, and any endorser) for any loss incurred by any recipient of a substitute check if that loss occurred due to the receipt of a substitute check instead of the original. Independent Sales Organizations(ISO) - 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 financial institution card transaction. Interchange fees generally flow toward the institution funding the transaction and assuming the risk. 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, which, 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% to 3% 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).LLarge Value Funds Transfer System - A wholesale payment system used primarily by financial institutions in which large values of funds are transferred between parties. Fedwire® 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.MMerchant 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 - Magnetic codes found on the bottom of checks, deposit slips, and general ledger debit and credit tickets that allow a machine to scan (capture) the information. MICR encoding on a check includes the account number, the routing number, the serial number of the check, and the amount of the check. The amount of the check is encoded when the proof department processes the check.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.NNACHA – The Electronic Payments Association (NACHA) - The national association that establishes the rules and procedures governing the exchange of ACH payments.National Settlement Service (NSS) - Also referred to as Deferred Net Settlement. The Federal Reserve Banks’ multilateral settlement service. NSS is offered to depository institutions that settle for participants in clearinghouses, financial exchanges, and other clearing and settlement groups. Settlement agents acting on behalf of those depository institutions electronically submit settlement files to the Federal Reserve Banks. Files are processed on receipt, and entries are automatically posted to the depository institutions’ Reserve Bank accounts. Entries are final when posted.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.OOffice of Foreign Asset Control (OFAC) - The Office of Foreign Assets Control, United States 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.PPaying 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 mechanism, the 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. Payroll Card Account - A bank account that is established directly or indirectly by an employer on behalf of an employee to which an electronic funds transfers the employee’s wages or compensation on a recurring basis. The payroll card, often branded by one of the credit/debit card associations, provides the employee access to the funds. Person-To-Person (P2P) Payment - Online 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 fee that an institution receiving a check may impose on the institution that presents the check for payment. No presentment fee may be charged for checks presented by 8 a.m. local time.Private Label Card - See "Store Card".RReal 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.Reconverting Bank (Check 21) - The financial institution that creates a substitute check. With respect to a substitute check that was created by a person that is not a financial institution, the reconverting bank is the first financial institution that transfers, presents, or returns that substitute check or, in lieu thereof, the first paper or electronic representation of that substitute check. The reconverting bank warrants that (1) the substitute check is the legal equivalent of the original check; and (2) the original check cannot be presented again in any form so the customer pays the check only once.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.Regulation Z - Regulation Z, the Truth in Lending Act (TILA) (12 CFR 226) promulgated by the Board of Governors of the Federal Reserve System. The regulation prescribes uniform methods for computing the cost of credit, disclosing credit terms, and resolving errors on certain types of credit accounts.Remittance Cards - Payment cards that are typically used to facilitate cross-border movement of funds by individuals and for person-to-person transactions.Remote Deposit Capture (RDC) - A service that enables users at remote locations to scan digital images of checks and transmit the captured data to a financial institution or a merchant that is a customer of a financial institution.Remotely Created Check (RCC) - A check that is drawn on a customer account at a financial institution, is created by the payee, and does not bear a signature in the format agreed to by the paying financial institution and customer. RCCs are also known as “demand drafts,” “telechecks,” “preauthorized drafts,” “paper drafts,” or “digital checks.” 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 - Also referred to as the ABA number. A nine-digit number (eight digits and a check digit) that identifies a specific financial institution.SSettlement - 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.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.Substitute Check (Check 21) - Also known as the Image Replacement Document (IRD). A paper reproduction of an original check that (1) contains an image of the front and back of the original check; (2) bears a MICR line that, except as provided under ANS X9.100-140, contains all the information appearing on the MICR line of the original check when it was issued and any additional information that was encoded on the original check’s MICR line before an image of the original check was captured; (3) conforms in paper stock, dimension, and otherwise with ANS X9.100-140; and (4) is suitable for automated processing in the same manner as the original check. The Federal Reserve Board of Governors can by rule or order determine different standards. TThird-Party Sender - A special subset of a technology service provider that is authorized to transmit ACH files on behalf of an originator. Typically, the ODFI must rely upon warranties by the third- party sender regarding the originators’ identity and credit worthiness, which places additional risks on the ODFI.Third-Party Service Provider (TPSP)(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 depository financial institution. Truncating Bank (Check 21) - The financial institution that truncates the original check. If a person other than a financial institution truncates the original check, the truncating bank is the first financial institution that transfers, presents, or returns, in lieu of such original check, a substitute check or, by agreement with the recipient, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check), whether with or without the subsequent delivery of the original check.UUSA Patriot Act - The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law Pub.L. 107-56), commonly known as the "Patriot Act", was enacted by Congress to deter and punish terrorist acts in the United States and around the world by enhancing the law enforcement investigatory tools of both domestic law enforcement and foreign intelligence agencies.WWEB 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.