Payment Systems

The Wire Transfer System

Basic Concepts• Method for transferring a credit initiated by

the sender of the credit. It does not refer to debiting another account as in ACH entries of a debit

• Governing Law– Article 4A (any funds transfer any part of

which is governed by EFTA is excluded §4A-108)

– Common law of contracts (for aspects relationship between originator and their bank)

Basic Concepts• Advantage:

– Offers relatively quick transfer of funds which are immediately available for use or withdrawal

– Certainty as to finality of payment

• Disadvantages– Once Payment Order is sent there is only a

limited opportunity to cancel it

Basic Concepts• Funds Transfer: transaction whereby a

bank credit is transferred from one party to another through a series of payment orders

• Payment Order: an instruction (orally, in writing or electronically) to a bank to transfer a credit which is part of a funds transfer

Basic Concepts• Originator: The party that initiates a funds

transfer by making a new payment order• Originator’s bank: the bank to whom the first

payment order is given• Beneficiary: the party the Originator designates

in its payment order to receive the funds transfer• Beneficiary’s bank: the bank of the beneficiary• Intermediary Bank: a bank which receives and

makes a payment order to accomplish a funds transfer which is not the Originator’s or Beneficiary’s Bank

Basic Concepts• Ways bank’s accomplish funds transfers:

– Bilateral netting (contractual agreement between two banks that have accounts with each other and net payments at end of each day and settle by a single debit)

– Multilateral clearinghouses: CHIPS– Fed Wire system – These payment orders

cannot be refused as payment is simultaneous,

Comment 6

• “Section 4A-209(b)(2) results in automatic acceptance of payment orders issued to a beneficiary’s bank by means of Fedwire because the Federal Reserve account of the beneficiary’s bank is credited and final payment is made to that bank when the payment order is received.”

• Insert two slides of chips and fedwire

• Insert two slides of chips and fedwire

Basic Concepts• What is the effect on an underlying

obligation?– Acceptance of a payment order by a

beneficiary’s bank discharges the underlying obligation (unless a contractual opt out) even if beneficiary never gets the money.

Basic ConceptsWhen is a payment order accepted?

• For Receiving Banks not the Beneficiary’s Bank: When you act on it

• For Beneficiary’s Bank:– When Beneficiary is notified or paid– When Beneficiary’s Bank receives a final

settlement through Fedwire, a clearing system or by withdrawable credit to an account

– If not rejected one day after payment date if withdrawable credit available at Beneficiary Bank in account of Sender

Basic ConceptsWhen is a payment order accepted?

• For Receiving Banks not the Beneficiary’s Bank: When you act on it

• For Beneficiary’s Bank:– When Beneficiary is notified or paid– When Beneficiary’s Bank receives a final

settlement through Fedwire, a clearing system or by withdrawable credit to an account

– If not rejected one day after payment date if withdrawable credit available at Beneficiary Bank in account of Sender

§ 4A-209. Acceptance of Payment Order

(a) Subject to subsection (d), a receiving bank other than the beneficiary's bank accepts a payment order when it executes the order.

§4A-209(b) Subject to subsections (c) and (d), a beneficiary's bank accepts a payment order at the earliest of the following times:

(3) the opening of the next funds-transfer business day of the bank following the payment date of the order if, at that time, the amount of the sender's order is fully covered by a withdrawable credit balance in an authorized account of the sender or the bank has otherwise received full payment from the sender, unless the order was rejected before that time or is rejected within (i) one hour after that time, or (ii) one hour after the opening of the next business day of the sender following the payment date if that time is later.

Basic Concepts• Beneficiary Banks can rely on account

numbers.

• Sending Banks are responsible for errors they make but may recover through restitution.

• Banks and customrs can vvary by agreement.

§ 4A-406. Payment by Originator to Beneficiary; Discharge of Underlying Obligation.

(a) Subject to Sections 4A-211(e), 4A-405(d), and 4A-405(e), the originator of a funds transfer pays the beneficiary of the originator's payment order (i) at the time a payment order for the benefit of the beneficiary is accepted by the beneficiary's bank in the funds transfer and (ii) in an amount equal to the amount of the order accepted by the beneficiary's bank, but not more than the amount of the originator's order.

(b) If payment under subsection (a) is made to satisfy an obligation, the obligation is discharged to the same extent discharge would result from payment to the beneficiary of the same amount in money, unless (i) the payment under subsection (a) was made by a means prohibited by the contract of the beneficiary with respect to the obligation, (ii) the beneficiary, within a reasonable time after receiving notice of receipt of the order by the beneficiary's bank, notified the originator of the beneficiary's refusal of the payment, (iii) funds with respect to the order were not withdrawn by the beneficiary or applied to a debt of the beneficiary, and (iv) the beneficiary would suffer a loss that could reasonably have been avoided if payment had been made by a means complying with the contract. If payment by the originator does not result in discharge under this section, the originator is subrogated to the rights of the beneficiary to receive payment from the beneficiary's bank under Section 4A-404(a).