DR NGOZI OJIMA

LECTURE NOTE ON BANKING SYSTEM METHOD OF PAYMENTS &

ELECTRONIC FUNDS TRANSFER AND ELECTRONIC BANKING
BAF221: ELEMENTS OF BANKING.
BY
DR NGOZI OJIMA
DEPARTMENT OF BANKING AND FINANCE
IGNATIUS AJURU UNIVERSITY OF EDUCATION
PORT HARCOURT

Learning Objectives
At the end of the this lecture the students should amongst other things be able to:
Understand the regulations governing Bank payment systems
Determine the different Bank payment methods available
Know the meaning of In-clearing capture, statement rendering, Examination & filing
The nature and types of bank cards available for use in the system
Understand the workings of the automated clearing house/systems for EFT
Know the meaning of Internet Banking
BANKING SYSTEM METHOD OF PAYMENT
The role of directing funds from surplus economic units to deficit economic units frequently take
place through two major channels. The direct and indirect channels. However, directing of fund
involves an intermediary(middleman), which is simultaneous with the indirect method. However,
the banks as intermediaries are not in business only to channel funds economically and
efficiently, but also in business to make profit. In the attempt to direct funds effectively, they try
to create efficient and effective payment system.
Bank services comprises of safe keeping of funds, offering of cheque in accounts (demand
deposit), offering of trust services, savings deposits, discounting commercial notes and bills of
exchange, corporate loans, currency exchanges, granting consumer loans, offering equipment
leasing financial advice, venture capital loans and cash management.
However, the payment process of the banking system is actually regulated by law; and some of
the laws governing payment system are
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Bank Secrecy Act (BSA), places stringent reporting requirements on banks for deposits,
withdrawals or exchange of money that appears suspicious (in fact any account that transact
(above 1M a day) will have to be part of disclosure as per the money laundry Act.

REGULITION E: This is electronic fund transfer Act, which offers protection and procedures
for customer and bank transacting pre-authorized EFT payment, as well as ATM and Point of
Sales (POS) transactions. The regulation details the disclosure required when transactions are
initiated, transferred, and received. It also summaries customer and bank responsibilities for
reporting and resolving disputed or erroneous electronic transaction and stop payment on pre-
authorized payment it places different limit of liability for authorized transfer depending on how
prompt the consumer notifies his or her bank. If a bank is notified within two days of having a
loss or theft of a debit card, consumer’s liability for unauthorized transaction up to a total of $50.
REGULATION J: This regulation concerns cheques and funds transfer, as per cheque
collection and returns, cash and non-cash items processes through central bank, as well as fund
transfer through foreign wire. It basically provides rules affecting all returning items and
settlement balance.
REGULATION CC: This one involves expedited funds availability Act, which requires bank
institution to make funds deposited into transaction accounts accessible for withdrawal within a
set availability schedule. This depends on the nature of cheque involved (casher’s or personal
cheque) and whether the cheque is local or non-local
Bank only hold funds beyond general funds available schedule under certain “protection”
exception is if a bank includes an exception it must notify the customer in writing,
*educate customer about substitute cheques and provide special customer notices in certain
situation.
*provides warranties and identities to protect the parties handling substitution cheques
*establish a process by which customers may receive an expedited re-credit of amounts paid if
they believe a substitution cheque they received was erroneously charged to their account
PAYMENT SYSTEM
CASH PAYMENT SYSTEM: this is one payment system that to a large extent require
everyone usage. Cash is printed by the Nigerian printing, Minting and security company and it is
then processed through central bank system to customers and actually back to the central bank
for destruction. It is often said that bad (dirty-paper) money drives away good money because it
goes round and round until it ceases to go round by finding its way back to CBN for destruction
and only then can crisp (new) notes circulate freely.

Nigeria security Central Bank of Nigeria

Holds new currency in
Printing Minting Delivers new currency Agents Governor of custody until issued
Company CBN

CBN sorts and court deposit

Orders for new currency CBN currency, destroy old currency
replace with fit and new
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CHEQUE PAYMENT SYSTEM:

Cheque is another process and a government method of making payment. This is so since a huge
sum of money maybe merely contained in one small piece of paper/document. A complete
cheque has three parties – the drawer, drawee and payee, and of course it tells a bank how much
money should be transferred, when it should be transferred and to whom. It is a universally
accepted method until sets of rules govern their negotiability, transferability, liability of parties
and processes.
A CHEQUE: is a negotiable instrument that involves three parties: the person who write the
cheque (drawer), the person to whom the cheque is written (payee) and the bank that house the
chequing account (the drawee). It is a way of making payment for goods, services and other
liabilities for the drawer. For the payee, the cheque will be exchange for cash at a bank teller or
credited to the payee’s account in a bank. It has some basic features –
(i) it is payable to bearer if not crossed.
(ii)unconditional order or promise to pay.
(iii)amount certain in money.
payable or cleared on determinable future date written and signed.
Types of Cheques
In addition to personal and business cheques, banks provided cashier’s cheques, teller’s cheques
or certified cheque for payment transactions
Cashier’s Cheque: this one is issued by the bank and drawn on the bank, making the bank both
the drawer and the drawee. Often bank use it to pay their own liabilities.
TELLER CHEQUE: this one is issued by one bank and drawn on another bank or payer. The
issuing banks obligation for this cheque is the same on cashier’s cheque. The paying bank
provides customer services to both the consumer and the issuing house.
CERTIFIED CHEQUE: This one is a draft, which is accepted by the bank on which it is
drawn. It is depositor’s cheque stamped certified, with a signature and data. The original order to
pay is transferred to the banks promise to pay. They are legal liabilities of the bank. the process
is completed by certifying a cheque, the bank places an official bank stamp and signature on the
cheque, after confirmation of the personal cheque above the funds for the cheque, debiting the
customer’s account and creating a certified cheque outstanding account.
The magnetic ink character recitation. (MICR)line is general with certified cheque account
number so that it can’t pass through the customer’s account.
DR NGOZI OJIMA

THE CHEQUE PAYMENT PROCESS

Deposit money
bank

The payment process starts when the cheque is issued from one person or Company to person or
company to another person or company. The authorization is signing the bottom of the cheque
(signature position) when it is presented before the bank for payment and then a collection
process begin, which results in the transfer of money from the drawer’s account to the
beneficiary or payee’s account (payment)
DRAWER: In the cheque payment process, the drawer starts up by writing a cheque on his or
her account payable to an identifiable person, bearer or cash.
IDENTIFIABLE PERSON: in this instant case, the cheque, requires endorsement by the
identifiable person and delivery or transfer of the cheque in the course of negotiation. Effort must
be made to ascertain the validity of all endorsement.
CHEQUE PAYMENT AS “AND OR OF”: This is a cheque payable to joint payees and as
such requires the endorsement of both persons. However, it is payable to one or the other (Bill or
Bright), the other can negotiate the cheque.
BEARER CHEQUE: This one is not to a specified or identifiable person and it could be
transferred by delivery alone and, negotiation is by endorsement. Any person with such
instrument (Payable to bearer) is the holder of same. However, if the bearer takes the cheque to a
teller to obtain cash, he is expected to endorse it in order to identify who is collecting the cash.
HOLDER IN DUE COURSE: The person in possession of a cheque is the holder and one
entitled to receive payment of the instrument, whereas holder in due course in one who holds a
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negotiable instrument (cheque) and who takes the instrument for (i) Value (ii) in good faith (iii)
without notice that it is overdue or dishonored (iv) without knowledge that it has an unauthorized
signature or is altered. (v) without knowledge of claims to the instrument or defect against
payment.
THE PAYEE: The payee is one who accepts the cheque from the drawer. He can transfer the
cheque to another person, to cash or keep it in his account. What happens to the cheque is a
function of the types of endorsements.
TYPES OF ENDORSEMENT ARE
(i) Endorsement in Bank: This is the signature of the payee and it therefore becomes a bearer
negotiated without other endorsement.
(ii) A Special Endorsement: This one means another designated person. It may state “pay to the
order of” and then the payee signs under that statement. Only the designated person can negotiate
the cheque. This could be used If the payee is mailing the cheque to another.
(iii) Restrictive Endorsement: Here the payee or other holder of a cheque restricts the purpose
for which the cheque may be used. The most common one is “For deposit only” and if endorsed
this way, it can only be for deposit to an account only, as any other used is prohibited, just like
crossed cheque.
BANK (DEPOSITORY): This is a bank in which a cheque is first deposited. It may be the
paying bank (Drawee) if the cheque is drawn on, payable at, or payable through the bank. From
there it is enlisted, proofed, captured, sorted and cleared for presentment to the drawee.
PAYING CHEQUE: A bank is under obligation to pay a cheque that is properly payable and
presented by his customer. When a person presents a cheque deposited or negotiated for cash at
the bank on which it is drawn (in house cheque) to a teller, it is deposited in an account or paid
over the counter. If it is accepted or paid by mistake, it is deemed not to have been paid in spite
of final payment. Cheque generally presents a high risk to the bank; therefore, the teller must
ensure all necessary instructions are in place before payment is made. For instance if there a stop
payment order if there any hold on the account, if there sufficient balance to cover the cheque,
and if the account balance available to the drawer because this involves paying a cheque. The
visual elements concern cashing a cheque item is the item an actual cheque drawn on the bank is
the signature genuine and authorized? Has the cheque been altered? Is the cheque properly
dated? Is the cheque properly endorsed?
Though, online system now allows tellers to view the image of the banks record of the customers
signature so it can be compared to the actual signature on the cheque.
THE DRAWEE: The Drawee (Paying Bank) receives cheque from other banks through a
clearing house and bank must follow before payment procedure irrespective of how the cheque
was received.
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IN-CLEARING CAPTURE: Here a bank or CBN presents cash letters to the drawee, who then
prepare the cheque for capture, and after capturing of the date settlement of the cheque is then
effect.
The entire MICR it must be captured though, if not cheques are rejected and the error is
corrected before posting.
POSTING: Here data capture runs (over the counter and in-clearing item) are saved through the
day and after total completion of the capture runs at the end of the day, transactions are posted to
accounts. Posting is actually the process of adding deposits to an account balance and deducting
cheques and other withdrawals from the balance. Deposit and other credits are posted first,
before debits.
EXCEPTION -CAPTION ITEMS: These are cheques rejected due to various reaction stop
order placed on the account insufficient fund from the normal posting process and as such
requires special handling. Each exception item requires action and whatever the reason cheque
drawn on an account are when a hold is placed must be rejected, examined, paid or returned. The
proper thing must be done. It can be represented after correction.
EXAMINATION AND FILING: With the nature of traffic of most banks, bill filing procedures
becomes imminent, because cheques are sorted daily by statement cycles and filled in bundles.
After the examination of details (signature, date, number etc) they are separated, sorted into
account number sequence using letter filing based or image based automated signature
verification. After the sequence with a divider to separate accounts, returned cheques are taken to
a statement preparation area for processing.
STATEMENT RENDERING: In a typical statement rendering process, statement is printed in
account number sequence and cheques are sorted into account number sequence. Then a bar code
flowing number of debit items is printed on the statement. Thereafter, cheques are controlled and
it the number equals that on the statement, they are enveloped, sealed and stamped for postage.
When a customer receives a statement in the mail listing previous months clearing account
deposits and debits the cheque payments process had come full cycle.

Summary
Banks are institutions licensed to carry out banking business, among which is to open accounts
for customers to make deposits, safeguard valuables and provide credits. However, in order to
make payment for transactions simple and efficient, they embark upon intermediary and other
effective services to the public. In the course of the performance of their function the need to
interact among banks, especially on behalf of their customers becomes imperative, leading them
to working out an arrangement for the settlement of cheques differentials in value among banks
giving the license to Participate in this process called clearing. Clearing Banks are actually
licensed banks, as well as banks approved by CBN to go to the clearing house to facilitate the
matching and settlement of accounts through issued cheques of the approved banks. The banks
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that are not licensed to participate in the clearing house do take part indirectly by having any of
the participating banks as their correspondent banks.
ELECTRONIC FUNDS TRANSFER AND ELECTRONIC BANKING
ELECTRONIC BANKING SYSTEM:
This is an invention that provides an expedient substitute to cheque writing. They are card
based, which consist of debit cards, stored value cards, smart cards, electronic fund transfer and
internet banking payment system.
DEBIT CARDS: It is a convenient substitute to paper cheques at the Point of Sale (POS). The
cards have a magnetic chip that permit the customer to carry out routine financial transaction
(withdrawals, deposits and transfer of funds) between accounts and to make payments. There are
fundamentally two types of Card-LIN only debit cards, where transactions are process onlin. The
other is the signature debit Cards used with either a PIN for online transaction or a signature for
offline transaction. They are used at ATMs and many merchant locations. They may carry the
master card, verve or visa logo. Offline transaction is authorized only, as the cardholder’s
account is not charged until the processing center makes the settlement for the transaction.
Offline transaction steps (signature required for offline purchase)
 Merchant
DR NGOZI
Merchant’s OJIMA
terminal

account
receives Processing
Netware
credited
authorizedI on from center totals
settlement

the processing daily

Customer’s Financial
central and print
Financial institution
transaction slip
institution is charges the

For signature
charged for customer

the purposes account for

the purchase
Sometimes signature

screen is used

ONLINE PURCHASE (PIN REQUIRED)

Merchants terminal
Customer inputs PIN
Processing center
Netware
receives authorization
and then receives Merchant
totals daily
settlement
from the ETT/POS
transaction slip account is
transactions
processing center and the
receipts credited
DR NGOZI OJIMA

STORED VALUE CARD: This card stores a specific amount of funds and reduces by the value
of the purchase (s) made from time to time (e.g. Walmart card). Some cards are for a time use,
while others may be reloaded with value. They are sold by a wide spectrum of merchants and
several service providers, as you give them cash they input the value into the card, which of
course becomes safer than cash or cheque and even easier to carry about;
SMART CARDS: This is an emergent card-based technology that can do a range of operations
debit card, credit card, stored value card, medical ID Card, driver’s license, national ID Card etc.
It has the look of a debit card but contains a microchip that permits the card to compute and
communicate information and store cardholder’s data.
THE AUTOMATED CLEARING HOUSE AND ETF TRANSACTIONS
The national automated clearing house (NACHA) established operating rules and business
practices for electronic payments, using the Automated Clearing House Network. The Federal
research wire network (FED Wire) is another. like SWIFT etc
Using the ACH Network, the bank originating the ACH transaction is the originating depository
Financial institution (ODFI) and the bank receiving the transaction is the (RDFI). The customer
directs the ODFI bank to originate the transfer (pre-authorized transfer) this transfer is batched
with others and sent to ACH, as outfits sends batches of different levels of transfers to ACH, it
then sends, settles and send credits and debit to customer account.
INTERNET BANKING PAYMENTS: This is an electronic delivering of banking processes
and services. With the help of internet banking sites and Applications, customers using personal
computers with internet access can make transfers between account, pay bills, make online
purchase and loan applications. They can also review account balances. Lots of made-to-order
information and data access is imputed into the system and consistent actions taken at specified
intervals contingent on the command from the customer with respect to originating depository
with the customer.
It essential to noted that the internet banking system of payment uses the ACH care by overriding
the ODFI to the RDT.
Summary
Electronic funds transfer system and electronic banking is the fastest way to do business in the
modern times and even globally. It means you can do any transaction from the confines of your
bedroom, conveniently, efficiently and effectively.
The E-banking platforms and applications have taken over business currently and has strongly
contributed to the ease of doing business. Creating steps and systems for online and offline
purchases of goods and other valuables. It is the current way to go and it has greatly impacted on
the system with particular reference to banks and banking culture of our citizens.
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References,

Hull, J. C. (2012). Risk management and financial institutions. (3rd ed.) New Jersey: John Wiley
and Sons.
Kohn, M. (2004). Financial institutions and markets. (2nd ed.). New York: Oxford University
Press.
Nzotta, S. M. (2004). Money, banking and finance- theory and practice. Owerri. Intercontinental
Educational Books and Publishers.
Nzotta, S.M. (2006). Globalization and the Nigerian banking industry. Abuja: NESG Economic
Indicators, Abuja.
Oleka, C.D. (2006). Fundamentals of Money Banking and Financial Markets. Enugu: Academic
publishing Company.