Question

1. Describe the components of the U.S. payment system

2. Summarize the major legislation regarding product offerings and geographic scope of depository institutions

3. How does the Federal Reserve facilitate the payments mechanism?

Answer 1

1. National payment systems are the conduits through which buyers and sellers of financial products and services make transactions and are an important component of a country's financial system. Global financial liberalization and technology advancements have enabled significant updates to the architecture of large-value, retail and securities payment systems, as well as the processes and procedures carried out by operators, administrators, regulators and users of the systems. In a large number of countries, a significant measure of responsibility for the integrity of the national payment system exists within the central bank. (source: Investopedia)

A typical national payment system includes the following institutions and infrastructure:

Banks and other depository institutions communicate with each other through a messaging and routing system. If you have a checking account with a U.S. bank, you are probably familiar with the nine-digit number on the bottom left-hand side of your checks: this is the American Bankers' Association (ABA) routing transit number (RTN), which is used to identify the financial institution on which the check is written. If your U.S. employer pays your salary via direct deposit, the transfer instructions (the messaging) are going to your bank via the automated clearinghouse (ACH), a system administered by the nonprofit National Automated Clearinghouse Association (NACHA) and operated by the U.S. Federal Reserve System (FRS) and Electronic Payments Network (EPN), a private sector payment network (source: Investopedia)

2. Depository institutions in US are international in scope. Banks can have branches all around the globe. Whether they chose to open branches abroad is their financial and strategic decision. Legislation is they are not governed by the FED which is an independent organisation and regulates the market rate and payment mechanism.

3.  The Federal Reserve has responsibilities that encompass issuing notes, providing payment services, acting as fiscal agent and depository of the United States, supervising and regulating banking institutions and conducting monetary policy. The Federal Reserve System includes the 12 regional Federal Reserve Banks, located throughout the United States, and the Board of Governors, located in Washington, DC. The Board of Governors is responsible for the general supervision and oversight of the Federal Reserve Banks, which are separately incorporated entities. (source: BIS)