Definition
A banker’s payment is a bank draft drawn by one bank in favor of another bank to settle financial transactions or business between the two banks. This method is typically used to clear interbank balances or settle debts, ensuring a secure and efficient transfer of funds between banking institutions.
Examples
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Interbank Settlement: Bank A may owe Bank B a significant sum of money due to various interbank transactions executed during a business day. To settle this, Bank A issues a banker’s payment to Bank B for the owed amount.
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Loan Repayments: If a customer repays a loan issued by Bank X but the funds are being received into an account held at Bank Y, Bank X may issue a banker’s payment to Bank Y to complete the transaction.
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Financial Clearinghouses: Clearinghouses often use banker’s payments to settle daily balances among member banks. For instance, a clearinghouse might sum up the net balances due among a group of member banks and facilitate settlements using banker’s payments.
Frequently Asked Questions
What is the main purpose of a banker’s payment?
The main purpose is to facilitate the settlement of financial obligations between banks, ensuring proper and efficient interbank settlements.
How does a bank draft differ from a personal check?
A bank draft is issued by a bank and is considered more secure since the funds are guaranteed by the issuing bank, whereas a personal check is drawn on an individual’s account and may bounce if insufficient funds are available.
Who uses banker’s payments?
Banker’s payments are primarily used by financial institutions for interbank transactions, corporate settlements, and transactions that require a high level of security and reliability.
Can individuals use banker’s payments?
While individuals typically do not use banker’s payments directly, they may instruct their bank to issue a bank draft as a form of payment to settle significant transactions like property purchases.
Are banker’s payments used internationally?
Yes, banker’s payments are used both domestically and internationally to settle debts and balance transactions between banks across borders.
Related Terms
- Bank Draft: A cashable order for payment guaranteed by issuing bank.
- Interbank Transfer: The transfer of funds between two banks.
- Settlement: The process of resolving a financial transaction, transferring funds from one party to another.
- Clearinghouse: An entity that facilitates the exchange of payments, securities, or derivatives transactions.
- SWIFT: Society for Worldwide Interbank Financial Telecommunication, a network used by banks to exchange financial messages securely.
- Chips: Clearing House Interbank Payments System, used for large value U.S. dollar payments.
Online References
- Investopedia - Bank Draft
- Federal Reserve - Interbank Payments
- SWIFT - Banking System
- Clearinghouse - Payment Systems
Suggested Books for Further Studies
- Principles of Banking by Moorad Choudhry
- Commercial and Investment Banking and the International Credit and Capital Markets by Brian Scott-Quinn
- Money, Banking, and Financial Markets by Stephen G. Cecchetti and Kermit L. Schoenholtz
- The Economics of Money, Banking and Financial Markets by Frederic S. Mishkin
- Understanding Financial Statements and International Markets by C C Haney
Accounting Basics: “Banker’s Payment” Fundamentals Quiz
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