dgarry01, Author at Payment Topics

What is PSD2?

PSD2 (Payment Service Directive (derived)) is an EU law which regulates access to your financial data by organisations other than your bank.

It is critical to the growth of Open Banking within the EU as it mandates banks to make their customers financial data available via APIs to registered third party vendors.

What is the purpose of PSD2?

The purpose of PSD2 is to:

Encourage innovation and competition in retail payments
Improved security for payment transactions
Protect customer data.

How does PSD2 work?

Basically Open Banking lets approved companies access bank accounts with the account holders’ permission.

Third party financial service providers need an account information service provider (AISP) license and/or a payment initiation service provider (PISP) license before they can offer Open Banking Services.

PSD2 facilitates the migration of banking applications to an open innovative ecosystem.

Technical Terms

PSD2 introduces a number of technical terms. The diagram below shows where these terms are applicable within Open Banking

PISP – Payment Information Service Provider. Third Party PISPs can initiate payments directly from customers payments account assuming they have the customers consent.

AISP – Account Information Service Provider. AISPs can access a customers data from different banks to give an overall overview of their financial position.

TPP – Third Party Payment Service Providers

PSU – Payment Service Users

ASPSP – Account Servicing Payments Service Provider. Financial institution holding a customer account, i.e. Bank.

XS2A – Access to account

PSD2 Services

PSD2 regulates two popular services available already:

Payment Initiation Services (PIS)

Account Information Services (AIS).

PIS allow customers to make online purchases without a credit card. This means that you can use a bank transfer to make a purchase without any delay.

AIS allows the collection of a customers financial information from different bank accounts into one location.

Who are Nacha?

Nacha govern the ACH (Automated Clearing House) payments network in United States. It stands for National Automated Clearing House Association.

It also manages the Operating Rules for ACH Payments. These define the rules and responsibility of any participants using the ACH network. However, the ACH operators, Federal Reserve, and the Electronic Payment Network run the ACH network, not Nacha.

Some of Nacha’s responsibilities are:

Promote the ACH network
Enforcing the rules governing the ACH network
Steering the evolution of the ACH network in the evolving payments world

What are the Nacha operating rules?

Each participant of the ACH network must adhere to rules if it wants to accept ACH payments. These rules are broad and participants of the ACH network need to stay up to date to ensure compliance. Participants can be fined or removed from the ACH network in the event of non-compliance. You can obtain a copy of the rules here.

Examples of Nacha operating rules

The following are examples of Nacha operating rules around ACH direct debit

Ensure customer information such as bank account numbers, social security numbers, billing addresses are secure.
Customers must clearly authorise any ACH direct debits.
Any change to amount of the ACH direct debits needs to be communicted clearly to the customer
Cancelled ACH direct debits need to be completed in a timely manner.

What is Nacha file format?

A Nacha file is a set of ACH instructions used to initiate a payment over the ACH network. A record (line) in a Nacha file must be 94 characters in length.

Fields that begin and end at certain positions make up each record. These fields contains important information such as account number and routing number. Additionally each record must follow a certain order.

Although banks mostly use Nacha files for payment initiation, they can also use the file format for a wide variety of other purposes such as reversals or returns.

What is the ACH Network?

The ACH (automated clearing house) network is a payments network in the United States used to process low-value domestic payments. Two different operators run the ACH network:

Electronic Payment Network (EPN). Run by the Clearing House.
FedACH. Run by the Federal Reserve Banks.

The National Automated Clearing House Association (Nacha) govern the ACH network.

Approximately 11,000 financial institution use the ACH network in the United States.

What is an ACH Transfer?

An ACH transfer sends electronic funds over the ACH network. There are two types of ACH transfers:

ACH Debits – Initiated by a payer to send funds directly to a receiving account. e.g. employee salaries
ACH Credits – Initiated by a recipient to request funds, e.g. bills.

ACH transfers are batched, cheap and can be reversed.

How does ACH work?

The ACH operators will batch these transfers according to the Receiving Depository Financial Institutions (RDFI) receiving the transfers. The RDFI receives these transfers at a number of set intervals during the day. An RDFI will debit/credit accounts based on the account and routing numbers.

An ACH transfer can complete in a number of hours or up to two business days depending on the time of the day or whether same day processing has been specified.

Examples of ACH Payments

Direct deposit from employer to employees
Household utility payments
Business paying suppliers for products/services
Funds transfer from one bank account to another

What is Correspondent banking?

Correspondent banking refers to any financial institution (correspondent bank) providing services to other banks (respondent banks). A respondent banks can gain access to foreign financial markets by using correspondent banks, rather than setting up branches overseas.

A common example is where a domestic bank does not contain branches in a certain country. When that bank needs to perform transactions in that country it would use a correspondent bank for access.

How does correspondent banking work?

Correspondent banks act as middlemen between different unconnected financial institutions. They will hold accounts of the respondent bank and refer to them as Vostro or your account but on our books. The respondent bank will refer to the accounts as Nostro, or our account on your books.

Generally speaking, both banks in a correspondent relationship hold accounts for one another for the purpose of tracking debits and credits between the parties.

Correspondent banks generate a portion of their revenue from bank charges for serving as an intermediary between two unconnected banks.

Most international wire transfers are handled through SWIFT. If there no working relationship between the originating and beneficiary bank, the originating bank can search the SWIFT network for a correspondent bank that has a relationship with both financial institutions.

Services provided by a correspondent bank

A correspondent bank can provide the following services to respondent banks:

funds transfer
settlement
check clearing
wire transfers
currency exchange

What are the pros and cons of correspondent banking?

Correspondent banks allow domestic banks access the global financial network without having to setup branches in countries they wish to do business in. Having a correspondent banking relationship allows domestic banks offer a range of services to its customers without having a relationship with the financial institutions at the other end.

Transactions processed through a correspondent bank can take time and can be costly. Customers usually have to bear these costs.

What is Cross-border Payments and Reporting Plus (CBPR+)

CBPR+ is an acronym which stands for Cross-border payments and reporting plus. It defines how the SWIFT network uses ISO 20022 messages for cross-border payments and cash reporting.

ISO 20022 messages will replace MT (ISO 15022) for cross-border payments. The ISO 20022 standard is the next generation of Swift instructions which will supersede the
current MT standard.

Rollout of Cross-border Payments and Reporting Plus

CBPR+ rollout has already started. SWIFT will facilitate translation from MT to MX and vice versa across a translation window that exists until November 2025. Mapping rules provide how MT messages are translated to Cross Border and Payments (CBPR+) messages and vice versa.

The rollout of CBPR+ is split into specific functional areas:

Payment Transactions and Confirmation
Account Statements and Advice
Cash Management
Cheques
Interest, Fees and Charges

From March 2023, Swift will enable CBPR+ messages over the FINplus service for the following:

Category 1 – Customer Payments and Cheques. These are the MT1xx series of messages.
Category 2 – Financial Institution Transfers. These are the MT2xx series of messages.
Category 9 – Cash Management and Customer Status. These are the MT9xx series of messages.

After November 2025, MT1xx, MT2xx and MT9xx will become obsolete and will no longer will accepted on the SWIFT network.

Cross-border payments and reporting plus

MT Message Type	CBPR+ ISO 20022 equivalent	Date
MT103	pacs.008.001.08	March 2023
MT192	camt.056.001.08	March 2023
MT200	pacs.009.001.08	March 2023
MT202	pacs.009.001.08	March 2023
MT210	camt.057.001.06	March 2023
MT292	camt.056.001.08	March 2023