Category: Uncategorized

Overview

Banks generally separate their payment systems into high and low value streams:

• High value payments (inter-bank payments)
• Low value payments (retail payments).

High value payments are settled instantly. Low value payments are batched and settled generally at end of day.

High Value Payment Systems (HVPS)

HVPS transfer large value inter-bank transactions. Transactions settle in real-time and instantly. HVPS are Real Time Gross Settlement Systems (RTGS).

Generally HVPS do not have an upper limit on the monetary value of transactions allowed. Central banks will have oversight of the HPVS in individual countries ensuring stability and reliability. They also will use robust security to guard against fraud, hacking and other malicious behavour.

Examples

Fedwire (United States)`

RTGS (India)

RITS (Australia)

MEPS+(Singapore)

TARGET2 (EU)

CHAPS (UK)

Low Value Payment Systems (LVPS)

LVPS are deferred settlement systems. Payments are batched and settled at a certain point in the day. Transaction amounts are on average low in comparison to high value payments.

Low value payments constitute the vast majority of payments. Individually they pose no systemic risk and it is inefficient and expensive to process them in a real time basis. They settle in batches at the end of the day.

LVPS are also known Batch EFT (Electronic funds transfer) or ACH (Automated Clearing House) payment systems.

SWIFT supports over 25 low-value payment systems.

Examples

CHIPS (United States)

NEFT (United States

BECS (Australia)

SEPA (EU)

Overview

The beneficiary bank uses the pacs.004 message to trigger the return of a settled payment. One possible reason for the return of a settled payment is that the beneficiary bank account no longer exists.

The pacs.004 message must identify the returned payment. The UETR (Unique End-to-end Transaction Reference) and the end-to-end-id identify the payment a pacs.004 refers to.

Building Blocks of the Pacs.004

Like other payment messages in ISO20022, the pacs.004 contains 2 main parts. You can find the definition of the pacs.004 schema and its message definition report here.

GroupHeader

The GroupHeader will contain the set of characteristics that are common to all transactions contained in the pacs.004.

The most important of these is the MsgId which used to uniquely identify the message. It is mandatory and must be unique

Transaction Information

The transaction information sections of the pacs.004 will contain all of the information used to identify the transactions that are being returned. There are a number of mandatory elements which must be present.

• RtrId – Unique identification, as assigned by an instructing party for an instructed party, to unambiguously identify the returned transaction.
• OrgnlEndToEndId – Unique identification, as assigned by the original initiating party, to unambiguously identify the original transaction
• OrgnlUETR – Universally unique identifier to provide the original end-to-end reference of a payment transaction
• OrgnlInstrId – Unique identification, as assigned by the original instructing party for the original instructed party, to unambiguously identify the original instruction.

In net settlement, a bank nets transactions at the end of the day, whereas in gross settlement, it happens instantaneously

It allows for efficient settlement by simplifying the reconciliation and reducing the overall volume of transactions, leading to increased operational efficiency and risk reduction.

Banks will collect transaction information throughout the day. At the end of the day, the bank commonly shares this information with a clearing house and calculate the net difference

Two types of settlement systems exist in payments; net and gross settlement.

Types of Netting Systems

Bilateral Net Settlement

A combination of two banks settles payments. Net Settlement is value of all the transactions a participant has received during a certain period of time less the value of the transactions made by that participant to all other participants.

The ECB defines bilateral netting as A settlement system in which every individual bilateral combination of participants settles its net settlement position on a bilateral basis

Multilateral Net Settlement (MNS)

Banks submit their transactions to a clearinghouse or a central bank. The clearing house/central bank then calculates the net positions or net obligations of each participant based on the transactions submitted. The calculation involves offsetting the payable amounts against the receivable amounts to determine the net amount owed or payable by each participant.

The clearing house or central bank facilitates the settlement process by transferring the net amounts between the participants once they determine the net positions.

The reduction in the number of transactions that need to be settled reduces risk. It also enhances operational efficiencies in the financial system.

MNS streamline the settling process, improve liquidity management, and reduce credit and liquidity risks associated with individual transactions. MNS is commonly used in securities trading, derivatives markets, and interbank payment systems.

What are the differences between Net and Gross Settlement?

Open Banking allows banks and registered third party vendors access consumers financial data as long as they have the consumers explicit consent. By doing so, it allows non-banks offer banking functionality.

A customer authorises apps to access their bank data. Those apps are run by third party organisations known as TPPs. These apps must have the consent of customers before they can access a customer’s data and they must do it in a secure and standardised manner. Customer’s data is accessed via secure Application Programming Interfaces (APIs). 

Examples of third party vendor who may wish to access your financial data could be budgeting or cash flow management apps.

Why do we need Open Banking?

Banks hold the most valuable data a person has, i.e. where and how they spend their money. Banks know how much we spend, where we spend it and on what.

Open Banking makes it easier for registered third parties access this data and provide services on this data.

What are the benefits of Open Banking?

• Better understanding and management of your finances. Lets you see all of your financial information in one location.
• By accessing a customers financial data, TPP apps could recommend better products and services as they become available.
• Lets customers pay online instantly. Most customers pay online with debit or credit cards which can fail and take a number of days to clear. Open Banking allows payments to be made instantly.
• Funds can moved instantly to apps used for things such as investing or betting.

What is PSD2?

Payment Services Directive, PSD2 is EU law which compels banks to allow registered third parties access consumer accounts. This facilitates innovation.

PSD2 also seeks to protect consumers by mandating stronger security through multi-factor authentication for user login.

PSD2 is integral 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. You can read more about PSD2 here

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.

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:

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

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