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Chapter 3

Clearing systems

3.1 What does clearing mean?

Clearing is the process of transmitting, reconciling and confirming payment

orders, and establishing a final position for settlement (either based on
individual transactions or bundles of transactions).

3.2 Real time gross settlement systems (RTGS) are a funds transfer
mechanism where transfer of money takes place from one bank to another
on a "real time" and on "gross" basis. Settlement in "real time" means
payment transaction is not subjected to any waiting period. The transactions
are settled as soon as they are processed. "Gross settlement" means the
transaction is settled on one to one basis without bunching with any other
transaction. Once processed, payments are final and irrevocable.

3.3 The Payment Services Directive (PSD):

The Directive on Payment Services (PSD) provides the legal foundation for
the creation of an EU-wide single market for payments. The PSD aims at
establishing a modern and comprehensive set of rules applicable to all
payment services in the European Union. The target is to make cross-border
payments as easy, efficient and secure as 'national' payments within a
Member State. The PSD also seeks to improve competition by opening up
payment markets to new entrants, thus fostering greater efficiency and cost-
reduction. At the same time the Directive provides the necessary legal
platform for the Single Euro Payments Area (SEPA)

3.4 European Payments and SEPA:

3.4.1 The TARGET2 RTGS System:

TARGET resp. TARGET2 (Trans-European Automated Real-time Gross

Settlement Express Transfer System) in 26 countries of the European Union.

TARGET was an interbank payment system for the real-time processing of

cross-border transfers throughout the European Union. It included 16
national real-time gross settlement (RTGS) systems and the ECB payment
mechanism (EPM). TARGET provided access to more than 1,000 direct
participants and more than 48,000 credit institutions (including branches and
subsidiaries). In November 2007 it was replaced by TARGET2. In June 2006
there were over 7 million TARGET payments, with a total value of over
47,000 billion euros

Value of transactions processed by

TARGET (EUR billions)


TOTAL 7,039,1 6,728,4 7,596,5 7,238,0 6,858,2 7,484,1

VOLUME 11 35 29 40 04 40

DAILY 335,19 336,42 345,29 361,90 342,91 340,18

AVERAGE 6 2 7 2 0 8

Value of transactions processed by TARGET (EUR billions)


TOTAL 53,02 47,39 51,93 43,11 40,73 45,02
VOLUME 0 0 2 9 1 6

AVERAGE 2,525 2,370 2,361 2,156 2,037 2,047

3.4.2 The EBA Payment Systems:

The Euro Banking Association is an association consisting of 183

European banks. It serves as a forum for the European payments industry
and plays a major role in the development of payment infrastructure
solutions at a pan-European level. Through its industry initiatives and the
euro payment systems it has delivered, the EBA has been and continues to
be a key contributor to the creation of a standardised Single Euro Payments
Area (SEPA).

Volume of transactions processed by EBA (number of payments)

(EUR billions)


TOTAL 4,489,4 4,416,1 5,057,0 4,866,7 4,604,7 5,046,0
VOLUME 85 80 74 20 00 87

AVERAGE 213,785 220,809 229,867 243,336 230,235 229,368

Volume of transactions processed by EBA (number of payments)

(EUR billions)


VOLUME 6,111 5,440 6,138 5,520 5,240 5,764

AVERAGE 291 272 279 276 262 262

3.4.3 Single Euro Payments Area (SEPA)

The Single Euro Payments Area (SEPA) is an initiative of the European

banking industry that will make all electronic payments across the euro area
– e.g. by credit card, debit card, bank transfer or direct debit – as easy as
domestic payments within one country are now.

On a practical level, SEPA means that you will be able to make fast and
secure transfers between bank accounts anywhere in the euro area, while if
you are shopping abroad you will be able to use your bank debit card to
make a payment in euro, just like at home.

SEPA will also help to improve all payments, whether they are domestic
payments or cross-border payments between two euro area countries. All
consumers will benefit from new rules ensuring transparent pricing and
prompt transfer.

Banks have been able to make the first SEPA products available since
1 January 2008, and are aiming to make SEPA a reality for everyone by the
end of 2010.

3.5 Who will benefit?


• Merchants

• SMEs

• Corporates

• Public administrations

• Banks

• Payment sector suppliers


• Consumers will be able to reach all accounts SEPA-wide from one home
country account. More widely accepted payments cards will displace
cash improving customer safety and security.


• Merchants will be able to accept payment cards from all SEPA

countries and back office processes will be simplified.


• For smaller businesses (SME) faster settlement and simplified

processing will improve cash flow and reduce costs. It will enable them
to receive or make euro-payment anywhere within SEPA on the same


• For large merchants and corporate, common standards enable the

construction of one standard platform for payments in the whole SEPA
resulting in major savings. For example, one single file in a common
format could be used to receive and send payments throughout SEPA.

Public administrations

• For governments and public administrations, common schemes and

standards will enable the delivery of improved services to citizens at
home and abroad. It will also facilitate the delivery of transaction-
related e-Government services.


• Banks will have opportunities to develop innovative products, enter

new markets and win new customers as well as increase the efficiency
of back office processes.

Payment sector suppliers

• The payment sector suppliers will have an opportunity to develop low

cost new technology products and services which will serve the single
euro market.

3.6 Clearing and Settlement Mechanisms of SEPA :

The SEPA clearing and settlement mechanism is the information exchange

and calculation mechanism of the settlement position, which is designed to
process SEPA payments – the SEPA credit transfer and SEPA direct debit.

The main features of the SEPA clearing and settlement mechanism are:

• processing of payments in accordance with the requirements of the

European Payments Council;

• interoperability with other clearing and settlement mechanisms;

• ability to send and receive payments;

• Fair and open access criteria.

3.6.1 Business and Operational Impact of SEPA

The chart shows the share of SEPA credit transfers (SCT) in the inter-bank
domain as a percentage of the total volume of credit transfers (CT) - that is
credit transfers in the "old" as well as in SEPA format.

The figures are based on aggregated data from the following clearing and
settlement infrastructures/systems located in the euro area: CEC, RPS, Dias,
Iberpay, SIT/CORE, BI-COMP, JCCTransfer, Equens,, SIBS, Bankart,
GiroClearing and STEP2.

The higher the value of the indicator, the higher the usage of the newly
introduced SEPA product. A figure of 100% would indicate that only SEPA
products are used and have fully replaced the non-SEPA instruments.

Transactions sent for example via links between infrastructures have been
excluded to avoid double-counting. The results also exclude "on-us"
transactions (credit transfers between accounts at the same bank), as well
as transactions cleared between banks bilaterally or via correspondent

The results are monthly figures. However, as the SEPA Credit Transfer
scheme was launched on 28 January 2008.the first result refers to the period
28 January to 29 February 2008.

3.7 UK Payment Systems:


BACS (Bankers Automated Clearing Services) is a not for profit, membership

based, industry body which, in 2008, processed more than 5.6 billion UK
payments with a total value of £3.85 trillion GBP. It is responsible for the
schemes behind the clearing and settlement of automated payments in the
UK and also maintains the integrity of payment related services.

BACS provides two principal electronic payment schemes; Direct Debit and
BACS Direct Credit. Payments made by these two schemes in 2007 equated
to approximately £3.7 trillion. These products have increased convenience
and provided peace of mind for tens of millions of consumers through the
delivery of safe and efficient payments. Almost three quarters of British
adults are positively disposed towards Direct Debit. 75% of adults now have
at least one Direct Debit commitment and approximately 115,000 businesses
use BACS services.

BACS payments are a simple, cost-effective way to make payments directly

from your bank account to another bank account. Payments take three
working days to clear: they are entered into the system on the first day,
processed on the second day, and cleared on the third day. This is the most
popular way for suppliers and employees to be paid.

3.7.1 Advantages of BACS Payment:

• Automates regular secure payments for goods or services.

• Helps reduce banking charges of up to 80% when compared to more

conventional bank payments, using cheque or cash payments.

• Reduces the administration time of transferring bulk payments.

• Automated payments remove the need to write and post cheques.

• Direct payments are cost effective by delivering payments


• BACS transfers are secure payments that eliminate the risk of

outstanding cheques being delayed or mislaid within the postal

BACS processing volumes 2000 to 2008 (thousands)

Direct Debit volumes by industry sector (thousands)

Sector 2006 2007 2008

Life insurance 374,00 355,77 329,63

premiums 9 7 0
Non-life 431,23 438,25 437,45
insurance total 1 5 7
142,31 148,58 151,89
Council tax/NDR 7 4 9
Mortgage 114,74 118,47 117,24
repayments 1 0 2
113,99 120,71 124,56
TV licences 9 4 3
Loans and 179,76 177,65 173,39
leasing 0 4 0
116,20 119,48 124,92
Electricity billing 7 9 6
148,04 155,65 159,10
Gas billing 0 4 5
110,73 115,08 120,27
Water rates 9 6 4
Telephone 221,38 228,15 225,48
billing 2 2 6
108,36 117,79 128,58
Retail sales 2 2 5
161,53 177,39 206,49
B2B collections 1 2 3
125,68 127,77 128,50
TV billing 5 3 4
208,80 225,88 239,21
Subscriptions 6 6 2
Housing rents 8,629 9,200 9,935
Other bank
payments 64,313 64,510 64,145
insurance 20,791 20,446 19,793
Fees (DD) 47,552 53,854 56,625
contributions 17,272 16,073 14,678
Other 133,49 168,91 209,64
debits/uncoded 0 8 9

Credit Contras 5,585 5,891 6,060
2,854, 2,965, 3,047,
Total 436 570 651

3.7.2 CHAPS Payments:

CHAPS (The Clearing House Automated Payment System) is the United

Kingdom’s high-value payment system, providing real-time gross settlement
(RTGS) of transfers between members which eliminates credit risk. It is also
an electronic bank-to-bank same-day value payment made within the UK in

The main benefit of CHAPS is that it is fast, secure and efficient and the
money is transferred the same day. Unlike other forms of payment such as
cheques, CHAPS payments are irrevocable.

Banks themselves use CHAPS to move money around the financial system,
but it is also used regularly:

• for business-to-business payments;

• by solicitors/licensed conveyancers to transfer the purchase price of a

house between the bank accounts of those involved;

• by individuals buying or selling a high-value item, such as a car,

who need a secure, urgent, same-day guaranteed payment.

CHAPS is used by 19 settlement banks including the Bank of England and

over 400 sub member financial institutions. On 9th February 1984 the CHAPS
Sterling system commenced operations. At the end of 1984 the average
daily volume and value transmitted was around 7,000 payments with an
aggregate value of around £5 billion. Now, 25 years on, comparative

numbers are around 130,000 payments with an aggregate value of around
£300 billion.

The daily value of CHAPS Sterling payments in 2008 averaged around £280
billion, making it one of the largest UK payment systems.

CHAPS transfers are relatively expensive, with banks typically charging as

much as £30 for a transfer. The cost of fast transfers and the slow speed of
free transfers (such as BACS) is sometimes a subject of controversy in the
UK, although low value transactions are now available from CHAPS from its
Faster Payments Service.

CHAPS Members

• Abbey

• Bank of England

• Bank of Scotland (HBOS)

• Barclays Bank plc.

• Citibank N.A.

• CLS Bank International

• Clydesdale Bank plc.

• The Co-operative Bank plc

• Danske Bank (including Northern Bank)

• Deutsche Bank A.G.

• HSBC Bank plc

• Lloyds TSB Bank plc

• National Westminster Bank plc

• The Royal Bank of Scotland plc

• Standard Chartered Bank

• UBS A.G.


The Faster Payments service was introduced in May 2008 and is a

completely new way of making payments in the UK. Separate from BACS and
CHAPS, the Faster Payments service significantly increases the speed of UK
credit transfers from one account to another and enables consumers and
organisations to send same-day payments at a considerably lower cost than

Banks’ customers are currently able to initiate Faster Payment services via
Internet and telephone banking. As consumers become more familiar with
Faster Payments, organisations will face more pressure for payments to be
made in near real-time.

Since September 2009, corporate organisations have had the option to

directly initiate Faster Payments for their customers via Direct Corporate
Access (DCA). However, to handle the requirements of near real-time
payment processing, corporate need to make significant changes to their
current payment systems.

Faster Payments will enable corporate to:

• improve customer service

• differentiate from the competition

• lower costs

• reduce risk

Confirming that beneficiary accounts support Faster Payments and

eliminating transaction errors prior to submission is critical to providing a
successful service.

3.8 The US Payment Systems :

3.8.1 Fedwire:

Fedwire is a Real Time Gross Settlement Funds Transfer system operated

by the Federal Reserve Banks that enables financial institutions to
electronically transfer funds between its more than 9,289 participants (as of
March 19, 2009). In conjunction with the privately held Clearing House
Interbank Payments System (CHIPS), Fedwire is the primary United States
network for large-value or time-critical domestic and international payments,
and it is designed to be highly resilient and redundant. The average daily
value of transfers over the Fedwire Funds Service in 2007 was approximately
$2.7 trillion, and the daily average number of payments was about 537,000.

3.8.2 CHIPS:

The primary clearing house in the U.S. for large banking transactions. CHIPS
differ from the Fedwire transaction service in several respects. First and
foremost, it is cheaper than the Fedwire service, albeit not as fast, and the
dollar amounts required to use this service are lower. It is also privately
owned by member banks and has only 46 members (as of 2006), compared
to the approximately 50,000 members that use the Fedwire service. Finally,
CHIPS acts as a netting engine, where payments between parties are netted
against each other instead of the full dollar value of both trades being sent.

CHIPS settles over 250,000 of trades per day, valued in excess of $1 trillion.
CHIPS and the Fedwire funds service used by the Federal Reserve Bank
combine to constitute the primary network in the U.S. for both domestic and
foreign large transactions denominated in U.S. dollars.

3.9 The Automated Clearing House (ACH) Network:

The ACH Network is a highly reliable and efficient nationwide batch-

oriented electronic funds transfer system governed by the NACHA

OPERATING RULES which provide for the interbank clearing of electronic
payments for participating depository financial institutions. The Federal
Reserve and Electronic Payments Network act as ACH Operators, central
clearing facilities through which financial institutions transmit or receive ACH

ACH payments include:

• Direct Deposit of payroll, Social Security and other government

benefits, and tax refunds;

• Direct Payment of consumer bills such as mortgages, loans, utility bills

and insurance premiums;

• Business-to-business payments;

• E-checks;

• E-commerce payments;

• Federal, state and local tax payments.

The number of ACH payments originated by financial institutions increased

to 8.05 billion in 2002, up 13.6 percent from 2001. These payments were
valued at $21.7 trillion. Including payments originated by the Federal
government, there were a total of 8.94 billion ACH payments in 2002 worth
more than $24.4 trillion.

any individual, corporation or other entity that initiates entries into the
Automated Clearing House Network

Originating Depository Financial Institution (ODFI)

A participating financial institution that originates ACH entries at the request
of and by (ODFI) agreement with it's customers. ODFI's must abide by the
provisions of the NACHA Operating Rules and Guidelines

Receiving Depository Financial Institution

Any financial institution qualified to receive ACH entries that agrees to abide
by the NACHA1 Operating Rules and Guidelines

an individual, corporation or other entity who has authorized an Originator to
initiate a credit or debit entry to a transaction account held at an RDFI.

1 Note E- NACHA—the Electronic Payments Association is a not-for-profit association that oversees
the Automated Clearing House (ACH) Network, one of the largest electronic payment networks in
the world.