INTERNATIONAL PAYMENT SYSTEMS-

A payment system is any system used to settle financial transactions through the transfer of
monetary value, and includes the institutions, instruments, people, rules, procedures, standards, and
technologies that make such an exchange possible. A common type of payment system is the
operational network that links bank accounts and provides for monetary exchange using bank
deposits.

So, who and what are the constituents and components of the international payment system? To start
with, banks and financial institutions form the first layer of the international payment wherein they hold
accounts of other global banks who in turn hold accounts of the former. This enables the banks to
send and receive payments from each other as they can simply debit their accounts and credit the
other bank’s account with them and this in turn leads to payments flowing to the recipient bank that
debit the sending bank and credit their account.

1. The SWIFT Protocol-

There is indeed a common protocol that forms the basis for such communication, this is the SWIFT
standard wherein the acronym stands for Society for Worldwide International Funds Transfer wherein
this payment standard prescribes the rules and regulations that all participants in the international
payment network must abide with to ensure that there is a common standard of messaging and
communication between the banks and other financial institutions.

For instance, the sender, the recipient, the intermediary, and the address and other details are to be
captured in a specific format that is standard across banks so that each participant in the payment
value chain knows exactly what is contained in the payment message. To take an example, if you are
located in the United States and want to send a funds transfer to India, you must first setup the
beneficiary and then transfer funds from your account to the beneficiary. While this completes your
end of the value chain, the next step is when your bank in the United States debits your account and
credits its account with the funds. After this, it transfers the money to its partner bank in India or if it
does not have any dealings with Indian banks, it contacts a bank in the United States that has such
dealings and in both these cases; the funds are then transferred from the banks in the United States
to the bank in India.
Once the banks in India receive the funds, they must then send it to the ultimate beneficiary wherein
the funds are debited from its account and credited to the recipient. Again, this step might be a single
or two step processes depending on the recipient holding an account with the concerned bank that
receives the funds.
Further, in recent years, there has been so much automation and digitalization of the payment
systems that funds from one country to the other are flowing in an almost real time manner with just
minor delays because of the clearing houses in between.
2. The NOSTRO Account system-
A nostro account refers to an account that a bank holds in a foreign currency in another bank.
Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign
exchange and trade transactions. The opposite term "vostro accounts," derived from the Latin word
for "yours," is how a bank refers to the accounts that other banks have on its books in its home
currency. A nostro account and a vostro account actually refer to the same entity but from a different
perspective. For example, Bank X has an account with Bank Y in Bank Y's home currency. To Bank
X, that is a nostro, meaning "our account on your books," while to Bank Y, it is a vostro, meaning
"your account on our books." These accounts are used to facilitate international transactions and to
settle transactions that hedge exchange rate risk. Most large commercial banks worldwide hold nostro
accounts in every country with a convertible currency. Major examples of convertible currencies are
the U.S. dollar, Canadian dollar, British pound, the euro and the Japanese yen. The central banks of
many developing countries limit the buying and selling of their currencies, which is usually to control
imports and exports and to control the exchange rate. Banks generally do not hold nostro accounts in
those countries, as there is little or no foreign exchange business.
When a bank needs to make a payment in a country where it does not hold a nostro account, it can
use a bank with which it has a correspondent relationship to make the payment on its behalf.
The following example illustrates the process of making a payment using a nostro account. Bank A in
the United States enters into a spot foreign exchange contract to buy British pounds from Bank B,
which is in Sweden. On the settlement date, Bank B must deliver pounds from its nostro account in
the United Kingdom to the nostro account of Bank A, also in the United Kingdom. On the same day,
Bank A must pay dollars in the United States to the nostro account of Bank B.

3. Other methods-
Prepaid Cards: The International Prepaid Card is a reloadable prepaid EMV Visa debit card, which
means you can spend up to the value placed on the card anywhere Visa/MasterCard debit cards are
accepted worldwide. You can shop in stores, online, over the phone, and by mail order. You can get
cash at Visa ATMs worldwide. Each time you make a purchase, the amount of that purchase is
automatically deducted from the card. When used in international markets where merchants
authorize with the Chip & PIN on the front of the card instead of the magnetic stripe on the back of the
card, the International Prepaid Card avoids unnecessary declines
SEPA:SEPA stands for the Single Euro Payments Area and represents a new format for international
bank transfers within Europe. The SEPA zone comprises 34 countries, including 28 EU member
states alongside Iceland, Monaco, Switzerland, Liechtenstein, Norway and San Marino. It was created
to simplify cross-border money transfers in Euros, the only currency SEPA supports. In many ways, a
SEPA transfer is similar to a domestic transfer. In essence, banks that support SEPA transfers either
have direct relationships established or a network of intermediary banks, thus allowing transfers to run
across country borders.