Unit 4 Payment Systems PDF

TYPES OF
ACCOUNTS
KAUSHIK JAISWAL
7276888855 kaushjaiswal@gmail.com
FOREIGN ACCOUNTS
❑ Nowadays, bank operations are not confined within a national
border.
❑ Banks are opening branches in foreign countries. But the problem is - Is
it possible for a bank to open branch in each and every country?
❑ Obvious answer is no. Then what is the easiest way to handle this
situation?
❑ Open an account in the foreign countries' bank!!
❑ Here Nostro, Vostro and Loro accounts come into play. Note that all
these accounts are termed as one's own country-basis.
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Kaushik Jaiswal 03-02-2020
NOSTRO & VOSTRO ACCOUNTS
❑ Nostro and vostro are accounting terms used to distinguish an account
held for another entity from an account another entity holds.
❑ Nostro means ours and Vostro means yours.
❑ The terms nostro and vostro are used, mainly by banks, when one bank
keeps money at another bank.
❑ Both banks need to keep records of how much money is being kept by
one bank on behalf of the other.
❑ In order to distinguish between the two sets of records of the same
balance and set of transactions, banks refer to the accounts
as nostro and vostro.
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NOSTRO & VOSTRO ACCOUNT
(Nostro For SBI) (Vostro For US Bank)
See : Nostro Account 4

03-02-2020
Kaushik Jaiswal
NOSTRO & VOSTRO ACCOUNTS
❑ Speaking from the point of view of the bank whose money is being
held at another bank:
❑ A nostro is our account, held by the other bank.
❑ A vostro is an account of other bank, held by us.
❑ A nostro account will be in foreign currency (in the currency of that
country) i.e. a bank in country A has an account in a bank in country
B, in the currency of country B.
❑ A vostro account will be in the local currency of the bank where the
money is being held.
❑ For these accounts, the domestic bank is acting like a custodian or
managing the accounts of a foreign counterpart. These accounts are
utilised for facilitating the settlements of forex and foreign trades.
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Kaushik Jaiswal
LORO ACCOUNT
(Nostro For SBI)
(Vostro For US Bank)
(LORO For BOB) 6

03-02-2020
Kaushik Jaiswal
LORO ACCOUNTS
❑ Loro means theirs.
❑ A loro is their account with them.
❑ Loro account is a record of an account held by a second bank on
behalf of a third party; that is, my record of their account with you.
❑ In practice this is rarely used, the main exception being complex
syndicated financing.
❑ For example, BOI wants to transact with HSBC, but doesn't have any
account, while SBI maintains an account with HSBC in U.K.
Then BOI could use SBI account.
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MESSAGING
SERVICES
KAUSHIK JAISWAL
9
SWIFT
“The (SWIFT) Society for Worldwide Interbank Financial

Telecommunication provides a network that
enables financial institutions worldwide to send and
receive information about financial transactions in a
secure, standardized and reliable environment.”
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SWIFT
❑ SWIFT transports financial messages in a highly secure way but does
not hold accounts for its members and does not perform any form
of clearing or settlement.
❑ SWIFT does not facilitate funds transfer: rather, it sends payment orders,
which must be settled by correspondent accounts that the institutions
have with each other.
❑ SWIFT also sells software and services to financial institutions, much of it
for use on the SWIFTNet Network, and ISO 9362.
❑ Business Identifier Codes (BICs, previously Bank Identifier Codes) are
popularly known as "SWIFT codes".
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SWIFT
❑ The majority of international interbank messages use the SWIFT network.
❑ SWIFT linked more than 11,000 financial institutions in more than 200
countries and territories, who are exchanging an average of over 24
million messages per day.
❑ SWIFT has become the industry standard for syntax in financial
messages. Messages formatted to SWIFT standards can be read by,
and processed by, many well-known financial processing systems,
whether or not the message traveled over the SWIFT network.
❑ SWIFT cooperates with international organizations for defining standards
for message format and content.
12
SWIFT - WORKING
❑ SWIFT assigns each financial organization a unique code that has either
8 characters or 11 characters. The code is called interchangeably the
bank identifier code (BIC), SWIFT code, SWIFT ID, or ISO 9362 code.
❑ To understand how the code is assigned, let’s look at this :
❑ First four characters: the institute code (SBIN For State Bank of India)
❑ Next two characters: the country code (IN for the country India)
❑ Next two characters: the location/city code (BB for Bangalore)
❑ Last three characters: optional, but organizations use it to assign
codes to individual branches. (122 for Bangalore Main branch).
❑ Ex - SBININBB122 for SBI Bangalore Main Branch.
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SWIFT - EXAMPLE
Assume a customer of a SBI branch in Pune wants to
send money to his friend who banks at the HSBC
branch in LA.
The man in Pune can walk into his SBI branch with his
friend’s account number and HSBC’s unique SWIFT
code for its LA branch.
SBI Pune branch will send a payment transfer SWIFT

message to the HSBC LA branch over the secure
SWIFT network.
Once HSBC LA branch receives the SWIFT message

about the incoming payment, it will clear and credit
the money to the friend’s account.
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SWIFT – WHO USES IT?
❑ In in the beginning, SWIFT founders designed the network to facilitate
communication about Treasury and correspondent transactions only.
❑ The robustness of the message format design allowed
huge scalability through which SWIFT gradually expanded to provide
services to the following:
Brokerage Asset
Securities
Banks Institutes and Management Clearing Houses
Dealers
Trading Houses Companies
Treasury Market
Foreign
Corporate Participants and
Depositories Exchanges Exchange and
Business Houses Service
Money Brokers
Providers
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CHIPS
“The Clearing House Interbank Payments System (CHIPS) is the
primary clearing house in the U.S. for large banking transactions.”
❑ The CHIPS Uid is a six-digit code that contains all the information that is
necessary to identify the person who is wiring the money.
❑ Thus your name, address, routing number, account number, and so forth
are all contained in this CHIPS code.
❑ As of 2015, CHIPS settles over 250,000 of trades per day, valued in excess
of $1.5 trillion in both domestic and cross-border transactions.
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CHIPS
❑ 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 it
has a market share of around 96%.
❑ CHIPS transfers are governed by Article 4A of Uniform Commercial
Code.
❑ It is owned by the financial institutions which use it.
❑ Until 1998, to be a CHIPS participant, a financial institution was required
to maintain a branch or an agency in New York City.
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CHIPS - MEMBERS
❑ According to the Federal Financial Institutions Examination
Council (FFIEC), an interagency office of the United States
government, "any banking organization with a regulated U.S. presence
may become an owner and participate in the network."
❑ CHIPS participants may be commercial banks, Edge Act corporations
or investment companies.
❑ A non-participant wishing to make international payments using CHIPS
was required to employ one of the CHIPS participants to act as its
correspondent or agent.
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CHAPS
“CHAPS is a sterling same-day system that is

used to settle high-value wholesale payments as
well as time-critical, lower-value payments like
buying or paying a deposit on a property.”
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CHAPS
❑ The Clearing House Automated Payment System or CHAPS is
a British payment system , which offers same-day sterling fund transfers.
❑ CHAPS was originally established in London by the Bankers Clearing
House in February 1984, transferring to the CHAPS and Town Clearing
Company Limited in December 1985.
❑ This company also operated the 'town clearing', where cheques
cleared the same day between the 'town' bank branches in central
London. Town clearing had been the forerunner of the CHAPS system,
and was finally closed in 1995.
❑ Responsibility for the CHAPS system was transferred to the Bank of
England in November 2017.
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CHAPS – HOW DOES IT WORK?
(1) (2) PSP A
Customer creates and SWIFT Messaging (8) PSP B
asks to submits a Network (7) Funds credits
make a CHAPS received customer’s
CHAPS payment to account
payment SWIFT
(3) CHAPS settlement (6) Settlement

request confirmation sent to PSP A
and PSP B via SWIFT
Real-Time Gross
Settlement (RTGS)
RTGS System process the

CHAPS settlement request 23
Kaushik Jaiswal
(4) Debit PSP A (5) Credit PSP B 03-02-2020
CHAPS – HOW DOES IT WORK?
❑ Payment obligations between direct participants are settled
individually on a gross basis in RTGS on the same day that they are
submitted.
❑ The transfer of funds is irrevocable between the direct participants.
❑ Operating hours: The CHAPS system opens at 6am each working day.
❑ Participants must be open to receive by 8am and must send by
10am.
❑ CHAPS closes at 6pm for bank-to-bank payments. Customer
payments must be submitted by 5.40pm.
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CHAPS - BENEFITS
Secure and efficient provision of high value, same day

payments
High level of operational resilience
Settlement risk is eliminated
Unlike with a bank credit, no pre-printed slip is required
Unlike cheques, the funds transfer is performed in real-time
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CHAPS - BENEFITS
❑ Direct access to CHAPS supports secure and efficient provision of high
value, same day payments from payment service providers to their
customers.
❑ There is no minimum or maximum payment limit.
❑ High level of operational resilience based on the Bank’s real-time gross
settlement infrastructure and the SWIFT messaging network.
❑ Settlement risk is eliminated between CHAPS direct participants, at the
cost of an increased need for liquidity, making this model best suited to
a high-value payment system with the largest potential systemic risk.
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CHAPS - BENEFITS
❑ Unlike with a bank credit, no pre-printed slip specifying the details of the
recipient is required.
❑ Unlike cheques, the funds transfer is performed in real-time removing
the issue of float or the potential for payments to be purposely stopped
by the sender, or returned due to insufficient funds, even after they
appear to have arrived in the destination account.
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CHAPS – WHO USES IT?
❑ A CHAPS transfer is initiated by the sender to move money to the
recipient's account (at another banking institution) where the funds
need to be available (cleared) the same working day.
❑ CHAPS is one of the largest high-value payment systems in the world,
providing efficient, settlement risk-free and irrevocable payments.
❑ As well as making transfers originated by banks themselves, CHAPS is
frequently used by businesses for high-value payments to suppliers,
by mortgage lenders issuing advances, and
by solicitors and conveyancers on behalf of individuals buying houses.
❑ Direct participants in CHAPS include the traditional high-street banks
and a number of international and custody banks. Many more financial
institutions access the system indirectly and make their payments via
direct participants. This is known as agency or correspondent banking.
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CHAPS - USES
❑ There are over 30 direct participants and over five thousand financial
institutions that make CHAPS payments through one of the direct
participants.
❑ CHAPS payments have several main uses:
❑ Financial institutions and some of the largest businesses use CHAPS to
settle money market and foreign exchange transactions.
❑ Corporates use CHAPS for high value and time-sensitive payments
such as to suppliers or for payment of taxes.
❑ CHAPS is commonly used by solicitors and conveyancers to complete
housing and other property transactions.
❑ Individuals may use CHAPS to buy high-value items such as a car or
pay a deposit for a house.
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CHAPS – DIRECT PARTICIPANTS
Bank of New York Bank of Scotland plc
Bank of America N.A. Bank of China Limited
Bank of England Mellon (London (part of the Lloyds
(London branch) (London branch)
branch) Banking Group)
Barclays International
Barclays UK (a trading
(a trading name of
name of Barclays BNP Paribas SA Citibank N.A. (London
Barclays Bank plc, ClearBank Limited
Bank UK plc, part of (London branch) branch)
part of the Barclays
the Barclays Group)
Group)
Danske Bank (a
CLS Bank International trading name of Elavon Financial
Deutsche Bank AG
(an Edge Act Bank Clydesdale Bank plc Northern Bank Limited, Services DAC (UK
(London branch)
based in New York) part of the Danske branch)
Bank Group)
HSBC UK Bank plc J.P. Morgan Chase

HSBC Bank plc (part of
(part of the HSBC Bank N.A. (London
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the HSBC Group)
Group) branch)
CHAPS – DIRECT PARTICIPANTS
• Bank of America N.A. (London branch)
• Bank of China Limited (London branch)
• Bank of England
• Bank of New York Mellon (London branch)
• Bank of Scotland plc (part of the Lloyds Banking Group)
• Barclays International (a trading name of Barclays Bank plc, part of the Barclays Group)
• Barclays UK (a trading name of Barclays Bank UK plc, part of the Barclays Group)
• BNP Paribas SA (London branch)
• Citibank N.A. (London branch)
• ClearBank Limited
• CLS Bank International (an Edge Act Bank based in New York)
• Clydesdale Bank plc
• Danske Bank (a trading name of Northern Bank Limited, part of the Danske Bank Group)
• Deutsche Bank AG (London branch)
• Elavon Financial Services DAC (UK branch)
• HSBC Bank plc (part of the HSBC Group)
• HSBC UK Bank plc (part of the HSBC Group)
J.P. Morgan Chase Bank N.A. (London branch)
•
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REQUIREMENTS FOR DIRECT ACCESS TO CHAPS
❑ An organisation must:
❑ Hold a reserves or settlement account at the Bank.
❑ Be participant within the definition set out in the Financial Markets
and Insolvency Regulations 1999.
❑ If domiciled outside England and Wales, provide information about
company status and settlement finality through a legal opinion.
❑ Satisfy the Bank on security and resilience arrangements through a
standard attestation process.
❑ Comply with the CHAPS Reference Manual on an ongoing basis
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REQUIREMENTS FOR DIRECT ACCESS TO CHAPS
❑ Technical requirements include:
❑ Access to the SWIFT network compromising one or more BICs,
❑ use of SWIFT FIN Copy,
❑ appropriate interfaces to connect to the SWIFT network and process
messages.
❑ Other important components are access to an Enquiry Link facility
provided by the Bank and the Extended Industry Sort Code
Database which is supplied by VocaLink.
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CHAPS - COST
❑ The cost of direct participation in CHAPS includes one-off set-up costs,
such as the cost of developing the necessary hardware, software and
processes to connect to CHAPS and establishing sufficient expertise
amongst staff.
❑ They also involve a potentially significant level of ongoing cost, such as
❑ fees and other participation costs;
❑ opportunity costs of providing collateral or holding liquid assets;
❑ hardware and software maintenance; and
❑ higher staffing costs.
34
CHAPS - COST
❑ Other costs that CHAPS Direct Participants can expect to incur are:
❑ VocaLink charges for status changes within the Extended Industry
Sort Code Directory (EISCD).
❑ SWIFT tariff fees and charges for CHAPS payment and advice
messages.
❑ Regulatory fees, including from the Payment Systems Regulator.
❑ Hardware and software costs such as a payments gateway or using
the services of a technical aggregator.
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CHAPS – COST PROBLEMS
❑ CHAPS transfers are relatively expensive, with banks typically charging
as much as £35 for a transfer.
❑ The cost of fast transfers and the low speed of free transfers (such
as BACS) was a subject of controversy in the UK, until immediate
transactions became available from the Faster Payments service.
❑ Problems can arise from delays, e.g. when an exceptional workload at
a bank results in the money being cleared too late in a working day to
complete related transactions, or inadequate instructions, when a bank
is not given sufficient information to know where to credit the money, or
in human delay in operating the machines.
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CHAPS - STATISTICS
❑ In its first year of operation, average daily transactions numbered 7,000
with an annual value of £5 billion sterling.
❑ In 2004, twenty years later, average daily transactions numbered
130,000 with an annual value of £300 billion sterling.
❑ In 2010 there were 32 million CHAPS transactions totaling over
£61 trillion, down from £73 trillion in 2008.
❑ In December 2018, CHAPS processed 3.8 million payments worth £6.4
trillion over 19 settlement processing days.
❑ The average daily volume was 202,350, an increase of 6.3% from
December 2017.
❑ CHAPS is used by over thirty direct participants including the Bank of
England and over 5,000 indirect participants (who process transactions
via agency arrangements with direct participants). 37
CHAPS – VOLUME FOR 2018
38
CHAPS – VALUES FOR 2018
39
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FEDWIRE
“The Fedwire Funds Service is the premier electronic funds-transfer service
that banks, businesses and government agencies rely on for mission-
critical, same-day transactions. “
❑ Fedwire Funds Service participants benefit from the finality of payments
credited to their Federal Reserve Bank master accounts.
❑ The Fedwire Funds Service is a real-time, gross settlement system.
❑ Each transaction is processed individually and settled upon receipt via
a highly secure electronic network. Settlement of funds is immediate,
final and irrevocable.
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FEDWIRE
❑ The Fedwire Funds Service consistently exceeds availability standards
and operates 21.5 hours each business day from 9:00 p.m. Eastern Time
on the preceding calendar day to 6:30 p.m. Eastern Time.
❑ It is operated by the United States Federal Reserve Banks.
❑ A Fedwire (or ABA) code is a bank code used in the United

States, which identifies financial institutions. Fedwire/ABA
codes are always nine (9) digits in length.
42
FEDWIRE
❑ Transfers can only be initiated by the sending bank once they receive
the proper wiring instructions from the receiving bank.
❑ These instructions include: the receiving bank's routing number,
account number, name and dollar amount being transferred.
❑ This information is submitted to the Federal Reserve via the Fedwire
system.
❑ Once the instructions are received and processed, the Fed will debit
the funds from the sending bank's reserve account and credit the
receiving bank's account.
❑ Wire transfers sent via Fedwire are completed in the same day, while
some are completed instantly.
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FEDWIRE - BENEFITS
❑ Flexible online access alternatives
❑ Access to a broad network
❑ Real-time processing
❑ Final and irrevocable funds settlement
❑ Immediate availability of funds
❑ Security and reliability
❑ Low transaction fees
❑ Access to streamlined after-the-fact analysis of payment transactions
and a historical transaction database to help automate manual
reporting processes with the FedTransaction Analyzer® tool
❑ Join the Payment Notification User Group and request email
notification when a beneficiary's bank credits or otherwise pays the
beneficiary.
45
DIFFERENCES B/W CHIPS & FEDWIRE
❑ CHIPS differs from the Fedwire payment system in three key ways.
❑ First, it is privately owned, whereas the Fed is part of a regulatory body.
❑ Second, it has 47 member participants (with some merged banks
constituting separate participants), compared with 9,289 banking
institutions (as of March 19, 2009) eligible to make and receive funds
via Fedwire.
❑ Third, it is a netting engine (and hence, not real-time).
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03-02-2020
Kaushik Jaiswal
NETTING ENGINE
❑ A netting engine consolidates all of the pending payments into fewer
single transactions.
❑ For example:
❑ If Bank of America is to pay American Express US$1.2 million, and
American Express is to pay Bank of America $800,000,
❑ the CHIPS system aggregates this to a single payment of $400,000
from Bank of America to American Express — only 20% of the $2
million to be transferred actually changes hands.
❑ The Fedwire system would require two separate payments for the full
amounts ($1.2 million to American Express and $800,000 to Bank of
America).
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03-02-2020
Kaushik Jaiswal
THANK YOU..!
KAUSHIK JAISWAL

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TYPES OF

(Nostro For SBI) (Vostro For US Bank)

See : Nostro Account 4

(Nostro For SBI)

(Vostro For US Bank)

(LORO For BOB) 6

“The (SWIFT) Society for Worldwide Interbank Financial

SBI Pune branch will send a payment transfer SWIFT

Once HSBC LA branch receives the SWIFT message

“CHAPS is a sterling same-day system that is

(3) CHAPS settlement (6) Settlement

RTGS System process the

Secure and efficient provision of high value, same day

High level of operational resilience

Settlement risk is eliminated

Unlike with a bank credit, no pre-printed slip is required

Unlike cheques, the funds transfer is performed in real-time

HSBC UK Bank plc J.P. Morgan Chase

❑ opportunity costs of providing collateral or holding liquid assets;

❑ hardware and software maintenance; and

❑ higher staffing costs.

❑ It is operated by the United States Federal Reserve Banks.

❑ A Fedwire (or ABA) code is a bank code used in the United

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