Sepa Payments 2s

Clearing and Settlement Mechanisms – Bilateral Clearing
July 19, 2017
Clearing and settlement mechanisms play a major role in the interbank exchanges of payments. They
can be considered as the cornerstone of payments systems in a monetary zone. Therefore it is important
to understand what they are and why they are so crucial. In this article and the next, I will present you
these concepts step by step so that you can easily understand them and teach them to others.
Although generally mentioned together, Clearing and Settlement are two completely different things. In
the following, we first define clearing and illustrate it with some examples.
What is (bilateral) Clearing?
The Bank for International Settlements (BIS) defines the term clearing as the process of transmitting,
reconciling and, in some cases, confirming transactions prior to settlement, including the netting of
transactions and the establishment of final positions for settlement. The key word in this definition is the
word netting, which is seen by the BIS as the offsetting of obligations between or among participants in
the netting arrangement, thereby reducing the number and value of payments or deliveries needed to
settle a set of transactions.
It takes at least two actors for the establishment of a clearing mechanism and the required netting
process. When there are exactly two participants, we talk about bilateral clearing. If there are more than
two participants, it is called multilateral clearing. Two Banks or a group of banks may decide to establish
clearing among themselves without going through an interbank system.
To start with the basics, we will take the example of bilateral clearing. Bilateral clearing is the simplest
case, since only two participants are involved. Imagine that the two participants are you and me and we
have to originate credit transfers because we live far away from each other. If you owe me 100 € and I
owe you 25 €, then there are two options to resolve our debts with credit transfers:
1. You can make a transfer of 100 € from your account to my account and I can make a transfer of
25 € from my account to your account.
2. Or you can make only one transfer of 75 € (100 € – 25 €) to my account and everyone will be
happy. 75 € is the final position after the netting. The final position is made by neutralizing the
reciprocal commitments between you and me. That is the offsetting of obligations.
In the first option, two credit transfers are made. In the second option, only one transfer is made. And it
is possible to make only one transfer because we first do the netting of amounts. Therefore we can save
one transaction. If we consider a netting process with a very high number of participants, we
immediately see that clearing contributes to significantly reduce the number of transfers needed to
settle a set of transactions.
Now if we transpose this example to two financial institutions, the number of transactions they
exchange among each other may amount to hundreds of thousands or even to millions every day. The
clearing allows them not to make a transfer each time a transaction is sent from one bank to another.
They can decide at the end of each day for instance to do the netting and then the party which owns
money to the other will make a single transfer.
Bilateral Clearing
This example shows that bilateral clearing is already quite efficient. If the clearing is done for more than
2 banks, it will be even more efficient. The higher the number of banks involved in the clearing process,
the more effective it is. We will discuss those benefits in detail by analyzing the multilateral clearing in
the next article.
For your information, we have created an online course where Clearing and Settlement and other
important notions like Payments Systems Models, The Four Corner Model, Payment messages
standards, Payment processing value chain, Basics of domestic and international payments, … are
presented and explained in a very simple manner. Click here and get an overview of the Payments
Fundamentals Course.
Previous article
The Four Corner Model of the SEPA Credit Transfer
Next article
Clearing and Settlement Mechanisms – Multilateral Clearing
RELATED ARTICLES
Credit Transfers
Fundamentals of Payments and Payment Systems
Credit Transfers
Payment Systems & Modernization in Canada
Credit Transfers
Differences between SEPA, SWIFT and UK Faster payments
18 COMMENTS
1. Deepa August 21, 2018 At 12:03 pm
Hi JP ,
Your payment blogs are very informative and the way you present your knowledge on payments is
highly commendable.
Reply
o Jean Paul August 21, 2018 At 2:59 pm
Thank you Deepa for your nice comment. I am glad you can easily understand the content.
You will surely spread the word so that other people can benefit from my articles as well!
Best regards,
Jean Paul
Reply
2. meera September 28, 2018 At 8:27 am
Lovely articles Jean..awesome and easily explained ..

You are real educator
Reply
o Jean Paul September 28, 2018 At 10:38 am
Thank you Meera for your comment. It is good to see that my content is valuable.
Reply
3. Alberico October 18, 2018 At 2:18 pm
Your Blog is amazing. Crystal clear explanations, structured knowledge, top down attitude, precious
definitions. Unmatched teaching skills. Thanks Jeans!
Reply
o Jean Paul October 18, 2018 At 3:22 pm
Thank you very much Alberico for your nice comment. It is really touching and I appreciate that.
It is great to see that the content provided on this blog is valuable and help many to move faster in their
payments journey.
All the best, Jean Paul
Reply
4. John Basco J H November 1, 2018 At 7:26 am
Hi Jean, your article(s) are clear and easy to understand. Without much background in this area/domain
I am able to understand the system easily. I appreciate your contribution.
Reply
o Jean Paul November 2, 2018 At 10:18 am
Thank you John for your comment. Making things easy is one of my goal.
I think everyone can learn payments pretty quick if it is explained in clear and simple manner.
Thanks again
Reply
5. Dilip Devkatte January 14, 2019 At 3:19 pm
Hi Jean, Thank you so much your articles are very clear, i have 1 query,
is there any charges on SEPA Payments at the time of transaction.i am not much clear for clearing &
settlement
Reply
o Jean Paul January 14, 2019 At 8:55 pm
Hi Dilip, Bank may charge a customer for sending a SEPA Credit Transfer or a SEPA Direct Debit.
But the clearing system does not charge interchange fees for processing the transaction.
Let me know if you have other questions.
Reply
6. Hassan Alkhateeb March 18, 2019 At 8:28 pm
Hi jean
Just i want to thank you for your articles.
Reply
7. raj October 4, 2019 At 3:39 am
great articles
Reply
8. Marie Lathiere December 6, 2019 At 12:10 pm
Hi Jean-Paul,
Thank you for this very interesting article. Would you say that bilateral clearing is frequently used?
Would you have some examples in which it is used? Or is multi-lateral clearing the most frequent?
Thanks
Reply
o Jean Paul December 9, 2019 At 3:17 pm
Hi Marie,
Thank you for your nice comment! Multilateral clearing is the most frequent and most interesting since
it enables to save a huge number of transactions. The bigger the banks involved, the more interesting
bilateral clearing is. But it is seldom. The banks involved have to connect to the CSM anyway to reach
the other banks in the country. So why maintaining two connections? You just build one connection to
the CSM to reach all the banks. Furthermore, the CSM manages credit risk for all the banks.
Best regards,
Jean Paul
Reply
9. RT April 8, 2020 At 6:56 pm
Hi Jean Paul, Thank you for explaining this topic so well. I have a question- is there any other type of
clearing as well apart from bilateral and multilateral? What is central clearing?
Reply
o Rafik May 18, 2021 At 9:09 pm
Many thanks…very valuable
Reply
10. Suresh December 24, 2020 At 4:42 pm
Thank You So much Jean, For your valuable contents to explain subject in the simplest way…
It’s very informative
Reply
11. Understand payments in 10 days (No Charge) - Payments Domain July 22, 2023 At 8:58
pm
[…] Payment Clearing Bilateral […]
Reply
LEAVE A REPLY
Comment:
Name:*
Email:*
July 23, 2017
After presenting the bilateral clearing in the previous article, it is now time to move to the next level: the
multilateral clearing.
In a multilateral clearing, a high number of financial institutions are involved. But the principle is the
same as for bilateral clearing. All the participant banks will exchange payments among each other up to
a certain time. Then the netting will happen after which the final position will be calculated for each of
the bank. Since many transactions (thousands or even millions) are exchanged between the banks, the
clearing allows to spare the execution of a huge number of transfers.
Multilateral clearing without a clearing house
To understand how effective multilateral clearing is, imagine a bank that is directly connected to several
other banks and there is no clearing system in between. In the following figure, a system with five
participant Banks has been considered. To reach all the other banks, each bank has to establish a point-
to-point connection with each of them. This results in a fully connected network topology which is
extremely impractical for large networks.
Interbank system with a fully connected network
In this configuration, many bilateral clearings have to be performed. As a matter of fact, this topology
yields many drawbacks:
1. Each bank in the system has to take care of the netting of positions itself. It has to do that for
each of the bank it is connected to, which is quite cumbersome. On the drawing, netting is
represented for Bank A and C. With several hundreds of Banks, the complexity will obviously
increase for the netting.
2. Every time a new bank joins “the market”, it has to set up a connection with all the other banks
if it wants to reach them directly. That will become also more and more difficult with the
growing number of banks.
3. How to make sure that the other banks will really pay after the clearing process? Remember
that the money is really transferred after the clearing.
Multilateral clearing with a clearing house
These problems are solved by introducing a third party, the Clearing House, which implements the
clearing mechanism. To reach all Banks connected to the CSM (Clearing and Settlement Mechanisms), a
bank has to establish only one connection to the CSM. It is far much easier to implement and less costly
than building links to each bank directly. A Bank does not have to implement the clearing with each
counterparty since the Clearing House takes care of it. And the CSM as a hub can better manage the risk
associated to the availability of funds than each bank by itself.
Below you see a picture with four participant banks which are connected to a Clearing House. And the
clearing House is connected to the central Bank, the overseer of the banking market in a country or a
region. Banks are connected through a clearing house. The central bank comes into play because as
overseer of the banking system in the economy, it implements the settlement mechanism that banks
uses to transfer funds among themselves. This is a crucial point to keep in mind: in almost all economies,
banks do not exchange funds directly among themselves. They have to do it through the central bank.
Multilateral Clearing System
This configuration is like a star network. Participant Banks can be compared to nodes of the network and
the clearing system acts like a central network hub or concentrator. In the real world, the number of
banks connected to the CSM is much more important. This gives the CSM an even more crucial role. But
the principles underlying clearing mechanism remain the same. The clearing system computes the final
position of all the participant banks one or several times a day.
One might think wrongly that the clearing system computes the final position between each bank and
each other participant bank. A clearing of this type would certainly limit the number of transfers of
funds to carry out. But given the number of participant banks, the number of transfers would still be
quite high. I have good news for you. The reality is much simpler. Each participant bank considers the
clearing system as a single counterparty.
When a bank receives a credit transaction, it considers that the clearing system owes it money
regardless of the bank that issued the operation. If it is a debit transaction, it considers that it owes
money to the clearing system regardless of the bank that issued the operation. In the other direction,
when a bank sends a debit transaction, it considers that it owes money to the clearing system regardless
of the receiving bank of the operation. And if it is a credit transaction, then the clearing system owes
money to the bank no matter which is the receiving bank of the operation. Therefore the multilateral
net position represents the bilateral net position between each participant and the central counterparty.
Each participant bank considers the clearing system as a single counterparty. In case a participant bank
would fail to fulfill its obligations, the other banks will not ask that bank to pay. But they will ask the
clearing system to pay. That is what it means for the CSM to be the single counterparty toward
participant banks. We see, the clearing system does more than just exchanging transactions and
computing the final position. It manages the risk related to the potential failure of a bank to fulfill his
obligations toward the CSM and the banking community. The bigger the bank, the more important it is
to manage the risk. A failure of a very big bank can cause the whole system to collapse (systemic risk).
To avoid this, CSMs set up strict procedures related to risk management. But let us go back to the above
figure again.
After the multilateral clearing, final positions of Bank A and Bank C are respectively -70 millions € and -
80 millions €. It is said in the financial jargon that they are short. Final positions of Bank B and Bank D are
respectively +50 millions € and +100 millions €. The banks with negative positions have to fulfill their
obligations by transferring the funds to the CSM. The banks with positive positions get funds from the
CSM. The process of moving funds is the settlement.
The CSM will debit the accounts of Bank A and C at the central bank and credit its own account. The
Banks with a short position (negative final position) must ensure that sufficient amount is available on
their accounts. After crediting its account with funds from Banks A and C, the CSM will debit its account
and credit accounts of Banks with a long position (positive final position). Take note that the sum of all
Banks’ final positions is zero. The debit of one party is always the credit of another and vice versa. So the
total amount must be zero. This was a short introduction to the settlement. We will examine it in more
detail in the next article.
Previous article
Clearing and Settlement Mechanisms – Bilateral Clearing
Next article
Clearing and Settlement Mechanisms – Settlement
RELATED ARTICLES
Credit Transfers
Cards
Top Trends Shaping the Future of Credit Cards
Credit Transfers
16 COMMENTS
1. Çeviri: Lehman’ın batışından 10 sene sonra: 2008 çöküşüne yol açan nedenler şimdi
post-modern 1930’larımızı şekillendiriyor| Yanis Varoufakis – Sosyonomi Blog September 11,
2018 At 10:52 am
[…] Bretton Woods’ta teklif ettiğine benzer çok taraflı borç sadeleştirme birliğini (multilateral clearing
union) teklif ederek ticaret dengesizliklerini giderme yolunda adımlar atmak isteyen Çin. […]
Reply
2. Guest November 5, 2018 At 3:21 pm
In this article, do you mean that ACH is the CSM? ACH is a word used in multiple other sources
Reply
o Jean Paul November 5, 2018 At 11:15 pm
Hi,
yes I do. CSM stands for Clearing and Settlement Mechanism. ACH (Automated Clearing House) focuses
more on Clearing.
I prefer CSM because I want to explain and show how clearing and settlement are related to each other.
Reply
 Guest November 6, 2018 At 5:02 pm
Ok, thanks.
So, when you mention that banks with positive positions get funds from the CSM, do you mean that the
CSM itself is a bank, which in turn is connected to the central bank?
Might be good making such subtle distinctions on these.
Reply
 Jean Paul November 6, 2018 At 9:23 pm
Hi,
The CSM is the company that implements the Interbank clearing system allowing banks to exchange and
clear payment transactions. It is not a bank.
yes the CSM is connected to the central bank for settlement. It has an account with the central bank. All
the banks in net debit positions transfer funds to the CSM account. And the CSM credits the accounts of
all the banks in net credit positions. Please let me know if you have additional questions.
Reply
 Amit Amay Singh March 18, 2020 At 8:25 am
Hello Jean,
Thank you for great article.I am currently going through your book on SCT.
I have a query around clearing systems. How CSM actually know the debit/credit instructions a bank
receives ? Until CSM knows the total debit/credit values across banks, it cannot perform netting ?
The payment instructions flows from bank to bank.I am struggling to connect the dots here.
Please help with your inputs.
 Jean Paul March 26, 2020 At 4:08 pm
Hi Amit,
Thank you for your comment!
Q: How CSM actually know the debit/credit instructions a bank receives ?

A: Let’s consider one specific Bank called Bank A. The CSM receives transactions from all banks to Bank A
and the transactions from Bank A to all the other banks. The CSM keeps track of all the exchanges and
can provide information about how many transactions Bank A sent and received.
Q: Until CSM knows the total debit/credit values across banks, it cannot perform netting ?
A: The CSM sets a cut-off, a time limit after which it cannot accept transactions any more for a specific
cycle. So it starts the netting process with what is available.
Messages and transactions carry amounts information that the CSM uses to compute the positions of
the participants.
I hope this helps.

Jean Paul
 Amit Amay Singh April 3, 2020 At 3:19 pm
Thank you for inputs Jean.
Following above query, I am confused on who sends payment responses (pacs002, pacs004, camt029
etc) to originator ? Is it CSM or benefeciary bank ?
 khushbu tawar June 20, 2020 At 2:42 pm
So if I understood correctly you mean to say CSM is company and not bank then how an account can be
opened . As per my understanding Central bank has the settlement account for each member banks in
which the fund transfer happens.
Can you give an example of CSM in SEPA system .
3. Aditya S April 23, 2020 At 1:04 pm
to Amit Amay Singh :
In case of RTGS, it is always CSM

In case of Cross Border, it is the Beneficiary/Instructed Bank
Thanks
Aadi
Reply
4. Anjana May 8, 2020 At 2:15 pm
Hi Jean,
You have explained the concepts really well that any beginner can follow.
One question:
Is it the CSM who checks whether the banks with short positions have sufficient funds to fulfill their
obligation?
Is it performed just before settlement?
Reply
o Jean Paul June 1, 2020 At 12:45 pm
Hi Anjana,
Thank you for your appreciation. To better manage the risk, there are procedures to ensure that
participants have enough money on the account used for settlement. The final check happens before
settlement but CSM do check positions of short participants from time to time to ensure they can fulfill
their obligations.
Reply
5. Romeo NGUIMEZAP KENFACK June 1, 2021 At 4:21 am
Hello Jean Paul,

Thank you for this great publications. I am a student at National Graduate School of Engineering
(ENSICAEN)-France, pursuing a Masters degree in e- payment and secured financial transactions. I have
been going through your articles and videos and i find them quite interesting.
I would like to know if it is possible to have have an internship with you.
Thanks in advance.
Reply
6. Ashok December 11, 2021 At 9:26 am
Hi Jean,
Your articles are very much informative and beautifully explained. It helped to clear lot of unambiguous
and hazy areas.
I would request you to help clearing below query.
Who is the Governing body for clearing and Settlements in International transactions?
From article, comments, it is clear that CSM as a company opens account with Central Bank of the
country to operate the clearing and settlement.
How does that work for Cross-Border payments? Is it via CSM? In this case, where does CSM open the
account to carryout clearing and settlement operations?
Reply
pm
[…] Payment Clearing Multilateral […]
Reply
8. swati October 18, 2023 At 11:22 am
Hi, very good explanation:

question pls:
what if one bank is not a part of clearing house/system(CSM) but wants to transfer funds to some other
bank? how will the payment process flow would be here?
Reply
LEAVE A REPLY
August 22, 2017
The Bank of International Settlement (BIS) defines settlement as an act that discharges obligations in
respect of funds or securities transfers between two or more parties. Thus settlement is the funds
transfer that is carried out by one party to fulfill his obligations towards the counterparty in a financial
operation. The settlement must be performed after bilateral or multilateral clearing to actually move the
funds. In payments, there are basically two types of settlements: gross settlement and net settlement.
A gross settlement system is a system in which the settlement of funds transfer occurs individually after
each payment transaction is processed in the system. Banks generally use this type of system to
exchange urgent transfers or large amounts transfers. If the funds are not available, the transfer cannot
be executed. However, when the funds are available, the instructions are executed almost
instantaneously. That is why these systems are called RTGS, which stands for Real-Time Gross
Settlement System. “Real-time” means that fund transfer happens right away if funds are available. In
addition, when a fund transfer is made between two accounts at the central bank, it becomes final and
irrevocable immediately after the transfer is made. The risk of default is therefore eliminated.
An RTGS system is a critical infrastructure for a country’s economy since it connects all the
(participating) banks and facilitates the fast transfer of funds among them. RTGS systems are usually
operated by the central bank of a country or monetary zone. Remember that the central bank plays the
function of “Bank of banks” as overseers of the banking system. The following picture illustrates the
connections of banks to an RTGS. After the processing of each transfer, accounts of instructing and
receiving banks with the central bank are respectively debited and credited.
Real-Time Gross Settlement System
Things are a bit different in a net settlement system. First, transactions are exchanged among
participants without transfers of funds. Then the multilateral netting happens at specific time(s). The
obligations are netted among all the participants and the multilateral net settlement positions are
calculated. The net settlement position is the sum of the value of all the transfers a participant has
received during a certain period of time less the value of the transfers made by that participant to all
other participants. If the sum is positive, the participant is in a multilateral net credit position; if the sum
is negative, the participant is in a multilateral net debit position.
Some time is needed to compute the net positions, send the information to the banks and proceed to
the transfer of funds. This inevitably adds delays in the actual moving of funds. To reduce the delays and
improve the liquidity in the overall system, many settlement cycles are carried out during the day after
related multilateral clearings. If a participant wants a transaction to be settled at a specific time, it has to
send that transaction before the cut-off time for that settlement cycle. The clearing system
communicates the cut-off times of settlement cycles to all participants and the information about the
settlement times. So each participant is aware that transactions that reach the CSM after the cut-off
time for a specific settlement cycle cannot be taken into account. They may be taken into account in the
next settlement cycle depending on the CSM rules.
Please refer to the previous article to see a picture of the multilateral clearing system and get more
detail about it.
Several multilateral clearing systems may exist in a country or region, but there is only one RTGS which,
as mentioned above is operated by the central bank. Those multilateral clearing systems belong to the
so-called ancillary systems. In the USA, the RTGS is Fedwire. CHIPs, Checking, ACH and Cards Systems are
multilateral clearing systems for which settlement takes place in Fedwire. The Eurozone countries have
one RTGS : TARGET 2. However, in each Eurozone country, many multilateral systems are available. You
can read the last part of the first article again where different high and low-value payment systems of a
few countries are mentioned.
Banks can participate in clearing or settlement systems as direct or indirect participants. What does it
mean? And what are the difference between direct and indirect participation? That will be the topic
of the next article.
Previous article
Next article
Direct and Indirect Participants to Clearing and Settlement Systems
RELATED ARTICLES
Credit Transfers
Cards
Credit Transfers
8 COMMENTS
1. Aviral Agarwal November 4, 2018 At 6:54 pm
Sir,
Please add the link of the next article which one should read post this article
Reply
o Jean Paul November 4, 2018 At 11:02 pm
Hi,
Thanks for the remark.
Done now. when I will have time, I will review my posts and add those links to ease the navigation for
my readers.
Reply
2. Reader November 13, 2018 At 9:46 pm
Very informative article. So,
“CHIPs, Checking, ACH and Cards Systems are multilateral clearing systems for which settlement takes
place in Fedwire.”
Do you mean that for any number of clearing houses the actual settlement takes place at the only RTGS
in a country? Could you clarify a bit on this?
Eg. The banks communicate with ACH to do the clearing, and immediately after they contact the RTGS
that will do the settlement inside the central bank or is it different than the central bank itself?
Thanks
Reply
3. Kusuma August 14, 2019 At 3:31 pm
Hi Jean,
All the payments related articles provide a clear understanding of the concepts. Your style of writing is
lucid. Thanks for sharing your knowledge!
Could you please let us know the accounting entries made by a bank in a net settlement scenario?
A outward remittance transaction – Accounting entries recorded by the core banking system of the bank
a)while the payment instruction is issued b) after clearing and c)after settlement. Many thanks!
Reply
o Jean Paul August 16, 2019 At 9:30 am
Hi Kusuma, Thank you for your appreciation.
I would love to help you with accounting entries (a key topic in payments and it takes time to really
explain how it works), but right now I am very busy.
So I recommend you to read the chapter 6 of the book I wrote about SCT if you have it.
Now that you know my style, I think you will not be disappointed. If you don’t have it yet, you can buy it
on my website (PDF version) or on amazon.
For now, this is the best thing I can do for you. In the future, I will write few articles about accounting.
But I do not know yet when that will be possible.
Best regards,
Jean Paul
Reply
4. Accounting Entries in Payments – Payments Domain June 18, 2021 At 11:40 am
[…] Settlement: https://www.paiementor.com/clearing-and-settlement-mechanisms-settlement/ […]

Reply
pm
[…] Payment Settlement […]
Reply
6. swati October 19, 2023 At 7:18 am
Hi JP,
thanks a lot for this article about CSM.
now that I have gone through all of these…I am confused between clearing system does(netting and
coming with final position) AND what does net settlement does(again netting)? can you pls explain the
difference pls? Many thanks in advance.
Reply
LEAVE A REPLY
ACCOUNTING ENTRIES IN PAYMENTS
 PAYMENTS - INTRODUCTION
 29 MAY 2021
 BY SANTOSH
 HOME
 PAYMENTS - INTRODUCTION
 ACCOUNTING ENTRIES IN PAYMENTS
Accounting Entries in Payments
As promised in my previous article, in this one we will talk about how money moves from one party to
another. Before we start, let me introduce you to a few terms that will be used throughout this article.
Debit – Money being taken from your account
Memory Aid – When you pay for something your account is debited
Credit – Money being added to your account
Memory Aid – When you receive your salary your account is credited
Let us get one more question out of our way. What are accounting entries??? It is a process of keeping
track of the different credits and debits in a transaction. As a rule, you can always say that the total sum
of debits should be equal to the total sum of credits.
We also need to understand 4 types of accounts that aid in the transfer of funds.
1. NOSTRO
2. VOSTRO
3. MIRROR NOSTRO
4. MIRROR CLEARING ACCOUNT (Clearing Account)
NOSTRO – Citi bank opens an account with AXIS bank (We will look at the why part in the future). From
the City bank’s perspective, the account in AXIS bank is called the NOSTRO account. NOSTRO accounts
are generally held in a foreign country and in the local currency of that country.
Somehow remember this, use any memory aid that you feel will do the trick. All the other 3 will fall into
place. Refer Pic A0401
VOSTRO – Using the same example from above, Citi bank’s account with AXIS bank from the perspective
of AXIS bank is called a VOSTRO account. So basically, the account is the same but the name changes as
the perspective from which we look at the account is different. If you are a bank then another bank’s
account that you hold in your books is a VOSTRO account. Refer Pic A0401
There is something else called LORO account. We will look at that later.
A0401
MIRROR NOSTRO – From Citi’s perspective, it has a NOSTRO account with AXIS. Now, Citi opens a mirror
account of that NOSTRO in its books (In Citi bank), which acts like a mirror and nothing more. Mirror
inverts left and right likewise mirror account inverts credit and debit. It is used to reflect the
status/balance of the NOSTRO account. At the end of the day, the NOSTRO account is reconciled (entries
matched) with MIRROR NOSTRO.
Example: If the MIRROR NOSTRO is credited then the actual NOSTRO is debited and vice versa.
You may ask “why?!!!”, The reason is simple. You will understand it if you read further.
A0402
MIRROR CLEARING ACCOUNT -When banks exchange funds with each other via a CSM, then they hold
an account with the CSM. It’s slightly more complex than that but for now, let us not focus on the
account that we hold with CSM instead let us focus on the mirror of that CSM account that we hold in
our books (or bank.) It is called the mirror clearing account.
A0403
Now that we know the different types of accounts and the associated terminologies let us start with the
topic at hand. If you have only 10 mins to prepare for a payments interview, I suggest you read the
following.
Correspondent Banking (Without CSM):
Let us take the story of John to understand the movement of money in a credit transfer. John wants to
send Tom $1000 and for now, let us assume that there are no charges for this transaction.
A0404
Step 1: John instructs his bank (Citi) to send funds ($1000) from his account to Tom’s account in AXIS
bank via. the internet banking portal (Or any other channel).
Step 2: Citi bank will have a “payment engine” that will receive this instruction and perform a range of
checks and if all the checks result in a positive outcome, then John’s account is debited $1000.
What is this “Payment Engine”, Is it a clue about my next article??!! What are the checks that are
performed?? Ok, definitely it’s the next article.
Step 3: Now the money taken from John’s account is credited into the Mirror of the NOSTRO account
that Citi bank has with Axis. This is like handing over the money to AXIS bank.
Note: There will be suspense accounts involved in the transfer of funds from John’s account to the
Mirror account but let us skip that here as we are trying to get the big picture.
Step 4: Now that the accounting entries within Citi bank are completed a payment message is sent by
Citi bank to AXIS bank. This will be a Customer FI to FI payment message. Check out my previous articles
on message types for more details.
Step 5: AXIS bank will have its payment engine and it will receive and process the payment message sent
by Citi. If all the checks are successful then Citi’s NOSTRO account is debited for $1000 and the same is
credited to Tom’s account.
Step 6: Tom is intimated via email or SMS or credit advice that funds have reached his account.
Yes, It’s as simple as that. This whole process can be compared to sending a money order, where you
give the details of the receiver and the money to the local post office (credit to MIRROR NOSTRO) and
the receiver’s city will have a post office that will provide the money to the receiver (Debit NOSTRO and
credit customer).
If you are not from India or a 2K Kid then forget about this example I just hope you understand
the concept. If not please reach out to me.
Banking Via. Market Infrastructure (With CSM):
For a similar type of transaction mentioned above if the CSM is involved then the concept is pretty much
the same only difference is that the Mirror CSM account is debited and credited on both sides. Here the
assumption is that the CSM is an RTGS system. In RTGS systems there is no clearing but only settlement.
A0405
If it is a NET settlement, then transactions are exchanged between parties via. Clearing and only the
position of the bank’s account with CSM are calculated and at the end of the day or during INTRA day
the funds are settled between the different CSM accounts of different banks. This settlement generally
happens in the RTGS system.
For detailed information on clearing and settlement kindly refer to these articles from paiementor.com
where it’s perfectly explained.
Clearing House: https://www.paiementor.com/clearing-and-settlement-mechanisms-multilateral-

clearing/
Settlement: https://www.paiementor.com/clearing-and-settlement-mechanisms-settlement/
If I may suggest something, try to find out meaning of the terms that you do not understand in this
article.
Quiz: Can you tell me what a payment market infrastructure (PMI) is???
Post Views: 21,160
 51 COMMENTS
 157
YOU MAY ALSO LIKE
MISC PAYMENT CONCEPTS
18 JUNE 2021
CHARGES AND FOREX (FX)
12 JUNE 2021
PAYMENT ENGINES
05 JUNE 2021
BLOG COMMENTS
REPLY
ASWINI
MAY 30, 2021 AT 3:39 AM
Very useful and easy to learn
REPLY
SANTOSH
MAY 30, 2021 AT 10:18 AM
THanks
REPLY
VEERARAGAVAN
MAY 30, 2021 AT 6:03 AM
Though I work in payment domain and used to the terms and process involved… I re-learn something or
get a clarity on basic concepts. Appreciate the way you have designed the flow….
Question: In RTGS part : “If it is a NET settlement, then transactions are exchanged between parties via.
Clearing and only the position of the bank’s account with CSM is calculated”.
Position of bank AC with CSM- refers to ?
Also please explain how the mirror entries are achieved …by debiting mirror account how does the
funds goes to Nostro account as credit….
REPLY
SANTOSH
MAY 30, 2021 AT 10:27 AM
In NET settlement, when a payment is processed there is no actual movement of funds between banks
only the debits and credits that happen in the CSM account is noted. Position means if banks owes
money or it has to receive money. I request you to read the article in the link that I have shared.
Fund does not actually go the the NOSRTO account. If a MIRROR account is credited with $100 then in
the NOSTRO account you can debit $100. Money is nothing but numbers in a computer system. Hope
you are able to understand.
REPLY
NEERAJ KUMAR
MAY 30, 2021 AT 6:06 AM
CSM,Swift network etc considered as market infrastructure
REPLY
SANTOSH
MAY 30, 2021 AT 10:18 AM
CSM is correct. To be fair my question was about payment market infra. SWIFT network is not PMI.
REPLY
NEERAJ KUMAR
MAY 30, 2021 AT 2:39 PM
Good initiative Santosh for all Payment enthusiasts. I want to connect with you on whtsapp or even
better if we all connect Payment enthusiasts in whtsapp group to discuss payment knowledge and
future opportunities.
Regards
Neeraj Singh
REPLY
SAAHIL
MAY 30, 2021 AT 6:20 AM
Service Provider for payment like Swft,SEPA, …

REPLY
SANTOSH
MAY 30, 2021 AT 10:17 AM
Actually Market infrastructure are entities like RTGS system, ACHs, Real time payment systems.
Customers, FI swift messages not not PMI (payment market infrastructure)
REPLY
ANIKET
MAY 30, 2021 AT 6:24 AM
Hi Santosh,
Market Infrastructure is nothing but the all the entities which are involved in the payment transaction
like Customer FI, CSM, SWIFT messages and Destination FI.
Please correct me if I am wrong.
Thanks
Aniket
REPLY
SANTOSH
MAY 30, 2021 AT 10:16 AM
Actually Market infrastructure are entities like RTGS system, ACHs, Real time payment systems.
Customers, FI swift messages not not PMI (payment market infrastructure)
REPLY
UMA
MAY 30, 2021 AT 11:26 AM
More informative and great article
REPLY
SANTOSH
MAY 30, 2021 AT 1:52 PM
Thank you
REPLY
NAGARAJ SUSURLA RAMASUBBARAO
MAY 30, 2021 AT 12:45 PM
Few things to share:

What are accounting entries??
A system of recording the financial events which results in inflow and/or outflow of money or its
equivalent.
An intro to Golden Rules of Accounting could have been made.
Nostro: OUR ACCOUNT WITH YOU (CITI)
Vostro: YOUR ACCOUNT WITH US (AXIS)
Loro: THEIR ACCOUNT WITH YOU (THIRD BANK)
Example: If the MIRROR NOSTRO is credited then the actual NOSTRO is debited and vice versa.
You may ask “why?!!!”, The reason is simple. You will understand it if you read further.
Response: If you understand the golden rules of accounting, you will have better clarity of journal
entries
In A0404 flow, Funding process is also involved wherein the Citi will arrange to fund the NOSTRO
account with Axis by using the balance in the NOSTRO Mirror Account.
REPLY
SANTOSH
MAY 30, 2021 AT 1:55 PM
Hi Nagaraj.
Thank you so much for contributing. These comments will make the article even stronger.
REPLY
ANAND GUPTA
MAY 30, 2021 AT 1:57 PM
Well discription of Account type.. Just want to add for Loro account s… Doreign correspondents account
maintained with a third Bank is referred to as LORO account ( third party account) .. example, Deutsche
Bank India is looking at an account maintained by Bank of America USA with DBS Singapore in Singapore
dollars.
Hope it’s correct??
REPLY
SANTOSH
MAY 30, 2021 AT 2:28 PM
Yes it is
REPLY
MURALIDHAR SHENOY
MAY 30, 2021 AT 4:31 PM
Awesome initiative Santosh.. the description is simple and the examples are perfect!
Although I’m aware of these concepts – when I am reading an article, I don’t want the current one to
finish and at the end of the article I’m looking forward to the next being published.
keep up the good work!
REPLY
SANTOSH
MAY 31, 2021 AT 4:04 AM
Thank you so much for your kind words
REPLY
SHANKAR S
MAY 30, 2021 AT 5:35 PM
Core topics covered with simple exams and diagrams, thanks for the article.
REPLY
SANTOSH
MAY 31, 2021 AT 4:03 AM
Thanks for your kind words
REPLY
RAJESH CP
MAY 31, 2021 AT 3:52 AM
Simple to understand. It would have been better to include the charges involved in transactions.
REPLY
RAJESH CP
MAY 31, 2021 AT 3:52 AM
Simple to understand. It would have been better to include the charges involved in transactions.
REPLY
SANTOSH
MAY 31, 2021 AT 4:01 AM
Thank you.. Point taken .. I am planning to write a separate article about charges ..
REPLY
ARUN
MAY 31, 2021 AT 5:36 AM
Known is always a drop. Good refresher of all the topics!! Great Job!! Happy Learning!!
REPLY
SANTOSH
JUNE 1, 2021 AT 8:09 AM
Great
REPLY
VAIBHAV CHAWLA
MAY 31, 2021 AT 9:20 PM
Market infrastructure like High value payments RTGS, low value payments ACH.
Thank you for the article
REPLY
SANTOSH
JUNE 1, 2021 AT 8:05 AM
Perfect answer
REPLY
PAVAN
JUNE 2, 2021 AT 1:21 AM
Hi Santosh,
Is it possible to speak about liquidity/funding/de-funding the accounts held with CSM ??
Thats an interesting subnect all together..
REPLY
SANTOSH
JUNE 2, 2021 AT 2:51 AM
Sure, I am not expert in liquidity management I will take the help of someone to get this info.
REPLY
SATHYAMURTHY
JUNE 3, 2021 AT 3:46 AM
Nice document and narrated well. Will be useful for the people who want to enter into Payment field.
REPLY
SANTOSH
JUNE 3, 2021 AT 3:53 AM
Thanks
REPLY
SANKAR
JUNE 7, 2021 AT 11:07 AM
Hi,
Mirror Nostro account and VOstro account are same account?
REPLY
SANTOSH
JUNE 7, 2021 AT 2:43 PM
Mirror NOSTRO is different from VOSTRO as it is held in a different bank but NOSTRO is the same as
VOSTRO
REPLY
SANKAR
JUNE 7, 2021 AT 11:41 AM
Hi in Step-3 you have mentioned in Correspondent Bank without CSM as below

In Now the money taken from John’s account is credited into the Mirror of the NOSTRO account that Citi
bank has with Axis. This is like handing over the money to AXIS bank.
But Mirror Nostro as you have explained it should be “Mirror of the NOSTRO account that CITI bank has
with CITI right? Could you please clarify?
REPLY
SANTOSH
JUNE 7, 2021 AT 2:46 PM

Mirror NOSTRO is held in CITI bank. It is the mirror of the original NOSTRO held with AXIS. Hope this
clarifies your query.
REPLY
ROSHNI
JUNE 28, 2021 AT 1:28 PM
About your question for PMI, I think CSM (NPCI, RTGS, NEFT), EuroNet (its between the bank and NPCI)
in UPI system are PMIs. Hope I am correct!
REPLY
SANTOSH
JUNE 28, 2021 AT 1:38 PM
You are absolutely correct
REPLY
SREEYA
JUNE 28, 2021 AT 6:34 PM
Accounting entries are an important part or the core of the Payment Systems and you have done a great
job in simplifying the things to such a great extent that any one with basic knowledge can follow.
Just one question – Aren’t the accounts used for settling the transactions, called settlement and mirror
settlement accounts? Clearing accounts are used by the clearing houses to derive the final positions of
all its participants. Am I correct or are the terms used interchangeably?
REPLY
PALLAVI
JULY 5, 2021 AT 6:44 AM
Hi Santosh,
Thanks for such a simple explanation of a crucial payments topic.
Few questions-
1.In case of banking with CSM, mirror clearing accounts are used and NOT Nostro/mirror Nostro, right?
2. Is Clearing account another term for settlement accounts or a different account?
Can you please explain the difference between both, if any?
REPLY
SANTOSH
JULY 5, 2021 AT 10:15 AM
1. Yes
2. Settlement account is a generic term used to describe any account with which we settle funds. In this
context settlement account is the account that has with the central bank.
Clearing is a private entity with which banks hold accounts that are called clearing accounts.
REPLY
GAYATHRI
JULY 13, 2021 AT 4:57 AM
Although I have worked in other leading Industry Domains, I am new to Payments Domain and Banking. I
think your page is a great start for me to learn the Business Functions. Thank you!
REPLY
SANTOSH
JULY 14, 2021 AT 3:41 AM
Thank you
REPLY
SANKARA
SEPTEMBER 15, 2021 AT 11:59 AM
Is Nostro and Vostro terms or accounts is specific to cross border payments or applies to domestic
payments as well(Inside the same country)?
REPLY
SANTOSH
SEPTEMBER 15, 2021 AT 12:04 PM
Generally, Nostro and Vostro accounts are used in cross-border payments and not in domestic payments
REPLY
NITIN NARULA
NOVEMBER 17, 2021 AT 1:57 AM
What is the role of VOSTRO account in this transaction? Doesn’t Vostro account get any entry in the
whole process of transferring money.
REPLY
SANTOSH
NOVEMBER 17, 2021 AT 5:05 AM
In this picture Citi’s Nostro account with AXIS bank is a VOSTRO account from AXIS bank’s perspective.
REPLY
DWARKADAS
NOVEMBER 20, 2021 AT 3:58 PM
Why can’t need the MIRROR VOSTRO account?
REPLY
SANTOSH
NOVEMBER 20, 2021 AT 7:38 PM
We would need mirror Nostro account
REPLY
RAJEEV
JANUARY 29, 2022 AT 7:34 PM
Hi Santosh ,
Very Nice article.
qq – as I understand is that Nostro account is held in foreign currency and in the local currency of that
country.
so does this mean that mirror nostro account which City Bank has also the currency of foreign
currency ?? because debit credit calculation will happen when currency are same.
Direct and Indirect Participants to Clearing and Settlement Systems
August 30, 2017
Banks can join a clearing system or a settlement system as direct participants (DP) or as indirect
participants (IP). After reading this post, you will understand the differences between these two types of
participants and why only direct participants settle in CSM. The following figure depicts direct and
indirect participants and the relationship they have to the CSM.
Direct and Indirect participants to a CSM
Direct participants have a direct link to the CSM. They exchange payment transactions directly with the
CSM. Indirect participants do not have a direct link to the CSM. They have a connection to a direct
participant which exchanges transactions with the CSM on their behalf. When the CSM receives a credit
transfer from indirect participants through the direct participant, it expects the direct participant to pay
the money not the indirect participant. And when the CSM sends a credit transfer to the indirect
participant through the direct participant, it expects the direct participant to receive the money not the
indirect participant.
Funds transfer between direct participant and indirect participant
The funds transfer between DP and CSM always happens through the Settlement System. The direct
participant takes money from the indirect participant and gives it to the CSM and receives the money
from the CSM and gives it to the indirect participant. Therefore direct and indirect participants must
have an account relationship. The indirect participant opens a so-called correspondent account with the
direct participant, so that the DP can receive funds and make payments on behalf of the indirect
participant. We will come back later to correspondent accounts. So just keep reading the posts and your
patience will be rewarded.
Even if the CSM exchanges transactions only with DPs, it has the information about all indirect
participants represented by a DP. The clearing system uses that information to route to the DP the
transactions where the receiving bank is the IP. The payment transactions ultimately reach the indirect
participant. The money however will be debited or credited by the CSM on the DP account. It is the DP
responsibility to collect the funds from or give them to its IP.
Why become an indirect participant to a CSM?
Now why would a bank choose to be an indirect participant? In summary, there are two main reasons
for that: cost and speed. First, becoming direct participant and setting up a connection to a CSM imply to
carry out important projects. Without a minimal volume of transactions, there is no return on
investment. Indirect participants are most of the time smaller banks which use the services of bigger
banks to exchange their transactions. Thus they can save the costs for running and maintaining a direct
connection to a CSM. But a big bank with multiple subsidiaries in many SEPA countries can choose to
have one direct participant and many indirect participants to lower the cost as well. Subsidiaries of that
big bank can be of important size. But they remain indirect participants because the Bank Group has
decided to have only one direct participant. The other reason is that it is easier and faster to establish a
connection to a direct participant than to a CSM. A big American bank which creates a subsidiary in a
SEPA country for example, may choose to start as an indirect participant and only builds its own
connection to the CSM later.
Since indirect participants use the services of direct participants to access the clearing system, direct
participants have the opportunity to get some revenue from their direct connection. But a direct
participant must ensure a good level of quality and service to gain indirect participants as customers.
There is theoretically no limit to the number of indirect participants that a direct participant can have.
This makes the competition even tougher.
To conclude this paragraph, I want to stress the importance of understanding that indirect participants
are banks like the others. They have their own customers and channels. They have their own IT systems.
And please do not associate indirect participants with small size or direct participants with big size. A
small bank can become a direct participant and a big bank can choose to be an indirect participant. Keep
in mind that an indirect participant can connect to a CSM only through a direct participant.
Now let’s come back to the four corner model which consists of End parties, Banks and CSMs. The last
articles were about clearing and settlement. Now we will consider the end parties. Who and what are
these end parties? What are their needs? Read the next articles …
Previous article
Next article
End Parties in the Four Corner Model – Private Customers
RELATED ARTICLES
Credit Transfers
Cards
Credit Transfers
16 COMMENTS
1. Venu February 7, 2019 At 7:46 am
Jean, I have started reading your articles recently. Big kudos for your explanation.
Just a small query
1) how is the Liquidity and credit risks managed for the Indirect participants? Does the Direct
participants is accountable to manage the risks which might occur from its Indirect participants or CSM?
Thanks,
Reply
o Jean Paul February 7, 2019 At 8:29 pm
Hi Venu, thank you for your appreciation.

The direct participant is accountable to manage the risk that might occur from its Indirect participants.
In practice, an Indirect participant opens an account with a direct participant and puts some money on
it. Before sending debit transactions on behalf of the IP, the DP will take the money from that account.
In case of Not sufficient funds on that account, the DP rejects the transaction. For credit transactions,
the DP credits the IP’s account and forwards the transaction. I hope it clarifies.
Reply
2. Venu February 8, 2019 At 3:42 am
Yes Jean its clear now. Appreciate your support.
Reply
3. Hassan April 27, 2019 At 7:58 pm
Hi Mr.jean
I have enquire about what the type of risk that related to indierct participant in payment systems from
central bank perspective?
Reply
o Jean Paul May 6, 2019 At 4:33 pm
Hi Hassan, the issue is the liquidity. How to make sure that the Indirect Participant has enough liquidity
to fulfill its financial obligations? That is normally the business of the direct participant. The DP must
ensure that the IP has enough fund before sending debit payments because the central bank sees the
DP even if the payments is for the IP. The Central bank oversees the DP as a whole. It does not really
handle with the IP. I hope this helps.
Reply
4. DK August 15, 2019 At 9:19 am
Hi Jean,
How does signing up for the scheme work with DP and IP?
If DP is signed up for cycle 00 in SCT and IP is not interested in cycle 00, how does it work?
can IP receive cycle 00 files from CSM even though they didnt sign up for that cycle?
and also will CSM accept cycle 00 files from IP (via DP) too?
Reply
o Jean Paul August 16, 2019 At 10:47 am
Q: If DP is signed up for cycle 00 in SCT and IP is not interested in cycle 00, how does it work?
A: The DP will receive the cycle 00 transactions, but will not send anything to the IP. The time when the
IP receives the files from DP is completely independent from the cycles. The DP can receive the files
during the whole day and forward them to the IP only one time at the end of the day. Or two / three
times a day.
Q: can IP receive cycle 00 files from CSM even though they didnt sign up for that cycle?
A: As far as I know, only the DP can sign up for the cycles. IP and DP agree on the times when the DP
forwards transactions to the IP.
Q: and also will CSM accept cycle 00 files from IP (via DP) too?
A: In classic SEPA, only DP can send/receive files from CSM. In the SCT Inst, you have some IP that are
directly connected to the CSM. But there is no cycle there as files are exchanged immediately.
Let me know if you have further questions.
Reply
5. Gency November 27, 2019 At 7:04 pm
Hi Jean Paul
Really great blog, easy to read and understand. I will not read the rule book, for me it is not
readable
Thank you very much!!!
Reply
6. Anjana May 9, 2020 At 6:17 pm
Hi Jean,
I have a question.
If a bank is an indirect participant in RTGS of the country where it operates, does this mean that the
bank is not connected at all to the central bank of the country?
Reply
Hi Anjana, the answer is NO. All banks have an account with the central bank of their country. This is
necessary for the central bank to play its role as overseer of the banking system. Direct participation just
means a bank uses another bank to exchange transactions with the RTGS and for settlement.
Both direct and indirect participant generally exchange funds among themselves through their central
bank accounts. Connecting to a RTGS requires to set up, manage and run a complex infrastructure.
Unless a bank has enough volumes, it is not interesting to do that. So it prefers to use the services of a
direct participant.
Reply
7. Raviprasad June 1, 2020 At 4:58 am
How we can identify pacs008 fields for the sending payment from one direct participant ? and same for
sending payment from one indirect participant?
Reply
Hi Raviprasad,
In a Direct participant payment, Instructing Agent is the Direct Participant, Debtor Agent is the direct
participant.
In a Indirect participant payment, Instructing Agent is the Direct Participant, Debtor Agent is the indirect
participant.
Reply
8. fred June 5, 2020 At 1:46 pm
hi Jean Paul
if im an indirect participant through a bank X, can I also make sepa payment through bank Y? technically
it is allowed, but is it allowed?
many tnanks
fred
Reply
9. PR June 25, 2020 At 11:42 am
Hi Jean Paul,
Thanks for the great content! It really helps simplify many concepts. My query is around access to
information:
a) Does indirect participant have access to information directly from CSM, even though funds flow may
be through the DP?
b) Is it for this information that BIC becomes relevant? And is it mandatory for the indirect participant to
have its own BIC rather than using DP’s BIC – in case of SEPA scheme?
Thanks!
Reply
10. RV March 17, 2021 At 4:37 pm
Does the Indirect participant / correspondent bank (if addressable BIC in t2 directory) send the payment
to the Direct Participant and Direct Participant forwards the payment to scheme (say T2)
Reply
11. Marc Gorr May 14, 2021 At 8:30 am
Dear Jean,
I have a tough question. Is there a way for my bank as a correspondent bank to identify/distinguish
payments from indirect participant clients versus correspondent banking clients? I ask because these are
treated differently in terms of AML monitoring.
I would think that IPs only instruct in their own name with MT202s. Is this the case, or can they also send
MT103/MT202COV payments on behalf of underlying clients?
Is there some kind of message formatting we can require from the IP that differs from CBK payments?
I always find your replies inciteful and easy to understand. This is the mark of a true expert.
Best regards,
Marc GORR
Reply
LEAVE A REPLY
On-us transactions – Intrabank
November 18, 2017
On-us transactions represent a significant part of transactions processed by banks. They can be classified
in two groups: Intrabank and Intrabankgroup transactions.
The word Intra is a prefix meaning “within something, inside something, on the inside”. An intrabank
transaction is a transaction exchanged inside or within the same bank. An intrabankgroup transaction is
a transaction exchanged inside or within the same bankgroup. An intrabankgroup transaction can also
be seen as an interbank transaction between two different banks of the same bankgroup. To avoid
misunderstandings when using the term “on-us”, it is important to clarify if you are at bank level or at
bankgroup level.
The exchange of on-us transactions does not require going through a CSM. They may go through a CSM,
but it is not mandatory. This article is about on-us transactions at bank level. The next article will be
about on-us transactions at bankgroup level. Transactions that do not fall under Intrabank and
Intrabankgroup transactions are logically called “off-us transactions”. These transactions must be
exchanged through a clearing system since the beneficiary bank is outside the bankgroup. There is no
other option.
In the following paragraph, intrabank transactions will be discussed in detail.
Intrabank transactions
Intrabank transactions occur when the intermediary bank is the same on both sides of the credit
transfer. Both debtor and beneficiary are customers of the same bank which holds both their accounts.
Consequently the debtor bank the same as the creditor bank. And in this case, there is no clearing
needed and the transaction is settled directly through an internal book transfer. The bank debits the
originator account and credits the beneficiary account. These transactions can be executed much faster
than the ones which have to go through the clearing and settlement process in a CSM.
Model for intrabank transfer
Now, look at the model for the intrabank transfer. There is one big box in the center that represents the
bank playing the role of both originator bank and beneficiary bank. In a way, this shows that the bank
sends the transaction to itself. The originator and the beneficiary are connected to the big box since
both are customers of the bank.
The bigger the bank, the larger the customer base and the higher the percentage of on-us transactions
because the probability of having transactions between the bank customers increases. Some customers
have multiple accounts (current accounts, saving accounts, etc) and need to move funds from one of
their accounts to another. They initiate intrabank transactions for that purpose as well. As a matter of
fact, the number of intrabank transactions between accounts of the same customer is much higher than
between accounts of two different customers in a bank.
Intrabank transactions must be considered carefully in a payment project. Their settlement through an
internal book transfer makes them really specific.
On-us transactions at bankgroup level bring other challenges. We will take a closer look at them in the
next article.
Previous article
Exchange periods of the SCT messages
Next article
On-us transactions – Intrabankgroup
RELATED ARTICLES
Credit Transfers
Credit Transfers
Credit Transfers
Differences between SEPA, SWIFT and UK Faster payments
4 COMMENTS
1. Venkat Desu March 21, 2020 At 6:07 pm
Do we have any standard messages for Intrabank book transfers (ON-US) ?
Reply
o Jean Paul March 26, 2020 At 4:26 pm
Same standard messages are used for Intrabank book transfers. For the SCT, it is the standard ISO
20022.
Different standards for interbank and interbank transactions create many many problems on the long
term.
Reply
2. Ramakrishna October 10, 2020 At 10:39 am
What are the standard ISO 20022 messages exchanged in SEPA DD if it is On-us transaction?
Reply
pm
[…] Intra Bank Payments […]
Reply

Sepa Payments 2s

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sepa Payments 2s

Uploaded by

Copyright:

Available Formats

Clearing and Settlement Mechanisms – Bilateral Clearing

July 19, 2017

What is (bilateral) Clearing?

The Four Corner Model of the SEPA Credit Transfer

Fundamentals of Payments and Payment Systems

Payment Systems & Modernization in Canada

Differences between SEPA, SWIFT and UK Faster payments

1. Deepa August 21, 2018 At 12:03 pm

o Jean Paul August 21, 2018 At 2:59 pm

2. meera September 28, 2018 At 8:27 am

Lovely articles Jean..awesome and easily explained ..

3. Alberico October 18, 2018 At 2:18 pm

o Jean Paul October 18, 2018 At 3:22 pm

4. John Basco J H November 1, 2018 At 7:26 am

o Jean Paul November 2, 2018 At 10:18 am

o Jean Paul January 14, 2019 At 8:55 pm

6. Hassan Alkhateeb March 18, 2019 At 8:28 pm

7. raj October 4, 2019 At 3:39 am

8. Marie Lathiere December 6, 2019 At 12:10 pm

9. RT April 8, 2020 At 6:56 pm

o Rafik May 18, 2021 At 9:09 pm

Many thanks…very valuable

10. Suresh December 24, 2020 At 4:42 pm

It’s very informative

[…] Payment Clearing Bilateral […]

Clearing and Settlement Mechanisms – Multilateral Clearing

July 23, 2017

Multilateral clearing without a clearing house

Multilateral clearing with a clearing house

Multilateral Clearing System

Clearing and Settlement Mechanisms – Bilateral Clearing

Fundamentals of Payments and Payment Systems

Top Trends Shaping the Future of Credit Cards

Payment Systems & Modernization in Canada

2. Guest November 5, 2018 At 3:21 pm

o Jean Paul November 5, 2018 At 11:15 pm

 Jean Paul November 6, 2018 At 9:23 pm

 Amit Amay Singh March 18, 2020 At 8:25 am

Please help with your inputs.

 Jean Paul March 26, 2020 At 4:08 pm

Q: How CSM actually know the debit/credit instructions a bank receives ?

I hope this helps.

 Amit Amay Singh April 3, 2020 At 3:19 pm

Thank you for inputs Jean.

 khushbu tawar June 20, 2020 At 2:42 pm

Can you give an example of CSM in SEPA system .

3. Aditya S April 23, 2020 At 1:04 pm

to Amit Amay Singh :

In case of RTGS, it is always CSM

o Jean Paul June 1, 2020 At 12:45 pm

5. Romeo NGUIMEZAP KENFACK June 1, 2021 At 4:21 am

Hello Jean Paul,

I would like to know if it is possible to have have an internship with you.

6. Ashok December 11, 2021 At 9:26 am

I would request you to help clearing below query.

[…] Payment Clearing Multilateral […]

8. swati October 18, 2023 At 11:22 am

Hi, very good explanation:

Clearing and Settlement Mechanisms – Settlement

August 22, 2017

Real-Time Gross Settlement System

Clearing and Settlement Mechanisms – Multilateral Clearing