Engr. Abdul-Rahman MahmoodMS, PMP, MCP, QMR(ISO9001:2000)

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VC++, VB, ASP

Fundamentals of bank to bank systems

Teaching skills, Project Management

Course portal http://alphapeeler.sf.net/me

Class Policies

Class Policies

Bank operations in context of payment

Contents I. Payment Systems

II. Payment Channels

paper-based, high-value systems, batch systems and card based

III. Payment Processing and Controls

IV. Settlement

V. Alternative Payments

VI. Conclusion

I. Payment Systems A payment system is a set of processes and

technologies that transfer monetary value from one entity or person to another.

Can be made in a variety of currencies

Uses several methods such as cash, Cheques, electronic payments and cards.

Uses cash-substitutes, such as Cheques or electronic messages, to create the debits and credits that transfer value.

Four corners payment model In the simplest case involving the traditional banking

system, payments involve four participants

Possible for banks to

use various

intermediaries to help

facilitate the

transaction. (“network”).

Network Central banks: the Fed (US Federal Reserve), ECB

(European Central Bank), The Bank of England, SBP.

Clearinghouses: CHIPS (Clearing House Interbank Payment Systems) and Fedwire (US Federal Reserve Bank network), and NCCPL (National Clearing Company of Pakistan Limited).

International transfer mechanisms: SWIFT (Society for Worldwide Interbank Financial Telecommunications)

Outside 4 corners: payroll processors, card systems (Visa, MasterCard)

Store for transfer value Depository accounts at banks

Other types of financial institutions

Payment Process Payment instructions

Payment generation

Clearing

Settlement

Final settlement

II. Payment Channels Processors for the payment systems can use different

channels to make a payment and each has different operating characteristics, rules and settlement mechanisms.

Payment Channels covers the four basic payments types; paper-based, high-value systems, batch systems and card based.

A. Paper-based payment channel Payments are initiated when one party writes an

instruction on paper to pay another

Cheques or Drafts

Oldest forms of non-cash payment systems.

Still widely used in Pakistan.

Cheque clearing process

payer

Cheque elements Name of the payer

Name of the payee

Payer’s account number

Amount of the Cheque

Date the Cheque was issued

Name and routing number of the payer bank.

Coding strip (bottom of the Cheque) that enables high-speed reader equipment to process quickly. MICR / OCR.

Value transfer of Cheque Value of Cheque is available to the payee within 1-2

days.

The value transfer is on provisional basis.

Validation of value of Cheque and settlement.

Cheque clearing has been improved through the use of images of the Cheques.

Creates few issues as well.

B. High-value payment channel Used between businesses

Used for requirement of fast, secure & final transfer of value.

Referred to as wires.

Costly than paper-based or batch systems.

A high-value transfer system.

High-value transfer instruction is final and irrevocable

Beneficiary’s bank is receiving immediate value from the central bank

Provides the funds to the beneficiary virtually on an immediate basis.

Central bank stands as a guarantor of the system to both banks.

Receiving bank can rely on the central bank

for the funds if sending bank fails to adequately cover their account with the central bank.

Hence it’s the most costly transfer system.

Complexity of High-value transfer In reality, making high-value payments is a bit more

complex.

Different ways in which sender’s can instruct its bank to effect the payment. These include bank-proprietary systems,

ERP (Enterprise Resource Planning)

file transfers through SFTP,

Third-party systems,

SWIFT and occasionally the telephone or by fax.

How the sender structures its message to the bank will determine the speed, cost and risk with which the bank can complete the transfer.

RTGS vs non-RTGS Mostly High-value transfer systems are based on Real

Time Gross Settlement Systems (RTGS).

In non-RTGS systems value is transferred between the sender’s bank and the beneficiary’s bank on a periodic basis.

This reduces the immediacy of the transaction but not the finality.

RTGS systems are important for global financial stability.

non RTGS systems are in a state of rapid decline.

RTGS examples Fedwire, the U.S. based high-value transfer system.

PRISM – Pakistan.

CHAPS - UK.

LVTS in Canada.

CNAPS in China.

C. Batch Systems Handles large volumes of relatively low value transfers.

Participants would exchange batches of transfers on a daily basis.

Originator

Receiver

ODFI

RDFI

ACH

Batch Systems

Automated Clearing Houses NIFT (National Institutional Facilitation

Technologies) - Pakistan

ACH - US

BACS - UK

ACH Systems Typically been used for domestic transactions.

Typically been a next-day payment system.

BACS - UK offer a same-day ACH process known as Faster Payments Service (FPS).

4. Card Based Payments Include both debit and credit cards.

Fastest growing form of payment.

3rd party vendor may issue credit / debit cards.

Bank-issued cards are the most widely used.

Credit card is issued against a line of credit that the institution or merchant has extended.

Debit card is issued against a deposit account held by a business or consumer.

Card Transactions

Card Transactions Cardholders can typically dispute charges assessed to

their accounts from 60 to 120 days after the originally transaction.

Disputes may result in a charge-back to the merchant unless the merchant provides proof of the original transaction.

Debit card transactions can be either:

Signature based, processed via Merchant’s CC N/W.

PIN based, processed through an EFT or ATM

III. Payment Processing and Controls Payment Processing and Controls looks at payments

from the corporate perspective dealing with topics such as making payments and processing collections.

Payment Processing andControls steps Entry into the obligation to purchase goods or services.

Obligation is approved and entered into an accounting system by payor.

The payment method, such as Cheque, ACH, or wire, is selected.

Initiation and execution of payment by the purchaser.

Funding and settlement of the payment.

Transaction reconciliation between company systems and external bank accounts.

IV. Settlement Settlement describes how financial institutions

involved in payments exchange value between each other.

Refers to the actual movement of funds from the payor’s account to the payee’s account.

Settlement : time at which the payee can actually use the money involved.

Finality : time when the payee knows that the value cannot be taken back by the payer.

Settlement becomes final when a payment is unconditional and irrevocable.

Forms of settlement Domestic transfer – handling settlements using

common accounts at central bank.

Cross-border payment – for handling settlements banks use depository accounts, called correspondent accounts, to settle their customers’ funds transfers with the correspondent banks using their reserve accounts on behalf of their clients.

Settle

ment th

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banks

V. Alternative Payments Alternative Payments deals with less conventional

payments systems, such as Hawala, PayPal and Bitcoin.

Hawala transfers

The Hawaladars exchange details about the transaction and move the value between themselves using the banking system.

Hawala transfers The Hawaladars function as banks, aggregating a

number of small transactions, which are ultimately settled through the formal banking system.

Hawala has characteristics that also appeal criminals or terrorists.

Conclusion

Thanks for listening!