International Money Transfers

Overview of Money Transfers

• Commercial banks facilitate international payments
• Central banks rely on commercial banking systems for recording daily transactions
• Recorded transactions are used to determine a nation's balance of payments

International Banking Services

• International banking services are commonly used to transfer money
• This includes purposes such as supporting students studying abroad, assisting family members living abroad, purchasing merchandise, and settling trades of foreign exchanges
• Banks use correspondent banks for internationally clearing checks
• Domestic interbank settlements are processes through the FED (central bank)

Correspondent Banks

• Correspondent banks enable the transferring of funds, financing international trade, and extending credit
• Active customers of one another, this system is referred to as correspondent banking
• Payments involve a message detailing the amount, timing, and currency, alongside the money transfer for settlement or reimbursement
• International banking activities primarily operate through correspondent banks
• Only 1% of US banks have branches in other countries
• Major and small banks become correspondents with each other to provide services
• Larger banks gain access to regional markets and smaller banks obtain services and lines of credit

Establishing Correspondent Bank Relationships

• Banks exchange information regarding service terms, conditions, and corresponding fees
• Banks also exchange signature books and confidential telegraphic test keys for verification

International Department Accounts

• Global payments rely on banks maintaining deposit accounts in other countries
• Money moves from one country to another through debits and credits to these accounts
• Global payments primarily happen through changes in bank account balances rather than physical currency movement

Due To (Vostro) Accounts

• A demand account held by a foreign bank in a US bank is referred to as a "Due To" or "Vostro" account
• Vostro means "your account with us"
• These accounts are denominated in US dollars
• Vostro accounts enable foreign banks to make payments, handle collections, settle drafts under letters of credit, and provide deposits
• Banks regularly exchange statements showing account balances

Due From (Nostro) Accounts

• An account held by US banks in a foreign bank is referred to as a "Due From" or "Nostro" account
• Nostro means "our account with you"
• These accounts are denominated in the foreign country's currency
• "Due From" accounts are kept in both foreign currency and US dollar equivalent, meaning it is referred to as a dual currency account

Using Bank Accounts

• Conducting banking operations is possible through establishing just one account between two banks
• This account operates for fund transfers, payments, traveller's checks and foreign deposits

Transferring Money Between Banks

• A remitting bank opens an account at the paying bank to begin transferring money
• Bank A sends instructions to Bank B
• Bank B sends a debit advice to Bank A
• Bank A's instruction states, "In cover, please debit the sum to our a/c with you"
• Bank A waits to receive debit advice to confirm remittance reception

Paying Bank Operations with An Account

• Bank B opens an account at Bank A
• Bank A sends instruction and credit advice to Bank B
• Bank B's instructions state, "In cover, we have credited the sum to your a/c with us"
• Bank B awaits for credit advice before processing payments

Opening Accounts in Different Banks

• Bank A opens an account in Bank C and Bank C opens an account in Bank B
• Bank A's instructions state, "In cover, please claim on Bank C"
• Bank C receives instruction from Bank A to receive payment requests and debit Bank B
• Bank C then sends debit advice

Bank Operations with Accounts at Bank C

• Both banks open accounts in Bank C
• Bank A's instruction states, "In cover, we have authorized Bank C to debit our a/c and credit the same to your account with them"
• Bank C's instruction authorizes debiting Bank A's account while crediting Bank B's
• Bank A's transfers are in USD

Remittances

• Remittance describes the process by which a buyer delivers the value of goods to the seller via bank transfer,
• This usually occurs between trusting parties, and requires both parties to have deep knowlege of trust
• A payment is called favorable when done by remittance, in which the buyer transfers the payment from a bank
• Payment is called adverse when using collection or a letter of credit, in which the exporter gathers the payment from the buyer
• Methods, like determining credit and bank credit (more reliable when compared to commercial credit), are chosen for the settlement's safety

Parties in an International Bank Remittance

• Remitter: Payer, buyer and importer
• Remitting Bank: The remitter's bank located in the importing country
• Beneficiary: Payee, seller and exporter
• Paying Bank: The beneficiary's bank in the exporting country

Types of Remittance

• Airmail Transfer (M/T):
  • The bank mails a letter to another specifying the amount, name/ address of beneficiary/sender.
  • Banks include the fee and other expenses, along with the customer's payment instructions.
  • This method is both cheap and slow
• Banker's Demand Draft (D/D):
  • The buyer purchases a banker's bill, delivering it through local mail, and once received, the seller will come to the local bank designated for cash
  • Promissory notes or checks are used in its place
  • It is easy to negotiate, though slow
• Telegraphic Transfer (T/T)
  • Almost identical, minus the electronic messaging
  • Speed is more important today, which leads to today's most common online computer system
  • fast, safe, and has limited keeping time

Security Through Transfer Methods

• A test key is a code for verification
• It consists of tables of numbers with days, months, year, currency, and amount, and is only available to the lending bank

Procedures for M/T and T/T

• Remitter delivers the application with funds/commission
• Receipt
• the bank instructs the paying bank and notifies the payee
• Payee provides the bank their receipt
• Bank debits paying bank
• Bank send the debit advice and payment receipt to the remitting bank
• Debt is discharged

Swift Systems

• Payment orders use data teletransmission services
• Organized as a cooperative, it provides member banks with standardized message formats

Key Swift Uses

• Uses computer systems
• Includes coding that proves the authenticity of messages
• Provides online real-time messaging for members through a NET development from 2001
• Connects more than 7,000 financial institutions for quick international money transfers/messages
• Uses regional payment methods, such as Chips
• Maintains security features (authentication and verification)

Advantages and Disadvantages of Transfer Methods

• Accuracy is better through SWIFT, due to mailing losses
• It is also more reliable
• Cost is much higher with SWIFT
• Speed is better through SWIFT

Value Dates of The Fund

• They are executed through the standard two times in a day:
  • Same-day: the equivalent of cash
  • Next-day: is ready on the next business day.

Executing Incomming Remittance Procedures

• Payment gets received, and availability is checked
• Payee is provided advice of remittance
• Customer ID is verified
• Money gets credited

Executing Outgoing Remittance Procedures

• Receives instruction through customer, while checking availability
• The customer's banking info is debited
• The payment order is then sent to an over-sea branch

Swift Roles In International Payments

• Markets have payments, systems, central banks, and clearing infrastructures
• Financial institutions have communication, counterparties, traditional payments and reporting statements
• Corporate customers participate in segments with communication, wholesale, retail, and payment initiation

Cancelling a Remittance

• For M/T and T/T remittances get cancelled
• D/D cannot, due to the original draft being hard to find, or being transferred between other banks

Traveller's Checks

• Most widely used instrument for international bankers, and also domestic travellers
• Issuers arrange checks, design the printing of dollar values, distribute money when the money is received by the issuer, and must replace lost checks

Settlements

• Transfers and balances take place for the funds from seller to recipient
• Can be made through
  • Banking, crediting, authorizing, transferring and debiting

Large Value Settlement

• Banks keep balances and interest, and maintain funds for day-to-day functions
• Fedwire and CHIPS are used, based on weather or not they are foreign or domestic

FedWire Systems

• Message and payment system of the Fed
• Available for payments because of Federal reserves
• All banks are required to maintain reserves

Keys To Fedwire

• Payment speed is near instant
• Banks debit right away
• "Netting out" never happens
• Has an average transfer of $3 million

ChIPS Systems

• Private, computerized, and an online system
• All transfers take place to The Clearing House

Keys To ChIPS

• Is final at the end of the day's net settlement
• Net position matters over individual transfers
• Banks need a credit limit with each other
• Overdraft orders only take place when funds are available for the day