Real-time gross settlement

From Wikipedia, the free encyclopedia

Real time gross settlement systems (RTGS) are specialist funds transfer systems where transfer of money orsecurities [1]  takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bundling or netting with any other transaction. Once processed, payments are final and irrevocable.

RTGS systems are typically used for high-value transactions that require immediate clearing, in some countries the RTGS systems may be the only way to get same day cleared funds and so may be used when payments need to be settled urgently such as when purchasing a house. However most regular payments would not use a RTGS system, but instead would use a national payment system or network that allows participants to batch and net payments.

RTGS systems are usually operated by a country's Central bank as it is seen as a critical infrastructure for a country's economy. Economists view that an efficient national payment system reduces the cost of exchanging goods and services, and is indispensable to the functioning of the interbank, money, and capital markets. A weak payment system may severely drag on the stability and developmental capacity of a national economy; its failures can result in inefficient use of financial resources, inequitable risk-sharing among agents, actual losses for participants, and loss of confidence in the financial system and in the very use of money[2]

RTGS

This "electronic" payment system is normally maintained or controlled by the central bank of a country. There is no physical exchange of money; the central bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank A's account by $100,000 and increasing the amount of Bank B's account by the same. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time. Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as the UKs, BACS system. In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. The implementation of RTGS systems by central banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS

system, transactions are settled across accounts held at a central bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. The best RTGS national payment system cover up to 95% of high-value transactions within the national monetary market.

The World Bank has been paying increasing attention to payment system development as a key component of the financial infrastructure of a country, and has provided various forms of assistance to over 100 countries. Most of the RTGS systems in place are secure and have been designed around international standards and best practices.[3] Several reasons exist for central banks for RTGS adoption decisions to include counterparts in the system. First, a decision to adopt is influenced by competitive pressure from the global financial markets. Second, it is more beneficial to adopt an RTGS system for central bank when this allows access to a broad system of other countries' RTGS systems. Third, it is very likely that the knowledge acquired through experiences with RTGS systems spills over to other central banks and helps them make their adoption decision. Fourth, central banks do not necessarily have to install and develop RTGS themselves. The possibility of sharing development with providers that have built RTGS systems in more than one country (Logica CMG of UK, CMA Small System of Sweden, JV Perago of South Africa and SIA SpA of Italy, Montran of USA) has presumably lowered the cost and hence made it feasible for many countries to adopt.[4] By 1985, three central banks had implemented RTGS systems. At the end of 2005, the use of RTGS systems had spread to 90 central banks.[5]

Systems in Europe covering multiple countries[edit]

TARGET2 is the Real Time Gross Settlement system for the Euro currency, and is offered by the Eurosystem, which comprises the European Central Bank and the National Central Banks of those countries that have adopted the Euro currency. The Eurosystem and the European System of Central Banks will co-exist as long as there are EU Member States outside the Euro area. TARGET2 is used for the settlement of central bank operations, large-value Euro interbank transfers as well as other euro payments. TARGET 2 provides real-time financial transfers, debt settlement at central banks which is immediate and irreversible.

Existing systems[edit]

Below is a listing of countries and their RTGS systems:

Albania  - AECH, RTGS Angola  - SPTR, (Sistema de pagamentos em tempo real) Azerbaijan  - AZIPS (Azerbaijan Interbank Payment System) Australia  - RITS (Reserve Bank Information and Transfer System) Bosnia and Herzegovina  - RTGS Bulgaria  - RINGS (Real-time INterbank Gross-settlement System) Brazil  - STR (Sistema de Transferência de Reservas) Canada  - LVTS (Large Value Transfer System) (This is actually an

RTGS Equivalent system. Final settlement happens in the evening.) China  - China National Advanced Payment System ("CNAPS") (also called

"Super Online Banking System)[6]

Chile  - LBTR/CAS (Spanish: Liquidación Bruta en Tiempo Real) Croatia  - HSVP (Croatian: Hrvatski sustav velikih plaćanja)[7]

Czech Republic  - CERTIS (Czech Express Real Time Interbank Gross Settlement System)

Egypt  - RTGS European Union  - TARGET2 Hong Kong  - Clearing House Automated Transfer System (CHATS) Hungary  - VIBER (Hungarian: Valós Idejű Bruttó Elszámolási Rendszer) India  - RTGS,[8] NEFT, IMPS [9] Indonesia  - Sistem Bank Indonesia Real Time Gross Settlement (BI-RTGS) Iran  - SATNA ( آنی ناخالص تسویه Real-Time Gross Settlement ,سامانه

System) Japan  - BOJ-NET (Bank of Japan Financial Network System)[10]

Kenya  - Kenya Electronic Payment and Settlement System (KEPSS)[1] Korea  - BOK-WIRE+ (The Bank of Korea Financial Wire Network,한은금융

망) Kuwait  - KASSIP (Kuwait's Automated Settlement System for Inter-Participant

Payments) Macedonia  - MIPS (Macedonian Interbank Payment System)[11]

Malawi  - MITASS (Malawi Interbank Settlement System) Malaysia  - RENTAS (Real Time Electronic Transfer of Funds and Securities) Mexico  - SPEI (Spanish: Sistema de Pagos Electrónicos Interbancarios)[12]

New Zealand  - ESAS (Exchange Settlement Account System)

Nigeria  - CIFTS (CBN Inter-Bank Funds Transfer System) Pakistan  - Pakistan Real Time Inter-Bank Settlement Mechanism - PRISM

(State Bank of Pakistan)[2] Peru  - LBTR (Spanish: Liquidación Bruta en Tiempo Real) Philippines  - PhilPaSS [3] Poland  - SORBNET [4] and ELIXIR Russia  - BESP system (Banking Electronic Speed Payment System)[5] Romania  - ReGIS system [6] Saudi Arabia  - (Saudi Arabian Riyal Interbank Express) SARIE [7] Singapore  - MEPS+ (MAS Electronic Payment System Plus) South Africa  - SAMOS (The South African Multiple Option Settlement) [8] Sri Lanka  - LankaSettle (RTGS/SSSS) Sweden  - RIX (Swedish: Riksbankens system för överföring av kontoförda

pengar) [9] Switzerland  - SIC (Swiss Interbank Clearing) [10] Taiwan  - CIFS (CBC Interbank Funds Transfer System) [11] Tanzania  - TIS (Tanzania interbank settlement system) Thailand  - BAHTNET (Bank of Thailand Automated High

value Transfer Network) Turkey  - EFT (Electronic Fund Transfer) Ukraine  - SEP (System of Electronic Payments of the National Bank

of Ukraine) [12] United Kingdom  - CHAPS (Clearing House Automated Payment System) United States  - Fedwire Zambia  - ZIPSS-Zambian Inter-bank Payment and Settlement System

CHAPSFrom Wikipedia, the free encyclopedia

For other uses, see Chaps (disambiguation).

The Clearing House Automated Payment System or CHAPS is a British company established in London in 1984, which offers same-day sterling fund transfers.

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. Unlike with a bank giro credit, no pre-printed slip specifying the recipient's details is required. Unlike cheques, the funds transfer is performed in real-time removing the issue of float or the potential for payments to be purposefully stopped by the sender, or returned due to insufficient funds, even after they appear to have arrived in the destination account.

CHAPS is used by 20 Direct Participants including the Bank of England and over 4500 Indirect Participants. In its first year of operation, average daily transactions numbered 7,000 with an annual value of 5 billion pounds sterling. In 2004, twenty years later, average daily transactions numbered 130,000 with an annual value of 300 billion pounds sterling. In 2010 there were 32 million CHAPS transactions totalling over £61 trillion,[1] down from £73 trillion in 2008.[2]

CHAPS used to offer euro fund transfers as a member of the EU-area settlement system TARGET, but this service closed on 16 May 2008.[1] The total value of these in 2007 was £57 trillion.[2]

As well as making transfers originated by banks themselves, CHAPS is frequently used by businesses for high-valuepayments to suppliers, by mortgage lenders issuing advances, and by solicitors and conveyancers on behalf of individuals buying houses.[3]

Costs and problems[edit]

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) is sometimes a subject of controversy in the UK,[4] although low value transactions are now available from its Faster Payments Service.[5]

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.[3]

Wire transferWire transfer or credit transfer is a method of electronic funds transfer from one person or institution (entity) to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office.

Different wire transfer systems and operators provide a variety of options relative to the immediacy and finality of settlement and the cost, value, and volume of transactions. Central bank wire transfer systems, such as the Federal Reserve's FedWire system in the United States are more likely to be real time gross settlement (RTGS) systems. RTGS systems provide the quickest availability of funds because they provide immediate "real-time" and final "irrevocable" settlement by posting the gross (complete) entry against electronic accounts of the wire transfer system operator. Other systems such as CHIPS provide net settlement on a periodic basis. More immediate settlement systems tend to process higher monetary value time-critical transactions, have higher transaction costs, and a smaller volume of payments. A faster settlement process allows less time for currency fluctuations while money is in transit.

History[edit]

Wire transfers originated in the 19th century, sent over telegraph lines. This process gave them their name wire as telegraphs were transmitted over wires. [1][citation needed]

Bank wire transfers are often the cheapest method for transferring funds between bank accounts. A bank wire transfer is effected as follows:

1. The entity wishing to do a transfer approaches a bank and gives the bank the order to transfer a certain amount of money. IBAN and BIC codes are given as well so the bank knows where the money needs to be sent.

2. The sending bank transmits a message, via a secure system (such as SWIFT or Fedwire), to the receiving bank, requesting that it effect payment according to the instructions given.

3. The message also includes settlement instructions. The actual transfer is not instantaneous: funds may take several hours or even days to move from the sender's account to the receiver's account.

4. Either the banks involved must hold a reciprocal account with each other, or the payment must be sent to a bank with such an account, a correspondent bank, for further benefit to the ultimate recipient.

Banks collect payment for the service from the sender as well as from the recipient. The sending bank typically collects a fee separate from the funds being transferred, while the receiving bank and intermediate banks through which the transfer travels deduct fees from the money being transferred so that the recipient receives less than what the sender sent.

Regulation and price[edit]

Since 2009 the European Union Regulation No 924/2009 [2][3] controls cross-border payments in the European Union. In the new regulation Article 1 (q.v., Ref.4) states that an IBAN/BIC transfer within Single Euro Payments Area (SEPA) must not cost more than a national transfer, no matter which currency is used. The receiving bank can charge for exchanging to local currency.

Prior to this, in 2002 the European Union relegated the regulation of fees a bank may charge for payments in euro betweenEuropean Union member states down to the domestic level,[4] resulting in very low or no fees for electronic transfers within the Eurozone. In 2005, Iceland, Liechtenstein,

and Norway joined the EU regulation on electronic transfers. However, this regulation was superseded by the Single Euro Payments Area (SEPA), consisting of 32 European countries.

In the United States, domestic wire transfers are governed by Federal Regulation J[5] and by Article 4A of the Uniform Commercial Code.[6] US wire transfers are costly, for example, as of November 2011 the Bank Of America charged $25 to send a wire and $12 to receive one within the U.S. For international transfer, it charged $35–$45 outgoing, $16 incoming.[7]However, fees may vary from bank to bank. Credit Unions charge a little less. For example, Delta Community Credit Union has an outgoing fee of $15 for domestic wires, and varying fees for international wires. However, they do not have an incoming wire fee. ACH transfers are much less expensive or even free of charge as part of online banking packages.[8]

Security[edit]

With bank-to-bank wire transfer, each account holder must have a proven identity. Chargeback is unlikely, although wires can be recalled. Information contained in wires is transmitted securely through encrypted communications methods. The price of bank wire transfers varies greatly, depending on the bank and its location; in some countries, the fee associated with the service can be costly.

Wire transfers done through cash offices are essentially anonymous [citation needed] and are designed for transfer between persons who trust each other. It is unsafe to send money by wire to an unknown person to collect at a cash office: the receiver of the money may, after collecting it, simply disappear[examples needed]. This scam has been used often[clarification needed], especially in the so-called 419 scams which often nominate Western Union for collection.

International transfers involving the United States are subject to monitoring by the Office of Foreign Assets Control (OFAC), which monitors information provided in the text of the wire and then decides whether, according to the US Government's federal regulations[5][6] and political positions, money is being transferred to terrorist groups, or countries or entities undersanction by the United States government. If a financial institution suspects that funds are being sent from or to one of these entities, it must block the transfer and freeze the funds.[9]

SWIFT or IBAN wire transfers are not completely free of vulnerabilities. Every intermediate bank that handles a wire transaction can take a fee directly out of the wire payload (the assets being transferred) without the account holder's knowledge or consent. In many places, there is no legislation or technical means to protect customers from this practice. If bank S is the sending bank (or brokerage), and bank R is the receiving bank (or brokerage), and banks I1, I2 and I3 are intermediary banks, the client may only have a contract with bank S and/or R, but banks I1, I2 and I3 can (and often do) take money from the wire without any direct arrangement with the client. Clients are sometimes taken by surprise when less money arrives at bank R. Contrast this with cheques, where the amount transferred is guaranteed in full, and fees (if there are any) can be charged only at endpoint banks.[10] Europe[clarification needed] offers some partial protection from this practice by prohibiting European intermediate banks from taking a fee out of the amount being transferred, even for transatlantic transfers. However, it's still common practice for a European brokerage firm to state that they charge no transfer fee, and then contract their bank to take an unpublished fee from the amount transferred as a means to compensate their bank with their clients' assets. E.g. CMC Markets implements this policy in partnership with Natwest.

EU privacy law may be breached by some USA operators such as SWIFT, so EU users are sometimes required by their service provider to make an explicit declaration that seeks to circumvent EU privacy regulations.

Methods[edit]

Retail money transfers[edit]

One of the largest companies that offer wire transfer is Western Union, which allows individuals to transfer or receive money without an account with Western Union or any financial institution.[11] Concern and controversy about Western Union transfers have increased in recent years, because of the increased monitoring of money-laundering transactions, as well as concern about terrorist groups using the service, particularly in the wake of the September 11, 2001 attacks. Although Western Union keeps information about senders and receivers, some transactions can be done essentially anonymously, for the receiver is not always required to show identification.[12]

There are other companies in Market like RIA Financial Services, MoneyGram and [VFX Financial PLC] and [LCC Money Transfer]] (both based in Europe).

Another option for consumers and businesses transferring money internationally is to use specialised brokerage houses for their international money transfer needs.[13] Many of these specialised brokerage houses can transfer money at better exchange rates compared to banks, thus saving up to 4%.[13] These providers can offer a range of currency exchange products like Spot Contracts, Forward Contracts and Regular payments.[14] However, not all of such providers are regulated by appropriate government body. For example, in the UK, even though such companies are regulated by Financial Services Authority, not all of them fall under FSA scrutiny.[15]

International[edit]

Most international transfers are executed through SWIFT, a co-operative society founded in 1974 by seven international banks, which operate a global network to facilitate the transfer of financial messages. Using these messages, banks can exchange data for the transfer of funds between financial institutions. SWIFT's headquarters are in La Hulpe, on the outskirts of Brussels, Belgium. The society also acts as a United Nations–sanctioned international standards body for the creation and maintenance of financial-messaging standards. See SWIFT Standards.

Each financial institution is assigned an ISO 9362 code, also called a Bank Identifier Code (BIC) or SWIFT Code. These codes are generally eight characters long.[16] For example: Deutsche Bank is an international bank with its head office inFrankfurt, Germany, the SWIFT Code for which is DEUTDEFF:

DEUT identifies Deutsche Bank. DE is the country code for Germany. FF is the code for Frankfurt.

Using an extended code of 11 digits (if the receiving bank has assigned extended codes to branches or to processing areas) allows the payment to be directed to a specific office. For example: DEUTDEFF500 would direct the payment to an office of Deutsche Bank in Bad Homburg. SWIFT deviate slightly from the standard though by using position nine for a Logical Terminal ID, making their extended codes 12 digits long.[17]

European banks making transfers within the European Union also use the International Bank Account Number, or IBAN.

International Prepaid Cards[edit]

International prepaid cards are an alternative way for transferring funds. Companies can provide a debit card for worldwide employees payments. The recipients don’t need to have a bank account and can use the card in places that a debit card is accepted at Point-of-Sale or online and may withdraw funds in local currency at an ATM.[18]

United States of America[edit]

Banks in the United States use SWIFT to send messages to notify banks in other countries that a payment has been made. Banks use the CHIPS or Fedwire system to actually effect the payment.

Domestic bank-to-bank transfers are conducted through the Fedwire system, which uses the Federal Reserve Systemand its assignment of routing transit number, which uniquely identify each bank.

Other electronic transfers[edit]

Other forms of electronic transfers include, for example, Electronic funds transfer system (EFTS). This is the system one uses when one gives one's bank account number and routing information to someone owed money and that party transfers the money from one's account. It is also the system used in some payments made via a bank's online bill payment service. EFTS transfers differ from wire transfers in important legal ways. An EFTS payment is essentially an electronic personal check, whereas a wire transfer is more like an electronic cashier's check.

In the United States, such EFTS transfers are often called "ACH transfers," because they take place through theAutomated Clearing House.

One important way ACH transfers differ from wire transfer is that the recipient can initiate it. There are of course restrictions, but this is the way people often set up automatic bill payment with utility companies, for example.

References[edit]

1. Jump up ̂  Chin, Courtney. "How things work: Wire transfers".The Tartan; Carnegie Mellon's Student Newspaper Since 1906. Retrieved 26 September 2013.

2. Jump up ̂  Regulation (EC) No 924/2009.3. Jump up ̂  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?

uri=CELEX:32001R2560:EN:HTML4. Jump up ̂  Regulation (EC) No. 2560/2001. European Parliament and

the Council of the European Union5. ^ Jump up to: a  b Regulation J - Check Collection and Funds Transfer.

BankersOnline.com6. ^ Jump up to: a  b Section 4A of Universal Commercial Code. Legal

Information Institute.7. Jump

up ̂ http://www.bankofamerica.com/deposits/checksave/index.cfm? template=lc_faq_wire#question4

8. Jump up ̂  Know Your Bank: ACH vs. Wire Transfer9. Jump up ̂  OFAC facts10. Jump up ̂  "Correspondent Bank Fees".

Openoffshorebankaccountsfornonresidents.com. Retrieved 2010-07-01.

11. Jump up ̂  "Western Union Money Transfer Options". Westernunion.com. Retrieved 2010-07-01.

12. Jump up ̂  Can Western Union Keep On Delivering?. Business Week

13. ^ Jump up to: a  b "Money Transfer South Africa". MoneyTransferSouthAfrica.org. Retrieved 2011-01-01.

14. Jump up ̂  "Currency Specialists". franceforex.com. Retrieved 2011-01-01.

15. Jump up ̂  "Currency Specialists". fxcompared. Retrieved 2012-11-28.

16. Jump up ̂  http://www.swift.com/biconline/index.cfm?fuseaction=display_aboutbic

17. Jump up ̂  http://www.c24.biz/what-is-swift.html#SWIFT-address18. Jump up ̂  http://www.payoneer.com/PrepaidMC.aspx