International Electronic Payments Illustration

Information: Bank A has an account with Bank B. Bank A is located in London and Bank B is located in Bangkok. Bank A’s account will be denominated in the local home currency for Bank B - Thai Baht.

Using Example 1, what are the steps involved in the payment process?

1. Bank A’s customers asks the Bank to make a payment for them in Thai Baht
2. On receipt of an instruction from their customer to make a Thai Baht payment, Bank A will sends a MT103 customer transfer message to Bank B initiating the payment
3. On receipt of the instruction, Bank B will debit Bank A’s Thai Baht account for the value of the payment stated in the SWIFT message and effect the payment
4. If the beneficiary holds an account with them, they will just credit the beneficiaries account on their own system
5. If not, they will Bank with another Bank in Thailand. In this event, Bank B will indicate a payment to the beneficiaries Bank through one of the local clearing systems

What does the SWIFT MT103 Format (Thai Baht Payment) include?

• Who to pay - Field 59 provides the beneficiaries name, address and Bank account details
• How much to pay - This value is provided in Field 33
• When the payment is to be made - The value date is given in Field 32

Example 2: Where the currency involved is not local to either Bank.

Information: Bank A is making a payment to Bank B, but the payment is denominated in US Dollars.

Using Example 2, what are the steps involved in the payment process?

• Bank A will issue the payment instruction to Bank B in SWIFT MT103 Format
• The second instruction issued by Bank A will be to Bank C in New York. This instruction will be for a Bank to Bank payment, and so will be issued as a SWIFT MT 202
• If Bank C holds the US Dollar accounts of both Bank A and B, they will send Bank B a SWIFT MT910 Credit Advice Message confirming that the payment has been made
• If not, they will debit the account of Bank A and pay the US Bank that does hold the account of Bank B, through the local clearing system - They will issue the MT910 to Bank B confirming the funds have been credited to their account in New York

How does the SWIFT MT103 Format (USD Payment) differ from example 1?

• As in the first example, it states who to pay, how much to pay, and when the payment is to be made in their respective fields
• Firstly, the difference is the currency of the payment is in US Dollars, as indicated in Field 33
• Secondly, there are no instruction to debit Bank A’s account, instead it advises in Field 53 and 54 the Senders and Receivers Correspondent Bank Fields that Bank A has arranged to pay the US Dollar amount of the payment to Bank B through a Bank in New York - Bank C

What does the SWIFT MT202  Format (USD Payment) include?

• The MT202 is an instruction from Bank A which authorises Bank C to debit Bank A’s US Dollar account that they hold for the value of the payment and to pay that amount to Bank B, Bank B account details will be stated in Field 58
• The reference number of the instruction will match that on the related MT103 for ease of reconciliation
• The MT202 also includes some of the same details that appear on the MT103, i.e. the customers name, the beneficiaries name, address and bank account details

Example 3: Let’s look at Example 2 again, but this time let’s effect the payment via the serial method

Information: Bank A asks Bank C to make the payment to Thailand. The instruction also includes permission to Bank C to debit the amount of the payment to Bank A’s account so that Bank C has the funds available to make the payment.

Using Example 3, what are the steps involved in the payment process?

1. Bank A issues a payment instruction in the SWIFT MT103 format. However, this time, the instruction is sent directly to Bank C in New York
2. Bank C will debit Bank A’s account and pay Bank B
3. Bank C will send their own payment instruction (MT103) to Bank B instruction Bank B to pay the beneficiary
4. The instruction will confirm where the money for the payment is available

What are the advantages of serial payments over direct and cover payments?

• With direct and cover payments, banks will commonly hold the payment instruction until they receive advice that the cover money is in their account and not effect payment until then
• Banks will worry that anything affecting the MT202 ‘money’ leg will leave them out of pocket. With the serial method, this uncertainty is removed because instructions form a chain with the instruction to pay Bank B not being issued until the cover money for the payments is in place
• Serial payments are therefore much simpler in nature, however may take much more time and incur additional costs from each of the Banks involved
• Serial payments also avoid the complications of direct and cover that may occur if either the messages are held for compliance reasons, creating a timing mismatch between the two legs
• Quick and cost effective method of making cross border payments