This document provides definitions and explanations of key terms related to international banking and payments systems, including: correspondent banking, NOSTRO and VOSTRO accounts, SWIFT, CHIPS, CHAPS, FEDWIRE, and letters of credit. It describes how correspondent banking works and how NOSTRO and VOSTRO accounts are used in foreign exchange transactions. It also summarizes the purpose and operations of payment systems like SWIFT, CHIPS, CHAPS, and FEDWIRE which facilitate international funds transfers and settlements.

1. 1
Chapter 8
Key Terminologies

2. You Must Know……
 Correspondent Banking
 NOSTRO and VOSTRO Accounts
 SWIFT
 CHIPS
 CHAPS
 FEDWIRE
 Letter of Credit and
 International Remittances
2

3. Correspondent Banking
 A Correspondent Banking relationship involves the
provision of banking services by one financial
institution (a Correspondence bank) to another
financial institution (Correspondent Banking Client)
 In which the financial institution carry on activities or
business at or through permanent establishments in
different countries
 It is also possible for one bank to open a
Correspondence Account with another bank that
already has an existing Correspondent facility
3

4. Contd….
 The banking services provided by Correspondent
Bank may involve provision of cash management
services, international fund transfers, check
clearing, foreign exchange services, loans and
letters of credit
 Correspondent banking as the banking services –
mainly payments, cash management and trade
services - provided by banks to customers via other
banks.
How this relationship works in real life???? 4

5. NOSTRO and VOSTRO Accounts
 Both NOSTRO and VOSTRO account are normally
used in the context of foreign exchange transactions
done by the banks or during currency settlement.
Let’s look at what they both mean.
 VOSTRO is an Italian word – meaning – Yours
 NOSTRO is an Italian word – meaning – Ours
5

6. Contd….
 VOSTRO Account – It is the account which is
held by a foreign bank with a local bank, so if
Bank of America maintains an account with State
Bank of India it will be a VOSTRO account for
State Bank of India.
 Account held by a foreign bank in a domestic
bank is called VOSTRO account. A VOSTRO is
our account of your money, held by US. A
VOSTRO account with a credit balance (i.e. a
deposit) is a liability, and a VOSTRO with a debit
balance (a loan) is an asset. 6

7. Contd….
 For example Bank A (Barclays Bank of UK)
opening an account in Bank B (ICICI Bank of
India), this is VOSTRO account for Bank B
(ICICI Bank of India).
 NOSTRO Account – It is the overseas account
which is held by the domestic bank in the foreign
bank or with the own foreign branch of the bank.
For example the account held by State Bank of
India with bank of America in New York is a
NOSTRO account of the State Bank of India
7

8. Contd….
 Account held by a particular domestic bank in a
foreign bank is called NOSTRO account. A
NOSTRO is our account of our money, held by
you. A bank counts a NOSTRO account with a credit
balance as a cash asset in its balance sheet.
 From the above one can see that the account which is
NOSTRO for one bank is VOSTRO for another so
when SBI opens a NOSTRO account with Bank of
America, it is a VOSTRO account for them and vice
versa.
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9. Contd….
 Here in the above example given in VOSTRO
account the same account is a NOSTRO account
for Bank A (Barclays Bank of UK), or if Bank B
(ICICI Bank of India) opens an account in Bank A
(Barclays Bank of UK) then that account is a
NOSTRO account for Bank B (ICICI Bank of
India). NOSTRO accounts are usually in the
currency of the foreign country. This allows for
easy cash management because currency doesn't
need to be converted.
9

10. What is SWIFT???
 It stands for Society for the Worldwide Interbank
Financial Telecommunications
 Founded in Brussels in 1973, is a co-operative
organization dedicated to the promotion and
development of standardized global interactivity for
financial transactions.
 More than 10,000 financial institutions and
corporations in 212 countries every day to exchange
millions of standardised financial messages. This
activity involves the secure exchange of proprietary
data while ensuring its confidentiality and integrity. 10

11. Contd….
 SWIFT enables its customers to automate and
standardise financial transactions, thereby lowering
costs, reducing operational risk and eliminating
inefficiencies from their operations
 SWIFT is organized into three regions – the
Americas, Asia Pacific, and EMEA (Europe, Middle
East and Africa).
 SWIFT provides a service for financial messages,
such as letters of credit, payments, and securities
transactions, between member banks worldwide.
11

12. Contd….
 SWIFT's essential function is to deliver these
messages quickly and securely -- both of which are
prime considerations for financial matters.
SWIFT Code???
 Bank swift code which is also referred to as the BIC
code is a unique code that is used to recognize
financial and non-financial institutions. The bank
swift code comes with eight or eleven characters that
throw light on details regarding the bank code,
country code, location code, and the branch code.
12

13. Contd….
 The first four letters of a eleven digit bank swift
code shows bank code, followed by another two
digits that identifies the country code, as the next
two letters help identify the location of the financial
institution. The last three letters tell us more about
the branch related to a financial institution, which is
but an optional code of letters that come along with
the other details of a financial institution.
 BKTRUS33
 DEUTGB2L
13

14. Contd….
 Businesses that plan to enter into transactions with
clients located in other countries should take note of
the bank swift code to enable smooth international
transactions. As an inherent part of international
transactions, bank swift code is used to transfer
money between banks, particularly for telegraphic
transfers and wire transfers. This code is also used by
banks across the globe to exchange messages
between them.
 http://www.deutschebank.co.in/swift-transfer.html
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15. CHIPS
 CHIPS stands for Clearing House Interbank
Payments System
 CHIPS is the largest private-sector U.S.-dollar funds-
transfer system in the world. In 2012, CHIPS cleared
and settled an average of $1.5 trillion in cross-border
and domestic payments daily. CHIPS operates on a
global business day and utilizes a sophisticated
liquidity savings mechanism to provide fast, final
payments while maximizing liquidity efficiency for
participating banks.
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16. Contd….
 CHIPS sets the industry standard for resiliency,
reliability, and innovation in funds transfers. Leading
banks worldwide, as well as their correspondents and
customers, find CHIPS a trusted partner in the U.S.-
dollar clearing and settlement services.
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17. How it Works..???
17

18. CHAPS
 CHAPS stands for Clearing House Automated
Payment System
 CHAPS is the only UK payment system that
guarantees real-time finality, of any value, in ‘Central
Bank money’ as each payment instruction settles.
 CHAPS continues to be one of the largest Real-Time
Gross Settlement systems (RTGS) in the world.
 As of July 2011 the total value processed since the
start of CHAPS exceeded one quadrillion pounds
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19. Contd….
 It is a sterling payments scheme that processes and
settles both systemically important and time-
dependent payments. The scheme is run by
CHAPS Clearing Company, which manages day-to-
day operations.
 Launched on 9th February 1984, the CHAPS
scheme provides a guaranteed same-day service for
the bank-to-bank transmission of sterling-
denominated payments.
19

20. Contd….
 Since 1996, CHAPS has used an enhanced Real-Time
Gross Settlement (RTGS) system where each
individual payment is settled in real-time across its
Members’ settlement accounts at the Bank of
England.
 A CHAPS payment is an electronic bank-to-bank
same-day value payment made UK sterling, generally
used for high-value interbank transactions.
20

21. Contd….
Banks themselves use CHAPS to move money around
the financial system, but it is also used regularly:
 For delivery of domestic and international wholesale
payments i.e. Money Market / Foreign Exchange
(FX) transactions.
 For business-to-business payments.
 By solicitors / licensed conveyancers to transfer the
purchase price of a house between the bank accounts of
those involved.
 By individuals buying or selling a high-value item, such
as a house or car. 21

22. FEDWIRE
 The Federal Reserve Banks operate three wholesale
payment services:
 The Fedwire Funds Service: which is a real-time
gross settlement system to settle funds electronically
between banks;
 The Fedwire Securities Service: which provides
issuance, settlement and transfer services for U.S.
Treasury securities and other government-related
securities and
22

23. Contd….
 The National Settlement Service, which is a
multilateral settlement service used by clearinghouses,
financial exchanges, and other clearing and settlement
groups.
 An electronic transfer system developed and
maintained by the Federal Reserve System.
 These services date back to the early 1900s when the
Federal Reserve Banks began using
telecommunications to transfer funds between
accounts maintained in different Federal Reserve
Districts. 23

24. Contd….
 The Fedwire services play a key role in the nation’s
payments mechanism and enable depository
institutions, the U.S. Treasury and other government
agencies to transfer funds and book-entry securities
nationwide.
24

25. Contd….
 Depository institutions use Fedwire mainly to move
balances to correspondent banks and to send funds to
other institutions on behalf of customers. Transfers
on behalf of bank customers include funds used in
the purchase or sale of government securities,
deposits, and other large, time-sensitive payments.
The Treasury and other federal agencies use Fedwire
extensively to disburse and collect funds.
25

26. Contd….
 In a typical funds transfer, an individual or a business
instructs its bank to send a funds transfer. The sending
bank debits the sender's account and initiates a
FEDWIRE funds transfer. The Federal Reserve, in turn,
debits the account of the sending bank and credits the
account of the receiving bank; the Fed notifies the
receiving bank about the transfer. The receiving bank
credits the recipient's account and notifies the recipient
of the receipt of the funds. The transfer is final when the
funds are received. Funds can be used by the recipient
immediately thereafter.
26

27. Letter of Credit
Refer the Material Provided
27

28. International Remittance
 In this globalizing world, migration of people from
one country to another for employment opportunities
has become a common phenomenon.
 Dominant migration corridors have been formed
between various countries/regions.
 This is primarily due to the socio-economic
conditions prevailing in the migrants’ countries of
origin and destination.
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Remittance is the act of transmitting money to a
distant location to fulfil an obligation

29. Contd….
 An International Remittance business may follow the
conventional banking model or any of the non-
banking models.
1. Conventional Banking Model
2. Non-Banking Channels
3. Emerging Non-Banking Channels
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30. 1. Conventional Banking Model
 It is end-to-end remittance transaction with the
following parties:
 Remitter’s Bank - the bank where the remitter has
an account that is debited for transferring money to
the beneficiary
 Beneficiary’s Bank - the bank where the beneficiary
of the remittance has an account that is credited for
the remittance money received
30

31. Contd….
 Correspondent Bank (only in cases where the
above-mentioned entities do not have a direct
business tie-up) - an intermediary bank which has
associated with various banks globally, through
which remittance transactions are routed
 The generic process involved in a remittance
transaction based on a Nostro account model.
31

32. Contd…(NOSTRO-based Setup)
32

33. 2. Non-Banking Channels
 Non-banking players play a vital role in the remittance
space and have a larger share in the Global Remittance
business than conventional banks. These entities
operate in various forms:
 Money Transfer Operators (MTO)
 Exchange Houses
33

34. Contd…
What is Money Transfer Operators???
 Western Union and Money Gram have a network of
agents across the globe and serve as non-bank
remittance channels.
 The remitter can visit an MTO outlet and pay cash in
foreign currency to send money to any part of the globe
where the MTO’s agent is present.
 The receiver can visit the MTO agent at his location
and collect the money in local currency.
34

35. Contd…(MTO Model)
35

36. Contd…
What is Exchange Houses???
 Exchange Houses are extensively used for
remittances from the Middle East. Unlike the banking
channel, this channel is based on Vostro accounts
i.e. the accounts maintained by exchange houses
with various banks in the beneficiary countries. These
accounts are pre-funded by the exchange houses.
 Key Steps……
36

37. Contd…
Step 1 The remitter deposits the remittance money in
the overseas currency in cash at the Exchange House
counter.
Step 2 The exchange rate and the transaction fee are
communicated and confirmed over the counter.
Step 3 The beneficiary account details are provided by
the remitter.
Step 4 The exchange house instructs the Beneficiary
Bank with whom it has a tie-up for transferring the
requisite amount in the beneficiary country’s local
currency. 37

38. Contd…(Exchange House Model)
38

39. 3. Emerging Non-Banking Channels
Online Channels
 Which provide platforms encompassing the entire
remittance process, are a recent development. They
have created global networks with banks/FIs in
origination and destination countries. From the
comfort of his home, the remitter can initiate a
remittance request by registering himself on the
online entity’s website and furnishing his and the
beneficiary’s bank account details.
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40. Contd…
40

41. Contd…
White Label Platform Providers
 A White Label Platform provider is a variant of the
online platform channel, wherein a third party enables
banks and FIs operating in the remittance corridors to
launch remittance services by providing the
following:
41

42. Contd…
42

43. Challenges faced….
 Transaction cost
 Grey Market
 Reconciliation of the remittance transactions
 Revenue sharing agreement
43