Looking at the world of financial transactions, learn about the key parties involved, the conventions for charging fees, and the concept of straight-through processing (STP).
Parties to a Payment
Remitter (Payer)
The remitter, also known as the payer, is the party that initiates the payment. The remitter instructs their bank or payment service provider to transfer funds to the beneficiary. This initiation can occur through various channels, including online banking, mobile apps, or direct instructions to the bank.
Beneficiary (Payee)
The beneficiary, or payee, is the recipient of the payment. Once the payment is processed, the beneficiary receives the funds transferred by the remitter. The beneficiary’s account is credited with the payment amount, minus any applicable fees depending on the charging convention used.
Clearing Systems
Clearing systems are mechanisms or networks that facilitate the exchange and settlement of payment instructions between financial institutions. They ensure that funds are accurately and efficiently transferred from the remitter to the beneficiary. Examples of clearing systems include:
- ACH (Automated Clearing House): Used for batch processing of low-value transactions such as payroll and utility payments.
- RTGS (Real-Time Gross Settlement): Processes high-value transactions individually in real-time, ensuring immediate settlement.
Service Providers
Correspondent Banks
Correspondent banks are intermediary banks that facilitate international payments by providing services such as foreign exchange and payment processing. They act on behalf of the remitter’s or beneficiary’s bank in different countries, enabling smooth cross-border transactions.
Payment Service Providers (PSPs)
Payment service providers (PSPs) offer payment processing services to businesses and consumers. PSPs handle the technical and logistical aspects of payment processing, ensuring secure and efficient transactions. Examples include PayPal and Stripe, which serve both remitters and beneficiaries.
Charging Conventions
Charging conventions determine how transaction fees are handled between the remitter and the beneficiary. Understanding these conventions is crucial for managing costs and expectations in financial transactions.
Beneficiary Deduct (BEN)
Under the beneficiary deduct (BEN) convention, the beneficiary pays all the transaction fees. The remitter sends the full amount, but the beneficiary receives the payment minus the fees charged by the processing banks or service providers.
Share (SHA)
In the share (SHA) convention, the remitter and beneficiary share the transaction fees. Each party pays the fees charged by their respective banks or payment service providers. This convention ensures a balanced distribution of costs between the two parties.
Our (OUR)
With the our (OUR) convention, the remitter pays all the transaction fees. The beneficiary receives the full amount of the payment without any deductions. This is often used in high-value transactions where it is essential for the beneficiary to receive the exact payment amount.
High-Value and Time-Sensitive Payments vs. Low-Value and Repetitive Payments
High-Value and Time-Sensitive Payments
High-value and time-sensitive payments, such as those processed through RTGS or CHAPS (Clearing House Automated Payment System), require faster processing due to their importance and urgency. These payments typically incur higher fees due to the need for immediate settlement and increased security measures.
Low-Value and Repetitive Payments
Low-value and repetitive payments, such as those processed through ACH or Direct Debit, are usually processed in batches. These payments incur lower fees and are commonly used for regular transactions like payroll, utility payments, and subscription services.
Payment Systems that Use Interchange
Cards
Interchange fees are paid between banks for card-based transactions, covering the costs and risks associated with processing the payment. These fees are typically borne by the merchant accepting the card payment.
ATM Networks
Fees are charged for using ATMs outside of a customer’s bank network. These fees cover the operational costs of maintaining the ATM network and providing access to funds.
Straight-Through Processing (STP)
Definition
Straight-through processing (STP) refers to the automated processing of transactions from initiation to settlement without manual intervention. STP enhances efficiency, reduces errors, delays, and costs associated with manual processing, and provides real-time tracking of transaction status.
Benefits
- Speed: Transactions are processed faster due to automation, improving overall efficiency.
- Accuracy: Minimizes human errors, ensuring that transactions are processed correctly.
- Cost-Effectiveness: Reduces operational costs by eliminating the need for manual processes.
- Transparency: Provides real-time status updates and tracking of transactions, enhancing visibility and control.
Implementation
Implementing STP requires the integration of various systems, such as front-end payment initiation platforms with back-end settlement systems. It also involves adhering to standardized formats and protocols to ensure seamless processing. Financial institutions must invest in technology and infrastructure to support STP, but the long-term benefits in terms of efficiency and cost savings are significant.
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