Best Way to Transfer Money Abroad

Many choices exist for transferring money to and from Australia but what is the right option for you to send funds abroad?

Banks charge an arm and a leg so understandably most sensible people don't want to do that if you are making regular transfers or send large amounts. Alternately there a other services to choose from which can save you lots of money, but its frustrating to know which one is best for you.

In this page we break down all the best options available including:

1. Online money transfer services (that work in conjunction with your bank)2. Banks3. Cash services such as Western Union or Travelex

Also don't miss our other money related info:

Opening a bank account in Australia (You will need one of these before you can do anything!) Getting a Tax File Number (You need one of these to get paid by an Aussie employer)

The options here is suitable for money transfers between many countries including Australia, UK, Canada and US.

The Most Common Options:

You HAVE A BANK ACCOUNT in the country where you want to receive money:

1. Inter-Bank Transfers » (transfer money from one bank to another)Most suitable for amounts less than $1000 or smaller once-off transfers

2. Australian Money Transfer Companies » Most suitable for amounts greater than $1000 or regular transfers

You DO NOT HAVE A BANK ACCOUNT in the country where you want to receive money:

1. Western Union and Travelex » Western money transfers come into their own when you do not have a bank account - Most suitable for amounts less than $1000

2. Credit Card Money Transfer » Credit card money transfers are most suitable for amounts less than $1000

1. Inter-Bank — Money Transfer Services

Transferring money from one bank to another can be a fairly straight forward process and can be done online or in the branch. The downside of inter-bank transfers is that fees and exchange rates are usually relatively high.

The big difference between transferring money from one bank to another and money transfer companies is the exchange rates and fees (see below), which can differ significantly.

Most banks worldwide will provide facilities along with your bank account so you can transfer money to an overseas bank account including Australia, Britain, Canada and the United States.

You will need to have the SWIFT number and/or the IBAN for the receiving bank. You will also need the account details of the receiving account, the address of the receiving bank, the account name and often the receiving bank's address.

o For transfers to Europe (including the UK) ask the receiving bank for the IBAN is an international standard for identifying bank accounts across national borders).

o Money transfer to Australia and Canada generally require the SWIFT number of the receiving bank.

The amount you can transfer for each transaction is often limited, however the limit varies widely between sending banks.

Bank transfer fees are generally around — Australia $20, Canada $20, Europe €15, Britain (UK) £15, United States $15 for their standard services and about double that for priority services for international money transfer from Australia.

Note that receiving banks sometimes also charge a fee - so be sure to check to avoid surprises. Bank transfers rates for international transfers are not competitive. You can use banks to send money to either yourself or to a third party.

Pros Cons

The countries you can send money between is generally not limited.

Costly compared to dedicated online International Money Transfer Companies.

No need for an internet connection if you don’t mind going to the bank’s branch.

Most banks limit the amount you can transfer per online transaction.

Online money transfer services are also possible if you have internet banking access.

For most banks you cannot easily check the currency exchange rates online.

Safe international funds transfer.Receiving banks will often charge a fee on top of the sending bank’s fee.

Bottom Line

For transferring relatively small amounts - irregularly, the convenience of not having to sign up to a third party service outweighs the extra costs you’ll incur by using an inter-bank service. However, if you want to make more than one transfer or transfer amounts over AU$1000,

GB£750, €1000, US$1000 you will almost certainly save money by using a company specifically for Money Transfer Service.

2. Money Transfer Services

Specialist services now save many travellers, expats and exporters many millions of dollars annually. Companies like Tranzfers and TorFX have pioneered these dedicated fund transfer services which have been warmly welcomed by those looking for a better option to banks or western union money transfers.

How does it work?

Money transfer services follow a simple two step process.

To move your money overseas, first you move the amount you want to send from your bank account to the bank account of the international money transfer company. This first transfer is free since they are in the same country as you.

The international money transfer company then sends your money overseas via its own international bank account network. Importantly, when the money arrives overseas you can choose to wait for the right exchange rate (real time) or you can have it exchanged automatically upon arrival. A set fee applies to the transaction, as set out below. Your money is then deposited into your specified destination account.

Tranzfers, for example, have offices in the countries where they send and receive money so you can send money and get phone or online assistance 24 hours a day with actual currency traders, which ensures everything runs smoothly.

Companies dedicated to international money transfers can offer exchange rates and transaction fees that beat the banks.

24hr service and offices in all the countries they transfer money to ensures you can always speak with or contact a currency trader for assistance.

To set up an account these companies usually require identification in the form of a copy of a passport/driver’s license and a signed bank statement (of the bank where the funds are coming from) showing your current residential address.

Fees per transaction are as follows: AU$15, CA$15, €10, GB£7, HK$60, NZ$15, SG$15, US$5. Currently, Tranzfers for example moves money between the UK, AUS, NZ, SA, Singapore and

Canada. The minimum transfer amount is AU$100, NZ$100 and GB£50 respectively for international

money transfers — Australia, New Zealand and the UK. (International money transfer limits may also apply depending on the countries).

Payments can also be made to credit cards in Australia and New Zealand.

Pros Cons

Competitive: Exchange rates and fees that are You must have a bank account in the country from

designed to beat the banks. which you are transferring and which you are receiving (the latter is required only if you are sending to yourself).

Flexibility: Can pay off credit cards back home or also send money to friends and family — all you need are the recipient’s bank account details.

You must have access to a secure internet connection.

Ability to lock-in exchange ratesYou must have access to either online banking or telephone banking through your current bank.

Safety and Security: To operate in a particular country the regulations for that country must be met.

Payments using cheques or credit cards are not accepted — electronic funds transfer from your bank account only.

Eligible countries are limited — be sure your home country is covered before signing up with a money transfer service.

Bottom Line

Best for saving money and flexibility.

If you are sending money from your overseas account to your home bank account or back the other way you will save hundreds if not thousand by using companies like Tranzfers or TorFX. 

If you are trying to choose between the two - TorFX is telephone based and only deals with amounts of $2000 or more. Tranzfers will deal with smaller amounts and is focused more on transacting online.

Bottom Line: If you want step-by-step assistance TorFX is our top pick. Alternately, if you want more control over timing of your transaction our pick is Tranzfers.

Exchange Rates and Fees

When you are comparing costs between your bank and a money transfer services companies, there are two major considerations: Exchange Rate and Fees. 

Exchange Rate

Rates vary significantly from 0.7% to 2.5% so it pays to compare. Some international money transfer companies will offer “free” transfers but the exchange rate offered is at the upper end and even higher.

The best way to see if you are getting a fair exchange rate is to compare the rate offered with the official “interbank” or “wholesale” rate. Rates of competitive providers should fluctuate on a real-time basis.

Check out Yahoo! Finance for the latest interbank rates and compare services with this rate.

Fees

Banks and online money transfer service companies will generally charge some kind of fee per transaction which generally ranges from $15 to $30. For transferred amounts over $1000 the fee will amount to less than the margin the provider makes on the exchange rate (see above). When conducting inter-bank transactions also beware of receiving fees charged by your receiving bank.

3. Western Union and Travelex

Western Union and Travelex are well-known companies that provide similar services. Sending money through either Western Union or Travelex generally involves in-person cash transactions.

The good news is that outlets exist nearly everywhere in the world. Western Union money transfer will pay out only in cash. However in some countries, Travelex will transfer cash to a bank account rather than require an in-person pick-up.

Pros Cons

The countries you can send money between is generally not limited.

Expensive compared to dedicated online transfer companies and even banks.

If you do not have access to a secure internet connection or do not not use online banking, you may have to do an in-person transfer.

The recipient will likely have to pick up the money in cash and in-person.

Safe international funds transfer.You have to actually find a Western Union or Travelex outlet, rather than simply logging on to your computer.

Transumo has more info about international money transfers. 

4. Credit Card Money Transfer

If you are in need of money from overseas relatives or friends also consider a credit card money transfer. You will still have to pay the banks exchange rates at the time of purchase but in terms of ease and security a credit card money transfer can be an excellent way to go.

If you want to save a significant percentage on the exchange rate you will better off using an international money transfer company, then using a credit card in the currency of the country you are using it.

Credit Card Money Transfer   Explained January 16, 2014

Credit Card Money Transfer

Money to be transferred can be paid for in several ways. One easy and effective way of paying the sum to be transferred is by making the required payment using a credit card. Such a payment is called a Credit Card Money Transfer.

Credit Card Money Transfers are offered by both banks and Payment Service Providers (PSP) like Western Union, Xpress Money, MoneyGram, Pay Pal etc.

How is a Credit Card Money Transfer executed?

A sender can do a Credit Card Money Transfer in one of the following ways:

▪ By going to the branch/location of the bank or Payment Service Provider

▪ By  contacting the PSP or the bank on their customer service line

▪ By logging onto the website of the PSP or the bank and completing a Credit Card Money Transfer online

▪ If the sender has a mobile-enabled account he/she can execute a transfer by visiting the mobile website of the PSP or bank or by using the relevant “app” provided by the PSP or bank.

If the sender is transferring money on a regular basis, he/she can consider executing a Standing Instruction on his/her Credit Card. The sender’s Credit Card will automatically be debited for the amount mentioned on the Standing Instruction, on the given date.

How is the money received from Credit Card Money Transfer?

▪ The money can be credited directly to the beneficiary’s bank account.

▪ The beneficiary can receive the money in cash by visiting the nearest agent/location of the PSP.

▪ A few PSPs like Xpress Money also provide door delivery of cash to the beneficiary.

▪ The money can also be credited to the beneficiary’s debit card or credit card or to a stored-value card.

Points to be checked

A sender would do well if he/she reviews the following points before executing a Credit Card Money Transfer (think of this as a checklist). It is advisable to check for:

▪ The countries / agent locations at which the Credit Card Money Transfer service is available.

▪ The transfer fees charged by the bank or the Payment Service Provider.

▪ The measures put in place by the PSP or the bank to ensure the safety of the transaction and security of the personal and financial information given.

▪ The time taken for the beneficiary to receive the funds.

▪ While many credit card issuers may treat a money transfer as a purchase, some issuers treat it as a cash advance; cash advances are associated with higher charges, both direct and indirect, in comparison to normal purchases.

▪ Although most transfer service providers regard debit and credit card payments in the same light, a few providers (like Ikobo) may charge up to 30 percent if the sender uses a credit card for payment.

▪ In case of international transfers, whether the banking/transfer regulations in the sending and receiving countries permit such a transfer.

▪ Any limits as to the total amount that can be transferred using a Credit Card.

What is Instant Money Transfer   Service? December 13, 2013

Instant Money Transfer Service is the process of enabling transfer of money from one person or entity to another person or entity often at another location within a very short period of time.

Although hand-to-hand physical transfer of cash can also be accomplished in an instant, it is not

categorized as instant money transfer, which is almost exclusively digital in it’s nature, unless it forms a part of such an already existing instant money transfer service.

Instant Money Transfer services are provided mainly by:

Banks

Almost all banks offer their customers the facility to instantly transfer money nationally (and depending upon regulations, internationally) either by default or consequent upon registering or paying a fee. To avail of this facility, customers must have an account with the respective bank.

Payment Service Providers (PSPs)

A number of retail Payment Service Providers like Xpress Money, PayPal, Western Union etc also offer their customers the facility to transfer money instantly. One big difference between the instant money transfer service offered by PSPs and banking financial institutions is that customers do not need to hold an account with the PSP.

Money can be transferred instantly through the following channels:

Online

Money can be transferred instantly through the online/web platform of the respective service provider, whether a bank or a PSP.

Wire

This is a mode of international transfer offered by banks through their sophisticated and proprietary networks like SWIFT, RTGS etc.

Mobile

Mobiles can be used to instantly transfer money to other accounts both at the same bank and at other banks (in case of banks), to other beneficiaries (in case of PSPs), to other mobiles and to retailers for payment of goods and/or services. Such instant transfers can be done through mobile-enabled websites, special “apps” or even through good, old SMS.

Cash

Customers can also walk into any branch of a Bank/PSP and pay cash to be transferred. In case of a Bank, the cash will be deposited and routed through their account while in the case of a PSP the customer needs to provide ID proof and the beneficiary details for the transfer to be routed.

PoS

This involves transferring funds using Point of Sale machines. The remitter can bring money to a PoS, give it to the shopkeeper, obtain a receipt and designate a beneficiary. He is given a one-time user code that is sent to the beneficiary usually via SMS. The beneficiary will use this code at a PoS where he will be given cash.

Other Means

ATMs and Telephone Customer Service can also be used to instantly transfer money.

* An Instant Money Transfer Service provides for transferring money to different locations within the same country or to any country across the world. Such transfer can be denominated in both local and international currencies.

10 Tips for Secure Money   Transfer August 14, 2013

Technology has enabled various new modes of money transfer. And, since these new innovations also seem to attract fraudsters like flies to trash, it is important that you be vigilant to avoid getting taken in.

We’ve listed out some measures that will, hopefully, help you transfer your money safely:

Tips for Secure Money Transfer

Digital transfers have become the most prevalent means of transferring money. Keep the following in mind before you execute one:

1. Choose a financial institution after sufficient research of its track-record, the background of its promotors, its policies especially those regarding “lost” and undelivered transfers and the robustness of its security systems.

2. Use service providers who have a multi-layered authentication process to ensure that money goes to the intended beneficiary.

3. Opt for mobile and email alerts at every stage of the transfer process, so that you are constantly aware of the movement of your money.

4. Keep your passwords and PIN codes secure. Do not write them down and change them regularly. If you fear that your password has been compromised, immediately notify your service provider.

5. Phishing, vishing, smishing, etc are all old cons in newer, digital-age forms like emails, SMSes, calls etc. Learn  to recognize them for what they are.

One very plausible scam is to send you a rather large cheque and ask you to transfer back a portion. Wait till the cheque clears before you initiate the transfer.

6. Be doubly careful before you transfer money or release your personal or financial details to a complete stranger. Check, double check and then, check again!

7. Use secure systems (whether PCs, laptops, mobiles or Tabs) to execute a transfer. Failure to do so may result in identity theft.

8. If  you are using an ATM to initiate a transfer, choose an ATM that is located in a public, well-lit location free of shrubbery and decorative partitions or dividers.

9. Always keep records/track of your transfers and/or financial activity. Most service providers send free SMS and email notifications regarding activity/transfers. Don’t delete these notifications till you are completely sure that the transfer has gone as intended.

10. Physical transfer instruments are still in use today; if you are using one, avoid drawing out bearer cheques or banker’s drafts; fill in the recipient’s name accurately and if possible, include the account number as well. Also, remember to cross the instrument. This ensures that even if the instrument gets into the wrong hands, it cannot be encashed.

Fraudsters seem to keep churning out newer and more innovative ways to part you from your hard-earned money. Educating yourself in fraudsters’ evolving ways is a continual process and will help you adequately safeguard your money.

Types of Money Transfer   Services July 19, 2013

The oldest form of money transfer is of course, the transfer of cash from one person (remitter) to another (recipient or beneficiary). Today, far more sophisticated mechanisms exist for the transfer of money. Money is transferred either electronically or physically.

 Money Transfer Services

The following physical instruments are used for transfer of money:

Cheque: This is given by the remitter to the recipient. The recipient needs to present it at a bank; the money is deducted from the remitter’s account and paid into the recipient’s bank account or paid as cash to the recipient.

Cashier’s Cheque (or Banker’s Cheque or Demand Draft): The bank deducts the money from the remitter’s account and presents him/her with a Cashier’s Cheque; this is given to the beneficiary. When the beneficiary presents it, the bank pays him/her the amount. This is a bank-guaranteed form of payment.

Postal Order: They are issued by many postal services across the world. They work like Banker’s Cheques in the sense that the amount (plus commission) needs to be pre-paid.

 Electronic money transfers are of the following types:

Wire Transfers: Historically, wire transfers referred to a time when funds were transferred through messages sent by telegraph. Today, the telegraph has been replaced by highly complex and sophisticated networks like the SWIFT, RTGS and others through which banks and Payment Service Providers (PSPs) like Xpress Money and Western Union, transfer funds.

Other Channel transfers: Both banks and PSPs offer their customers the facility to execute transfers through their websites, ATMs, phone banking service and even via the customers’ mobile phones.

Email Transfers: This is currently offered by some Canadian banks in conjunction with a service provider called Interac. Customers who have accounts with the participating institutions can login to their account, select a beneficiary by entering their email address and complete the transfer.

Money is not actually sent by email; the beneficiary receives an email containing instructions on how to retrieve the funds.

PoS Transfers: This involves transferring funds using Point of Sale machines. The remitter can bring money to a PoS , give it to the shopkeeper, obtain a receipt and designate a beneficiary. He is given a one-time user code that is sent to the recipient usually via SMS. The beneficiary will use this code at a PoS where he will be given cash.

Islamic Money Transfer: This is a Shariah-compliant service offered by some banks and financial institutions. Money transfers are routed through a particular account, on which neither is interest paid nor an overdraft facility offered, in accordance with Islamic law. The funds in this account will also not be invested in activities which are not Shariah-compliant.

 Payment Service Providers

 Payment Service Providers (PSP) provide an alternative, competitively-priced money transfer service. This service does not require the remitter or the recipient to have bank accounts, although transfer can be done from a bank account or even a credit card to another bank account.

In the absence of bank accounts, the remitter can go to a branch of the PSP, pay the amount (and the fees) and give the beneficiary details. The beneficiary can go to a branch of the PSP at his location and withdraw the amount by producing necessary identification.

Some PSPs even offer door-delivery to the beneficiary (on payment of requisite fees). And, almost all PSPs offer their services through websites. Mobile alerts to the remitter and the beneficiary help ensure that payment is made only to the intended recipient.

Money transfers, whether by banks or PSPs like Xpress Money or Western Union, need to comply with the financial and banking regulations of the respective countries where transfers are made.

International Wire Transfer (SWIFT)

How does International Wire Transfer (SWIFT) work?

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 funds transfer between financial institutions. See SWIFT.

Each financial institution is provided an ISO 9362 code, also called a Bank Identifier Code (BIC) or SWIFT Code. These codes generally are eight characters long. For example: Deutsche Bank is

an international bank, with its head office in Frankfurt, Germany, the SWIFT Code for which is DEUTDEFF:

1. DEUT identifies Deutsche Bank.2. DE is the country code for Germany.3. 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.

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

The costs of International Wire Transfer (SWIFT)

Envato charges $35 for each Wire Transfer that is requested. This cost comprises of the fees charged by our bank plus our administration cost. Authors should be aware that depending on the bank or country you are receiving the money from, your financial institution may charge the recipient (you) for receiving money via wire transfer and may deduct their additional charges/commissions from the total amount received. It is your responsibility to ensure that you understand the fees which are charged by your financial institution when receiving SWIFT payments, including those that may be incurred when receiving wire transfers from an Australian bank.

When can I get my money using International Wire Transfer (SWIFT)?

Once your payment has been processed (assuming that you have provided us the correct account details), you will generally receive the money in your bank account in approximately two business days. However, occasionally the transfer can take up to 5 business days. If you have not received your money after 5 business days from the time you receive our payment confirmation email, then please contact support immediately and we will be happy to assist you.

Important to Note:

Envato cannot be held responsible for delays, extra costs or financial loss that arises from being provided incorrect account information, so please ensure that you double check the details with your financial institution prior to submitting a request for a SWIFT Wire Transfer.

How do banks carry out transaction between them?Consider that I transferred cash from an account in Bank A to another account in Bank B. In this world of high speed transfers, the account in Bank B is credited sans the cash moving physically. Now Bank A owes Bank B the cash that was transferred. Now how do they clear such arrears? What systems are in

place in the banking sector to address the issue? It will be nice if you could explain it in Indian background.

 

1 Answer

8 Abhishek Desikan, Keen learner of Banking processes. Votes by Datta Prasad, Quora User, Navendu Dogra, Ambresh Nandawadgi, and 3 more.Working in the Finances sector of my company, and having had extensive training in how the banking sector works overall, I will try and explain the flow of money between banks in general and make comparisons to how it works in India. 

How does funds transfer take place between two or more banks?

Before I explain in detail, I'll list down the meanings of few commonly used terminologies in the banking domain-

Creditor- The person/institution which receives funds/ whose account is credited. Also known as beneficiary.

Debtor- The person/institution from whom funds are debited and credited to the creditor. Initiating party- The one who initiates any transaction. (eg) credit transfer or direct

debit. Accounting relationship- When any bank/institution holds an account with another

institution, they're said to have an accounting relationship. Clearing house/ Clearing & Settlement Mechanism(CSM)- A centralized institution

(usually Government owned) with which all banks in the country have either a direct/indirect accounting relationship. They are said to have  a membership with the Clearing house. In India, the Reserve Bank of India(RBI) is the clearing house. The CSM is responsible for transfer of funds between any two banks in a country. Clearing and settlement is a two-step process- The process of calculating the net obligation that each bank owes to another is known as clearing. There is no actual transfer of funds at this stage. Once this is calculated, the respective amount is credited/debited to the respective banks. This process is known as settlement.

Nostro/Vostro account- When a bank(Bank A) holds an account/accounting relationship with another bank(Bank B) in a foreign country, that account is said to be Nostro account for Bank A and Vostro account for Bank B. Nostro/Vostro refer to the same account which are viewed differently. Usually, both banks involved hold accounts with the other bank.

Correspondent/Correspondent bank- An intermediary bank, which aids in transfer of funds between two banks which do not have a direct relationship with each other.

RTGS- Real Time Gross Settlement. As the name indicates, the transfer of funds takes place "real-time", i.e there is no waiting period for the funds to be transferred from one bank to the other, via clearing house. Gross settlement means that the funds are transferred on a one-to-one basis, without any netting procedure. This mode is usually used for transfer of high value payments.

NEFT- National Electronic Funds Transfer. This is usually used by individuals or corporate customers for low-value payments, where the transfer of funds need not be immediate, but takes place two or three hours after the instruction has been made. This follows a netting process, where the clearing house determines the net "obligation" that Bank A owes Bank B and debits/credits their respective accounts accordingly.

Note: RTGS and NEFT are the two modes of electronics funds transfer in India. Other countries have similar systems in place.

Now, there are two basic modes of funds transfer- Credit Transfer & Direct Debit. This system is universal, and it exists across the globe at all financial institutions  in some form.

Credit Transfer:

A credit transfer is a simple transfer of money from either -

1. An account held in one bank, say Bank A, to another account of the same bank. This is called as intra-bank credit transfer.

2. An account held in a bank, say Bank A, to an account held at another bank , say Bank B. This is called as inter-bank credit transfer.

In a credit transfer, the initiating party is the debtor.

Case 1:

In this case, since the accounts of both parties involved belong to the same bank, the funds are directly transferred from one account to another, which is a simple case of debiting the debtor account with the amount to be transferred and crediting the creditor account with the same amount. There is no involvement of clearing house in this case. This is termed as a simple "book transfer" as in the olden days, bank accounts were settled and accounted for using huge books called "ledgers".

Case 2:

There are sub-types in this scenario. This may occur when funds are to be transferred between two bank accounts in the same country, or two bank accounts in different countries.

If the bank accounts are in the same country, then as explained above, the clearing house comes into picture. Depending on whether the payment is made through RTGS/NEFT, the clearing house routes the payments accordingly from Bank A to Bank B. If either Bank A or Bank B are not direct members of the clearing house, then the funds are routed through an intermediary bank which is a direct member of the CSM. Then, Bank A or Bank B, are said to have an indirect accounting relationship with the CSM.

When the funds are to be transferred between accounts held at two different countries,  if they have a Nostro/Vostro relationship, then the debtor bank credits its Nostro account with the amount to be transferred and then the Creditor bank withdraws the amount from that account onto its own account known as a settlement account/wash account. From this account, the money is transferred to the individual/institutions account.

If the banks between which the funds have to be transferred do not have a Nostro/Vostro relationship, then they make use of a correspondent bank/banks. The correspondent is one who usually has an accounting relationship with both the debtor and creditor banks. Hence, it acts as an intermediary between the two banks to transfer money. Assuming Bank C as the intermediary bank, money is transferred from Bank A to Bank C and then from Bank C to Bank B.

There can be more than one correspondent bank involved in a funds transfer.

Note: Credit transfer is usually a non-reversible process i.e. once funds have been transferred, they cannot be reversed by the initiating party. However, in certain regions like Europe, there is a provision for reversal of credit transfer even after transfer of funds. In India, it is non-reversible.

Direct Debit:

A direct debit is a mode of funds transfer wherein the funds are transferred from one account to another based on a "mandate" or an agreement. The debtor signs an agreement with the creditor giving him permission to withdraw a certain amount on a monthly/yearly basis.

Here, the initiating party is the creditor.

An example of direct debit is payment of utility bills. We sign a mandate with "Airtel" allowing them to debit a fixed amount from our account for our telephone/broadband services. Airtel initiates the request for funds transfer on the specified date, and after verifying the mandate details, the amount is debited from your account and credited to Airtel's account.

It is interesting to note that a Recurring Deposit(RD) is NOT an example of direct debit. It is just an automated form of credit transfer, wherein we set a Standing Instruction(SI) to debit our account on a periodic basis.

Transfer of funds in Direct Debit takes place in a similar manner like the Credit Transfer, with the major difference being that it is initiated by the creditor and verification of mandate takes place before funds are transferred. The debtor is intimated beforehand to ensure sufficient funds are held at his account so that the debit process occurs smoothly.

Note: Banks in India offer compensation to the customer in case they carry out any erroneous transactions. Also the customer can instruct the bank to stop payment if the debit amount is incorrect. However, after settlement, he cannot reverse the payment.

In certain regions, mainly Europe, the debtor has the provision to  reverse the direct debit up-to a year after the  funds have been credited to the beneficiary.

When we transfer funds electronically from one bank to another, it doesn't require for funds or cash in physical form to actually be moved from the cash vault of one bank to another. There doesn't exist enough currency in physical form, i.e as cash ,in the world, as reflected in bank accounts. Most of it is just manipulation of numbers electronically and in the form of bonds/ other assets.  Upvote • 1+ Comments • Written 30 Apr, 2013

How to Choose a Money Wire Service

Edited by Carolyn Barratt, Chris, Maluniu

If you need to wire money to someone in another city, state or country, you can use a money wire service that specializes in sending funds securely. Comparing several aspects of a few companies before choosing can help you save money and ensure that the funds arrive safely. Use the following guidelines to help you choose a money wire service.

Steps

1. 1

Find out the exchange rate for the country that you want to send money to, and then compare the rate given by various money wire services. The rate changes often, but the variation is not usually extreme. This means that if you notice large fluctuations in the rates when you compare

them, some of the transfer services may be trying to take advantage of you by increasing the exchange rate.

Inquire whether your bank offers a money wire service, as some banks provide customers with free or inexpensive wire services.

3

Compare money transfer fees charged by each money wire service. Choosing the one with the lowest fee can save you at least a few dollars.

4

Decide whether to use a money transfer service that charges a flat fee for wiring funds, or one that charges a percentage of what you are sending. If you are sending a lot of money at once, a flat fee is usually better, while a percentage is best for lower amounts.

5

Consider how fast you need to get the money to its destination. Most services allow you to get money there immediately, but some may take a few business days. Make sure you take into account the fact that international transfers usually take longer than the domestic kind.

6

Find out whether extra fees are charged for paying for the money wire service with a credit card, or over the phone. Many wire services offer a lower price if you pay in cash or through a bank account.

7

Know the limit on the amount of money that can be sent at one time or in one day. Some companies also have a minimum amount that you have to wire, especially if they charge a fee that is a percentage of the total being sent. Keep in mind that if you are paying a flat fee to wire money, you should send as much as possible at one time to save funds.

8

Ask whether there are fees that the recipient has to pay, and if so, how much they are. You should compare the fees of various money transfer businesses to ensure that your recipient does not have to pay an outrageous amount to receive funds.

9

Make sure that the company is secure before you wire money. You can do this by finding reviews on the money transfer service in question, or by asking others which companies they have used to send money. Otherwise, you may end up losing your money to fraud on the part of the company or someone who has hacked their way into supposedly secure information.

How to Make an International Wire Transfer

Edited by Maniac, Demonshreder, Noris Maingey, BR and 7 others

Wire transfers are a type of electronic funds transfer. They are usually considered the safest way to transfer funds, especially large amounts, to other banks or countries. Most large banks belong to a bank network in Belgium called the Society for Worldwide Interbank Financial Telecommunications (SWIFT) that helps to verify and process financial messages, such as transfers. In order to make a wire transfer to another country, you will need to get some information from your payee and submit a fee to a major bank to process the transfer. This article will tell you how to make an international wire transfer.

Steps1. Call your bank to see if they do wire transfers. Also inquire what branches near you

are available to do wire transfers and at what cost. You can secure a wire transfer fairly quickly, if you have an account at a large bank.

In order for a bank to do a wire transfer, it must have a reciprocal account with the bank overseas. Many small banks and credit unions do not keep reciprocal accounts, and they may not be able to do this type of electronic funds transfer.

If you do not have an account with a major bank, you can find a Western Union branch. Western Union transfers can usually be made without an account. The process of getting the transfer is very similar to how you would do it at a bank.

2. Requeste

Bank Identifier Code (BIC),

International Bank Account Number (IBAN)

and contact information from the payee.

*You will need to fill in this information to order a wire transfer. Make sure all information is correct, as it is rare to receive a refund for a wire transfer.

3. Go to the bank branch to make your transfer. Ask for a wire transfer form and fill it out with your account information and all the account information for the payee. Sign the form in front of a bank employee and show them a photo ID.

If you are using a Western Union branch for your transfer, you will need to bring the money to be transferred, a fee payment and an address where the recipient can pick up

the money abroad. The Western Union agent will give you a Money Transfer Control Number (MTCN) to give to the recipient. You tell the recipient the number. They can receive money by going to the specified location, telling them the MTCN number and showing a photo ID.

4. Pay the bank for the transfer. International wire transfers from the United States can cost anywhere from $20 to $50 (12 to 31 pounds, 14 to 36 euros). In 2011, the cost for a wire transfer from the UK at HSBC was 13 pounds ($21, 15 euros).

Usually, the payment for sending the transfer is given separately from your account at the bank. The payee will have to pay to receive the money as well. This will be taken from the payee's account.

5. Wait at the bank while they send the message via the SWIFT network. They should be able to confirm whether the message was received. The funds transfer will take anywhere between a few hours to 5 business days.

If you plan to make frequent wire transfers, ask your bank to receive a Personal Identification Number (PIN) code so that you can make the transfers over the phone or Internet, rather than going into the bank.

Tips

Fees for wire transfers will depend upon the bank and the country to which you are sending money.

You may be able to send a wire transfer online with Western Union. You must create an online account with Western Union. They will verify your account and funds before you can make the online international transfer.

Payments within the Eurozone usually cost less than other international wire transfers, thanks to reciprocal economic agreements. However, payments in and out of the Eurozone tend to be more expensive.

Fees from an online Western Union account are likely to be less than the fees required if you go to a branch. However, you can make a transfer more quickly by going to a branch in person, unless you already have an online account.

Things You'll NeedBank

Western Union branch (optional)

Bank identifier code

International bank account number

Bank account

Money

Identification

How does international money transfer works? All Banks are maintaining Nostro and Vostro accounts with selected foreign Banks. They maintain account only in important city of a country. For example an Indian Bank maintain account with a USA Bank in New York. Similarly that Bank will have an account with the same Indian Bank in any one of the important centers like Mumbai or Chennai. When an Indian Bank remits money on behalf of his customer, they debit his account and credit USA Bank account with their bank in India and request to remit the money to the beneficiary at USA through their branch or any other Bank with whom they have arrangement. The amount is settled through their Nostro and Vostro accounts. In India an Indian Banks account with foreign Bank is known as Nostro account and the foreign Banks account in India with Indian Bank is known as Vostro account.

How international money transfers work

We might think of PayPal, Western Union, and the like as front-ends for international payments. They’re the companies with which we as consumers are familiar, but they in turn rely on other services to facilitate funds transfers.

Just as ACH and Fedwire operate as transfer networks in the US, other networks facilitate international payments. SWIFT, the Society for Worldwide Interbank Financial Telecommunication, is a key player in the global payments game. SWIFT does not actually move money; their network transmits messages between banks that allow the banks to make transfers. Rather than giving someone your bank account number, then, you use a SWIFT account number and SWIFT does the rest. They’re also not a corporation, but a cooperative owned by the banks who use the network. Based in Belgium, with a chairman from Pakistan and a CEO from Spain, SWIFT is about as international as a financial entity gets.

For large international (and domestic) transactions, there’s CHIPS. Their site boasts, “CHIPS is responsible for over 95% of USD cross-border and nearly half of all domestic wire transactions totaling $1.5 trillion daily.” Their members include the largest banks in the world, and they’re behind the scenes of most of the money transfers that fuel the global economy. Member banks combine a large number of transactions into one big transfer to another bank, and CHIPS settles the score and moves the money.

Exchange rates are always a factor in international money transfers, whether you’re sending $50 to a relative overseas or a company is paying millions to buy property in another country. Some networks will use the rate at the moment a payer initializes a transaction; others will process the payment based on the rate at the moment the payee’s bank receives the funds. And if either country involved has regulations that specify which exchange rate should be applied, the game changes again.

International laws and other complications

But wait, there’s more. Countries have different banking regulations and practices, and consumers around the world have different needs in terms of security and privacy. For instance,

a company called MutoNovo provides anonymous wire transfers of large amounts, like a PayPal for the very rich and mysterious.

Regulatory bodies around the world have systems in place to monitor transactions for suspicious activity. Governments, banks, payment processors, and companies around the world have a common interest in making sure that you can send and receive money easily and quickly. They also have a common interest in making things difficult for countries, organizations, companies, and people they don’t like. Earlier this month, the US Senate approved new sanctions against Iran that could lead to Iranian banks being expelled from SWIFT; a New York Times article explains that the Senate’s goal is to place further strain on the Iranian economy so that Iran will comply with US demands. The US cannot actually force SWIFT to do anything, and according to the Times, “The legislation does not specify what action would be taken against SWIFT if it did not comply.”

What is clear is that these payment networks are absolutely vital to the global economy, and the actions and reactions of a major player like SWIFT can have serious implications. The recent legislation regarding Iran and the ways in which different countries have addressed payment processors like PayPal demonstrate how much international politics can influence the financial landscape.

As with anything else in the wide world of finance, there’s a price to pay for simplicity and security. You can store your life savings in a shoebox and never set foot in a bank, but for most of us, the risks and inconvenience involved in sidestepping the global financial system don’t come with much—if any—benefit. So it’s a good thing we’ve got options.

Mae Saslaw is a writer and critic who lives and works in Brooklyn, NY.

The illustration by Sally Madden for Simple Finance Technology Corp. is available through Creative Commons license (by-nc-nd 3.0).

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This blog is written by the folks at simple.com. Simple replaces your bank with the best way to save and spend, and this is where Simple employees blog about new features, our philosophy, and tips and tricks to using Simple.

Society for Worldwide Interbank Financial Telecommunication (SWIFT)

Wire Transfers

Remittances

Money Transfers

Banking (excl. Investment Banking)

What exactly happens when a wire transfer is made?How does the money travel from the sender's account to the recipient's account? How much time does each step take? What regulatory measures are in place, if any?

Answers

Faisal Khan, Mo Money!

Wire Transfers between two banks is essentially not too complex. To understand the whole concept of wire transfer, you need to understand the different types of Wire Transfers:

Domestic Inter-bank Transfers (within the country transfer from one bank to another) Domestic Intra-bank Transfers (within the country and transferring from one bank branch to

another) International Inter-bank Transfers (probably the most common/famous bank transfer, whereby

funds are transferred from one bank in one country to another bank in another country) International Intra-bank Transfers (transferring of money within the same bank, but in a

different country)

Domestic Inter-Bank Funds Transfer This depends on how the setup is in each country. It can be done via RTGS (See Wiki on RTGS: http://en.wikipedia.org/wiki/Rea...) or via a local Automated Clearing House or even a localized Financial

Network or Switch. Essentially, banks are members of a network (secure, closed network) that essentially allows banks to net off or send payments to each other and exchange beneficiary details. Some old-school (read: not technologically advance countries) still do this manually by exchanging physical cheques and then settling them. Whilst, most of the modern and even developing economies have some form of an exchange / network to connect to and settle. The United States, for example uses ACH for this purpose.

Intra-Bank Funds Transfers (Domestic)For Intra-Bank Transfers the procedure is very simple. Most banks will simply instruct their core banking software to do an FT (Funds Transfer), which essentially means debit one account holder and credit the other account holder.

Intra-Bank Funds Transfers (International)When the same Intra-Bank transfer is done internationally, banks in both the remitting country and the beneficiary country have to follow laws in their respective countries for reporting the same to the financial services authority / central banks on the money in-flow/out-flow (see more below on the different types of reporting).

Inter-Bank Funds Transfer (International)On the International transfers, for Inter-bank transfers, banks usually use the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Think of SWIFT as the common denominator (or network) to connect any two banks. Sometimes two banks may have a direct arrangement (for example, a transfer from Citibank NYC (US) to Deutsche Bank Karachi (PK) have a direct arrangement, and hence the transfer will be done via the SWIFT network, without the interaction or involvement of an intermediary bank, commonly referred to as a correspondent bank.

In the event a direct relationship is not available, banks have arrangements with each other (via Nostro Accounts).

So for example, if Sunbank out of Orlando Florida (US) needs to send money to Mr. XYZ at Askari Bank in Lahore (Pakistan), the two banks here: Sunbank and Askari Bank certainly do not have a working arrangement.

Via SWIFT Sunbank can easily see that Askari Bank has an arrangement with Deutsche Bank NYC as a direct arrangement. IF Sunbank has a direct arrangement with Deutsche Bank - via a Nostro Account, they will simply send an instruction and the money to Deutsche Bank and and then Deutsche Bank NYC will accept the funds, minus its correspondent banking fees, and forward the money to Deutsche Bank (Karachi).

If Sunbank does not have a direct arrangement, they will ask Deutsche Bank for the bank account used for on-ward funds transfer and simply do a local wire transfer (ACH) which can take up to 2 days to clear.

Because Askari Bank and Deutsche Bank (Pakistan) have an arrangement, the funds come into the nostro account of Askari Bank in Deutsche Bank Pakistan. Askari Bank now has your money from Sunbank Orlando Florida. At the end-of-the-day settlement of Nostro account, the incoming money is transferred into the appropriate central account of Askari Bank and which will then do a FT (Funds Transfer) of the money to your account.

In this case, Deutsche Bank (Pakistan) may deduct correspondent bank fees and your bank may do the same. All in all, it is not unusual for mid-bank deductions to be in the vicinity of US$ 25 to say US$ 75 per transaction.

Reporting - is a very essential element of wire transfer business. Depending on the country (each has its own set of requirements), such reporting includes essentially:

KYC (Know Your Customer) Report Source of Funds Reporting (if Cash was induced into the source end of the transactions) AML (Anti-Money Laundering) Report (specifically velocity checks) SAR/CTR (Suspicious Activity Report / Currency Transaction Report) OFAC (Office of Foreign Assets Control - predominantly practiced by the US) and in other

countries they may have their own check lists to see if the funds are being transferred To/From people on a given checklist.

Threshold Reporting (reporting on amounts that exceed a specific monetary value in a given number of days, usually US$ 10,000 in the last 30-day window)

Workers Remittance Reporting. Any other reporting as required by law or internal policies in the country the Bank is operating

out of.

Online Payment Gateways and Processing :   How does the settlement of payments work in banks?

Specifically, how do payment systems that are connected to multiple banks actually settle the amount between two banks?For example if I use an ATM card from one bank, while my card is issued by another, how does the back end settlement of this money work?

39

Faisal Khan, Payments Yoda!

Votes by Anonymous, Quora User, Quora User, Kashif Haseeb Makhdum, and 34 more.

Here is a generic settlement process example as shown below. It can be applied universally all across for payments. For some intricate payment scenario the model slightly changes, but the gist of it remains the same.

Lets use the example above, Bob wants to send his friend Jake money. Assuming they are using some real-time mobile solution that sends money across instantly.

Both Bob & Jake are using two different banks. So the question usually asked is how is the money instantly transferred across?

In Bob's bank? how does the core banking software move money and how is this money, suddenly posted in Jake's bank account, which might be using a different core banking software?

In most cases, a settlement bank is used. The settlement bank will usually settle all the net transactions at the end of the day (at a particular anointed time and will settle the net funds for all the participating member banks). In this example, let us consider three banks:

X-Bank (which is the bank Bob uses) Y-Bank (which is the bank Jake uses) Bank Z - which is the settlement bank for all these participating banks using the switch.

At a particular time, (lets take this clock for example), when Bob sends money across to Jake, at 9:40:00 AM, a message is generated on a switch (think of a switch as a financial router/authority that both the banks agree-to/listen-to). This message (and lets not get into the technical details of the message) simply says, in a secure, irrevocable manner that:

"Y-Bank, please pay Jake US$ 100, as I have already taken US$ 100 from Bob, from his X-Bank".

Remember, nothing more than a message is sent across. No money actually moves. Just an "instruction" (or message).

Here is where the magic that seemed so confusing, actually happens - how does the money move?

The short answer is - its doesn't move (yet!)

X-Bank will deduct money from Bob's account (US$ 100) and credit this money in its own bank Settlement Account. Think of this settlement account as an SWITCH IOU Account, or a safekeeping account.

Y-Bank will take money from its own Settlement Account or Switch IOU Account, and credit the money to Jake's account.

The assumption here was, that when both these banks decided to do business with the switch and each other, they decided they would need a Settlement Account and this account will be funded by the bank's own money, which would be used to fund the transfers, pending the actual net settlement of funds.

In simple words, we will loan the money to whomsoever needs it immediately, because I have already been assured by the switch that the money is available, and you will settle with me later on.

If you assume that both X-Bank and Y-Bank started the day with US$ 1,000 in their settlement accounts, then this is how the ledger would reflect as the transaction was done:

Before Transaction:

X-Bank Settlement Account: US$ 1,000.00Bob's Bank Account: US$ 100.00Y-Bank Settlement Account: US$ 1,000.00Jake's Bank Account: US$ 0.00

(Lets assume Bob has US$ 100 only and Jake has zero money, at the start of the transaction).

After the transaction is done, this is how the accounts will look like:

X-Bank Settlement Account: US$ 1,100.00Bob's Bank Account: US$ 0.00Y-Bank Settlement Account: US$ 900.00Jake's Bank Account: US$ 100.00

During the day, a lot many transactions can happen, back and forth for different accounts between each participating member bank. As a switch operator or payment system operator, they too will have a Settlement Bank to use.

Participating banks appoint a time when they will do net settlements (transfers In/Out) with the Settlement Bank of the Switch Operator. This is usually done during banking hours for RTGS type of a transfer.

So, the final ledger of accounts would looks something like this:

Before Transaction:

X-Bank Settlement Account: US$ 1,000.00Bob's Bank Account: US$ 100.00Y-Bank Settlement Account: US$ 1,000.00Jake's Bank Account: US$ 0.00Bank-Z: Settlement Account for X-Bank: US$ 0.00

Bank-Z: Settlement Account for Y-Bank: US$ 0.00

After the transaction is done, this is how the accounts will look like:

X-Bank Settlement Account: US$ 1,100.00Bob's Bank Account: US$ 0.00Y-Bank Settlement Account: US$ 900.00Jake's Bank Account: US$ 100.00Bank-Z: Settlement Account for X-Bank: US$ 0.00

Bank-Z: Settlement Account for Y-Bank: US$ 0.00

and the end of the batch process day, this is how the ledges would look like (expanding it to show how the transfer are made)

X-Bank Settlement Account: US$ 1,00.00Bob's Bank Account: US$ 0.00Y-Bank Settlement Account: US$ 900.00Jake's Bank Account: US$ 100.00Bank-Z: Settlement Account for X-Bank: US$ 100.00

Bank-Z: Settlement Account for Y-Bank: US$ 0.00

and transfer to the final Bank (Y-Bank):

X-Bank Settlement Account: US$ 1,00.00Bob's Bank Account: US$ 0.00Y-Bank Settlement Account: US$ 900.00Jake's Bank Account: US$ 100.00Bank-Z: Settlement Account for X-Bank: US$ 0.00

Bank-Z: Settlement Account for Y-Bank: US$ 100.00

Final transfer to Y-Bank

X-Bank Settlement Account: US$ 1,00.00Bob's Bank Account: US$ 0.00Y-Bank Settlement Account: US$ 1000.00Jake's Bank Account: US$ 100.00Bank-Z: Settlement Account for X-Bank: US$ 0.00

Bank-Z: Settlement Account for Y-Bank: US$ 0.00

Now you will notice...

X-Bank's Settlement Account and Y-Bank's Settlement Account have both been topped up back to their initial investment of US$ 1,000

Bob's Bank Account is US$ 0.00Jake's Bank Account is US$ 100.00

and the Settlement accounts at Bank-Z for X-Bank and Y-Bank are US$ 0.00 each as all has been settled.

. Not for Reproduction

Upvote • Comment • Written 14 Nov, 2013

Nostro and vostro accountsFrom Wikipedia, the free encyclopedia

Nostro and vostro (Italian, from Italian, nostro and vostro; English, 'ours' and 'yours') are accounting terms used to distinguish an account held for another entity from an account another entity holds. The entities in question are almost always, but need not be, banks.

Origins

It helps to recall that the term account refers to a record of transactions, whether current, past or future, and whether in money, or shares, or other countable commodities. Originally a bank account just meant the record kept by a banker of the money they were holding on behalf of a customer, and how that changed as the customer made deposits and withdrawals (the money itself probably being in the form of specie, such as gold and silver coin).

Some customers will keep their own records of their transactions, for instance, so they can check for errors by the bank. That record kept by the customer is also an account, of the money the bank is holding for them. When that customer is another bank, since they also keep other accounts (of the money they are holding for their customers) there is a need to clearly differentiate between these two types of accounts.

The terms nostro and vostro remove the potential ambiguity when referring to these two separate accounts of the same balance and set of transactions. Speaking from the bank's point-of-view:

A nostro is our account of our money, held by you A vostro is your account of your money, held by us

Note that all "bank accounts" as the term is normally understood, including personal or corporate checking, loan, and savings accounts, are treated as vostros by the bank. They also regard as vostro purely internal funds such as treasury, trading and suspense accounts; although there is no "you" in the sense of an external customer, the money is still "held by us".

A client bank elects to open an account - nostro with another facilitator bank, in the absence of having access to primary clearing arrangements (generally with the Central Bank in the country where the currency is considered a local currency), for settling Treasury or Trade transactions. The facilitator bank, may or may not directly be a participant of the primary clearing system or even be in the country of the origin of currency. From the facilitator bank's perspective, the client bank's account is a vostro.

Accounting

Conventions

A bank counts a nostro account with a debit balance as a cash asset in its balance sheet. Conversely, 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. Thus in many banks a credit entry on an account ("CR") is regarded as negative movement, and a debit ("DR") is positive - the reverse of usual commercial accounting conventions.

With the advent of computerised accounting, nostros and vostros just need to have opposite signs within any one bank's accounting system; that is, if a nostro in credit has a positive sign, then a vostro in credit must have a negative sign. This allows for a reconciliation by summing all accounts to zero (a trial balance) - the basic premise of double-entry bookkeeping.

Typical usage

Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit.

For example: First National Bank of A does some transactions (loans, foreign exchange, etc.) in USD, but banks in A will only handle payments in AUD. So FNB of A opens a USD account at foreign bank Credit Mutuel de B, and instructs all counter-parties to settle transactions in USD at "account no. 123456 in name of FNBA, at CMB, X Branch". FNBA maintains its own records of that account, for reconciliation; this is its nostro account. CMB's record of the same account is the vostro account.

Now, FNBA sells AUD1,000,000 to C (a counterparty who has an AUD account with FNBA, and a USD account with CMB) for a net consideration of USD2,000,000. FNBA will make the following entries in its own accounting system:

(Internal) FX AUD trading account 1,000,000 DR AUD Account in name of C 1,000,000 CR

USD Nostro at CMB (FNBA's nostro) 2,000,000 DR (Internal) FX USD trading account 2,000,000 CR

Over at CMB, they record the following transaction:

USD Account in name of C 2,000,000 DR USD Account in name of FNBA (CMB's vostro) 2,000,000 CR

????? [This is somewhat simplified; in reality C may not have an account with FNBA's corresponding bank, and will make settlement by cheque or some form of electronic funds transfer (EFT). In this case CMB will make entries on several other accounts, such as a Teller's receiving account, or a clearing account with the third bank that the cheque was written on.]

Related expressions

There is also the notion of a loro account ("theirs"), which is a record of an account held by a second bank on behalf of a third party; that is, my record of their account with you. In practice this is rarely used, the main exception being complex syndicated financing.

In the same style as above:

A loro is our account of their money, held by you

Correspondent accountFrom Wikipedia, the free encyclopedia

A correspondent account is an account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution.

Commonly, correspondent accounts are the accounts of foreign banks who require the ability to pay and receive the domestic currency. The accounts allow them to pay others from the account or receive money from others into the account. This allows the bank to offer various services to their customers such as foreign exchange and foreign currency denominated loans and deposits, despite them not having a bank licence for the foreign country in that country's currency.

Such accounts are necessary for international trade which demands people and business pay for things in a currency other than their own. It is impractical to transport large amounts of currency around the world and physically exchange domestic currency for the currency that your customer/supplier demands. Instead money is taken out of an account at a local bank (which is in local currency) and an equivalent amount of money is put in the customer/suppliers account at their local bank (in a foreign currency). The money from your account goes to an internal account of your bank. The money to your customer/supplier comes from an account your local bank holds with a bank in your supplier's country - your bank's correspondent account, at their correspondent bank.[1]

Example

A customer of Wells Fargo Bank may wish to pay a German firm EUR1,000,000 for machinery. Wells Fargo determines that this is equivalent to USD1,200,000. Wells Fargo takes the $1,200,000 out of the customers bank account, and instruct their German correspondent bank—perhaps Deutsche Bank—to take EUR1,000,000 out of Wells Fargo's correspondent account with Deutsche Bank, and pay the money into the German company's EUR.

So, the customer has their machinery. The supplier have their money (in EUR) . Wells Fargo is square by having fewer EUR, correspondingly greater amount of USD.

It is established through bilateral agreements between two counterparts (in this case two financial organisations) to support the multi lateral economic balances established throughout the globe.

Nostro and Vostro accounts

Definition

Nostro and vostro (Middle Italian, from Latin, noster and voster; English, ours and yours) are accounting terms used to distinguish an account you hold for another entity from an account another entity holds for you. The entities in question are almost always, but need not be, banks.

Example

Nostro account - An Australian bank with an account in New York will call the record in its own books of its New York account a 'nostro account'. The same account in the New York bank's books would be a 'vostro account' (from the Latin, 'ours' and 'yours').

Vostro account - The counterpart to nostro account; vostro (Latin, 'yours') describes the record of an account held by a bank as correspondent on behalf of an overseas bank.

Quickie- A nostro is our account of our money, held by you - A vostro is our account of your money, held by us

Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit.For example: First National Bank of A does some transactions (loans, foreign exchange, etc.) in B$, but banks in A will only handle payments in A$. So FNB of A opens a B$ account at foreign bank Credit Mutuel de B, and instructs all counter-parties to settle transactions in B$ at "account no. 123456 in name of FNBA, at CMB, X Branch". FNBA maintains its own records of that account, for reconciliation; this is its nostro account. CMB's record of the same account is the vostro account.

Now, FNBA sells A$1,000,000 to C (a counterparty who has an A$ account with FNBA, and a B$ account with CMB) for a nett consideration of B$2,000,000. FNBA will make the following entries in its own accounting system:

(Internal) FX A$ trading account 1,000,000 DR A$ Account in name of C 1,000,000 CR B$ Nostro at CMB (FNBA's nostro) 2,000,000 DR (Internal) FX B$ trading account 2,000,000 CR

Over at CMB, they record the following transaction:

B$ Account in name of C 2,000,000 DR B$ Account in name of FNBA (CMB's vostro) 2,000,000 CR

[This is somewhat simplified; in reality C may not have an account with FNBA's corresponding bank, and will make settlement by cheque or some form of EFT. In this case CMB will make entries on several other accounts, such as a Teller's receiving account, or a clearing account with the third bank that the cheque was written on.]

[Excerpted from http://en.wikipedia.org/wiki/Nostro_and_vostro_accounts]

Working of nostro and vostro accounts for fund transfer

International accounting procedures between Local banks and overseas banks often involve the use of nostro and vostro accounts. A nostro (means "ours" in Latin) account is an account maintained by a Local bank with a foreign bank that allows the Local bank to buy foreign currency. A vostro (means "yours" in Latin) account is an account maintained by an overseas bank with a Local bank that allows the overseas bank to purchase Local currency. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the Country's (Local)Bank and foreign banks.

Example : When X (Buyer) a trader in Base Country wants to purchase $5000 worth of goods by paying cash. Mr.X deposits the cash in his local bank in the country's currency for the corresponding amount ($5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. US Dollars. Thus facilitating the trade between X & Y. IF Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X's country. Posted by Dan

Money launderingFrom Wikipedia, the free encyclopedia

(Redirected from Money Laundering)

This article is outdated. Please update this article to reflect recent events or newly available information. (March 2014)

Placing 'dirty' money in a service company, where it is layered with legitimate income, and then integrated into the flow of money is a common form of money laundering

Money laundering is the process whereby the proceeds of crime are transformed into ostensibly legitimate money or other assets.[1] However in a number of legal and regulatory system the term money laundering has become conflated with other forms of financial crime, and sometimes used more generally to include misuse of the financial system, including terrorism financing, tax evasion and evading of international sanctions. Most anti-money laundering laws openly conflate money laundering (which is concerned with source of funds) with terrorism financing (which is concerned with destination of funds) when regulating the financial system.[2]

Money obtained from certain crimes, such as extortion, insider trading, drug trafficking, illegal gambling and tax evasion is "dirty". It needs to be cleaned to appear to have derived from non-criminal activities so that banks and other financial institutions will deal with it without suspicion. Originally, the term applied to real money but now money laundering applies to the proceeds of crime that are laundered using a variety of monetary instruments including securities, digital currencies such as bitcoin, credit cards, and traditional currency. Money can be laundered by many methods, which vary in complexity and sophistication.

Different countries may or may not treat tax evasion or payments in breach of international sanctions as money laundering. Some jurisdictions differentiate these for definition purposes, and others do not. Some jurisdictions define money laundering as obfuscating sources of money, either intentionally or by merely using financial systems or services that do not identify or track sources or destinations.

Other jurisdictions define money laundering to include money from activity that would have been a crime in that jurisdiction, even if it were legal where the actual conduct occurred. This broad brush of applying the term "money laundering" to merely incidental, extraterritorial, or simply privacy-seeking behaviors has led some to label it "financial thoughtcrime".[3]

Many regulatory and governmental authorities issue estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996, the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. The Financial Action Task Force on Money Laundering (FATF), an intergovernmental body set up to combat money laundering, stated, "Overall, it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard."[4] Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.[5] Various estimates of the scale of global money laundering are sometimes repeated often enough to make some people regard them as factual—but no researcher has overcome the inherent difficulty of measuring an actively concealed practice.

Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions (US dollars) and poses a significant policy concern for governments.[5] As a result, governments and international bodies have undertaken efforts to deter, prevent, and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved. Issues relating to money laundering have existed as long as there have been large scale criminal enterprises. Modern anti-money laundering laws have developed along

with the modern War on Drugs.[6] In more recent times anti-money laundering legislation is seen as adjunct to the financial crime of terrorist financing in that both crimes usually involve the transmission of funds through the financial system (although money laundering relates to where the money has come from, and terrorist financing relating to where the money is going to).

Reverse money laundering is a process that disguises a legitimate source of funds that are to be used for illegal purposes.[7] In an affidavit filed March 24, 2014 in United States District Court, Northern California, San Francisco Division, FBI special agent Emmanuel V. Pascau alleged that several people associated with the Chee Kung Tong organization, and California State Senator Leland Yee, engaged in reverse money laundering activities.

What is Money Laundering?

Money laundering is a process whereby the proceeds of crime are transformed into apparently legitimate money or other assets.  It is said that the term ‘money laundering’ was coined from the practice of the American mafia who, at one time, channelled the cash proceeds of crime through laundrettes to legitimize the cash.  Whether this is true or not, the term ‘money laundering’ is now widely used.

Money laundering has traditionally been viewed as a three stage process.

1. In the first, or placement, stage proceeds of crime are introduced into the Canadian financial system. Placement usually occurs by breaking up large amounts of cash into smaller sums that are then deposited into various accounts at financial institutions or used to purchase a series of monetary instruments (travellers’ cheques, money orders, etc.).

2. In the second, or layering, stage money is converted (or moved) through a web of transactions to disguise it from its source and ownership. Money may be channelled through the purchase and sale of investment instruments, or wired through a series of accounts at various banks across the globe.

3. In the third, or integration, stage the money is re-entered into the Canadian economy as apparently legitimate funds and may be used to purchase real estate or luxury assets or to invest in business ventures.

Methods

Money laundering is commonly defined as occurring in three steps: the first step involves introducing cash into the financial system by some means ("placement"); the second involves carrying out complex financial transactions to camouflage the illegal source ("layering"); and the final step entails acquiring wealth generated from the transactions of the illicit funds ("integration"). Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement.[5]

Money laundering takes several different forms, although most methods can be categorized into one of a few types. These include "bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing".[8]

Structuring : Often known as smurfing, this is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.[9]

Bulk cash smuggling: This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.[10]

Cash-intensive businesses: In this method, a business typically involved in receiving cash uses its accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Service businesses are best suited to this method, as such businesses have no variable costs, and it is hard to detect discrepancies between revenues and costs. Examples are parking buildings, strip clubs, tanning beds, and casinos.

Trade-based laundering: This involves under- or overvaluing invoices to disguise the movement of money.[11]

Shell companies and trusts: Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true, beneficial, owner.[12]

Round-tripping : Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation. A variant on this is to transfer money to a law firm or similar organization as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.

Bank capture: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

Casinos: In this method, an individual walks into a casino with cash and buys chips, plays for a while, and then cashes in the chips, taking payment in a check, or just getting a receipt, claiming it as gambling winnings.[10]

Other gambling: Money is spent on gambling, preferably on higher odds. The wins are shown if the source for money is asked for, while the losses are hidden.

Real estate: Someone purchases real estate with illegal proceeds and then sells the property. To outsiders, the proceeds from the sale look like legitimate income. Alternatively, the price of the property is manipulated: the seller agrees to a contract that underrepresents the value of the property, and receives criminal proceeds to make up the difference.[12]

Black salaries: A company may have unregistered employees without a written contract and pay them cash salaries. Dirty money might be used to pay them.[13]

Tax amnesties : For example, those that legalize unreported assets in tax havens and cash [14]

Fictional loans A goal of money laundering is to be able to use the dirty money for private consumption. If

unable to use it openly, the traditional way to keep the dirty money near is hiding it as cash at home or other places. A more modern method is a credit card connected to a tax haven bank.

Enforcement

Anti-money laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent, detect, and report money laundering activities. Anti-money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task Force (FATF) and the promulgation of an international framework of anti-money laundering standards.[15] These standards began to have more relevance in 2000 and 2001, after FATF began a process to publicly identify countries that were deficient in their anti-money laundering laws and international cooperation, a process colloquially known as "name and shame".[16][17]

An effective AML program requires a jurisdiction to have criminalized money laundering, given the relevant regulators and police the powers and tools to investigate; be able to share information with other countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.[18]

Criminalizing money laundering

The elements of the crime of money laundering are set forth in the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and Convention against Transnational Organized Crime. It is defined as knowingly engaging in a financial transaction with the proceeds of a crime for the purpose of concealing or disguising the illicit origin of the property from governments.

The role of financial institutions

While banks operating in the same country generally have to follow the same AML laws and regulations, financial institutions all structure their AML efforts slightly different.[19] Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must verify a customer's identity and, if necessary, monitor transactions for suspicious activity. This is often termed as "know your customer". This means knowing the identity of the customer and understanding the kinds of transactions in which the customer is likely to engage. By knowing one's customers, financial institutions can often identify unusual or suspicious behavior, termed anomalies, which may be an indication of money laundering.[20]

Bank employees, such as tellers and customer account representatives, are trained in anti-money laundering and are instructed to report activities that they deem suspicious. Additionally, anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software also flags names on government "blacklists" and transactions that involve countries hostile to the host nation. Once the software has mined data and flagged

suspect transactions, it alerts bank management, who must then determine whether to file a report with the government.

Value of enforcement costs and associated privacy concerns

The financial services industry has become more vocal about the rising costs of anti-money laundering regulation and the limited benefits that they claim it brings.[21] One commentator wrote that "[w]ithout facts, [anti-money laundering] legislation has been driven on rhetoric, driving by ill-guided activism responding to the need to be "seen to be doing something" rather than by an objective understanding of its effects on predicate crime. The social panic approach is justified by the language used—we talk of the battle against terrorism or the war on drugs".[22] The Economist magazine has become increasingly vocal in its criticism of such regulation, particularly with reference to countering terrorist financing, referring to it as a "costly failure", although it concedes that other efforts (like reducing identity and credit card fraud) may still be effective at combating money laundering.[23]

There is no precise measurement of the costs of regulation balanced against the harms associated with money laundering,[24] and given the evaluation problems involved in assessing such an issue, it is unlikely that the effectiveness of terror finance and money laundering laws could be determined with any degree of accuracy.[25] The Economist estimated the annual costs of anti-money laundering efforts in Europe and North America at US$5 billion in 2003, an increase from US$700 million in 2000.[26] Government-linked economists have noted the significant negative effects of money laundering on economic development, including undermining domestic capital formation, depressing growth, and diverting capital away from development.[27] Because of the intrinsic uncertainties of the amount of money laundered, changes in the amount of money laundered, and the cost of anti-money laundering systems, it is almost impossible to tell which anti-money laundering systems work and which are more or less cost effective.

Besides economic costs to implement anti-money-laundering laws improper attention to data-protection practices may entail disproportionate costs to individual privacy rights. In June 2011, the data-protection advisory committee to the European Union, issued a report on data protection issues related to the prevention of money laundering and terrorist financing, which identified numerous transgressions against the established legal framework on privacy and data protection.[28] The report made recommendations how to address money laundering and terrorist financing in ways that safeguard personal privacy rights and data-protection laws.[29] In the United States, groups such as the American Civil Liberties Union have expressed concern that money laundering rules require banks to report on their own customers, essentially conscripting private businesses "into agents of the surveillance state".[30]

Many countries are obligated by various international instruments and standards, such as the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the 2000 Convention against Transnational Organized Crime, the 2003 United Nations Convention against Corruption, and the recommendations of the 1989 Financial Action Task Force on Money Laundering to enact and enforce money laundering laws in an effort to stop narcotics trafficking, international organised crime, and corruption. Mexico, which has

faced a significant increase in violent crime, established anti-money laundering controls in 2013 to curb the underlying crime issue.[31]

How Online Money Transfers Work

by Brian Boone

Online money transfer is where the old-fashioned concept of wiring money converges with the modern technology of electronic funds transfer, or EFT. You probably use EFT all the time -- it's simply a completely electronic way of transferring money from one bank account to another bank account. Data is exchanged; paper money is not. Using a debit card at a store transfers money from your checking account into the store's banking account. Direct deposit payroll moves money from your employer's bank account into yours. Both of these transactions are examples of EFT, and so is online money transfer.

But online money transfer is distinctly different from EFT -- this is not about a way to pay your bills over the Internet. Online money transfer is the modern-day equivalent of wiring money: You can send someone money instantaneously simply by transferring money (or the data that represents that money) from you to another person. Usually involving little more than contact information -- such as a cell phone number or an e-mail address -- for the sending and receiving parties tied to a bank account, online money transfer can be done for a small fee from a secure, Web-based service via any computer with Internet access. There's no need to go to a money wiring office, telegraph station or even a bank.

So that's how you send money. But why would you want to … and is it safe?

Online Money Transfer Basics

The main reasons to send money via an online money transfer service are undeniable: Online money transfer is fast, convenient and safe.

Mailed checks can take days to be delivered, and they can be lost in the mail or stolen. If that money is being sent internationally, where it might be needed most, there's also the matter of currency conversion fees, which are generally costlier than a money transfer fee. Online money transfer allows nearly instantaneous delivery -- it takes data only seconds to travel on the Internet -- with no physical complications to virtually anywhere in the world.

Numerous safety measures are in place to ensure that your money goes exactly where it needs to go. Multiple layers of data encryption are used for online money transfers. That way, if by chance the data is stolen or hacked en route to the recipient, it's all coded multiple times so that it's illogical, illegible jibber-jabber. It's money on a screen to you, but once you hit send on a secure money transfer Web site, it goes out into the Internet as coded data, and once it's received by the recipient's bank or service, it's decoded and deposited as currency.

All online banking transactions, including online money transfer services, are processed by the Automated Clearing House (ACH), an independent agency that offers secure financial data transmission. The various services offer other levels of protection, such as confirmation phone calls to both parties (who have to verify private information), confirmation e-mails, and even insurance policies that guarantee your money will be sent and your bank accounts won't be compromised.

OK, so it's safe for you, and for the person that needs money. But how much does it cost to send money online, and where do you go to do it?

Online Money Transfers: Companies and Costs

There are four main online money transfer services. Two have been in the money-sending business for decades. One, Western Union began as a transcontinental telegraph operator in 1851, and introduced money transfer over telegraph lines, or "wiring," in 1871. It was a fairly unsophisticated process: You'd give cash to the telegraph office, a message would be sent to the waiting friend at the other telegraph office hundreds of miles away, and they'd receive cash. Today, you no longer have to go to the train station or the Western Union outpost -- you can send money online via Western Union's Web site. For example, "Money in Minutes" transfers money from one person's bank account to another in, well, minutes. The service fee is on a sliding scale, so you'll pay anywhere from 8 to 10 percent of the total amount of money you're sending [source: Western Union].

MoneyGram, another holdover from the money-wiring era, also offers instant online money transfers at a flat rate of 8 percent, no matter the size of the amount sent. If the money isn't being sent to alleviate an emergency and can wait a couple of days, MoneyGram has a three- to five-day transfer service for which the fee is 3 percent [source: MoneyGram].

Owned and operated by eBay, PayPal is primarily an online payment system. But it can be used to transfer money. Both the money sender and money recipient should have PayPal accounts. Accounts are free, but must be tied to some kind of savings or checking account. To send money on PayPal, you simply enter the recipient's e-mail address that's on record with the service, and the money is transferred from your account to the recipient's. Warning: PayPal is not an instant online transfer service. It will take no less than three to five business days for the transaction to clear. On the bright side, it's very cheap: PayPal's fee is 2.9 percent of the amount sent, plus 30 cents [source; PayPal].

iKobo, whose business is primarily international, uses loadable debit cards to handle its online transfers. Essentially, the recipient gets an iKobo bankcard, and the sender tells iKobo how much money to put on the card. It's not instantaneous, however -- the money is available in eight business days. But that's if they already have an iKobo card. Getting the card adds at least a week to the timeframe. iKobo charges an $8 flat fee when the sender uses a checking account. When you use a credit card, the fee is based on a sliding scale from 8 to 30 percent of the transaction [source: iKobo].

Online Money Transfers: Credit Cards and Fees

In some cases, you don't have to have a bank account to send money online -- or even to receive it from an online transfer. A credit card is a viable tool in this regard. But do note that, as is usually the case with credit cards, it's going to cost you. While most online transfer services (Western Union, MoneyGram) treat debit and credit cards the same for the money sender -- it's just a method of payment -- iKobo, for example, can charge as much as 30 percent if the sender uses a credit card [source: iKobo].

Fortunately, if you do use a credit card to apply funds to an online money transfer, credit card companies view it as a purchase, not a cash advance, because the money is not going to you. As far as the credit card company is concerned, you are purchasing a service. This is far more economically sound than using a credit card cash advance and simply sending the needy party a check; cash advance fees can run as high as 4 percent [source: credit.com]. But that's 4 percent on the transaction. The balance of that cash advance then goes on your credit card bill, where it's also subject to the usual credit card monthly interest rate. Payday loan houses, which are appealing because they don't require credit checks, charge even higher interest rates; the annual percentage rate (APR) can run, on average, 400 percent [source: Davidson & Miller].

As stated, iKobo's model uses a preloaded debit card. This is good for sending money to people who don't have a bank account, while offering the flexibility of point-of-purchase ease of use a standard bank-issued debit card offers. The sender can upload an amount onto the recipient's card for as little as $8 if the money comes from a checking account, as opposed to a credit card. The recipient, however, ends up paying for the convenience. The card carries a $1.99 monthly maintenance fee, a $2.25 ATM withdrawal fee, and 55 cents for point-of-purchase, like a store [source: iKobo]. All of these fees come off the balance of the card.

For more information regarding online money transfers and related personal finance topics, visit the links on the following page.

Transfer Limits

There are limits on how little or how much money can be sent, and how much can be transferred in a period of time. For example:

Western Union caps any online transfer coming out of the U.S. at $3,000 each. You can send more, but it will be broken up into chunks.

MoneyGram caps transfers at $899.99, for a maximum of $3,000 in a 30-day period. PayPal allows transactions of up to $10,000 domestically. iKobo limits usage of a preloaded card to $500 per day

[sources: Western Union, MoneyGram, PayPal and iKobo].