PAYMENT MESSAGES

 PAYMENT MESSAGES

We might be getting ahead of ourselves here. There is a lot to understand about payments before we discuss messages, right?! I have a different view on this. My feeling is that payments could be better understood if we get our basics right about messages.

A common man might not have heard about payment messages at all. If you are from the IT/Software industry and have worked in banking, then you might have heard about them. In the real world, if not for the exchange of these messages, then the world’s economy would come to a halt.

What are these “messages” that I am talking about??

They are the carriers of payment information from one party to another. They start their journey from the ordering customer (Industry-standard term for a customer who initiated the payment) and ends with the Beneficiary Customer (Industry-standard term for a customer who receives this payment)

On a high level these messages are of two types:

1. Customer to Bank / Bank to Customer (aka. Customer to FI / FI to customer)
2. Bank to Bank (FI to FI)

FI means financial institution. Do you remember the very first article?? Let us pull up the picture again for our reference.

A0301

Customer to Bank:

John does not personally type these payment messages. When he logs into the net banking portal he provides the details of the payment like the amount, currency, account number of the beneficiary, the bank’s code, and description of the payment, then the bank’s software converts it into a payment message.

This message is an instruction to the bank (Pic A0301) to initiate a credit transfer. A point to note here is that these ‘customers to bank’ instruction messages are not mandatory in most payment systems, but are recommended. Corporations send these types of payments directly to the bank.

These messages do not carry any funds in them but only instructions.

You may have a question here If these messages are not mandatory then in what other ways the instructions are passed to the bank. The answer to this is slightly technical. There are a variety of ways and it varies from bank to bank, but the most popular method used these days is API.

APIs are like waiters in a restaurant they take the order from one application (customer at a restaurant) to another (the kitchen).

Bank to Bank:

These are the messages that move funds from one bank to the other. In Pic A0301 they carry payment information and funds from Citi to Axis banks.

They are of two types

1. Customer transfers
2. Bank transfer

Confusion?? – Let me explain 

Customer transfers: These are messages sent by one bank to another and at least one of the parties in the payment chain is a bank’s customer. The message sent by Citi Bank in pic A0301 is a customer transfer.

Bank transfers: These are messages sent by one bank to another and all the parties are banks. Banks send funds to other banks for reasons like fees, settlement amount, funding their accounts, etc. In the below picture(A0302) you can see a bank transfer message.

A0302

Bank to customer: These are mostly status messages or confirmations or advices related to funds transfer. The intimate the customer about the debit or credit of funds, statements, etc. . In most cases these are sent to corporate customers by the bank.

If you refer to my previous article Link, I had given a brief about the governing bodies. They actually decide the structure of these messages. Every year changes to these messages will be done based on the requirements of the market. These governing bodies also provide the secure infrastructure required for the transportation of these messages.

We still have not addressed the most important question. How is the actual money transferred from one bank to another?? Does a bank employee carry a suitcase full of cash to the other bank?? Definitely “No”

In My next article I will be talking about the accounting entries that happen in a transaction when these payment messages are sent and received.

Before we close, I want to talk about two more things.

How does the ‘message’ actually look like??

If you are thinking that the messages are written in some sort of computer code then you will be quite surprised to learn that these messages are extremely readable. Below you can find the snippet of two of the most popular messages. We can easily take an educated guess on what the highlighted fields are.

SWIFT

A0303

SEPA

A0304

Quiz:

 Here is a short quiz, you can email me the answer or message me in LinkedIn.

Beginner Level:

Name 3 examples of each of the different types of payments described above.

ANS

SWIFT (ISO 15022)

Customer to FI MT101
Bank to bank MT202, MT103
Fi to customer MT 910,940

Sepa (ISO 20022)

Customer To Fi pain.001
Bank to Bank pacs.009,Pacs.008
Fi to customer Camt 52

Note:

In a credit transfer (Push payment), the initiating party is the ordering customer and the payment ends with the beneficiary customer. Here the beneficiary does not initiate the payment. In a Direct debit transaction (Pull Payment), the beneficiary initiates the transaction but the payment still ends with the ben customer.