Transaction settlement is the process of moving funds from the cardholder’s account to the merchant’s account following a credit or debit card purchase.
The issuer will route funds to the acquirer via the card network. For debit card payments, the funds will be withdrawn directly from the cardholder’s bank account. For credit card payments, the issuer will forward funds to the acquirer and the cardholder will reimburse the issuer at a later date. When the acquirer receives the funds, the amount of the transaction minus fees will be deposited into the merchant’s account.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT), legally S.W.I.F.T. SCRL, is a Belgian cooperative society that serves as an intermediary and executor of financial transactions between banks worldwide. It also sells software and services to financial institutions, mostly for use on its proprietary “SWIFTNet”, and ISO 9362 Business Identifier Codes (BICs), popularly known as “SWIFT codes”.
SWIFT does not facilitate funds transfer: rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. To exchange banking transactions, each financial institution must have a banking relationship by either being legally organized as a bank or through its affiliation with at least one bank. While SWIFT transports financial messages in a secure manner, it does not hold accounts for its members nor performs any form of clearing or settlement.
As of 2018, around half of all high-value cross-border payments worldwide used the SWIFT network, and in 2015, SWIFT linked more than 11,000 financial institutions in over 200 countries and territories, who were exchanging an average of over 32 million messages per day (compared to an average of 2.4 million daily messages in 1995).
Though widely utilized, SWIFT has been criticized for its inefficiency. In 2018, the London-based Financial Times noted that transfers frequently “pass through multiple banks before reaching their final destination, making them time-consuming, costly and lacking transparency on how much money will arrive at the other end”. SWIFT has since introduced an improved service called “Global Payments Innovation” (GPI), claiming it was adopted by 165 banks and was completing half its payments within 30 minutes. SWIFT has also attracted controversy for enabling the United States government to monitor, and in some cases interfere with, intra-European transactions.
As a cooperative society under Belgian law, SWIFT is owned by its member financial institutions. It is headquartered in La Hulpe, Belgium, near Brussels; its main building was designed by Ricardo Bofill Taller de Arquitectura and completed in 1989. The chairman of SWIFT is Yawar Shah of Pakistan, and its CEO is Javier Pérez-Tasso of Spain. SWIFT hosts an annual conference, called Sibos, specifically aimed at the financial services industry.
SWIFT has become the industry standard for syntax in financial messages. Messages formatted to SWIFT standards can be read and processed by many well-known financial processing systems, whether or not the message traveled over the SWIFT network. SWIFT cooperates with international organizations for defining standards for message format and content. SWIFT is also Registration authority (RA) for the following ISO standards:
- ISO 9362: 1994 Banking: Banking telecommunication messages; Bank identifier codes
- ISO 10383: 2003 Securities and related financial instruments; Codes for exchanges and market identification (MIC)
- ISO 13616: 2003 IBAN Registry
- ISO 15022: 1999 Securities; Scheme for messages (Data Field Dictionary) (replaces ISO 7775)
- ISO 20022-1: 2004 and ISO 20022-2:2007 Financial services; Universal Financial Industry message scheme
The Clearing House Interbank Payments System (CHIPS) is a United States private clearing house for large-value transactions. By 2015, it was settling well over US$1.5 trillion a day in around 250,000 interbank payments in cross border and domestic transactions. Together with the Fedwire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value domestic and international USD payments where it has a market share of around 96%. CHIPS transfers are governed by Article 4A of Uniform Commercial Code.
Unlike the Fedwire system which is part of a regulatory body, CHIPS is owned by the financial institutions that use it. For payments that are less time-sensitive in nature, banks typically prefer to use CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required). One of the reasons is that Fedwire is a real-time gross settlement system, while CHIPS allows payments to be netted.
There are two steps to processing funds transfers: clearing and settlement. Clearing is the transfer and confirmation of information between the payer (sending financial institution) and payee (receiving financial institution). Settlement is the actual transfer of funds between the payer’s financial institution and the payee’s financial institution. Settlement discharges the obligation of the payer financial institution to the payee financial institution with respect to the payment order. Final settlement is irrevocable and unconditional. The finality of the payment is determined by that system’s rules and applicable law.
In general, payment messages may be credit transfers or debit transfers. Most large-value funds transfer systems are credit transfer systems in which both payment messages and funds move from the payer financial institution to the payee financial institution. An institution transmits a payment order (a message that requests the transfer of funds to the payee) to initiate a funds transfer. Typically, large-value payment system operating procedures include identification, reconciliation, and confirmation procedures necessary to process the payment orders. In some systems, financial institutions may contract with one or more third parties to help perform clearing and settlement activities.
The legal framework for institutions offering payment services is complex. There are rules for large-value payments that are distinct from retail payments. Large-value funds transfer systems differ from retail electronic funds transfer (EFT) systems, which generally handle a large volume of low-value payments including automated clearing house (ACH) and debit and credit card transactions at the point of sale.
The Clearing House Automated Payments System (CHAPS) is a company that facilitates large money transfers denominated in British pounds (GBP). CHAPS is administered by the Bank of England (BoE) and is used by 30 participating financial institutions. Approximately 5,500 additional institutions also engage with the system by way of partnership agreements with the 30 primary members.
CHAPS is used by large financial institutions that need to transfer billions of dollars’ worth of currency each day. To assist in these transfers, CHAPS enables real-time fund transfers and can accommodate frequent large transfers with virtually no delay. The speed of CHAPS also substantially eliminates the risk that senders will cancel their transfers before they are accepted by the recipient.
The primary members of CHAPS are large financial firms with business interests worldwide. Examples of current CHAPS members include American firms such as Bank of America (BAC), Citibank (C), and JPMorgan Chase (JPM); British firms such as Barclays (BARC), Lloyds Bank (LLOY), and Standard Chartered (STAN); and European firms such as Deutsche Bank (DBK), UBS (UBSG), and BNP Paribas (BNP).
Fedwire (formerly known as the Federal Reserve Wire Network) is a real-time gross settlement funds transfer system operated by the United States Federal Reserve Banks that allows financial institutions to electronically transfer funds between its more than 9,289 participants (as of March 19, 2009). Transfers can only be initiated by the sending bank once they receive the proper wiring instructions for the receiving bank. These instructions include: the receiving bank’s routing number, account number, name and dollar amount being transferred. This information is submitted to the Federal Reserve via the Fedwire system. Once the instructions are received and processed, the Fed will debit the funds from the sending bank’s reserve account and credit the receiving bank’s account. Wire transfers sent via Fedwire are completed the same business day, with many being completed instantly.
In conjunction with Clearing House Interbank Payments System (CHIPS), operated by The Clearing House Payments Company, a private company, Fedwire is the primary U.S. network for large-value or time-critical domestic and international payments, and it is designed to be highly resilient. In 2012, CHIPS was designated a systemically important financial market utility (SIFMU) under Title VIII of the Dodd–Frank Act, which means that CHIPS is subject to heightened regulatory scrutiny by the Federal Reserve Board.
The Fedwire system, along with the other two wholesale payment systems operated by the Fed, goes back more than 100 years. It is considered to be very robust and reliable.
The Fed began to transfer funds between parties as early as 1915. In 1918, the central bank established its own proprietary system, which processed the transfers.
Until 1981, the Fedwire system was only available to member banks and services were free of charge. The Fed began charging fees after the Depository Institutions Deregulation and Monetary Control Act of 1980 (the Monetary Control Act) was signed into law.