Balance of Payments

When describing international payments systems there are two important considerations to keep in mind. Different systems or methods are used for intra-country payments versus cross-border payments. Payments may be denominated in a country's local currency or the currency of another country These issues have a significant impact on settlement procedures.

Paper-Based Payments Systems:

International paper-based systems involve payment and clearing of checks, also referred to as drafts, within and between countries. There are several key issues in international check clearing. They include the following:

1. The check clearing process within a country varies significantly from country to country Some countries have nationwide clearing, others do not The clearing of checks may be accomplished by the central bank (as the Fed does in the U 5), by several of the major banks acting as clearing agents, or by correspondent relationships between different banks. 
2. The clearing of checks between countries (cross-border clearing) is often a slow and complicated process. Inter-country checks generally clear as collection items which must be presented back to the bank in the country where they are drawn. Settlement is typically accomplished through correspondent bank accounts. For smaller value items the drawee bank may replace the original check for one that can be cleared in the payee's country. This check is then returned to the payee's bank for deposit. 
3. Some financial institutions offer specialized international check clearing services that speed up the process of collecting cross-border payments.

Electronic Payments Systems:

Many countries offer different types of electronic systems for both corporate and consumer payments.

Company-to-Company Electronic Payments Systems

Electronic payment of company obligations is more common in some areas of the world than it is in the U.S. The actual structure and operation of these payments systems vary from country to country but they also have some common characteristics:

• Credit-Based Transactions - Most company-to-company electronic payments are credit transactions, where the payor initiates a transfer of funds to the payee. In this sense, these payments are similar to ACH credits or Fedwire transactions in the U.S. The method by which a company accesses its bank to initiate payment varies widely by country, bank, and company. Generally, the payment initiation systems are provided by the banks to their customers on a proprietary basis. 
• Transactions are Cleared Through Correspondent Balances - The majority of electronic payments systems outside the U.S. are cleared through correspondent balances of the banks involved in the transfers. Between countries, this clearing is usually done bank-to-bank on a bilateral basis. Within a country, the clearing may be done on a bilateral basis, or through a netting system run by a few clearing banks. These systems are different from the Fedwire system in the U.S., where value is transferred by debits and credits to bank reserve balances at the Federal Reserve. 
• Role of the Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.) - S.W.I.F.T. is an interbank telecommunications network that enables banks to send authenticated electronic messages in standard formats. These communications, initiated and received by member banks, cover a wide variety of international banking services. A company can request its bank to initiate a balance transfer or foreign payment through S.W.I.F.T. It should be noted that S.W.I.F.T. communications contain payment-related information but do not transfer value. The actual clearing and settlement of S.W.I.F.T messages regarding the transfer of funds are accomplished through correspondent bank balances. Standardized S.W.I.F.T. messages have also been developed for other international service needs including balance reporting, letters of credit, foreign exchange transactions, and documentary collections. 

Consumer Electronic Payments Systems

The use of electronic payments systems by consumers is more common in many areas of the world than in the U.S. These types of payments include those from consumers to companies and governments, as well as consumer-to-consumer payments. As in the case of company-to-company payments, the structure and operation of the payment systems vary from country to country. Some of the most common systems and applications are as follows:

• Use of Giros - Many European countries have giro systems which operate through their postal systems. Giro systems allow payments from one giro account to another using direct debits and credits. Payments from consumers to companies and to governments (for taxes) represent the bulk of payment volumes in these systems. Consumers use the giro system in place of checks for payment of their monthly bills and statements. In some countries, consumers access these systems via PCs, terminals, or telephone. Though these systems are primarily used for consumer initiated payments, there is experimental use of giros for corporate-tocorporate and corporate-to-consumer payments in some countries. 
• Debit Cards - Debit cards outside the U.S. operate similarly to U.S. cards. As consumers use these cards for purchases, the funds are debited from their bank or giro account and credited to the seller's account. 
• Smart Cards - These cards are similar to debit cards but contain a microchip with additional information and security protection. Smart cards may be used for prepaid value transactions, where the consumer prepays the bank, giro, or company issuing the card. The card then keeps track of purchases and any remaining balance. 

Source: Essentials of Cash Management, Sixth Edition, a publication of the Treasury Management Association