What is Funds Transfer?

  • A Funds Transfer is a sequence of events that results in the movement of funds from the sender / remitter to the receiver / beneficiary. It is also defined as the remittance of funds from one party to itself or to another party through the banking system.
  • Financial institutions or banks can initiate these for themselves, or on behalf of their customers.

Types of payments in funds transfer”

Funds Transfers can be classified as…

Incoming – indicating that funds are coming into the bank.

Outgoing – indicating that funds are going out from the bank.

Internal – indicating that fund are transferred

within the bank or between the branches of the bank.

Types of funds transfers

Broadly speaking, there are three types of funds transfers: a customer transfer, a bank transfer and bank transfer for own account.

Customer Transfer: A customer transfer is a transfer made by the financial institution of the ordering customer to the financial institution of the ultimate beneficiary. Here the originator and the beneficiary of the transfer are not financial institutions.


Bank Transfer: A bank transfer refers to the transfer of funds between the ordering institution and beneficiary institution. Here the originator and beneficiary are financial institutions.


Bank Transfer for Own Account: A transfer initiated by a bank to transfer funds from one Nostro account to another Nostro account.

“Naming Payment Participants”

Title(and alternative titles)       
Remitting Bank     

Ordering Bank 
Ordering Institution   
Originating Bank                                                            

Remitting Customer

Ordering Customer
Originating Customer               

Account with Institution

Beneficiary Bank
Ultimate Bank 
Final Bank in the chain     

Beneficiary Customer   

Ultimate Beneficiary


Bank which has ordered the payment on  behalf of itself or one of its customers 
Original source of the payment order
 Bank at which the ultimate beneficiary holds their account
Ultimate receiver of the funds                  

Naming Payment Participants

Remitting Bank

Account with Institution

Remitting Customer

Beneficiary Customer

Direct Account Relationship

Citibank New York

State Bank New York

For a bank to transfer funds directly to another bank it must hold an account at that bank.

Mirror Account

  • Where two banks have a direct account relationships, each maintains a mirror of its account at the other bank.
  • Balances on the mirror account are the inverse of those held on the account to which it is related.
  • This is the mechanism by which banks effect direct funds transfers between each other.

Nostro Account

Vostro Account

Citibank India

Chase Manhattan NY

A Rupee  account maintained by Chase Manhattan New York with Citibank India is called a Vostro account by Citibank India

A/c No 9876: Chase Manhattan NY
A/c No9876:Vostro A/c
A/c No6789: Nostro Mirror

Bank Transfer With Direct Relationship

Bank Transfer Without Direct Relationship

Problems With Direct Account Relationship

  • Banks can link together in chains to facilitate funds transfer between banks that do not have direct account relationships.
  • In a series of debits and credits, funds can work their way around a group of banks until such time as the target bank has them credited to an account of theirs.

Clearing Systems

  • Clearing Systems(Central Banks) are the primary method that banks use for making payments in their own currency.
  • Clearing systems act like the hub of a wheel.
  •  To Transfer funds to one another the banks must first pass through the clearing system.
  •  Each bank now only needs one external account, an account with the clearing system.
  • Clearing systems are not Central banks but are usually owned and controlled by central banks.
  • Clearing systems are owned and maintained by the national central bank of a country.
  • l Central banks are country specific and currency specific.
  • Every Clearing system supports only one currency.
  • Every Central Bank is responsible for only one currency.
  • Every funds transfer of a currency, that is not transacted across direct account relationships, must pass through the currencies home clearing system.
United States
United Kingdom
Clearing System
Federal Reserve, CHIPS

When a bank needs to make a foreign currency payment then it routes the payments through a Correspondent bank with which it maintains a direct account relationship.

  Correspondent banks are members of clearing systems who for a fee will make payments into the clearing system for non-member banks.

  Payments made via correspondents are called Cross Border payments.

  A bank needs to have a correspondent bank for each foreign currency in which it makes payments.

  Foreign currency payments must pass through the local clearing system for that currency.

  US dollar payments from a bank in India must pass through US Dollar clearing.


  • Messages are the mechanisms by which funds transfers are effected.
  • They are the lifeblood of cash management.
  • Messages can be unstructured or Structured.
  • Information in structured messages falls into clearly defined fields or codes. Computers can automatically read structured messages.
  • TELEX, SWIFT, GCN are messaging systems

Messaging- communicating instructions

Messaging Systems


  • Established by Banks l Universally followed l Reliable and secure
  •  BIC coding system
  • Constant improvement


  • Generally unstructured messages
  • Not secure
  •  Messages are garbled and unreliable 
  • Susceptible to fraud


  • Global Communications System
  • Basically used for branch to branch communication  Proprietary system of Citibank
  • Cheaper than Swift messaging system l Secure
  • 5 digit code for ID

Clearing systems using Messaging Systems

These messaging systems are unique only to US and are not applicable outside US.

CHIPS: The New York clearing House Interbank Payment System is an electronic system for making payments. The Chips messaging system is used as a means of transferring USD between its New York based member banks.

FED: The US Federal Reserve owns and operates the Fed Wire telecommunication and electronic payment system.

  • Swift works in much the same way as the Internet, and it enables members to send messages to each other.
  • The message structure, format and contents are common across banks only the method of viewing the messages differs.
  • Swift messages use a common set of codes that all members use when communicating with each other.
  • It helps to speed up communication

   This correct coding of messages is referred to as message formatting