Systems for sending fund transfer instruction

Systems for sending fund transfer instruction

[ From chapter-17 of the book "Information Technology in Banking" written by Abul Kashem Md. Shirin and Nusrat Tamanna Prianka and published by Institute of Bankers, Bangladesh (IBB) ]

1.         Telex

Banks in Bangladesh are used to send and receive fund transfer or L/C related information to/from a foreign bank through Telex. There are a number of reasons for which banks are required to use SWIFT instead of Telex. These are:

(a)        The telex messages are not secured. It can be send from any machine located anywhere in the world. Security in telex message is maintained using “test key”. However, a number of frauds have been occurred through transmitting fraudulent messages from telex. In case of SWIFT, only an authorized SWIFT member can transmit a message. Every message has identity indicating from where it has been originated and thus the sender can be made responsible for any occurrence of fraud.

(b)        Telex sometimes generates garbage messages for which banks are to request the sender to re-transmit the message. This involves in wastage of time and expenses.

(c)        Transmission of message through SWIFT is cheaper than transmission through Telex.

(d)        90% of the banks in the world are using SWIFT. Their banking application software are capable to generate messages in the SWIFT format and send it to the destination without manual intervention. Also these application software can read the message received by the SWIFT from a foreign bank and process it for auto posting of vouchers and generation of various letters, reports and statements. These banks, for sending message through telex, or for further processing of messages received through telex, require extra man-power. Thus they add extra charges for the foreign banks where to be communicated through telex. In near future, no bank will allow such communication, even at an extra charge.

2.         SWIFT

2.1.      What is SWIFT?

SWIFT is the abbreviation for “Society for Worldwide Interbank Financial Telecommunication”. It is a bank owned co-operative based in Belgium servicing the financial community worldwide. The SWIFT made its debut twenty years back and now it supplies secure messaging and 24-hour global support to 6,495 banks and financial institutes in 178 countries. SWIFT’s global network carries an average of 4 million messages in a day. The average daily value of payments messages on the SWIFT network is estimated to be above USD 2 trillion. SWIFT helps its customer reduce costs, improved automation and manage risk. Today, in addition to its 3,000 member banks, SWIFT users include both sub-members and participants such as brokers, investment managers, securities deposit and clearing organisations, and stock exchanges.

2.2.      SWIFT traffic:

The average daily traffic of the SWIFT is 3.95 million messages with a peak traffic of 4.28 million messages on 29 October, 1998. SWIFT’s traffic is distributed over a wide range of financial markets which covers Payments (64.4%), Securities (28.9%), Treasury (10.2%), Trade Finance (5.8%) and others (2.9%). The traffic is high in Europe, Middle-East, Africa region (60.6%) followed by America (20.1%) and Asia-Pacific (15.2%). However, the traffic sent by all customers operating in USA amounts the highest followed by UK and Germany. The routes between UK and USA carry highest number of traffic.

2.3.      SWIFT membership:

SWIFT defines the three categories of customers as under:

(a)        Member:

Any organization which is involved in international financial message transmission, may become a member. For example, DBBL can become a member. In such case all the branches of DBBL in Bangladesh will have the right to use SWIFT services for transmission of Letter of Credit (L/C) and other messages such as fund transfer. Members are the shareholders in SWIFT and thus have voting rights. The member-bank is allotted a 8-digit BIC (Bank Identification Number) such as “DBBL BD DH” for DBBL where BD stands for Bangladesh and DH for Dhaka. The branches will be identified by adding three digits to the BIC. For example, BIC for the Local Office and Agrabad branch of DBBL is “DBBL BD DH 101” and “DBBL BD DH 102” respectively. It may be noted here that the city code for the Agrabad branch, which is located at Chittagong is also “DH”.

(b)       Sub-members:

Sub-members are either a separate legal entity at least 90% directly or 100% indirectly owned by a member, or foreign branches of a member institution. For example, if DBBL has a branch in USA, that branch can not access SWIFT unless it become a sub-member.

(c)        Participants:

The participants are generally one of the following companies:

i)                    Brokers and Dealers in securities and related financial instruments

ii)                  Recognized exchanges for securities and related financial instruments

iii)                Central depositories and clearing institutions

iv)                Money brokers

v)                  Trust or Fiduciary service companies

vi)                Subsidiary providers of custody and nominee services

vii)              Registrar and transfer agent organizations

viii)            Investment management institutes

ix)                Payment system participants

x)                  Travelers cheque issuers

xi)                Trading institutes

xii)              Securities electronic trade confirmation (ETC) service provider

xiii)            Representative office of a bank or a consortium of banks

xiv)             Non-shareholding bank

xv)               Non-shareholding financial institutions, and

xvi)             Security proxy voting agency

2.4.      Why to become SWIFT member?

Banks in Bangladesh are used to send and receive fund transfer or L/C related information to/from a foreign bank through Telex. There are a number of reasons for which banks are required to use SWIFT instead of Telex. These are:

(a)        The telex messages are not secured. It can be send from any machine located anywhere in the world. Security in telex message is maintained using “test key”. However, a number of frauds have been occurred through transmitting fraudulent messages from telex. In case of SWIFT, only an authorized SWIFT member can transmit a message. Every message has identity indicating from where it has been originated and thus the sender can be made responsible for any occurrence of fraud.

(b)        Telex sometimes generates garbage messages for which banks are to request the sender to re-transmit the message. This involves in wastage of time and expenses.

(c)        Transmission of message through SWIFT is cheaper than transmission through Telex.

(d)        90% of the banks in the world are using SWIFT. Their banking application software are capable to generate messages in the SWIFT format and send it to the destination without manual intervention. Also these application software can read the message received by the SWIFT from a foreign bank and process it for auto posting of vouchers and generation of various letters, reports and statements. These banks, for sending message through telex, or for further processing of messages received through telex, require extra man-power. Thus they add extra charges for the foreign banks where to be communicated through telex. In near future, no bank will allow such communication, even at an extra charge.

2.5.      Security at SWIFT:

SWIFT maintains various level of security. The operator can only prepare a message. Before posting the message to the SWIFT network, it requires approval from a supervisor. The supervisor approves each of the messages after careful checking and entering his password against each of the messages. There may be more than one level of security for different activities and values. Only the authorized terminal (computer at the member’s office) will be able to connect to the SWIFT network, other computers, if try, will be refused. Thus a strict security is maintained.

Moreover, for trouble shooting and maintenance work, two security officers to be nominated – one from the IT department and one from the concern department. They will be provided with part-I and part-II of the security passwords. If any trouble shooting or maintenance work is required, both the officials will have to work together.

2.6.      How the SWIFT works?

SWIFT is basically a worldwide communication media based on X.25 Public Switch Data Network (PSDN). It is owned and used by the banks and financial institutions. The network has some access points called SAP through which the users enter the SWIFT network. Such two nearby SAP are located in Singapore and Mumbai, India. The member banks in Bangladesh will make ISD telephone calls to Singapore for submission and receiving of message to/from the Network.

The banks will require to purchase computer, UPS, printer, Leased-line support modem, Eicon card, Windows NT or UNIX software. The quantity will depend on the type of SWIFT alliance software selected by the banks. There are two type of alliance software – alliance entry and alliance access. “Alliance Entry” is a stand-alone software and require one set of hardware and Windows NT. “Alliance Access” is a multi-platform, multi-user software and requires more than one set of hardware depending on the number of messages and branches, and Windows NT or UNIX software. Alliance Access software supports SWIFT operations from terminals in a LAN (Local Area Network), or from computers located in remote branches connected by dial-up/lease-lines and modems. If leased-line is used and WAN be established between the branches, the messages will be routed to the branches automatically. The inward messages will first reach the Head Office and then distributed to the respected branches. The outward messages will be posted by the respective branches to the Head Office server, which in turn will send them to the SAP. Alliance access software can also send/receive messages to/from FAX and telex.

Both the software accept input from banking application software. If the banking software is capable to generate the outward message in SWIFT format, and read and process the SWIFT inward messages, SWIFT operator is not required. This stops posting of various information in duplicate - once in banking application software and again in SWIFT software.

2.7.      What are the drawbacks?

The SWIFT has some drawbacks. Its one-time cost and annual support charge are high. The one-time membership charge for a bank is around Tk.25 lac and the annual support charge is around Tk.4.5 lac. The banks will also require investment in computers and peripherals. For banks in Bangladesh, the SAP is located in Singapore, thus the banks will require to make an ISD telephone call to the Singapore for collection and transmission of messages. This cost can be reduced if SWIFT install its SAP in Dhaka. Another way is to allow the banks to use X.25 PSDN (Public Switch Data Network) of the BTTB for connection to the SWIFT network. However due to security reason, SWIFT does not agree to provide connectivity with the X.25 network of BTTB. SWIFT has connectivity with the X.25 network of the SITA (which is being using worldwide for the Airline ticketing system). If the banks can arrange connectivity from SITA, SWIFT may allow the banks to connect to the SAP in Singapore using this connection.

2.8.      User Group in Bangladesh:

First generation banks (cutover in December, 1999): Seven private sector banks in Bangladesh are the first generation members of the SWIFT. The banks are BASIC, Prime bank, AB bank, Islami bank, IFIC, UCBL and NCC bank.

Second generation banks (cutover in June, 2000): Three private sector banks in Bangladesh are the 2^nd generation members of the SWIFT. The banks are DBBL, Bangladesh Bank and Dhaka Bank.

Third generation banks (cutover till to date): Rest of the Banks are the third generation members of the SWIFT.

In all countries, where the financial institutes are using SWIFT, there are a few user groups and a national group. In Bangladesh, a first user group was formed with all the first generation participating banks. This user group also represented the national group.

3.         CHIPS

For more than 40 years, CHIPS (Clearing House Interbank Payments System) has set the industry standard for reliability, efficiency and innovation in wire transfer payments. Leading banks worldwide, their correspondents and customers rely on CHIPS for real-time payments that are accurate and final. Today, CHIPS is responsible for over 95% of USD cross-border and nearly half of all domestic wire transactions totaling $1.5 trillion daily.

CHIPS is operated by ‘The Clearing House’, which also provides ACH, paper cheque exchange and cheque image exchange for financial institutions of all sizes.

4.         FEDWIRE

Formally known as the Federal Reserve Wire Network, Fedwire is a Real Time Gross Settlement Funds Transfer system operated by the Federal Reserve Banks that enables financial institutions to electronically transfer funds between its more than 9,289 participants (as of March 19, 2009).^[1] In conjunction with the privately held Clearing House Interbank Payments System (CHIPS), Fedwire is the primary United States network for large-value or time-critical domestic and international payments, and it is designed to be highly resilient and redundant. The average daily value of transfers over the Fedwire Funds Service in 2007 was approximately $2.7 trillion, and the daily average number of payments was about 537,000.