Payments Terminologies – Part 02

Terms and definition used in Payments

  1. Debtor (Originator, Ordering Party Buyer): The Party whose account is debited with the payment
  2. Creditor (Beneficiary, Seller): The Party whose account is credited with the payment
  3. Initiating Party: The Party on the initiative of which the payment data is established. This might be the payer itself, an agent, or the company service center
  4. Debtor Agent (Originating Bank, Originator’s Bank, Payer’s Bank): Party is the Bank of the Payer
  5. Creditor Agent (Beneficiary’s Bank, Seller’s Bank): Party is the Bank of the Beneficiary
  6. Payment (Amount): The payer’s transfer of a monetary claim on a party acceptable to the payee OR The action or process of paying someone or something or of being paid
  7. Payment Instrument: Any instrument enabling the holder/user to transfer funds
  8. Payment Instruction (Payment Message): An order or message to transfer funds (in the form of a monetary claim on a party) to the order of the beneficiary. The order may relate either to a credit transfer or to a debit transfer
  9. Payment System: A payment system consists of a set of instruments, banking procedures and, typically, inter-bank funds transfer systems that ensure the circulation of money
  10. Settlement: An act that discharges obligations in respect of funds or securities transfers between two or more parties OR The completion of a transaction, wherein the seller transfers securities or financial instruments to the buyer and the buyer transfers money to the seller. A settlement may be final or provisional
  11. Netting: An agreed offsetting of positions or obligations by trading partners or participants. The netting reduces a large number of individual positions or obligations to a smaller number of obligations or positions. Netting may take several forms which have varying degrees of legal enforce-ability in the event of default of one of the parties OR An agreed offsetting of mutual obligations by trading partners or participants in a system, including the netting of trade obligations, for example through a central counter party, and also agreements to settle securities or funds transfer instructions on a net basis
  12. Clearing (Clearance): The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement. Sometimes the term is used (imprecisely) to include settlement
  13. Clearing System: A set of procedures whereby financial institutions present and exchange data and/or documents relating to funds or securities transfers to other financial institutions at a single location (clearing house). The procedures often also include a mechanism for the calculation of participants’ bilateral and/or multilateral net positions with a view to facilitating the settlement of their obligations on a net or net net basis
  14. Clearing HouseA central location or central processing mechanism through which financial institutions agree to exchange payment instructions or other financial obligations (ex: securities). The institutions settle for items exchanged at a designated time based on the rules and procedures of the clearing house. In some cases, the clearing house may assume significant counter party, financial or risk management responsibilities for the clearing system
  15. Agent (Bank): An entity, such as a fund manager or a custodian, that undertakes a securities loan and negotiates the terms with the borrower on behalf of a customer-owner OR A financial institution which undertakes processing of received payment instruction based on agreement
  16. Agency Relationship (Bank): A contractual relationship in which one party, the agent, acts on behalf of another party, the principal. The agent may execute trades for the principal but is not responsible for performance by the principal
  17. Correspondent Banking: An arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks. Such arrangements may also be known as agency relationships in some domestic contexts. In international banking, balances held for a foreign respondent bank may be used to settle foreign exchange transactions. Reciprocal correspondent banking relationships may involve the use of so-called nostro and vostro accounts to settle foreign exchange transactions
  18. Nostro: One bank’s account in another bank, in other bank’s currency (ex: ‘A’ bank’s account in ‘B’ bank, in ‘B’ bank’s currency)
  19. Vostro (Loro): An account that a bank holds in its own currency for a bank in another country (ex: ‘A’ bank holding ‘B’ bank’s account in A’s currency)
  20. Instructed Amount: Amount of money to be moved between the debtor and creditor, before deduction of charges, generally expressed in the currency as ordered by the initiating party
  21. Equivalent Amount (Equivalent Amount Currency – Equivalent Amount Transfer Currency): Amount of money to be moved between the debtor and creditor, generally expressed in the currency of the debtor’s account, and the currency in which the amount is to be moved. In other words: “Equivalent Amount” is used when order is done with a different currency than the one in Debtor’s account. SEPA payments, for example, normally always use “Instructed Amount”
  22. Counter Value: Value of the Counter currency in a forex trade. For example, in a trade with the purchase of one currency against the U.S. dollar, the value of the total USD amount of the Transaction OR A displayed monetary amount converted from the base currency into a different currency
  23. Agio: The percentage charged on the exchange of one currency, or one form of money, into another that is more valuable
  24. Mid Rate: A term used to describe the average rate agreed upon when conducting foreign exchange. The middle rate is calculated using the median average of the bid and offer rates. The middle rate intuitively is the rate in the middle of the prices offered by the market makers. For example: The offer price is 1.5 and the bid price is 2.0. Using the median average, the middle rate would be 1.75. This rate can also be called the mid-rate, mid-price, etc
  25. Base Currency: Base currency is the main currency used domestically in own country.  Base currency is the local currency in the country, and normally the currency all counter values are calculated in to support cases when a counter value is required.  Typically generation of booking entries require a counter value
  26. Buy Rate: The rate at which the Bank will buy foreign currency from a customer. Also called as Bid Rate. This is always based on the Base Currency of the country
  27. Sell Rate: The rate at which the Bank will sell foreign currency to a customer. Also called as Ask Rate / Offer Price. This is always based on the Base Currency of the country
  28. Cross Rate: The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in
  29. Sell Rate MarginThis is the rate which the Agent / Foreign Exchange earns when the a currency is sold
  30. Buy Rate Margin: This is the rate which the Agent / Foreign Exchange earns when the a currency is bought
  31. Ultimate Debtor (Originator Reference Party): The party that originally ordered goods or services and to whom the seller has sent the invoice. Ultimate Debtor is used when the receiver of the invoice is different than the payer
  32. Ultimate Creditor (Ultimate Beneficiary, Beneficiary Reference Party): The party which is the ultimate beneficiary of the payment. For example the payment is credited to an account of a financing company, but the ultimate beneficiary is the customer of the financing company
  33. SWIFT: The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment
  34. In-house (On-us)Creditor/Beneficiary is in processing bank
  35. Pay-away (Not on-us): Creditor/Beneficiary is not in processing bank and the processing bank acting as intermediary
  36. Posting: Performing actual debit and credit between the involved accounts in transaction
  37. Message: MT or MX (ISO15022 or ISO20022) messages sent to or received from a financial institution
  38. Transaction: A transaction is an agreement between a buyer and a seller to exchange goods, services or financial instruments
  39. IBAN: IBAN stands for International Bank Account Number and is a number attached to all accounts in the EU countries plus Norway, Switzerland, Liechtenstein and Hungary. The IBAN is made up of a code that identifies the country the account belongs to, the account holder’s bank and the account number itself
  40. BBAN: BBAN is short for Basic Bank Account Number. It represents a country-specific bank account number. The BBAN is the last part of the IBAN when used for international funds transfers. Every country has it’s specific BBAN format and length depending on it’s own standards
  41. BIC (SWIFT Code, Identifier Code, Bank ID)The “Bank Identifier Code” is an international code that banks use for financial transactions. Each bank has its own BIC. This way, European and international payment orders automatically arrive at the correct bank and branch. The BIC is also called a SWIFT address or SWIFT code. The BIC can be 8 or 11 characters long depending if it supplies branch information
  42. SEPASingle Euro Payment AreaThis unique euro payment area establishes an integrated European market for payment instruments. The aim of SEPA is to ensure that payments within Europe take place as simply and effectively as those within a single country

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