INTRODUCTION – FUNDS TRANSFER

FUNDS TRANSFER

If you have transferred money online and have wondered “what happens ??” after we enter details of the beneficiary in our internet/mobile banking portals and click on the ‘Submit’ button, then this article is for you.

Let us take an example to easily understand money transfers,

If JOHN wants to transfer funds to TOM then John needs to know the details of Tom’s account, like his account number, name, and the bank in which the account is held (and the branch). The bank and branch details are usually used to identify the BANK code (We will get to this a little later).

What John is doing is, he is instructing his bank to take funds from his account and send it to Tom. The problem now is that TOM does not have an account in the same BANK as John.

Citi bank now has to send the funds to Axis bank and ask it to credit it into TOM’s account. On a very high level, this is done by sending a message containing the payment details to Axis bank via a clearing and settlement mechanism (CSM).

After receiving the payment message, Axis bank checks if the details of the message are correct, performs a set of validations, and then credits the funds into TOM’s account.

                                                                                        Picture A0101:

You might have a lot of questions at this point, like

• What is a CSM?
• How the actual money is moved from bank A to B?
• What happens if TOM’s account is in the same bank or in a different country?
• What is this payment message? and how does it look like?
• What are the different types of payment messages?
• How do different types of customers send money to each other?
• How a payment received from another Bank is processed and what are the validations done?
• How does banks make money from fund transfers?

All these questions and more will be answered in the articles to follow, one question at a time. After we study the different blocks that make up a fund transfer, the above picture will get clearer.

So, to summarize, Payments messages are used to transfer funds between two accounts held in two different banks and they are the carriers of payments information.