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Getting online to pay.

Thinking of setting up an electronic payments system for your overseas business activities? Find out the nitty-gritty details that'll get the ball rolling.

In 1995 the Canadian government switched from paper checks to electronic disbursements for pension payments to retirees residing in Florida. Individuals cashing Canadian-dollar checks often incurred collection charges ranging from $25 to $75 (U.S.) at U.S. banks, and the funds weren't available for 14 to 20 days. By converting to electronic payments, the Canadian government now makes funds available within six days of origination, and the beneficiaries no longer incur collection charges. Reportedly, the U.S. dollar value of the payments deposited to beneficiaries' accounts averages 18-percent higher than that realized by check.

Numerous studies have demonstrated savings for companies and banks using electronic payments systems. Since domestic clearinghouse processing is batch-oriented, it's well-suited to high-volume, low-value payments, which include direct deposit of payroll; Social Security; pensions, annuities and dividends; financial electronic data interchange; direct debits; electronic bill payment; and point-of-sale, electronic, tax, government and commercial vendor payments. Some payment types may be better suited for more immediate mechanisms, such as high-value transactions typically made by wire transfer. Still, electronic payments can offer companies significant savings, and the availability of cross-border electronic payments is expanding rapidly. If you decide to go this route for some of your transactions, read on for a primer on how the process works.

The exchange and settlement of electronic payments in the United States are governed by a central body of rules - the National Automated Clearing House Association operating rules - with which the approximately 20,000 financial institutions in the network must comply, regardless of size. The uniform standards have helped build confidence in the concept of an electronic payments system among businesses and governments in the United States, Canada and Mexico, as well as other countries where national electronic funds-transfer systems are operating, such as Germany, Italy, Norway, the United Kingdom, Colombia and the Netherlands.


To facilitate uniform and universal delivery of cross-border payment services, the association's board of directors established the Cross-Border Council in 1993. Made up of commercial banks, credit unions, central banks, domestic and international-payment processors, banking associations, corporations and software vendors from eight countries, the council has developed a central body of rules to serve as the operational and legal framework for the exchange of clearinghouse payments globally. These rules fill the void between different national payments systems. They'll be modified accordingly as new countries are added.

The rules define the responsibilities, requirements, liabilities and warranties of gateway operators, which are the entry and exit points to individual national payments systems. They also address discrepancies between participating countries' systems and govern financial institutions originating cross-border payments on behalf of their customers. The cross-border operating guidelines supplement the rules with recommendations for audit functions for rules compliance, guidelines for developing service agreements and explanations of participant roles and relationships.

The rules are divided into eight parts: applications and required agreements; entry origination; entry receipt; entry return; settlement and accountability; gateway operators; rules amendment; and definitions of terms. Entities that originate and process cross-border payments are bound by the rules and must enter into specific agreements. Passive players, such as financial institutions receiving cross-border payments and the corporate and individual beneficiaries of those payments, come under their respective national payments-system rules and don't have to overtly agree to receive cross-border payments.

The payment rules were written to be neither country- nor network-specific, to enhance their adoptability and global appeal. But the technical specifications and implementation requirements are country- and network-specific. They contain the data requirements, procedures and implementation conventions for each participating national payment system, as determined by the system's representatives to the Cross-Border Council.

Currently, these documents govern the cross-border exchange of corporate and consumer credit payments among financial institutions in the United States, Canada and Mexico. As additional countries, transaction types and payment networks are incorporated, the rules and specifications will be amended. For instance, the Cross-Border Council projects the development, review and approval processes will be completed to support corporate and consumer debit payments among the three nations' payments systems, as well as financial EDI credit transactions between the United States and Canada. Unlike the United States, where financial EDI debits and credit may be exchanged via the clearinghouse network, the Canadian financial EDI infrastructure supports credit payments only. In Mexico, the banking industry is exploring the feasibility of establishing an interbank financial EDI mechanism.


In developing the rules and specifications, the council adhered to two main principles: the preeminence of the national payments systems and universality. The payment systems of the participating countries are national in scope and open to qualified financial institutions of all sizes that meet the criteria in their rules and by-laws. While privately held organizations compete and provide services within that framework, the networks are industry-owned and are sanctioned by the central banks and banking industries in each country as official payment systems. These national infrastructures are complemented by the cross-border payment operating rules.

In terms of universality, any financial institution that wishes to originate cross-border payments on behalf of its customers may do so, in accordance with the operating rules. A payment from another country transmitted into the network is treated no differently by a receiving depository financial institution than an entry originated domestically. The entry is conveyed in the clearinghouse formats as a transmission from the clearinghouse operator (such as the Federal Reserve) along with domestic entries.

The agreements required under the operating rules exist between the company initiating the payment instructions (originator) and its originating depository financial institution; the originating depository financial institution and the originating gateway operator, which is the exit point from the national system; and the originating gateway operator and the receiving gateway operator, which is the entry point to the receiving country's national payments system. Each agreement should bind the parties to the cross-border payment rules. Issues such as fees, foreign-exchange conversion terms, value-added services, transmission procedures and schedules, emergency notification requirements and the assignment of warranties are also integral components.

Because the operating rules define specific technical, operational and settlement requirements, warranties and liabilities for gateway operators, they place added overhead and risk on those entities. Therefore, the agreement between the two gateway operators is more involved, covering the legal basis for the agreement; telecommunication protocols and security; credit risk, settlement and exposure reporting and monitoring; and the allocation of duties for the processing, translation and currency conversion functions.

The council recently adopted some new data element requirements for non-U.S. national payments systems (see box on page 41). Right now, these new elements are conventions in the existing data fields of the payment formats. To improve efficiency and more effectively identify cross-border payments, clearinghouse participants in the United States are considering a new payment format for cross-border entries. This long-term approach would create a cleaner format in which account number lengths, payment value amounts and other field length differences could be more readily processed.

One important note: Anyone transacting cross-border payments must be very careful to avoid Office of Foreign Assets Control violations. An arm of the United States Department of the Treasury, OFAC publishes a list of specially designated nationals and blocked persons, with whom American nationals and organizations may not engage in commercial activity, under penalty of fine and/or imprisonment. Financial institutions originating and receiving electronic payments in general, and cross-border entries in particular, need a systemic solution to identify suspect payments and to allow the institution to take appropriate action, as prescribed by OFAC. The listing is available either on paper or electronically from the United States Department of the Treasury.

Assuming the required agreements are in place, transacting cross-border payments is a process that uses the existing clearinghouse network infrastructure to settle payments between the originating depository financial institution and originating gateway operator, and between the receiving gateway operator and receiving depository financial institution. An originating company in the United States transmits cross-border payment instructions to its financial institution, just as it would with domestic payments, but with the additional required data (if any) in the formats. The financial institution in turn transmits the payments contained in a unique batch or batches within the file. The foreign-exchange rate, country of destination and currency code are indicated at the batch level. Thus, differences in these elements across entries require separate batches.


In the domestic process, the clearinghouse operator makes entries available to the receiving depository financial institution, as designated by its routing number in the NACHA format. The clearinghouse operator uses this same field to make cross-border entries available to the originating gateway operator. The gateway operator, typically a financial institution or an entity working with one, receives these entries along with domestic payments sent to its own account holders. Settlement normally occurs within the clearinghouse. The originating gateway operator serves as the receiving depository financial institution for the purposes of applying the operating rules to payments within the United States.

To transfer the entries to the receiving country, the originating gateway operator transmits the payments to the receiving operator with which it's conducting business. The execution of the foreign-exchange conversion, mapping between payment formats, storing of data, and settlement between the gateway operators occur in accordance with the operating rules and per their bilateral agreement. The receiving gateway operator then transmits the entries into its national system. For inbound cross-border payments, the scenario works in reverse.

The settlement warranties in the operating rules stipulate that the originating gateway operator warrants to the receiving operator that settlement for the transferred funds is final in the originating payments system. The receiving gateway operator warrants to the receiving depository financial institutions that settlement for payments with the originating gateway operator is final. Gateway operators transferring payments before the settlement is final assume liability for those payments if the settlement is revoked. In this way, the warranties can limit cross-border risk while letting entities able to assume the risk execute payments faster.


The operating rules offer participants flexibility on the question of foreign exchange. The rules stipulate only that the terms of the foreign-exchange conversion be documented in the required agreements between all the parties, so they enter into cross-border transactions in good faith. Gateway operators and originating depository financial institutions are allowed to use favorable foreign-exchange terms to compete for customers, so bear that in mind if you're seeking cross-border payment-origination services.

Three types of foreign-exchange scenarios are possible: fixed-to-variable, variable-to-fixed, and fixed-to-fixed. Because the gateway operators need to know the methodology used for forward and return payments, the data specifications include coding for each. To date, the rules and specifications support only the fixed-to-variable scenario. In other words, a payment originates in the domestic currency, undergoes a foreign-exchange conversion at the border, and is received by the beneficiary in his or her national currency denomination, as derived from the foreign-exchange conversion. The transactions best suited for this process are direct deposit of payroll, pension, dividends and annuities, where the payment obligation of the originator is in its national currency denomination.

The variable-to-fixed and fixed-to-fixed methodologies are included in the council's Phase III development (debits and financial EDI), which has just been completed. These scenarios are better suited for commercial transactions, in which the corporate beneficiary (i.e., a vendor) expects to get paid a specific amount, generally in its own currency. The variable-to-fixed model is a payment obligation in a set amount, in the receiving country's currency. With fixed-to-fixed payments, no foreign-exchange conversion occurs. The Canadian Payments Association, the country's payments-system rules development and approval body, has decided to allow the electronic clearing and settling of U.S. dollar-denominated financial EDI payments. Implementation is expected in April 1997.

The association is also considering establishing the means to clear and settle U.S. dollar-denominated consumer payments in Canada. Businesses and consumers can hold U.S. dollar accounts in Canada currently, but the transactions are paper-based. There are no current plans to modify the network in the United States to accommodate non-U.S. dollar-denominated payment clearing.


NACHA executives and Cross-Border Council officers have spoken with payments systems leaders from other countries on future expansion. Representatives from Italy, Austria, Germany, the United Kingdom, the Netherlands, Israel, Chile and Colombia have all expressed interest. Guided by market data from its own studies and augmented by input from external sources, the council is focusing its next efforts on Europe. To provide a forum for dialogue, the council will hold one of its trimester meetings in May in Edinburgh, Scotland, in conjunction with the International ACH Conference.


* The exchange and settlement of electronic payments in the United States is governed by a uniform body of operating rules for the originating and receiving parties.

* The rules are based on two underlying principles: the preeminence of the various national payments systems and universality.

* The National Automated Clearing House Association recently adopted new required data elements for non-U.S. national payments formats.

* Canada now allows U.S.dollar EDI payments.


The National Automated Clearing House Association recently adopted new required data elements for non-U.S. national payment formats. These elements are in addition to each system's rules.

* Cross-border indicator, to distinguish cross-border payments from domestic items;

* Foreign-exchange indicator, to signify the foreign-exchange conversion methodology;

* ISO destination country code (country to which the payment is sent);

* ISO destination currency code, or the currency in which the payment is to be received;

* ISO origination currency code (currency in which the payment is originated);

* Foreign-payment amount, which is the foreign-currency equivalent amount;

* Foreign-exchange rate;

* Foreign receiver's account number;

* Foreign trace number - the reference number assigned in the counterparty's payments system; and

* Foreign DFI routing number - foreign bank identifier.

Mr. Lang is director of wholesale applications at the National Automated Clearing House Association in Herndon, Va. You can reach him at (703) 742-9190, or you can e-mail him at
COPYRIGHT 1997 Financial Executives International
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Copyright 1997, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:electronic payments system for overseas business
Author:Lang, Scott M.
Publication:Financial Executive
Date:Jan 1, 1997
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