Payment systems represent an important component of the financial market infrastructure. They provide financial intermediaries – the economic agents of the financial system – with liquidity and ensure that liquidity flows smoothly between the public sector and households. Payment systems operate on the principle of stability and security as well as the guarantee of fast and cost-efficient transfers.
As a rule, financial institutions run proprietary settlement systems, which are electronically linked to each other.
As a rule, payment systems are categorized as follows:
- Large-value payment systems
- Clearing systems
- Correspondent banking arrangements
Financial service providers avail themselves of the payment system suited to the type and size of transaction involved.
Large-value payment systems
The special feature of such payment systems is that they handle euro transactions in real time and with settlement finality (Finality Act). This means that payments sent by the ordering financial institution are immediately credited to the beneficiary bank and are final and irrevocable. Hence, such payments cannot be reversed. Moreover, transactions are settled on an individual order (transaction-by-transaction) basis without netting debits with credits (gross settlement). The higher cost of this procedure predestines these systems for use for especially urgent transactions involving large amounts. TARGET2 is one such large-value payment system.
As a rule, clearing systems handle retail payments. Consumers or companies initiate such retail payments, and banks send files (compilations of payments) to the clearing house, which collects the transactions and, at particular cutoff times, compiles each bank’s net settlement position. In other words, all transactions – credits and debits alike – of a particular participant are netted at a predetermined cutoff time. In any event, settlement must be performed by a bank or central bank across whose books the transfers between the participants take place (settlement agent).
The large volume of transactions handled and the high degree of standardization make settlement cost-efficient, benefiting consumers and banks in handling day-to-day financial transactions.
Correspondent banking arrangements
Correspondent banking arrangements are bilateral links between payment institutions. In the euro area, correspondent banking relationships are increasingly losing ground to centralized euro settlement systems.
However, correspondent banking arrangements still play a key role in processing foreign currency transactions.
Two types of accounts play a role in correspondent banking:
- nostro accounts ( = our account)
Nostro accounts are the customer bank’s accounts with the service-providing correspondent bank from the customer bank’s perspective.
- loro accounts ( = their account)
Loro (vostro) accounts are the customer bank’s accounts with the service-providing correspondent bank from the service-providing bank’s perspective.
The OeNB provides accounts only to a limited number of counterparties. See the Terms and Conditions for details.