Value Transfer System Explained: Types, Models, and Examples

A value transfer system is essentially a way for people to send and receive value, whether that's money, goods, or services. It's a crucial part of modern commerce and finance.

There are several types of value transfer systems, including those based on cash, credit, and digital payments. These systems can be found in various models, such as peer-to-peer, point-of-sale, and online platforms.

Let's take a look at some examples of value transfer systems in action. For instance, a person can use a credit card to make a purchase at a store, or they can send money to a friend through a digital wallet service.

There are different types of large-value transfer systems, each designed to meet the unique needs of various markets and customers. These systems have evolved to provide the necessary reliability, security, accuracy, and timeliness for large transactions.

The average size of payments handled by a system is a key indicator of its uses. For example, the average size of funds transfers over Fedwire is about $3 million, while BOJ-NET handles transfers averaging around $33 million.

The daily average value of funds transfers over these systems is also a relevant indicator of their purpose. Table 1 shows the daily average value of funds transfers over four large-value transfer systems, with values ranging from $796.7 billion for Fedwire to $1,198.7 billion for BOJ-NET.

The cost of providing these high levels of service is high, which has limited the use of these systems for small-value transfers.

A Large System is essentially a complex network that facilitates the transfer of funds between large financial institutions, such as the central Bank of Canada. The Large Value Transfer System (LVTS) in Canada is a great example of this, as it enables the transfer of funds in real-time, or at least the same day they are processed.

In the case of LVTS, payments are settled in the evening, making them practically instantaneous. This level of speed and efficiency is crucial for large financial transactions.

The LVTS is a real-time gross settlement (RTGS) equivalent, which means it processes and settles payments in batches rather than individually in real-time. This approach allows for a high volume of transactions to be processed quickly and accurately.

The LVTS is designed to facilitate large value transactions, which are typically high-stakes and time-sensitive. Its ability to process payments in the evening makes it an ideal solution for financial institutions that need to transfer large amounts of money quickly and securely.

Large-value transfer systems can be categorized into three distinct models, each with its own unique characteristics and purposes.

The first model is the interbank and securities market model, which caters to large-value payments in these markets. This model is characterized by high-security, reliability, and timeliness requirements, which come at a higher cost.

The average size of payments handled by systems in this model is substantial, with the Swiss Interbank Clearing System processing transfers of around $0.4 million on average, and Fedwire handling transfers of about $3 million.

Table 1 highlights the average transfer sizes and daily average values for four large-value transfer systems, providing a clear picture of the scale and scope of these systems.

The second model is the business-to-business (B2B) or wholesale market model, which also deals with large-value payments in these markets. This model requires high-security, reliability, and timeliness, similar to the interbank and securities market model.

The third model is the specialized system model, which caters to specific needs and requirements of its users. The Swiss Interbank Clearing System is an example of this model, as it is used heavily to process smaller-value transactions compared to other large-value transfer systems.

Large system examples are essential to understanding the value transfer system. The Swiss Interbank Clearing System (SIC) is a gross settlement system without central bank credit, launched in 1987 and operated by the Swiss National Bank.

SIC processes transactions from 18:00 day t to 16:15 day t+1. The system has 163 banks participating as of year-end 1992, with a daily average transaction volume of 250,000.

Fedwire, on the other hand, is a gross settlement system with central bank credit, launched in 1918 and operated by the Federal Reserve System. It processes transactions from 8:30 to 18:30, with 11,435 banks participating as of year-end 1992, and a daily average transaction volume of 280,000.

BOJ-NET Designated-Time Net Settlement is a multilateral net settlement system without central bank credit, launched in 1988 and operated by the Bank of Japan. It processes transactions from 9:00 to 17:00, with 461 banks, securities firms, and money market brokers participating as of year-end 1992, and a daily average transaction volume of 36,000.

Clearing House Interbank Payments System (CHIPS) is a privately operated multilateral net settlement system, launched in 1970 and operated by the New York Clearing House. It processes transactions from 7:00 to 16:30, with 20 settling banks and 119 nonsettling banks participating as of year-end 1992, and a daily average transaction volume of 150,000.

Here's a summary of the key features of these large system examples:

Switzerland's large-value transfer system, the Swiss Interbank Clearing System (SIC), was launched in 1987 and operates from 18:00 day t to 16:15 day t+1. It's a gross settlement system without central bank credit.

SIC has 163 banks as participants and handles 250,000 transactions daily, with an average transfer size of 0.4 million U.S. dollars. The daily average value of funds transfers over SIC is 93.6 billion U.S. dollars.

In contrast, the Clearing House Interbank Payments System (CHIPS) is a privately operated multilateral net settlement system with 20 settling banks and 119 nonsettling banks. It operates from 7:00 to 16:30 and has a daily average transaction volume of 150,000.

The average transfer size over CHIPS is 6.1 million U.S. dollars, and the daily average value of funds transfers is 941.7 billion U.S. dollars.

BOJ-NET, Japan's large-value transfer system, offers a gross real-time settlement capability without credit and operates from 9:00 to 17:00. It has 461 banks, securities firms, and money market brokers as participants and handles 36,000 transactions daily, with an average transfer size of 33.4 million U.S. dollars.

Fedwire, the United States' large-value transfer system, operates from 8:30 to 18:30 and has 11,435 banks as participants. It handles 280,000 transactions daily, with an average transfer size of 2.9 million U.S. dollars.

The daily average value of funds transfers over Fedwire is 796.7 billion U.S. dollars.

Cross-border large-value payments are a significant aspect of international trade and finance, with substantial value reflecting growing internationalization in goods and financial markets. The largest cross-border financial flows result from trading in the international interbank markets, with the foreign exchange market being the largest.

The settlement of payment obligations in these cross-border markets relies heavily on the international correspondent banking system, which provides clearing, settlement, and credit services. Correspondent banks use either book transfers or domestic large-value transfer systems to settle their interbank obligations.

A special type of risk that must be managed by banks settling cross-border obligations is temporal risk, arising from international time-zone differences. This risk is currently not fully addressed by large-value transfer systems, which do not have a mechanism for simultaneous final settlement of interbank money positions in different currencies.

Several private arrangements have been initiated to improve settlement in the foreign exchange markets, including the Exchange Clearing House Organization and MultiNet, which aim to design and implement safe and efficient final settlement capabilities.

Participants in cross-border, multicurrency multilateral settlements may wish to rely on domestic large-value transfer systems to achieve final settlement and greater simultaneity in the settlement of their respective positions in various currencies.

Let's take a look at some real-world examples of value transfer systems in action. The city of Stockholm, Sweden, has implemented a congestion tax, which charges drivers a fee to enter certain areas of the city during peak hours. This fee is a form of value transfer, where drivers are paying to reduce traffic congestion.

The city of Singapore has a similar system, where drivers are charged a fee to enter certain areas of the city, with the revenue generated being used to improve public transportation. This system has been successful in reducing traffic congestion and improving air quality.

In the United States, cities like San Francisco and New York have implemented congestion pricing systems, where drivers are charged a fee to enter certain areas of the city. These fees are often used to fund public transportation projects and improve infrastructure.

The value transfer system in Singapore has been so successful that it has been replicated in other cities around the world. The city of London has implemented a similar system, where drivers are charged a fee to enter certain areas of the city, with the revenue generated being used to improve public transportation and reduce congestion.

The Large Value Transfer System (LVTS) plays a crucial role in facilitating overnight loans between banks. At the end of each day, participating banks settle up their LVTS transactions, which may leave some banks with extra funds and others in need of more funds.

Banks with extra money can use the LVTS to loan money to banks that need more funds, with the loan taking place in the overnight market at the overnight interest rate. The Bank of Canada sets the overnight rate, aiming to keep it within a one-half percentage point wide operating band.

The target for the overnight rate is in the center of this band, with the bank rate at the top and the deposit rate at the bottom. In an example operating band of 2.5 to 3.0 percent, the target rate would be 2.75 percent, the bank rate 3 percent, and the deposit rate 2.5 percent.

The Bank of Canada charges banks the bank rate on any overnight loans and pays the deposit rate on surplus funds held overnight. This system is comparable to the Federal Reserve's target for the federal funds rate.

IVTS are used by individuals, businesses, and governments to remit funds domestically and abroad. Expatriates and immigrants often use IVTS to send money back to their families and friends in their home countries.

IVTS operations are also used by legitimate companies, traders, and organisations needing to conduct business in countries with basic or no formal financial systems. In some countries, IVTS-type networks operate in parallel with formal financial institutions or as a substitute for them.

IVTS offer transfers that are more efficient, reliable, and cheaper than formal financial institutions. For example, a wire transfer of funds using banks involves fees charged to the sender and receiver, may take from two to seven days to complete, and may be delayed or lost. Funds moved through IVTS are usually available within 24 hours, with minimal or no fees charged to the participants.

IVTS can be used to avoid paying higher foreign exchange rates, transfer taxes, and mandatory reporting of large transactions from financial institutions to governments. IVTS operators charge lower fees for exchange rate conversion and do not maintain records, ensuring anonymity for the user.

IVTS provide security, anonymity, and versatility to the user, making them a popular choice for individuals and businesses. However, IVTS have also been linked to illegal activities, leading to increased scrutiny and regulation in many countries.

The FATF Recommendations provide a framework for countries to follow in order to prevent money laundering and terrorist financing. The FATF has updated its 2009 Guidance to bring it into line with the 2012 FATF Recommendations.

In December 2015, the United Nations estimated that developing countries received over USD 400 billion in remittances from migrants living abroad in 2014. This highlights the importance of Money or Value Transfer Services (MVTS) in the international financial system.

The FATF Recommendations are intended to assist countries and their competent authorities, as well as practitioners in the MTVS sector, to apply a risk-based approach to combating money laundering and terrorist financing.

The risk-based approach requires that measures to combat ML/TF are commensurate with the risks. This means that not all MVTS providers should be categorized as inherently high-risk.

The FATF Guidance is applicable to the entire MTVS sector, including both banking and non-banking institutions offering MVTS.

IVTS are widely adopted by various individuals, businesses, and governments to transfer funds domestically and internationally. Expatriates and immigrants often use them to send money back to their families and friends.

IVTS are also used by legitimate companies, traders, and government agencies that need to conduct business in countries with limited or no formal financial systems. People residing in host countries from foreign countries may prefer to use IVTS due to various reasons.

Some countries have no diplomatic ties or discourage sending money to certain countries, making IVTS a viable alternative. IVTS can also be used in areas where formal financial institutions are scarce or hard to access.

One of the main advantages of IVTS is their efficiency, reliability, and cost-effectiveness compared to traditional financial institutions. For instance, wire transfers can take several days to complete and involve high fees, while IVTS typically offer same-day transfers with minimal or no fees.

IVTS can also help individuals avoid paying higher foreign exchange rates, transfer taxes, and mandatory reporting of large transactions. This makes them an attractive option for those who value anonymity and flexibility in their financial transactions.

A country can choose not to impose a separate licensing or registration system for financial institutions that are already licensed or registered and permitted to perform money or value transfer services.

This is based on the FATF Recommendations, which state that such institutions are already subject to the full range of applicable obligations under the Recommendations.

In essence, existing financial institutions can continue to operate under their existing licenses or registrations, without the need for additional oversight.

Interpretive Note to Recommendation 14 is a crucial aspect of understanding how countries can implement anti-money laundering measures.

A country can choose not to impose a separate licensing or registration system on financial institutions that are already licensed or registered within that country.

This means that if a country already has a robust system in place for regulating financial institutions, it may not need to create an additional system specifically for money or value transfer services.

Financial institutions already licensed or registered as such within a country are permitted to perform money or value transfer services under such license or registration.

These institutions are already subject to the full range of applicable obligations under the FATF Recommendations, which means they are held to a high standard of compliance.

By not imposing an additional system, countries can simplify their regulatory framework and reduce bureaucracy.

This can also help to avoid duplication of efforts and resources, allowing for more effective use of time and money.

In conclusion, the interpretive notes and conclusions of the study reveal that the use of interpretive notes can significantly enhance the understanding and application of complex information.

The study found that interpretive notes can help reduce cognitive load by providing a clear and concise summary of key information.

Interpretive notes can also improve retention and recall of information by breaking it down into smaller, more manageable chunks.

According to the study, interpretive notes can increase the likelihood of applying learned information to real-world situations by providing practical examples and applications.

By incorporating interpretive notes into educational materials, educators can create a more engaging and effective learning experience for their students.