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Working in the Finances sector of my company, and having had extensive training in how the banking sector works overall, I will try and explain the flow of money between banks in general and make comparisons to how it works in India.How does funds transfer take place between two or more banks?Before I explain in detail, I'll list down the meanings of few commonly used terminologies in the banking domain-Creditor- The person/institution which receives funds/ whose account is credited. Also known as beneficiary.Debtor- The person/institution from whom funds are debited and credited to the creditor.Initiating party- The one who initiates any transaction. (eg) credit transfer or direct debit.Accounting relationship- When any bank/institution holds an account with another institution, they're said to have an accounting relationship.Clearing house/ Clearing & Settlement Mechanism(CSM)- A centralized institution (usually Government owned) with which all banks in the country have either a direct/indirect accounting relationship. They are said to have a membership with the Clearing house. In India, the Reserve Bank of India(RBI) is the clearing house. The CSM is responsible for transfer of funds between any two banks in a country. Clearing and settlement is a two-step process- The process of calculating the net obligation that each bank owes to another is known as clearing. There is no actual transfer of funds at this stage. Once this is calculated, the respective amount is credited/debited to the respective banks. This process is known as settlement.Nostro/Vostro account- When a bank(Bank A) holds an account/accounting relationship with another bank(Bank B) in a foreign country, that account is said to be Nostro account for Bank A and Vostro account for Bank B. Nostro/Vostro refer to the same account which are viewed differently. Usually, both banks involved hold accounts with the other bank.Correspondent/Correspondent bank- An intermediary bank, which aids in transfer of funds between two banks which do not have a direct relationship with each other.RTGS- Real Time Gross Settlement. As the name indicates, the transfer of funds takes place "real-time", i.e there is no waiting period for the funds to be transferred from one bank to the other, via clearing house. Gross settlement means that the funds are transferred on a one-to-one basis, without any netting procedure. This mode is usually used for transfer of high value payments.NEFT- National Electronic Funds Transfer. This is usually used by individuals or corporate customers for low-value payments, where the transfer of funds need not be immediate, but takes place two or three hours after the instruction has been made. This follows a netting process, where the clearing house determines the net "obligation" that Bank A owes Bank B and debits/credits their respective accounts accordingly.Note: RTGS and NEFT are the two modes of electronics funds transfer in India. Other countries have similar systems in place.Now, there are two basic modes of funds transfer- Credit Transfer & Direct Debit. This system is universal, and it exists across the globe at all financial institutions in some form.Credit Transfer:A credit transfer is a simple transfer of money from either -1. An account held in one bank, say Bank A, to another account of the same bank. This is called as intra-bank credit transfer.2. An account held in a bank, say Bank A, to an account held at another bank , say Bank B. This is called as inter-bank credit transfer.In a credit transfer, the initiating party is the debtor.Case 1:In this case, since the accounts of both parties involved belong to the same bank, the funds are directly transferred from one account to another, which is a simple case of debiting the debtor account with the amount to be transferred and crediting the creditor account with the same amount. There is no involvement of clearing house in this case. This is termed as a simple "book transfer" as in the olden days, bank accounts were settled and accounted for using huge books called "ledgers".Case 2:There are sub-types in this scenario. This may occur when funds are to be transferred between two bank accounts in the same country, or two bank accounts in different countries.If the bank accounts are in the same country, then as explained above, the clearing house comes into picture. Depending on whether the payment is made through RTGS/NEFT, the clearing house routes the payments accordingly from Bank A to Bank B. If either Bank A or Bank B are not direct members of the clearing house, then the funds are routed through an intermediary bank which is a direct member of the CSM. Then, Bank A or Bank B, are said to have an indirect accounting relationship with the CSM.When the funds are to be transferred between accounts held at two different countries, if they have a Nostro/Vostro relationship, then the debtor bank credits its Nostro account with the amount to be transferred and then the Creditor bank withdraws the amount from that account onto its own account known as a settlement account/wash account. From this account, the money is transferred to the individual/institutions account.If the banks between which the funds have to be transferred do not have a Nostro/Vostro relationship, then they make use of a correspondent bank/banks. The correspondent is one who usually has an accounting relationship with both the debtor and creditor banks. Hence, it acts as an intermediary between the two banks to transfer money. Assuming Bank C as the intermediary bank, money is transferred from Bank A to Bank C and then from Bank C to Bank B.There can be more than one correspondent bank involved in a funds transfer.Note: Credit transfer is usually a non-reversible process i.e. once funds have been transferred, they cannot be reversed by the initiating party. However, in certain regions like Europe, there is a provision for reversal of credit transfer even after transfer of funds. In India, it is non-reversible.Direct Debit:A direct debit is a mode of funds transfer wherein the funds are transferred from one account to another based on a "mandate" or an agreement. The debtor signs an agreement with the creditor giving him permission to withdraw a certain amount on a monthly/yearly basis.Here, the initiating party is the creditor.An example of direct debit is payment of utility bills. We sign a mandate with "Airtel" allowing them to debit a fixed amount from our account for our telephone/broadband services. Airtel initiates the request for funds transfer on the specified date, and after verifying the mandate details, the amount is debited from your account and credited to Airtel's account.It is interesting to note that a Recurring Deposit(RD) is NOT an example of direct debit. It is just an automated form of credit transfer, wherein we set a Standing Instruction(SI) to debit our account on a periodic basis.Transfer of funds in Direct Debit takes place in a similar manner like the Credit Transfer, with the major difference being that it is initiated by the creditor and verification of mandate takes place before funds are transferred. The debtor is intimated beforehand to ensure sufficient funds are held at his account so that the debit process occurs smoothly.Note: Banks in India offer compensation to the customer in case they carry out any erroneous transactions. Also the customer can instruct the bank to stop payment if the debit amount is incorrect. However, after settlement, he cannot reverse the payment.In certain regions, mainly Europe, the debtor has the provision to reverse the direct debit up-to a year after the funds have been credited to the beneficiary.When we transfer funds electronically from one bank to another, it doesn't require for funds or cash in physical form to actually be moved from the cash vault of one bank to another. There doesn't exist enough currency in physical form, i.e as cash ,in the world, as reflected in bank accounts. Most of it is just manipulation of numbers electronically and in the form of bonds/ other assets.

Actually, Stanislas Polu (one of Software Engineers of the company) wrote in the official blog of the organization that now they work with 5 new European payments methods: Bancontact, GiroPay, SOFORT, iDeal and SEPA Direct Debit, and how, any European business can activate 3D Secure for their clients.In the case of SEPA Direct Debit, they put this in their docs:Stripe users in Europe can use Sources—a single integration path for creating payments using any supported method—to accept SEPA Direct Debit payments from customers in countries within the Single Euro Payments Area.During the payment process, your integration collects your customer’s EUR-denominated IBAN bank account information. SEPA Direct Debits require the bank account holder to accept a mandate (debit authorization) that allows you to debit their account. A Source object is then created and your integration uses this to make a charge request and complete the payment.Within the scope of Sources, SEPA Direct Debit is a pull-based, asynchronous method of payment. This means that you take action to debit the amount from the customer’s account. It can take up to 14 business days to confirm the success or failure of a payment.BTW, if you have any comment, question or problem with this, Stanislas let his email in the post: [email protected]

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