Payment principles
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This document discusses key principles related to payment systems and international credit transfers. It outlines several legal acts that govern these systems, including the UNCITRAL Model Law and EU directives. Basic elements of payments like messages and account movements are illustrated. The relationships between banks in the payment chain and applicable laws are also covered.
![Legal Acts
1. UNCITRAL Model Law on International
Credit Transfers [Soft Law] 1992
2. Directive 2007/64/EC [Payment Services in
the Internal Market]
3. Regulation 924/2009 [Cross-border
payments in Euro]
4. Directive 98/26 [Settlement Finality in
payment an securities settlement systems]
5. Directive 2002/47/EC [Financial Collateral
Arrangements]
6. Directive 2009/110 [EMI institutions]](https://image.slidesharecdn.com/paymentprinciples-130405020158-phpapp02/85/Payment-principles-2-320.jpg)
![Basic Elements to Payment
Message – unconditional instruction given
to a bank on order of the payor to make
payment to a payee
Movement on accounts – series of debits
and credits
Settlement – payment between banks
involved in execution of payment
message [order]](https://image.slidesharecdn.com/paymentprinciples-130405020158-phpapp02/85/Payment-principles-3-320.jpg)
![Credit Card Payment
Merchant [selling goods/services] seeks authority from card issuer
through its “acquirer”
Acquirer seeks authorization through the Visa authorization Centre
in the region where acquirer is located
When acquirer has approval, the Visa authorization Centre seeks
approval from the corresponding Visa authorization Centre where
the card issuer is located
The latter Visa authorization Centre has to seek approval from the
card issuer – the bank
Card issuer’s account with Visa is debited for sum of transaction
Sum is credited to merchant through process described
If dispute, there is a process called chargeback and
representment; in other words, a card issuer may charge back the
transaction to the acquirer; if acquirer does not accept
chargeback, it makes a representment; if dispute ultimately is not
resolved through this process, then arbitration](https://image.slidesharecdn.com/paymentprinciples-130405020158-phpapp02/85/Payment-principles-24-320.jpg)
Payment principles
- 2. Legal Acts 1. UNCITRAL Model Law on International Credit Transfers [Soft Law] 1992 2. Directive 2007/64/EC [Payment Services in the Internal Market] 3. Regulation 924/2009 [Cross-border payments in Euro] 4. Directive 98/26 [Settlement Finality in payment an securities settlement systems] 5. Directive 2002/47/EC [Financial Collateral Arrangements] 6. Directive 2009/110 [EMI institutions]
- 3. Basic Elements to Payment Message – unconditional instruction given to a bank on order of the payor to make payment to a payee Movement on accounts – series of debits and credits Settlement – payment between banks involved in execution of payment message [order]
- 4. Illustration Pr- Message to pay Pr Bank Pe Message - paid Pe+
- 5. Pr- Illustration 2 Message Pr Message Settlement Pe Message Pe+
- 6. Illustration 3 PrB- Pr- Pr PrB PrBc Pe PeB Message Settlement Japan PeBc London PeB+ PeB+ NY
- 7. Legal Relationships Bank has obligation to carry out instruction of customer, if authorized Authorization allows bank to debit account of customer The bank’s duty in carrying out payment instructions is to exercise reasonable care and skill in performance of the service Interbank relationships often are governed by bi- lateral contractual agreements Settlement systems are governed by multi-lateral contracts
- 8. Privity A funds transfer consists of a series of “orders” General rule is that parties have rights and obligations against each other only if in privity of contract Thus the payor will have rights against the payor bank but no rights against the correspondent bank that the payor bank selects to execute the payment order Likewise payee has rights only against its bank the payee bank
- 9. Applicable Law Generally, in the absence of agreement, it is the law applicable to each operation carried out in the credit transfer There is no single legal regime covering the entire credit transfer, though the laws of individual jurisdictions may be converging The UNCITRAL model law does not contain a choice of law clause The commentary suggests that the law of the receiving bank would govern the rights and obligations arising out of the payment order sent to that bank
- 10. Non-Completion Money back guarantee plus interest No other damages allowed unless bank is put on notice and acts recklessly or acts with specific intent to cause loss Otherwise remedies are exclusive
- 11. Switch
- 13. Application Cross-border credit transfers in currencies of Member States Up to equivalent of € 50,000 Executed by “credit institution” Cross-border means from one MS to another MS Hence does not apply to transfer from MS to third country
- 14. Information Pre-Transfer When order is given, time needed for transfer to reach beneficiary’s institution When order is received by that institution, time needed to credit beneficiary’s account Manner of calculating commission fees and charges payable by the customer Details of complaint and redress procedures Indication of reference exchange rate used (if not euro to euro, see R 2560/2001/EC) Above are found in Article 3
- 15. Information Post-Transfer Record enabling customer to identify cross-border transaction Original amount of transfer All charges and commission fees A few other items see Article 4
- 16. Originator Bank: Obligations Tell how much time is needed for execution Identify all charges and commissions Bank must execute within time agreed, or if no time limit, within 5 days of date of acceptance Where non-compliance, bank has duty to compensate - pay interest on amount of credit based upon reference rate -from date it was supposed to execute until date it executed If failure is due to intermediary bank, that bank compensates originator bank
- 17. Beneficiary Bank: Obligation That bank must credit within time limit as agreed or, if not time limit, at end of banking day following credit to account of that institution Non-compliance entitles beneficiary to interest rate based on difference between date funds should have been and were actually credited to its account The mandatory compensation does not exclude other remedies
- 18. The Process Article 7 require banks in the chain to execute the transfer in the full amount as specified by the originator, that is, follow the instructions. In other words, in the absence of consent, the banks can’t deduct charges as the credit moves though the system. The originating bank can charge as provided in its transparent statement of fees; the beneficiary bank can charge an administration fee according to rules governing the account. Beneficiary bank that wrongly executes is liable to credit the beneficiary for amount wrongly deducted.
- 19. Non-Execution Originator bank gives money back guarantee of 12,500 €, plus interest, plus charges This remedy does not exclude other legal claims, for example, when sum exceeds “guaranteed” amount, originator can sue in contract or tort to recover “amount over” plus whatever national law allows Refund must be made within 14 days of request Similarly, each bank in the chain owes the same duty to refund to its predecessor in the chain.
- 20. If Credit Goes Outside EU Neither the Directive nor the subsequent Regulation 924/2009/EC apply Law that governs would be result of party choice or of the system through which the credit passes. The most significant question is recovery of consequential damages. The Directive is silent on the issue as is the Regulation, leaving it to Member State law.
- 21. If € to € and w/in EU Regulation 2560/2001/EC applies mandating same charge for internal as for external transfers (Article 3) But note Article 4, banks may impose fees for exchanging currencies into and from euro, but must tell customers the fees
- 22. Consequential Damages Evra v. Swiss Bank Corporation, 673 F.2d. 951 (1982) No UK cases and Directive and Regulation do not address issue nor do they apply above 50,000€ Threshold Correspondent bank deemed in privity with originator.
- 23. Illustration CC Privately owned NFP Six Regions Visa Incorporated in US Issue Cards Mb Mb Mb MA C MT
- 24. Credit Card Payment Merchant [selling goods/services] seeks authority from card issuer through its “acquirer” Acquirer seeks authorization through the Visa authorization Centre in the region where acquirer is located When acquirer has approval, the Visa authorization Centre seeks approval from the corresponding Visa authorization Centre where the card issuer is located The latter Visa authorization Centre has to seek approval from the card issuer – the bank Card issuer’s account with Visa is debited for sum of transaction Sum is credited to merchant through process described If dispute, there is a process called chargeback and representment; in other words, a card issuer may charge back the transaction to the acquirer; if acquirer does not accept chargeback, it makes a representment; if dispute ultimately is not resolved through this process, then arbitration