India’s banking messaging system can go global

Subject :Economy

Section: Monetary Policy

In News: India’s Structured Financial Messaging System (SFMS) can become a viable alternative to the SWIFT messaging system.

Key Points:

India has two parallel offerings to the world in the area of banking.
- RBI has been proactively trying to internationalise the rupee and its payment systems.
- India’s Structured Financial Messaging System (SFMS) as an alternative to SWIFT.
While RBI efforts have gained attention, the internationalisation of India’s Structured Financial Messaging System (SFMS) went unnoticed.
Operationalised in 2001, SFMS provides secure financial message services to domestic banks and financial institutions within India. Around 250 members use SFMS either through a thick client or cloud-based systems.

RBI Efforts:

RBI and the Central Bank of the UAE entered into two significant memorandums of understanding related to the use of local currencies for cross-border transactions, and the interlinking of respective payment systems.
The objective is to promote the use of the rupee and the UAE dirham bilaterally and to promote fast and cost-effective cross-border fund transfers.
The statement also includes exploring the linking of payments messaging systems.

Difference between fund transfer and messaging:

Fund transfers and messaging are two distinct processes.
A payment transaction involves two key elements: the exchange of financial messages between the banks, and the actual transfer of funds.
Within India, both the National Electronics Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) are fund transfer platforms, which are first validated by a secure message sent through SFMS.

How is SFMS as SWIFT alternative:

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is widely used as the messaging system for international payments.
SWIFT is just a messaging system like SFMS that provides secured financial messages to financial institutions.
It neither monitors nor manages the transfer of funds; that process is separately executed by banks using different platforms.
SFMS is at par, if not better, than SWIFT on messaging standards, messaging capabilities and cost.
- the internationalised version would cost less than half of SWIFT.
- SWIFT currently uses MT (Message Text) Standards and has initiated a shift to the International Organisation of Standardisation 20022 (ISO 20022).
- SFMS provides certain additional message types for interbank transactions such as Letters of Credit which can be used by foreign banks as well. SWIFT is only now building this capability.
Given that it is interoperable with SWIFT, they can co-exist easily. This would enhance the resilience of global financial architecture but making it less dependent on a single messaging system.

How does the banking messaging system works?

To enable fund transfer as a first step, the transfer request is communicated between the banks.
SWIFT messages between remitter (sender) and beneficiary banks and will first authenticate various details.
After confirmation, the transfer of funds between the banks gets initiated through VOSTRO and NOSTRO accounts.
- NOSTRO (our’s) account is a domestic bank’s account maintained by a foreign bank.
- VOSTRO (their’s) account is the same foreign bank’s account maintained by the domestic bank.
- The settlement of the entire process takes 2- 3 business days as per the mutual agreements between the counterparties.