SWIFT Serial and Cover payments originate from the two methods that are used to settle transactions in correspondent banking: The serial method and the Cover method. What are these two methods and how do they work? In this article, we will first describe shortly how each of the methods works and then we will make a detailed analysis of each method.
Serial and Cover payments in a Nutshell
This is shortly how each of the methods works.
Cover method: two messages are initiated by the sender to settle the funds. One message is used to inform the creditor bank that funds are coming. It is called an announcement. The other message, called cover message, moves the funds between correspondent accounts.
Serial method: Only one message is initiated by the sender to settle the funds. That message moves from one party to the next in the payment chain until it reaches the beneficiary bank.
Serial and Cover payments analysis – The cover method
When the cover method is used, the party (usually a bank) that transfers the funds, initiates two payments: an announcement (MT103 Announcement for customer transfers or MT202 Announcement for financial institution transfers) and a cover (MT202 COV). The picture below illustrates messages sent for a customer transfer. For a financial institution transfer, an MT202 announcement would be exchanged between the debtor bank and the creditor bank.
The announcement is sent to the beneficiary bank to announce that funds are coming for a specific beneficiary. The announcement does not carry the funds. It just informs the bank of the beneficiary that 1) funds are coming, 2) for which beneficiary and 3) the correspondent (of the beneficiary bank) that will receive the funds. That is why it is called an announcement.
The cover payment (MT202 COV) is sent by the sender to its correspondent. This is the message that really moves the funds. With the MT202 COV, the sender says to its correspondent: “Please debit my account that you hold and credit the beneficiary bank’s account with its correspondent.” Note that the correspondent of sender and beneficiary are located in the same country or monetary zone. So this payment may go through a local clearing system and not through SWIFT as you can see in the above picture.
Most of the time, the announcement is created and sent before the cover. But it is theoretically possible to do the opposite. On the receiving side, the announcement almost always reaches the creditor bank before the cover. But it happens that the cover arrives before the announcement and that should always be foreseen in a xborder payment processing software.
When the beneficiary bank receives the announcement, it might already credit its customer even if the funds (the cover) have not arrived yet. It depends on many criteria. Among others there are:
- the level of trust that it has in the circuit used to transfer the funds – A bank may decide to systematically wait for the cover if the transfer is in a specific currency for example.
- the amount of the transfer – Payment above a certain threshold will be credited only after the cover is received.
- the party initiating/receiving the funds – how good is the relationship of the bank with that party
- and so on.
Why do we have MT910/950 between the receiver and its correspondent?
I made this choice because most of the time the MT202 COV stops at the receiver’s correspondent since its holds the settlement account. The settlement account is simply the account of the beneficiary bank where the funds should be credited. The receiver’s correspondent does not send an MT202 COV to the receiver, but rather sends a SWIFT MT910 (Confirmation of Credit) or a SWIFT MT950 (Statement Message) to inform the receiver that the amount of the cover has been credited to his account.
The receiver then reconciles the announcement with the MT910 or MT950 and can consider that the related funds are received. As said above, the beneficiary account can then be credited or if it has already been credited (when the announcement arrived), the transaction can just move from pending to processed status.
The cover method is the prevailing settlement method in Europe. For that reason, it is sometimes referred to as the European method. The serial method that will be considered in the next paragraph is also called the American method. It is the preferred settlement method in the USA.
Serial and Cover payments analysis – The serial method
When this method is used, the party (bank) that transfers the funds, initiates only one payment: the MT103 serial for customer transfers or MT202 serial for Financial Institution Transfer. The picture below illustrates messages sent for a customer transfer. For a financial institution transfer, an MT202 would be sent instead.
The funds move from one party to another until it reaches the final beneficiary. For a customer payment, the sender sends an MT103 serial to its correspondent. Its correspondent debits its account and transfers the funds to the intermediary institution, the correspondent of the beneficiary bank most of the time. The intermediary institution in its turn credits the account of the creditor bank. And finally, the creditor bank credits the beneficiary account.
Note that in the SWIFT MT103 Serial Message, the fields 56a and 57a are used while the fields 53a and 54a are used in the MT103 Announcement Message (cover method). As mentioned above, intermediary institution and receiver’s correspondent are usually two names to designate the thing. The account with the institution is the bank that holds the beneficiary account, so just another name for Creditor bank. Remember the fields differences, but more important the principle: Sender and receiver located in different currency zones send or receive funds through their correspondents.
Movements of funds between correspondent accounts in the same country or the same monetary zone can happen through local clearing systems. SWIFT is not mandatory even if it might be used as well. What is mandatory is that the funds move. :-). The method to move the funds is at the discretion of the sending bank.
In conclusion, we see that SWIFT Serial and Cover payments play a key role in correspondent banking. I hope this article is helpful for you to understand how they work. If you still have questions, just leave a comment below and I would be happy to answer and support you.