SWIFT Serial and Cover payments

SWIFT Serial and Cover payments originate from the two methods that are used to settle transactions in correspondent banking : Serial method and 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 initiatiated 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 for 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 debtor bank and creditor bank.

 

Cover Payment - MT103 Single Customer Credit Transfer

Cover Payment – MT103 Single Customer Credit Transfer

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 on 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 payement processing software.

When the beneficiary bank receives the announcement, it might already credit its customer even if the funds (the cover) has not arrived yet. It depends on many criterion. 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 stopped 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 European method. The serial method that will be considered in the next paragraph is also called 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.

Serial Payment - MT103 Single Customer Credit Transfer

Serial Payment – MT103 Single Customer Credit Transfer

The funds moves 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 most of the time. The intermediary institution on its turn credits the account of the creditor bank. And finally the creditor bank credits the benificiary 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 Annoucement Message (cover method). As mentionned above, intermediary institution and receiver’s correspondent are usually two names to designate the thing. The account with 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 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.

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38 Responses to SWIFT Serial and Cover payments

  1. Sudip August 27, 2018 at 3:56 pm #

    Hi JP,

    As usual a very nice illustration from your end. Can we also document in the financial world which all geographies use serial and who use cover and if so why one choses one over another.

    kind regards
    Sudip

    • Jean Paul August 28, 2018 at 9:57 am #

      Hi Sudip,
      Thanks for your comment. I take note of your points.
      I will try to cover them in future articles.
      Best regards,
      Jean Paul

  2. Jul September 30, 2018 at 6:28 pm #

    Wow, that’s nice and clear analysis. Your website helps me a lot since I only started with payments recently.

    • Jean Paul September 30, 2018 at 7:53 pm #

      Hi Jul,
      Thank you for your comment. It encourages me to continue in my endeavour.
      Subscribe to the newsletter to get regular updates.

  3. Barry October 5, 2018 at 10:32 am #

    Hi Jean Paul,

    Many thanks indeed for the very informative articles.

    Just with regard to the above, is Field 53A used in the case of the Serial payment?

    Is it soley geography that determines if acover message is used instead of a serial message.

    Thanks in advance, regards, Barry

    • Jean Paul October 5, 2018 at 12:31 pm #

      Hi Barry,

      thank you for your interest. When Field 53A or 53D (Sender’s Correspondent) is used, the sender is saying to the receiver that money will come through his correspondent. It is therefore not a serial payment. The option B of field 53a, (so the field 53B) is used when the sender has a many accounts with the receiver and wants a specific account to be debited.

      Now second question: Is it soley geography that determines if acover message is used instead of a serial message?The anwser is no. The cover method is also called European method because it is the prevailing settlement method in Europe. A serial method is called American method because it is the prevailing settlement method in the USA. But they are many other parameters. A bank can decide to settle payments with a correspondent only via the serial method. In this case, it will never send a cover payment to that correspondent. A correspondent may not accept the cover method too. Senders must then send only serial payments.

      I hope this helps.
      Jean Paul

  4. Barry October 5, 2018 at 12:44 pm #

    Many thanks indeed Jean Paul for your prompt reply. Regards, Barry

  5. Shashi Bhushan October 21, 2018 at 12:20 pm #

    Hi,

    Do you have any idea when do we used tag 54 in MT202?

    • Jean Paul February 21, 2019 at 8:59 pm #

      HI Shashi, I just realized that I missed your comment. I am very sorry for that. The reason for using the Tag 54 in the MT202 is the same as for using it in the MT103. Please read my article about SWIFT MT103 202 Cover payment analysis. BR, Jean Paul

  6. sarah November 19, 2018 at 12:13 am #

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  7. suyash November 23, 2018 at 9:12 am #

    Do MT 103 Cover always uses Tag 53 and Tag 54 and MT 103 Serial always uses Tag 53 and Tag 56 to represent sender correspondent and receiver correspondent ? Or any of the pair of tags can be used in either message to represent the same.

    • Jean Paul November 25, 2018 at 4:06 pm #

      The answer to your question is yes. You cannot use any pair of tags in either message.
      MT 103 Cover always uses Tag 53 and Tag 54. And MT 103 Serial always uses Tag 56 and Tag 57.
      When you use Tags 53 and 54, it means you are settling through correspondents. If you do not want to settle through correspondent, the only option is to use tags 56 and 57. I hope it clarifies.

  8. Srini December 4, 2018 at 5:38 pm #

    Hi Jean, one basic question. What determines at the debtor bank side to send the payment as a direct cover or a serial payment?

    • Jean Paul December 4, 2018 at 9:46 pm #

      Hi Srini,
      There are a lot of parameters to consider. One of the key parameter is the account relationship between the sending bank and the beneficiary bank.
      If they have an account relationship, the sender will send a serial payment. If not, it is a cover payment and the transaction is settled through the correspondent that holds the sender’s nostro account.

      • Sriini December 5, 2018 at 3:33 am #

        Appreciate the quick reply! Thanks Jean!

  9. Thomas December 20, 2018 at 7:05 am #

    Simply superb ..thank you …a hard topic explained so easily

  10. aditya January 2, 2019 at 7:53 am #

    Hi Jean ,

    Happy New Year and thanks for the one of the best article regarding cover and serial payments , i need to clear some doubts …
    Sender correspondent is stored in which field in case of serial payments.

  11. Shatanik January 15, 2019 at 8:40 am #

    Hi Jean,

    Can a MT202 be send between two banks in the same country..? Is it mandatory, as they could also settle the same through the local clearing.?

    Looking forward to your response.

    • Jean Paul January 15, 2019 at 11:15 am #

      The answer is YES. RTGS systems usually process MT202 from one bank to another located in the same country. In Europe, you have the clearing system EBA/EURO1 which process MT202 too. And Two German/French/Italian banks can exchange MT202 through EURO1. But Banks would use it if the destination bank is not reachable through a local clearing. Going through a local clearing is the most common and cheapest way to settle the funds. Let me know if you have additional questions. 🙂

      • Shatanik Roy Chowdhury January 15, 2019 at 12:16 pm #

        Just to understand generally In which cases the destination bank is not reachable in the local clearing..?

        • Jean Paul January 15, 2019 at 1:04 pm #

          As I said, banks are normally reachable through the local clearing. But there are cases where a bank (usually an indirect participant) may not be reachable. One example: A bank with small volumes of transactions may make the choice to be reachable only through EURO1 or TARGET2 (the Europe RTGS). These banks are very few, but they exist. In the reachability check, you should always foresee the case where a bank is not reachable through the local clearing. I hope this helps.

  12. kiran January 28, 2019 at 9:44 am #

    Hi Paul ,

    This is the best article I have ever found on Internet for Payments , u r really doing an awesome job for helping people to get clean and clear picture on Payments , thnks

    keep doing this good works

    • Jean Paul January 28, 2019 at 11:50 am #

      Thank you for your appreciation. 🙂

  13. kiran January 28, 2019 at 9:48 am #

    What does the term means , Direct debit or Direct debit authorizations w.r.t Swift Payments

    • Jean Paul January 28, 2019 at 11:50 am #

      Not sure I get your question. In Swift, you have the MT104 that is used as direct debit involving customers and the MT204 that is used for direct debits between financial institutions. Those messages are initiated by the creditor provided he has an authorization from the debit party to debit his account. I hope this helps.

      • kiran January 28, 2019 at 6:48 pm #

        Yes Got it ,thanks Paul …

  14. ozhakkan February 21, 2019 at 1:12 pm #

    Hi Paul,

    Nice article. Really worth reading. Thanks for sharing your knowledge.

    I have a basic question: What are the benefits Cover method has over Serial method. As per my knowledge

    – Overall cost reduction
    – Early credit to privileged Customer (by satisfying set of rule)

    However I heard there are some benefits in terms of Nostro recon. Do you have any details around it?

    • Jean Paul February 21, 2019 at 8:47 pm #

      Hi Ozhakkan, Thank you for your nice comment!

      What you say is correct
      – overall cost reduction, because Intermediaries tend to take charges on the serial MT103.
      – Yes accounts of privileged customers can be credited before the cover is received and that value-added service is very appreciated.

      As far as I know, there are benefits with regards to Nostro reconciliation for the receiving party, specifically the manual reconciliation.
      The cover payment is credited on the receiving bank’s Nostro account. And the receiving bank usually gets a MT910/MT950.
      A payment operator can easily investigate and follow the payment. You have the announcement and the cover for the same transaction.
      For a serial payment, the receiving bank gets just one MT103. It does not know anything until the MT103 arrives.

      To finish, let me mention another benefit: better liquidity forecast and management.
      When some banks receive the announcement, they credit the liquidity forecast account.
      You cannot do that for a MT103 serial since you do not know that the payment is on the way.

      Best Regards :-), Jean Paul

      • ozhakkan February 26, 2019 at 10:33 am #

        Thanks alot mate. Make sense!

  15. Paul February 21, 2019 at 2:15 pm #

    I have searched many places but no presentation as clear as this one. Thank you.

    • Jean Paul February 21, 2019 at 8:55 pm #

      Thank you for your appreciation! Have you joined the newsletter?

  16. Olivier March 1, 2019 at 2:17 pm #

    Hi Jean-Paul,

    I believe I have pretty much understood how MT202COV/MT103 work.
    What is somehow more confusing for me is how does it work for MT202 covered by another MT202 payment. I refer to SWIFT Standards’ Message Reference Guide for Category 2, describing the usage rules for field 53 of a MT202, which states :

    QUOTE

    USAGE RULES
    When the Sender instructs the Receiver to transfer funds between two accounts owned by the
    Sender and serviced by the Receiver, this field must be used with option B to identify the account
    to be debited.
    In those cases where there are multiple direct account relationships, in the currency of the
    transaction, between the Sender and the Receiver, and one of these accounts is to be used for
    reimbursement, the account to be credited or debited must be indicated in field 53a, using option B
    with the party identifier only.
    If there is no direct account relationship, in the currency of the transaction, between the Sender and
    the Receiver (or branch of the Receiver when specified in field 54a), then field 53a must be
    present.
    When field 53a is present and contains a branch of the Sender, the need for a cover message is
    dependent on the currency of the transaction, the relationship between the Sender and the
    Receiver and the contents of field 54a, if present.
    A branch of the Receiver may appear in field 53a if the financial institution providing reimbursement
    is both the Sender’s correspondent and a branch of the Receiver, and the Sender intends to send a
    cover message to the branch of the Receiver. In this case, the Receiver will be paid by its branch in
    field 53a.
    In all other cases, when field 53a is present, a cover message, that is, MT 202/203 or equivalent
    non-SWIFT, must be sent to the financial institution identified in field 53a.
    When field 53B is used to specify a branch city name, it must always be a branch of the Sender.
    The absence of fields 53a and 54a implies that the single direct account relationship between the
    Sender and Receiver, in the currency of the transfer, will be used.
    The use and interpretation of fields 53a and 54a is, in all cases, dictated by the currency of the
    transaction and the correspondent relationship between the Sender and the Receiver relative to
    that currency.

    UNQUOTE

    What’s puzzling to me is the sentence
    “In all other cases, when field 53a is present, a cover message, that is, MT 202/203 or equivalent non-SWIFT,
    must be sent to the financial institution identified in field 53a.”
    which seems to infer that an Institution can send a MT202 to another Insitution even if they have no account relationship ? Meaning, if I understand well, that this pattern would be the equivalent of MT202COV/MT103 but when the beneficiary is a bank whose account is held at the Receiving Institution.
    I would be interested of having your own understanding of such pattern, as I feel it’s very unusual since in most cases, for purely interbank payments, a ‘serial’ method will be used, i.e. each Institution will send a subsequent MT202 to the next Institution (if any) in the payment chain, until it reaches the beneficiary Institution’s account holder. Have you ever encountered such pattern of what looks like a 202/202 cover method ?
    Thanks for your blog !

    • Jean Paul March 3, 2019 at 8:27 pm #

      Hi Olivier, Thank you for your appreciation. I read your comment carefully.
      In summary, your question is about MT202 Announcement and the related Cover. It is unusual as you say because the serial method is used most of the time, but it does exist.
      And yes I have encountered it. The principle is quite similar to the MT103 Announcement except that only financial institutions are involved in the transaction.
      An MT202 Announcement is sent directly to the Bank holding the account of another bank. And A cover is settled through correspondents.
      Now think about this: What makes a MT103 or MT202 an announcement? There is no flag inside telling you that it is an announcement.
      So it is Receiver who identifies the payment as an announcement based on its content, typically when the sender has no direct account relationship with the receiver and fields 53a (not option B of course) / 54a are present. For me we should just think of a MT202 annoucement like an MT103 announcement. The underlying principle is the same.
      I hope this clarifies. Let me know if you have further questions.

      • Olivier March 4, 2019 at 8:10 am #

        Thanks for your explanation, this confirms my initial understanding, and I agree the way the 202 will be processed by the receiving bank depends on the existence of a direct account relationship, or not, betweeen the Sender and the Receiver.

        Having said that, I tend to believe this is a fairly unusual pattern and the general rule for purely interbank payments is the ‘serial’ method.
        Knowing that even for corporate payments, it appears that the serial 103 method is now also the preferred one (rather than 202COV/103), the main reason for that being the increased scrutiny about RMA relationships, and the fact that most banks now try to limit the number of RMA they have with each other, for KYC reasons.
        Hence, with no RMA in place, you are not able to send a 103 to the beneficiary’s account servicing Institution, leaving no other choice than a serial 103 method.
        Plus the process of an ‘announcement’ payment message depends pretty much on the contractual provisions of the Agreement between the client and its account servicing Institution, leading sometimes to a certain level of confusion (e.g. on whether the beneficiary’s account will be credited upon receipt of the announcement, or only when the funds have effectively been received by the account servicing Institution).

        One last high-level question : would you agree to say that two banks will exchange MT202 or MT103 if and only if, either :
        – they have a direct account relationship with each other, or
        – the Receiver is the account servicing Institution of the final beneficiary ?

        Best regards !

        • Jean Paul March 5, 2019 at 5:13 pm #

          Hi Olivier,
          Thank you for your comment! I see that you are really on top of this topic.
          I agree with you that using a MT202 Announcement is an unusual pattern. Interbank payments are performed with the serial method most of the time.
          Concerning your question, I guess you are refering to the MT103 and 202 Serial.
          My understanding is that serial payments move from one bank to another, the two having an account relationship in the currency of the transfer. So sender and receiver involved in a serial payment must have an account relathionship. Can a Bank send a serial payment to another bank that is the account servicing Institution of the final beneficiary even if both do not have an account relationship? I do not see how the money would flow. Therefore my answers to your question:
          would you agree to say that two banks will exchange MT202 or MT103 if and only if, either :
          – they have a direct account relationship with each other, or – [YES] Absolutely.
          – the Receiver is the account servicing Institution of the final beneficiary ? [NO] I do not see how the funds will flow if sender and receiver do not have an account relatinship. It is needed to move the funds.

          Please share your opinion and again, thank you for your insight!
          BR, Jean Paul

          • Olivier March 6, 2019 at 4:43 pm #

            Hello,

            Maybe I was not clear enough.

            In a 202COV/103 pattern, the Receiver and the Sender of the 103 don’t have account relationship with one another, but the Receiver holds the account of the beneficiary. The funds will move through the asscociated 202COV.

            But my point was to say that a 103 will ever be exchanged between two institutions if and only if :
            – they have a direct account relationship with one another or,
            – the Receiver is the account servicing institution of the beneficiary

            Regards,

          • Jean Paul March 7, 2019 at 9:20 pm #

            Thank you Olivier for the clarification. I understand that you were not refering to serial payments only.
            Your statement is therefore correct. Thank you again for your contribution.

  17. vimal March 25, 2019 at 6:25 am #

    Hi Paul,

    i saw a incoming message ,it’s

    1) 52A and 53A same BIC contains Head Office BIC of Sender Bank
    2) 54A hold a different bank BIC

    could you please explain about this

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