A. Funds Transfers In General

2. Until the mid-1970's a person who wished to transfer funds to another country, whether to pay an obligation or to provide itself with funds in that foreign country, had a limited number of ways in which to proceed. It could send its own personal or corporate cheque to the intended recipient of the funds, but international collection of such items was both slow and expensive. It could purchase from its bank a draft drawn by the bank on the bank's correspondent in the receiving country. Collection of such an international bank draft was faster than collection of a personal or corporate cheque since it was payable in the receiving country and in the funds of the receiving country.

3. A third and even faster procedure had also been available since the mid-nineteenth century. The originator's bank could send a payment order by telegraph to its correspondent bank in the receiving country instructing the receiving bank to pay the intended recipient of the funds. (The payment order could also be transmitted between the banks on paper. This is the common method for making funds transfers in many countries. However, it was less commonly used for international transfers.) While faster than the other two methods, the telegraph was a relatively expensive method of communication and it was prone to error. When telex replaced the telegraph, the basic banking transaction remained the same, but the cost was reduced and accuracy improved. That led to a gradual movement away from the use of bank cheques for international payments. With the introduction of computer-to-computer inter-bank telecommunications in the mid-1970's, the cost dropped still further, while speed and accuracy improved dramatically. The extension of computer-to-computer inter-bank telecommunication facilities to ever increasing numbers of countries means that the use of bank cheques for international funds transfers has drastically decreased and the role of telex transfers has been significantly reduced.

4. The collection of bank cheques, telex transfers and the newer computer-to-computer transfers have one important element in common: value is transferred from the originator to the beneficiary by a debit to the bank account of the originator and a credit to the bank account of the beneficiary. Settlement between the banks is also accomplished by debits and credits to appropriate accounts. Those accounts may be maintained between the banks concerned or with third banks, including the central bank of one or both countries.

5. There is also a striking difference between, on the one hand, the collection of a bank cheque (or the collection of a personal or corporate cheque) and, on the other hand, a telex or computer-to-computer transfer. The cheque is transmitted to the beneficiary by mail or other means outside banking channels. Therefore, the banking procedures to collect the cheque are initiated by the beneficiary of the funds transfer. A funds transfer in which the beneficiary of the funds transfer initiates the banking procedures is more and more often called a debit transfer. Collection of a bill of exchange or a promissory note is also a debit transfer, since the beneficiary of the funds transfer initiates the funds transfer, and there are other debit transfer techniques available, including some that are based on the use of computers.

6. In telex transfers and computer-to-computer transfers it is the originator of the funds transfer who begins the banking procedures by issuing a payment order to its bank to debit its account and to credit the account of the beneficiary. A funds transfer in which the originator of the funds transfer initiates the banking procedures is often called a credit transfer, and that is the term used in the Model Law.