Do you have a glossary of commonly used terms?

At Freemarket, we try to keep things as straightforward as we can. However, if there are any terms that are unclear, we’ve compiled a glossary to help explain.

A

ABA routing transit number

American Bankers Association code originally used on US cheques now also used in Fedwire and US ACH payments.

Anti-Money Laundering (AML)

Checks set out by financial regulators to prevent proceeds from criminal activity being filtered through the banking system. Describes the legal controls that require financial institutions and other regulated entities to prevent, detect, and report money laundering activities. There are multiple layers of checks undertaken by Freemarket:

• Client screening – onboarding checks (KYC and various levels of Diligence, depending on the risk of the client) to ensure client is bona fide. Details are refreshed periodically, at a frequency determined by the risk of the client.
• Transaction screening – check the beneficiary and other aspects of the payment are bona fide before the payment is sent
• Transaction Monitoring – perform checks of payments sent over a period to look for suspicious patterns (e.g. for “smurfing”)

Automated Clearing House (ACH)

A US-based organisation that processes massive amounts of debit and credit transactions such as direct deposit, payroll and vendor USD payments in the USA.

Application Programming Interface (API)

A way for two or more computer programs to communicate or interface with each other, intended to simplify the building of client-side software. It has been described as a “contract” between a client and server, such that if the client makes a request in a specific format, it will always get a response in a specific format or initiate a defined action. Clients use our API to communicate with our system to initiate some action like an exchange or to get details like transfers.

B

Basis points (bp)

Often used in relation to fees, charges and variable mark-ups on currency rates. Each basis point is 1/100th of 1% - for example, 50bp is half a percent i.e. 0.50%.

BBAN

Basic Bank Account Number. In the UK this is the 6 digit sort code + 8 digit account number.

BIC

A Business Identifier Code (BIC) is a unique code that tells the Swift network which bank is making/receiving messages, helping to process payments.

Bid rate

The bid rate is the rate quoted to you when you’re about to buy a currency.

C

Charge type

The type of deduction made by a receiving bank for a priority payment. There are two available payment charge types - ‘Shared’ (SHA) and ‘Ours’ (OUR).

SHA payments: the intermediary bank charges are deducted from the payment amount. As a result, the payment amount received in the beneficiary bank account may be less than the full amount expected.

OUR payments: the intermediary bank charges are covered by the payer and not deducted from the payment amount. The beneficiary receives the full payment amount but the payer will be charged a higher payment fee to cover the intermediary bank charges.

Clearing

The process of confirming, documenting and settling a transaction as well as managing credit and collateral exposures and supporting monitoring and reporting processes. These processes are handled by a clearing house as they require a single, central, trusted entity which can trade with all its members on terms that enable certainty and consistency.

Correspondent bank

Banks are financial institutions that are licensed to provide financial services, such as deposit taking, lending, currency exchange and payment services.A correspondent bank is a bank in one country that is authorized to provide services for another bank or financial institution in a foreign country.

Cross-border payment

Cross-border payment is a term referring to transactions involving individuals, companies, or banks operating in at least two different countries.

Counter-terrorist financing

A multitude of laws and regulations have been enacted to reign in the financing of terrorist activity, and are collectively known as counter-terrorist financing policy. Under these policies, most financial institutions are required to fulfil many strict requirements regarding monitoring customers’ transactions and behaviour, conducting proper due diligence, and maintaining appropriate records.

Currencies

Currencies are a system of money accepted within a country, for example the Pound Sterling in the UK, or the Euro across the Eurozone.

Currency pairs

A currency pair is a quotation featuring two different currencies, with currency being quoted in terms of the other.

D

Delivery date

The delivery date is the date on which the purchased funds are available for payment.

Direct and cover

Non-serial payment messaging where the initiating bank sends a payment message directly to the beneficiary bank (MT103), and sends funds to cover the payment (MT202COV) on an FI-to-FI basis.

E

Enhanced due diligence

A KYC process that provides a greater level of scrutiny of potential business partnerships and highlights risk that cannot be detected by Customer Due Diligence.

Exchange rate

An exchange rate is the price of one country's currency expressed in another country's currency. An exchange rate has two components, the domestic currency and a foreign currency (see currency pairs), and can be quoted either directly or indirectly.

F

Faster Payments (FPS)

The UK's banking initiative for sending sterling payments electronically in the UK and reducing payment times between different domestic banks' customer GBP accounts. Generally, the receiver see the credit on the account within seconds and also be able to access the funds.

FinTS

FinTS (Financial Transaction Services) is a bank-independent protocol primarily used in Europe for online banking.

Foreign exchange

Foreign exchange, FX or Forex is the market in which currencies are traded. Financial institutions and payments providers trade trillions a day.

Forwards

A forward conversion is an agreement, usually with a bank or financial provider, to exchange a specific amount of currencies sometime in the future (greater than two days later) for a specific rate.

I

IBAN Every bank account has an International Bank Account Number (IBAN). It is a unique code which provides a standard way to identify any account, worldwide. Made up of the country code (GB), 2 digit check-sum, 4 character bank code (from the BIC) then the local BBAN (in the UK the 6 sort code +8 account number). BBAN differs in length between countries, but the structure of the first 8 characters is common.

Interchange fee

An Interchange is a fee paid between banks from the acquirer to the card issuer each time a card payment transaction occurs.

ISO currency code

The ISO currency code is the three letters also used in exchange rates. Devised by the International Organization for Standardization it is a country’s two characters and a letter denoting the country’s currency. For example, in Hong Kong the currency is Dollars and so the ISO code is HKD.

K

Know Your Business (KYB)

In Europe: identifying the beneficial owner and taking reasonable measures to verify that person’s identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer; EUR-Lex

In US: beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted).

Know Your Customer (KYC)

Know Your Customer (KYC) is a requirement that protects both financial institutions and their clients. Financial institutions are required to formally verify the identity of all clients and understand the purpose of trading, expected volumes and jurisdictions their clients will use.

Know Your Client's Customer (KYCC)

Where KYC must be conducted on an underlying service user who is not directly contracting with the provider of those services. May be required in certain circumstances for named vIBANs.

L

Local payments

Local payment schemes are payment initiatives set up in a domestic market to make the payment process between banks more efficient. Schemes include ACH, Faster Payments and SEPA.

M

Margin

Margin is financial collateral used to cover credit risk and is set aside as a good will deposit as collateral to hold a position against future trades as security to cover any potential losses the provider may incur as a result of non-settlement of the trade.

Margin call

A margin call means that the exchange rate has moved sufficiently so that the initial margin held is no longer sufficient to support the “open” or unsettled trades and additional deposit is required to cover the risk to the provider.

Measuring rates

Since most currencies are quoted to a maximum of 4 decimal places, movement in currency rates, no matter how small, will have an impact on the price you pay. Rates are measured in three factors. These are spreads, pips and basis points. The spread is the difference between ‘bid’ and ‘offer’ prices.

Mid-market rate

Usually, financial institutions make money by charging different prices for buying and selling a currency. The mid-market rate eliminates this margin, and is the exact halfway point between the two. At Freemarket, is the rate we use for our matched, scheduled currency exchanges.

Money Laundering Reporting Officer (MLRO) Sometimes referred to as a ‘nominated officer’, the MLRO provides oversight for a firm’s anti-money laundering (AML) systems, and acts as a focal point for related inquiries.

MT103

This is a standardized Swift payment message. It is accepted as proof of payment and includes all payment details such as date, amount, currency, sender and recipient

Multi-factor Authentication (MFA)

An electronic authentication method in which a user is granted access to a website or application only after successfully presenting two or more pieces of evidence to an authentication mechanism.

N

Nostro account

The account that a respondent bank holds at a correspondent bank, usually for the purposes of payment clearing. Described as the Nostro by the respondent bank (as derives from the Latin for ‘ours’). The correspondent bank describes its provision of these accounts to other FIs as a ‘Vostro’ or ‘clearing’ service (Vostro derives from ‘yours’).

O

Offer rate

The offer rate is the rate quoted to you when you’re about to sell currency. Also known as the ask price or sell price.

Open Banking

A banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).

P

Payee

A payee is an entity receiving payments through any form of money transfer method. Also known as the beneficiary.

Payer

A payer is an entity, either an individual or organisation, that makes a payment to another entity.

Payment Service Provider (PSP) Provides payment services to payment services users (PSUs). Domestically, may include acceptance of electronic payments by a variety of payment methods including credit card, bank-based payments such as direct debit, bank transfer, etc. Internationally, provide the ability to send funds overseas.

Politically Exposed Person (PEP)

Someone who has been entrusted with a prominent public function. A PEP generally presents a higher risk for potential involvement in bribery and corruption by virtue of their position and the influence that they may hold.

Pip

In currency exchange, Pip stands for “point in percentage”; it is used to describe how values change between currencies. It is usually measured at the fourth decimal point. For example, if the GBP/EUR rate is 1.1425, and the Pound depreciates by five Pips against the Euro, the new rate would be 1.1420; a depreciation of €5 in every £10,000.

Q

Quote rates

The quote rate is the most recent market price that a currency was traded on, meaning a buyer and seller agreed to trade at that price.

R

Regulated entities

Regulated entities are the service providers governed by financial regulation, such as banks, brokers and payments companies.

Real-time pricing

Real-time pricing gives customer information about the actual cost of the transaction at that point in time. For example we will provide the actual exchange rate along with the cost for an exchange that customer could get if the customer choose to execute the transaction at that point in time.

S

Safeguarding

Payment Service Providers acting as Authorised Payment Institutions must ensure that relevant client funds are appropriately identified, managed and protected on a day-to-day basis; this includes the clear segregation, designation and reconciliation of client balances. Client's funds are held in safeguarded accounts at authorised credit institutions (Freemarket’s Banking Partners) in the UK and EEA. Safeguarding requirements are in place to protect client funds if the payment service provider (PSP), in this case Freemarket, were to ever become insolvent. Freemarket must comply with the Payment Services Regulations 2017 (PSRs). Freemarket Ireland must comply with the Payment Services Regulations 2018 (PSRs).

Sanctions

Economic sanctions are commercial and financial penalties and restrictions applied by one or more countries against a targeted country, group, or individual. Sanctions may include various forms of trade barriers, tariffs, and restrictions on financial transactions.

Settlement date

The settlement date is the day on which a trade or a contract must be reconciled. The buyer must make payment of the sold currency before the conversion is processed and the purchased currency is available for payment.

Single Euro Payments Area (SEPA)

The European's domestic clearing scheme for simplifying the European banking transaction network and processing EUR payments within the SEPA region.

Spot trade

The spot rate is the price quoted with settlement usually for settlement in T+2 (fulfilment / delivery 2 business days after contractual execution) on a commodity, security or currency transaction. The spot rate, also referred to as the “spot price,” is the current market value of an asset at the moment of the quote.

Spread margin

When an institution buys a currency at one price and sells it at another, the difference between the two rates is called the spread margin. It is often denoted in Pips or Basis points.

Swift

Swift stands for Society for Worldwide Interbank Financial Telecommunications. Set up in 1973, it’s a member-owned cooperative that developed a communication platform to transmit secure financial transaction information between the financial institutions it represents.

T

Third-party payments processor

A third-party payments processor lets businesses handle transactions from various channels such as credit cards and debit cards, without having to establish their own banking relationships or set up a merchant bank account of their own.

TOD conversion

A TOD conversion is a conversion that will settle today.

TOM conversion

A TOM conversion is a conversion that will settle tomorrow (T+1). The T stands for Transaction Date.

Triangulation

Triangulation is a method of currency exchange where one currency amount is converted to another through an intermediate currency.

U

UETR reference

This is a unique reference associated with every Swift payment that is kept and shared by each bank involved in the payment.

Ultimate beneficial owner

The person or entity that is the ultimate beneficiary of the company. The underlying reason for identifying UBO is to prevent natural persons with malintent, such as money-laundering or financing terrorism, from being able to hide behind a company, foundation or other legal entity. The ultimate beneficial owner of a legal entity is the natural person who: holds an interest of at least 25% in the legal entity’s capital; OR can exercise at least 25% of the voting rights at the general meeting of shareholders OR is the beneficiary of at least 25% of the legal entity’s capital.

V

Virtual IBAN (vIBAN)

A virtual IBAN (International Bank Account Number) is issued by a bank to allow incoming payments to be rerouted to a different, real, physical bank account.

W

Wholesale rate

The wholesale market used by banks, governments, investment funds and large corporates to buy and sell foreign currency is called the Spot Market. For most currencies, the standard settlement period for spot trades is two business days.

Wire transfer

Wire transfer is the means of transferring money electronically around the world. This can be institutions, individuals or organisations. Also known as a ‘Swift payment’ as wires are dependent on Swift messaging and correspondent banking.