International, or cross-border payments are typically between individuals and businesses, the key types being person-to-person, person-to-business, and business-to-business. They include remittances, mostly money that migrants send back to their home countries.
The importance of international payments continues to grow because of easier access to goods and services and the mobility of people. In 2018, Boston Consulting Group estimated its value to increase from almost $150 trillion in 2017 to over $250 trillion by 2027This is increasing the demand for users to have access to services that are as efficient and safe to comparable domestic services.
Domestic payment systems are not connected with other countries’ systems and so when making a transfer between, say Brazil and the US, the currency isn’t physically sent.
Funds are not sent across borders, instead the bank receiving the money’s account is credited in one jurisdiction and debited in the other.
This is done by sending encrypted messages between banks that instruct the receiving bank to make a transaction to the payee from the sending bank’s account with them, after the sending bank has made a transaction from the payer’s account to the receiving bank’s that they hold.
International banks can do this because to facilitate cross-border payments they hold accounts with foreign counterparts and reciprocate by holding the accounts of foreign counterparts. These are called ‘Nostro’ and Vostro’ accounts and describe the same bank account in each bank. ‘Nostro’ and ‘vostro’ are Latin for ‘ours’ and ‘yours’ respectively and emerged from 13th century banking in Italy, where the depositor kept a ‘nostro’ ledger and the bank kept a corresponding ‘vostro’ ledger.
In the modern international version ‘nostro’ means ‘our money on deposit at your bank’ and ‘vostro’ means ‘your money on deposit at our bank’. For it to work, both banks must record the amount of money being stored by one bank on behalf of the other, and the words are used to differentiate between the two sets of accounting records kept by each of them. They differ from standard bank accounts as they are only held by financial institutions in a foreign currency and are only used to simplify payment and foreign exchange transaction settlement.