Why Was MT202 COV Introduced? Everything You Need to Know About MT202 COV

In the world of international transfer, SWIFT messages play a crucial role in transferring funds between banks globally.

 

One such message type, MT202 COV was introduced to address key transparency issues in the banking system. But I thought to address this question why was MT202 COV introduced, and how does it differ from other SWIFT messages like MT103 and the traditional MT202?

We will explore all the aspects why this MT202 was introduced. So scroll down and go for a trip to understand Why(KYUN).

The Basics: MT103 vs. MT202 vs. MT202 COV

Before diving into MT202 COV, let’s first understand the existing message types:-

• MT103: It is used for customer credit transfers. This message contains all necessary details about the sender and receiver of the funds.
• MT202: It is used for financial institution transfers (bank-to-bank payments). This message originally did not include details of the underlying customer transactions.
• MT202 COV: A new variation of MT202 introduced to improve transparency in cover payments. It include the underlying Mt103 message means sender and receiver information.

Read Here – Mt103 vs Pacs.008

Why Was MT202 COV Introduced?

Before MT202 COV, banks used a method called cover payments to process international transactions efficiently. However, this method lacked transparency and raised regulatory concerns, especially after 9/11 attack in US.

The Problem With Traditional MT202

In the past, when a bank needed to transfer money internationally but had no direct relationship with the beneficiary bank, it used intermediary banks. This could be done in two ways only that time:-

• Serial Method (MT103 Only): Each bank in the chain forwarded an MT103 to the next bank, until it reached the beneficiary’s bank. However, this was slow way because multiple banks involved and had to process the transaction sequentially.
  Ex- Bank A → MT103 → Bank B  → MT103 → Bank C → MT103 → Bank D
• Cover Method (MT103 + MT202): The sender sent MT103 directly to the beneficiary bank, while an MT202 was sent separately to move the funds through intermediary banks. This method was faster, but MT202 did not include the originator or beneficiary details, raising concerns about money laundering and fraud.Ex-  Bank A → MT103 → Bank D (Direct to beneficiary bank)
  Bank A → MT202 COV → Bank B → MT202 COV → Bank C → MT202 COV → Bank D (Cover payment via intermediary banks)

 The 9/11 Regulatory Changes

After the 9/11 attacks, regulators found that some banks were altering or omitting details from payment messages to avoid detection. This is the trigger point to make some change in the old process

• The old MT202 did not include beneficiary or sender details.
  
• Authorities needed a way to track payments more effectively without disrupting legitimate banking operations.

The Introduction of MT202 COV: Ultimate Savior in Transparency

To solve these transparency issues, SWIFT introduced MT202 COV in November 2009. This new message type ensured that all cover payments included:-

i) The originator’s details (who is sending the money)
ii) The beneficiary’s details (who is receiving the money)
iii) A clear link to the MT103 customer credit transfer

This allowed regulators and banks to track payments efficiently while maintaining the speed and benefits of the cover method.

How Do Banks Decide Between MT103 Serial and MT202 COV?

Now that we understand why MT202 COV was introduced, an important question arises:-

Who decides whether to use the serial method (MT103 only) or the cover method (MT103 + MT202 COV)?

Factors That Influence the Decision:

1. Bilateral Relationships Between Banks
   • If Bank A has a direct relationship with Bank D, it can send MT103 directly.
   • If there is no direct relationship, an intermediary is needed, and the bank may use the cover method.
2. Correspondent Banking Agreements
   • Some banks have predefined agreements to use cover payments in certain cases.
   • Others prefer the serial method based on cost, efficiency, and compliance policies.
3. Speed & Efficiency
   • Serial Method (MT103 Only) → Slower, as each intermediary must process a new MT103.
   • Cover Method (MT103 + MT202 COV) → Faster, as MT103 goes directly to the beneficiary bank while MT202 COV moves funds in parallel.
4. Regulatory & Compliance Considerations
   • Many regulators now require MT202 COV for cover payments to enhance transparency.
   • Banks must ensure compliance with AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations.

Read Here – Mt103 vs Pacs.008

Conclusion: MT202 COV – A Necessary Evolution in Payments

The introduction of MT202 COV was a critical step in making the global payments system more secure and transparent. By ensuring that all cover payments include full sender and beneficiary details, financial institutions can now process payments faster while maintaining compliance with international regulations.

i) If a bank has a direct relationship with the beneficiary bank, it can use MT103 (serial method).

ii) If there are multiple intermediaries involved, the cover method (MT103 + MT202 COV) is preferred for speed and compliance.

iii) MT202 (without COV) should only be used for purely financial institution transfers, not for customer credit transfers.

In today’s financial landscape, MT202 COV is the standard for ensuring safe and transparent global payments. Understanding these SWIFT message types is crucial for professionals working in the payments domain.

 

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