Understanding Flow of Funds
It is extremely important in the banking & payments world, to understand the Flow of Funds (FoF). You may understand your business well, someone listening to you for the very first time, may not. Many questions might be going through a person’s mind when you are explaining your transaction and transaction flows. A similar analogy is like explaining the route you will take for a trip to someone, very quickly, and verbally.
It would be difficult to comprehend.
A flow of funds can best be thought of as a map. It shows the origination point, from where money started its journey, and then the route it took along the way to reach its final destination, the termination point. In between all the roads and highways the money took, the pitstops, etc. are all explained in a flow of funds.
By looking at a FoF, can immediately get a sense of direction and get your bearing straight with respect to the law of the land and regulations that govern it.
For any financial institution to better understand your business and business model, the funds flow diagram is extremely crucial. The diagram in many ways is a time-motion diagram depicting the flow of funds from the start of a transaction till its logical end.
It provides a unified, clear-cut blueprint on your transaction set and how the funds will be flowing in your proposed setup.
A properly constructed flow of funds diagram would identify various elements of a transaction, such as:
- Originator / Originating Institution
- Terminating Institution
- All intermediaries involved in the transaction
- Ownership of funds
- Fees and splits
Here is a sample time-motion flow of funds diagram. This just serves as an example as to how a funds flow diagram should look like:
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