global reform of payment infrastructure instruments, systems and retail banking finance forum 2002 -...

Global Reform of payment infrastructure

instruments, systems and retail banking

Finance Forum 2002 - World BankJune 20

[email protected]

Washington DC , June 20 , 2002 World Bank / FSD / C G 2

Agenda

• Introduction (definition)

• Strategic issues (objectives, stakeholder, scope)

• Reform Approach (principles, phases, I, II, III)

• Results (decisions and project implementation)

• Conclusions


Introduction World Bank experience

• World Bank’s experience in many countries in transition or development (more than 50 countries)

• Lessons learned – To clearly identify objectives, constraints, opportunities

– Stakeholders should be involved early in the process

– Cooperation and Competition are not antagonistic

– Reform should be “business driven”

– Technology is only a powerful mean and an enabler to implement feasible and reliable solutions


IntroductionPayment infrastructure objectives

• Payment infrastructure final target: to transfer value from one participant’s account to another one (bank’s or customer’s account)

• It is composed of several main components – International standards/rules– Legal rules ( laws, regulations, contract)– Instruments (credit/ debit orders ; paper/electronic)– Participants (clients, banks, Central Bank, operators)– IT Infrastructure ( accounting, clearing , settlement,

risk management, liquidity management, transfers )


IntroductionPayment Infrastructure Quality

• Quality of payment infrastructure covers:– Fast settlement (end to end): instant, end of day– Security (fraud , operational risk)– Finality (value available-in a predictable time)– Cost (acceptable for all participants)– Transparency (clear information is provided to

all participants regarding payment process status, results, potential risks)


INTERBANK SYSTEMSINTERBANK SYSTEMSTransportation/Exchanges

CLEARING

Payment System Architecture is composed of three main layers

Client A Client A1 Client A2

Branch A1 Branch A2

Head Office BANK A

Client B Client B1 Client B2

Branch B1

Branch B2

Head Office BANK B

VALUE transferred from Bank to Bank in

Central Bank’s Books

SETTLEMENT betweenBranches and Customer’s

Accounts

CENTRAL BANKCENTRAL BANK

FINAL SETTLEMENT

1

2 3 3

3

2

2

Risk/Credit Management

BANKSBANKS

SecuritiesFinancial markets


Functional Architecturecovers many functions/systems

Real Time Gross SettlementLarge Value, Liquidity

NET Clearing

LOW VALUE

SECURITIES

ATM, POS, PHONE, INTERNET, E-COMMERCE

RISK / CREDIT

MANAGEMENT

Bank branch

Commercial Banks’ Head Offices

Bank branch Bank branch Bank branch

Clients Clients Clients Clients

CARDS

INTER-BANK layer

INTRA-BANK layer

CENTRAL BANK layer

Delivery channels


Complex migration processpaper -> electronic, local -> national

Local offices

Regional offices

Exchange interface

Queuing mechanism

Settlement accounts

Net systems

interfaces

CB Interfaces Liquidity

General ledgerMonitoring

Real Time Commercial ‘Banks Interface

Real Time Gross Settlement System RTGS

Central Bank

Local clearing

Regional clearing

National Clearing Centres

End of day

Net balances

Low value payments

HQ commercial banks

Large value payments

Commercial bankspaper

Balances Electronic transactions

Securities

Cards

Electronic

paper


Large value system=> Low volumesLow value systems => Large volumes

• FRANCE: year 1999– Population: 60 million– Customers accounts:

• Banks: 45 million, Post Office: 10 million

– Branches• Banks: 25 000, Post Office: 17 000

– Low value net clearing system : value: 4,300 billion Euros (5%)• Checks: 3.4, others: 6 billion (including card transactions)

– Large value systems : 6.6 millions , value: 75,000 billion Euros– Cards: (year 2000) dramatic increase after 1985 from 5 to 20% /y

• 40 million ; 3.3 b payment, 1 billion cash withdrawal• ATM: 35 000; POS: 740 000; telephone booth: 210 000;• Minitel: 600 000; TV decoder: 1 700 000; mobile phone: 200 000.


• PORTUGAL: year 1999– Population: 10 million– Customers accounts:

• Banks: 20.5 million, Post Office: (negligible)

– Branches• Banks: 5,000; Post Office: 1 000

– Low value net clearing systems :• Checks: 870, others: 250 million (excluding card transactions)

– Cards: • 12.9 million ; 510 payment, 290 million cash withdrawal• ATM: 8 850; POS: 81 000; • E-money cards: 3.4 million ; transactions 4.9 million

Large value system=> Low volumesLow value systems => Large volumes


Payment Reform Objectives

• Economy– Facilitate Industry and economic development– Increase efficiency of Government's tax collection and

expenses payments

• Population– To offer better banking services to all potential

customers (range of payment instruments/ credits)– To prepare easy insertion of e-payment , e-banking and

e-commerce environment– To facilitate access to basic needs like water/electricity

by pre-paid cards payment


Financial sector objectives

– To develop business – To increase depth and resistance to shocks– To complying with international standards (BIS

CPSS « Core Principles) attached to clearing and settlement systems :

• Clear and fair legal framework , • Credit and liquidity risk, • Efficiency, • Transparency


Stakeholders consensus is a prerequisite to success

CENTRAL BANK

GOVERNMENT

COMMERCIAL BANKS

INDUSTRIES

MERCHANTS

SME’S

INDIVIDUALS

ADVISORY COUNCIL

ONPAYMENT REFORM


Reform Approach • MAIN PHASES

– Candid diagnostic (SWOT, BIS/CPSS principles, FSAP)– Strategy and long term vision (business, legal, technology)– Systems' Architecture design (shared / non shared)– Financing and Prioritization (budgeting and planning)– Implementation of systems architecture (project management)– Evaluation (performance indicators)– Evolution and adaptation (quality, costs recovery)

• Key issues– Legal framework, standardization, cooperation/competition– Project management/organization


List of frequently observed deficiencies

– Cash and paper based instruments are dominant, – Transaction processing is unreliable (lengthy delays in

clearing and settlement process, uncertainty in finality)– High rate of rejection or return, fraud,– Central bank and commercial banks’ information

systems are non compatible ( no straight through processing)

– Telecommunication services are underdeveloped – Population access to services is low (10%)– Retail banking and financial services are poor– Lack of transparency in process status


How to move

• Success conditions – Strong commitment of the Central Bank and

Government authorities in Reform process

– Long term approach supported by a long term business vision shared by major stakeholders

– Development of standards, norms, legal framework

– Realistic implementation schedule of components supported by a large cooperation to accelerate and optimize investments in technology, human resources, marketing, culture changes,


Participatory reform approachprinciples

• 3 to 4 Workshops (4 to 5 full days each) to cover– Analysis and diagnostic

– Strategy and business vision,

– Global architecture design,

– User’s requirements per components

– Prioritization, budgeting and planning

– Implementation Plan

– Evaluation methodology

Duration of the study phase 9 to 12 months.


Participatory reform approach principles

• Workshops/ Seminar organization– Day 1: Plenary session: Experts conferences, example

of Reforms, organization of groups and work,

– Day 2 to 3: three to five working groups in parallel; themes: business strategy, legal framework, large value transactions, low value transactions, cards, technology

– Day 4: Plenary session: Reports of Working groups and discussions

– Day 5: General report, working plan, conclusion


Workshop’s Participants ( 80 to 100 /workshop)– Central bank ( national and regional levels)– Commercial banks ( experts and managing directors)– Governments ( Ministry of finance, …)– Consultants ( Legal, Large value, Low value,

Cards,Technology)– Central Bank experts ( Tunisia, Swizerland, France)– International institutions ( WB, IMF, BIS)

one major condition of success : to maintain continuous work between workshops seminars

Participatory reform approachprinciples


Participatory reform approach implementation study : phase I

First workshop/seminar objectives• to educate and create motivation and consensus • to define (first draft)

– A long term and agreed business vision

• to identify– Global functional architecture and major components

– Legal issues to be addressed

– Technology issues to be addressed


Business Strategy should combine 3 dimensions ( at least)

Delivery Channels

BranchesATMPOS

Home bankingMobile phoneInternet

Telecommunication network

Phase I: Business strategy

10* thousand million access pointsthousand

Banking products

Customer’s segments

Individuals Merchants SME’s Industry Government


Phase I: Payment Instruments strategy : Paper => Electronic => Virtual

High value

ValueNumbers

Cash Cards Checks

ElectronicDebit/Credit orders

Electronic purse

some (or more) paper transactions

billion thousand

millionthousand


Phase I : Payment instruments Checks: an obsolete product ?

• slow or rapid decline ( % of non cash transactions in nb)

0

10

20

30

40

50

60

70

80

90

1990 1997

USCanadaFranceAustraliaBelgiumGermanyJapan


Phase I: Payment instruments Direct debit

• Direct debit: a random evolution ( % of non cash transactions in nb)

0

10

20

30

40

50

60

1990 1997

USCanadaFranceAustraliaBelgiumGermanyJapan


Phase I: Payment instruments Debit card

• Debit card: a sharp development ( % of non cash transactions in nb)

0

5

10

15

20

25

1990 1997

USCanadaFranceAustraliaBelgiumUKGermany


Phase I : Payment instruments a whole range is available to serve the population

• Cash• Checks• Direct debit• Cards ( prepaid, debit, charge card, credit)• Credit orders,• Tele-banking ( phone , e-banking, e-payment)• Electronic money/ purse / wallet• Letter of Exchange


Phase I: Payment instrumentsconclusion

Strategy: to develop a whole range of PAYMENT INSTRUMENTS

• Each payment instrument corresponds to a specific requirements depending on the culture and financial education of the customer

• Payment infrastructure should be fully adaptable to changes


Phase I :Functional Architectureusers and business requirements

Real Time Gross SettlementLarge Value, Liquidity

NET Clearing

LOW VALUE

SECURITIES

ATM, POS, PHONE, INTERNET, E-COMMERCE

RISK / CREDIT

MANAGEMENT

Bank branch

Commercial Banks’ Head Offices

Bank branch Bank branch Bank branch

Clients Clients Clients Clients

CARDS

INTER-BANK layer

INTRA-BANK layer

CENTRAL BANK layer

Delivery channels


Phase I :Functional Architecturesome findings

• One centralized single settlement account per financial institution to reduce liquidity and credit risk

• Each function may be processed in one or several systems, shared among banks or not , however one major objective is to avoid duplication and centralize data and processes to reduce costs and enable an efficient risk management mechanism, ( trade off between cooperation versus competition, cost /benefit analysis)

• Electronic clearing system should process all payment instruments

• Risk/Credit management system should cover all instruments

• Anti Fraud fight requires specialists in close relation with police and justice (speedy reaction and decision are key factors of success)

• End to end processing and efficient connection between inter-bank and intra bank systems and networks are key factors to be considered in the architecture design, security features, standards,


Participatory reform approach implementation study : phase II

Second workshop/seminar: in depth work– to confirm and validate the business vision

– to define users’ specifications and functions of the infrastructure components to be implemented

– to progress on standardization, legal reform and regulations

– to identify technical investments to be installed in Central Bank, at inter-bank level and inside each individual bank


Phase IILarge value system (RTGS)

Commercial Bank HO A

Commercial Bank HO B

Network

Central Bank General Ledger

Participant Interface

Settlement Account Management

(debit A and credit B)

Real Time Transactions Interface

RTGS Central Bank


Phase IILarge value system (RTGS)

Commercial Bank HO A

Commercial Bank HO B

Network and Vor Y Copy Service

CB General Ledger

Participant Interface

Settlement Account Management

(debit A and credit B)

Queuing

Optimization

Real Time Transactions Interface

CB Operations

LVS/RTGS

Net Systems Interface

Central Bank

Liquidity


Phase IILarge value system (RTGS) some findings (1)

To specify which transactions are processed : credit, debit, balances – money market, foreign - multi-currency, - minimum value- etc.)

To define optimum level of liquidity required to avoid settlement delays and grid lock risks on one side and financial costs for commercial banks on the other side

To define liquidity management mechanism ( REPO, Guaranty, intra-day credit,…)

To define processing of foreign transactions and relations with international systems

To define quality of service and acceptable processing costs


Phase IILarge value system (RTGS) some findings (2)

To select functions to be included in the system and their required sophistication

To define queuing processing ( FIFO, cancellation, priorities, ) and optimization methods

To define daily processing profile: opening hours, cut(s)-off), and volumes to be processed (how to smooth volumes all along the day)

To define messages to be exchanged and information accessed (in real time, at opening and closure, to Central Bank departments, to sender and beneficiary commercial bank, to netting systems operators, etc.)

To define level of network security for exchange of financial and information messages


return

Electronic Clearing House

National level

Regional Clearing systems/houses

National level

Branch A1Branch B1

Branch C1

Paper Transactions

HO A1HO B1

HO C1

RTGS SystemHO Central Bank

balances OK

presentation

Information (debit) balances

Commercial Banks

Clearing houses balances

Phase IILow value net clearing system (ECH) architecture

Automation capture

Electronic Transactions


Phase IILow value net clearing system (ECH) flow of data

Payee or Presenting BANK

A

Central System

Electronic Net Clearing system

MULTILATERAL BALANCES

information

MICR Data and image (checks)and other electronic transactions

information

Settlement in

RTGS

Payor or Receiving BANKPayor or Receiving

BANKPayor or Receiving BANKS B,C,D,

Continuous flow of files

Once a day or more

information


Phase IILow value net clearing system (ECH) findings

Electronic transactions should be legally or industry wide accepted

It is recommended to process all kind of transactions (credit or debit orders, check image, cards, etc.) in a single Electronic Clearing House System (ECH) for economic and risk management reason

All electronic transactions are sent by commercial banks to the most convenient regional or national receiving point including “out of station” transactions

Paper documents are processed and stored independently from the electronic data and sent to the issuer bank’s branch only for further control , claims or and if it is required, for legal “proof”

Rejections cases have to be very carefully regulated (including delays)

Protections rules against netting settlement failure and systemic risk have to be efficient, including all messages exchanged between ECH, Banks and RTGS


Phase IICheck truncation process example

Check ACheck ACheck A

Clearing based on MICR data

calculation ---

many schemes forexchange of images exchange of paper

Check A Check Aon request

data and image

MICR data MICR data

Checks are stored in Bank B

Depository/certification

Imageaccess

Bank A head office branches

or

Bank B branches head office

Imageaccess

Imageaccess

Check A


Phase IICheck truncation process findings

• MICR data and imaging are captured by payee bank B and sent to a national clearing house in a centralized process

• Checks are stored in Bank B (Payee Bank)• Clearing process is based on data files that can be received and

exchanged all day long (continuous day)• More than one cut off time allows to settle balances many times a

day• Check images can be exchanged and/or stored in a Central Check

Image “Depository” easily accessible on line• Payer Bank controls most check based on data and/or their image

(authentication, signature, funds available) and in case of doubt ask for physical paper for further acceptance or rejection


Phase IICard based inter-bank architecture

BANK A BANK B

National Switch

POS ATM ATM

SI Card System Card System

SI

Inter-bankNETWORK

SI

BANK C


Phase IIInter-bank card arrangement principles

A whole range of products and services should be distributed to customers under free competition (no standard customer’s fees)

A Core Inter-bank service for all customers(minimum customer’s rights) should be agreed among banks as well as inter-bank fees

Cooperation and sharing of several functions and systems should be agreed among banks

Fraud and Incidents support systems have to be shared for better efficiency

Service quality common monitoring ( availability and efficiency) is a key success factor

Several options are available for authorization’ systems


Phase II Card transactions: 4 levels of authorization

Acquiring Issuing

Authorization center( limits and delegation)

Acquiring of transactions

Bank A

Real time customer account position processing

Authorization by issuing bank’s system

(limits)

Smart card’s function: to secure the card holder identification

Authorization processing

ATM network

POS network

1

2

3

4off line


Phase IICard transactions: batch processing settlement

Acquiring BANK or service provider / Acquiring Back Office

Sorting (on us transaction)

Acquiring

of transactions

Preparation of Files for Electronic Clearing

Credit and debit own customers account

Telecollection process

ATM network

POS network

Batch process


Phase IICard transactions: authorization and settlement

• Several schemes of authorization: trade off between costs and risks between off line or full on line processes

• Chip card or smart card can decrease dramatically the level of fraud and enable a secured off line process for payment (POS)

• Clear rules should be defined for transferring risk between card holder, merchant, merchant’s and card holder’s banks

• Off line transaction collection ( batch processing and reconciliation) may enable easier control of risk and fraud

• It is of major importance to differentiate Inter-bank’s fees (cooperation) from customers’ fees (competition)


Paiements de gros montant en temps réel

Gestion des comptes de règlement

(débit A et crédit B)

Siège banque A

Files d’attente

Siège banque BRéseau

BA ou SWIFT (?)

Optimisation

Interface des échanges temps réel

Opérations BA

Système comptable BA

RTGS Siège BA

Op. compensation

Interface participant


Phase IIE-money /purse/wallet process (example)

account

account

CustomersMerchant

Accounts Banks A,B,C Bank’s B

E-money company group of

transactions

e-moneyLoading

E-purses POS

2 000 (credit)

- 10 ,30,50,-10., 50

150

150 (debit)

Loading the E-Purse Paying with the E-Purse

+ 500,200,200,100, 1000,

+ 10,30,50, 10., 50

- 500,200,200,100, 1000,

150 (credit)

2 000 (debit)


Phase IIE-money /purse/wallet findings

Several schemes of loading: ATM, POS , home PC readers, etc … and storing the “mirroring” of the e-money: banks, service provider, merchants

Potential creation of money has to be carefully controlled

Risk : security and safety of transfer of value from one chip card or to another chip card or PC or other memory and on counterfeit chips

No matching between loading amount and merchant credit nor between the remaining fund on e-cards and the balance in the e-money company,

E-company should guaranty a fully safe cash deposit and should be supervised as deposit taking institutions by the Central Bank

E-card individual transactions should be archived somewhere for statistic and trace-ability, fully anonymous cards should be avoided…


Phase IIMulti Channel, approach

Bank's SERVICES

Bank’s Information System

Brick and Click

Teller ATM POS Phone PC

Mobile


Phase IIInternet , cross-channel approach

Bank’s IS

Anytime, Anywhere, Anyway

Services Provider IS Merchant's IS


Phase IIElectronic, Internet banking, main issues

Three main models:– Pure, many failures: Security First Network Bank, Unofirst (BBVA)

– Click and mortar, big success: Well Fargo, Nordea

– Online extension…from brokers, ( E*Trade)

• Success factors:– No revolution=> gradual approach,

– Large customer base => a key factor

– Sound marketing and business strategy and customer’s needs focus

• Issues to address– Economics (costs – iceberg structure-, and revenue -advertisements risk- )

– Standardization (technology, procedures)

– Rules and regulation ( privacy, risks, security)


Phase IIGlobal architecture complexity

CardsATM

Check

Debit / Creditorders

E-cardR

ecei

vin

g B

ank

Bra

nch

Pap

er t

o E

lect

ron

icD

ata

cap

ture

POS

Receiving BankHead office

RTGS

Card processing Center(s)

National Electronic Clearing House

Beneficiary BankHead Office

General Ledger CB

Check image storage MICR data and Two sides checks scans

? SWIFT ?

E-money Company

CB Access Point

CB Access Point

CB Access Point

Payment incidentsFraud, Abuse, …Data base

CB Access Point


Participatory reform approach phase III Reform design validation and Implementation Plan

• Business vision and strategy• Legal framework reform plan• Architecture design and components to be installed• Users requirements and technical specifications of each

component ( RTGS, Low value, Truncation, Cards, Risks)• Technology framework and normalization• Investments sharing among participants and external financing • Implementation plan priorities, schedule• Project management/organization

• Reform Strategy and Implementation Document


Participatory reform approach Results achieved

• Motivation, information and consensusmore than 500 persons involved in the process

– Central bank ( national and regional levels)

– Commercial banks ( experts and managing directors)

– Governments ( Ministry of finance, …)

– Consultants ( RTGS, Electronic Clearing, Cards,Technology. Legal)

– Central Bank experts ( Tunisia, Swizerland, France)

– International institutions ( WB, IMF, BIS)



• Strategy– Promotion of new electronic instruments and

low cost decentralized check truncation mechanisms

– Development of retail banking (customers’ accounts, basic banking services)

– Inter-bank initiatives (cards, standardization, legal)

– Clearing and Settlement architecture scheme

– Shared telecommunication network

– Legal framework supporting Reform



• Design, user requirements specifications– Large value transactions: RTGS,– Electronic clearing house ( all instruments)– Checks truncation– Inter-bank card association and center(s)– Telecommunication network upgrade– Legal framework supporting Reform



• Implementation– Priorities,

– Project organization (CB, Financial Institutions)

– Legal reform action plan

– Creation of an Institution in charge of Norms and Standards

– Budget and finance (cost around $US 20 million)

– Schedule ( 4 to 5 years)


Participatory reform approach Project organization and costs

Steering Committee

Global Project Team

Director,Sub-project leadersLegal,Finance and BudgetTechnologyTraining

3 4.5

Sub projects teams

RTGS ACH/ Net Systems Card systems Telecommunication Risk Mg. Training

4.5 2 0.5

Commercial Bank’s projects teams

Advisory CouncilTOTAL : US$ 20 million

1.5

4


Participatory reform approach Main difficulties

• Project organization / management• Identification of (good) consultants / experts• Level of knowledge of participants (heterogeneous)• Real work between workshops/seminars • Choice between urgent and non urgent requirements • Tight time schedule and limited human resources

Cooperation versus competition / Consensus


Participatory reform approach Conclusion

• Candid and clear assessment ( Strength, Weaknesses, Opportunities, Risks,)

• To agree on a long term shared business vision (trade off between ambition and feasibility)

• Strong cooperation among all stakeholders• Clear Agreement on technical design and

standards• Professionalism in project management,

budgeting, scheduling and implementation


Participatory reform approach Some thoughts

• Payment activity and systems constitute a key infrastructure of the financial sector in a country

• It is a field in which several stakeholders, even with conflicting interests, should share a common and realistic long term business vision and technology infrastructures

• It is a field in which technology play a key role but should not lead the process

• The process should be business and social driven

• Participatory approach methodology: key success factor to ensure consensus, cooperation, motivation, transparency


Payment Reform Success

global reform of payment infrastructure instruments, systems and retail banking finance forum 2002 -...

Documents

low volumeslow value

fast settlement end

world bankjune

large volumesfrance

payment process status

post office

participants account

end of daysecurity fraud