3What is the National Payments System? The National Payments System (NPS) of a country encompasses everything to do with the movement of money from payer to payee.It covers all phases of payment from initial offer of a payment instrument to final settlement.It is the essential lubrication mechanism for the engine of the economy.
4The NPS is the infrastructure for moving money safely, efficiently and swiftly “Real” Economy (Buying & Selling)Banking System(Payment Systems)Interbank Transfer (Clearing) SystemsFinal Settlement
5Requirements Speed of payment Certainty of payment Reliability Safety and soundnessMinimum riskConvenienceLow costEquality of access and competitionConformity with international standards
6Components of a National Payments System Payment InstrumentsSystemsLegal and regulatory arrangements
8Systems Payments Securities Markets Central Bank Government Real Time Gross Settlement (RTGS)Low Value Clearing (LVCS)Card clearingSecuritiesCentral Securities Depository (CSD)Primary Market (auction)Secondary Market (trading)MarketsInterbank money marketForex marketStock ExchangeCentral BankGeneral LedgerCash managementGovernmentTreasury SystemsFinancial InstitutionsCore banking systemsCustomers’ accounting systems
9CSD RTGS LVCS BPNG Message handling General Ledger Cash Mgmt System NBFIsBPNGTreasury System (Govt.)Commercial Banks’ SystemsPrimary Market AuctionMessage handlingCSDRTGSLVCSSecondary Market TradingStock ExchangeCard Clearing Centre(s)Foreign Exchange MarketInterbank Money Market
10Real Time Gross Settlement (RTGS) At the heart of a modern NPSUsed for high-value, high-priority interbank paymentsOperated by the central bankPrimary objective is to eliminate systemic risk by ensuring that each payment is settled at the central bank:In Real Time (as soon as it is sent)Gross (one by one, no batching or netting)With finality (once settled, the payment is irrevocable)
11What Sorts of Payments?All payments in the RTGS system are bank-to-bank:Settlement of securities purchasesPayments of interest and maturity on Government /BPNG securitiesSettlement of interbank obligations (loans and repayments)Large or urgent payments by banks on behalf of customersSettlement of netted low-value clearing operations, e.g. cards (see later slides)Settlement of trading operations in equities and securities
12Low Value Clearing Systems (LVCS) The great majority of payments are low-value, high-volume. e.g:(cheques & warrants)Credit ordersSalary and pension paymentsATM, EFTPOS and credit card transactionsCollection of Government revenuePayment of utility bills (phone, gas, water, electricity, etc.)Regular customer payments (loan repayments, insurance premiums, etc.)It is inefficient and costly to handle these on a real time, gross basis (each payment by itself poses no systemic risk)Low value payments usually go through a bulk clearing process, often in an Automated Clearing House (ACH), with net positions settled in RTGS
13Automated Transfer System (ATS) The modern approach to clearing and settlementOne electronic system which combines RTGS and ACH functions for both:Low-volume/High-value payments andHigh-volume/Low value payments
14Central Securities Depository Holds information about all Government and BPNG securities:Details of each issue (date of issue, maturity, interest, etc.)Details of holders (identity, amounts held, etc.)Updated each time:an issue is completedA trade is settled on the secondary marketAn issue reaches maturityCalculates and pays interest, maturity payments
15Coupling of ATS and CSDBest modern practice is to have the ATS and CSD systems very closely coupled. Why?Two main reasons:Delivery versus Payment (DvP)Intraday liquidity management in the ATS
17Role of the Bank of PNG Responsibility Goal “…. to promote an efficient national and international payments system” (Central Banking Act 2000)Goal“.... improve payment, clearing and settlement systems to:promote efficiencyreduce risk andencourage electronic payments”( Strategic Plan)
182008 Review Extensive consultation Deliverables: Analysis of present NPSVision and Strategy for future NPSLegal recommendationsAction Plan
19Risks in the Present NPS (1) Systemic Risk (that one participant’s failure might threaten the whole system)could potentially happen in present situationSettlement Risk (that settlement will not take place as expected), e.g.:NBFIs are not participants in risk-reducing operations such as the Clearing HouseNo DvP for trades in securities (or equities)Credit Risk (that a party will not be able to settle an obligation), e.g.:banks lend to each other without collateralclearing operations outside NCD are not all settled on accounts at BPNG
20Risks in the Present NPS (2) Operational Risk (that systems, procedures or people may fail, resulting in loss or unavailability), e.g.:underdeveloped technological infrastructureCompetition Risk (that lack of competition may stifle innovation and increase costs), e.g.:no interbank card networksmall number of banksFraud Risk, e.g.:cheque and warrant fraudPhysical Risk (of violent crime), e.g.:general reliance on cash
212009 Actions Structure for co-operation (National Payments Council) Supporting legislation & regulationsAutomated Transfer SystemCentral Securities DepositoryInstitution-independent card switchElectronic payment systems for the unbanked
22National Payments Council PurposeOversee the development of the NPSCommitment and cooperation from all stakeholdersRoleFacilitate co-operation among stakeholdersAdvise BPNG on:design & development principles & optionsPreparing strategic documents, e.g. rules, procedures & agreementsPriority and scheduling of individual projectsMembershipRepresents all stakeholders in the NPSMeetingsChaired by BPNG Governor (or representative)Advisory, not decision-makingFaciltiate the sharing of information – the NPC members are the conduit by which information will be passed to members of their organisations. It is essential that they set up a process to facilitate information on the project reaching all staff involved.
23Legal and Regulatory Payments System Act Regulations Other agreements Submitted to Parliament first half 2010RegulationsMobile Payments (needed immediately to cover existing services)Other agreementsOversight of the NPS will be exercised by BPNGAs is usual practice, we are proposing the establishment of a Payments System Act. This is an all encompassing Act will give the BPNG the ability to oversee the National Payments System, as well as making operational rules enforceable.The Act would also include the establishment of a National payments Council.23
24ATS and CSD ATS will handle: CSD: Both systems tightly-coupled High value payments (RTGS functionality)Low value/high volume payments (ACH functionality)CSD:Electronic record of securitiesElectronic auction functionalityBoth systems tightly-coupled
25Impact on Stakeholders GovernmentSignificant cost savingsIncreased operational efficiencyReduction in risk: fraud and theftBusinessNew payment servicesLower costsPotential for direct connection to payment servicesCitizensAccess to new servicesMuch saferFor banks there will be significant operation al changes with a move towards electronic instruments. And therefore away from the traditional cash and cheques.
26National Electronic Card Switch Multiple EFTPOS networksWasteful on resourcesNo level playing fieldOpportunity to implement a nation wide card platformWider access for banksNot competing on physical networkOpens opportunities for other participants (Savings & Loans, Microfinance, Others)Decision for the National Payments CouncilDecision for NPC give the implications on participants of such a resource heavy project.26
27Payment Systems for the Unbanked ATS (and card switch) will provide a sound platform for introduction of more innovative systemsFor example, mobile phone-based systemsM-bankingM-paymentsCould be offered widely through NBFIsDecision for the market, not BPNG