1. THE SEMINAR ON RESPONSIBILITIES OF PAYING AND COLLECTING BANKS UNDER CITS
These are the photos of first seminar organized by Clearing Association of Bankers on Responsibilities of paying and collecting banks under CTIS at BOC auditorium on 8th January 2009.
This seminar was conducted by Mr. Ravi Molligoda a well known resource person in the banking circle.

2. PAYMENT SYSTEM IN SRI LANKA FOR RETAIL VALUE TRANSACTIONS – By Mr. P.D.J. Fernando Assistant Governor - Central Bank of Sri Lanka
Abstract
In Sri Lanka, cash continue to be the main payment mode. Though several payment instruments are in use, the public heavily rely on cheque for non-cash payments. However, in recent years the use of other noncash instruments namely direct fund transfers and card payments have undergone a rapid growth. Possibly the most fundamental element, leading to this growth is the application of Information Technology for executing and processing payments electronically by individual banks. The strengthening of the legal framework and the regulatory environment has also led to wider acceptance of electronic payments. So far, the on-line facilities provided, for electronic payments have been confined to accounts held within the same bank. The proposed implementation of the Common Payment Switch in May 2009 would widen the scope for electronic payments by facilitating inter-bank transfer of funds. The implementation considered as a landmark in the development of the financial infrastructure in Sri Lanka, will enable bank customers to pay and receive funds through their bank accounts within an automated environment and a closed network. LankaClear, the national clearing house will be the hub in receiving payment instructions from banks and clearing from the payer to payee banks. Implementing the Common Payment Switch, would bring substantial gains to the efficiency of the country’s retail payment system.

3. Introduction
An important function of the financial system is to provide an efficient way for households, businesses and government to make payments when they purchase goods, services or financial assets. The modern day transactions which involves movement of goods and services and financial assets across time, space and national borders are far more complex than simple transaction types of yesteryear.
However, payment intermediation services and payment instruments supplied by banks facilitate rapid transfer of funds between the transacting parties through accounts maintained with banks. The payment clearing organizations, inter-bank settlement facilities provided at the Central Bank, the banking procedures and rules are considered as the necessary elements of the enabling environment for circulation of funds in a secure and reliable manner. Long delays in cheque cashing and lengthy time requirements in transferring paper based payment instruments are impediments to development of an efficient payment system. Accordingly, the worldwide trend is implementing electronic options, taking advantage of the reducing costs in application of information and communication technology. In a market economy the payment system play an important role as a means of promoting economic efficiency and as a necessary channel for effective economic management.

4. Contd….
All payments essentially require transfer of money between two parties. The way in which the transfer is made is determined by the choice of the payment instrument and the channel. In a simple transaction where the mode of payment is by cash, the financial claim is extinguished and the payment obligation is completed at the time of payment. This is because the transaction is conducted ‘face to face’ and the exchange of goods/services and the payment is simultaneous with immediate transfer of value. In cash transactions a payment intermediary is not required. Unlike cash payments, for payments involving non-cash instruments such as cheques, pay orders, credit cards are not finalized at the time of payment. Instead they entail transfer of money between two accounts at banks where the banks act as payment intermediaries. They are therefore said to be account based instruments.

5. The main characteristic s of payment instruments are:
Physical form of payment instruction; Whether the physical form is paper, such as cheques and payment orders or non-paper such as by a payment card or an electronic instruction arranged by the sender of payment instruction arranged in person, by telephone or fax.
(B)
Security features; the means of checking that the payment instruction is genuine and has not been fraudulently produced. Traditionally this was by means of the signature. In the present context it is by means of a Personal Identification Number (PIN) and in the case of electronic instructions by digital signature.
(C)
Credit based or debit based transfer; When a credit based instrument is used, for example pay-order, the sender of the payment instruction instructs directly to the bank for onward transmission of funds to the receiving bank.

6. Payment Instruments ( Contd..)
When a debit based instrument (such as a cheque) is used the sender gives the payment instruction to the receiver. The receiver then will pass the instruction to his/her bank which will in turn pass it to the sender’s bank. Here the payment is legally deemed to have been made prior to the receiver obtaining good and final funds. In general a credit based system carry less risk because a payment cannot be made unless there is cash to cover the transaction value. It is efficient because the costs of a credit transfer system do not involve return items which are expensive to process. A credit based system could be more conveniently automated than a debit based system.
The most important characteristic of a payment instrument is wide acceptability in transferring value in trade and exchange. Acceptability is determined by the total cost of using a particular instrument in a transaction. This involves the cost of production, clearing and settlement costs as well as the indirect costs related to convenience and risk of loss through theft or fraud.

7. Inter-bank fund transfers
The inter-bank fund transfers are classified into retail transfers and wholesale transfers. Wholesale transfers consist of direct payments between banks for their own account payments, which require rapid inter-bank fund transfers in a very secure transmission environment and execution of their customer’s urgent time critical payment orders. Retail fund transfers involve an individual as one counterparty and another individual, company or government agency as the other. The counterparties can be engaged in a relationship involving one-time payments or in a contractual relationship involving recurring payments. Such payments can be face-to-face or remote. As a result there are several retail payment instruments, each with different characteristics that accommodate particular types of relationships.
The initiation of a payment is the first and in many ways the most visible step in the process of transferring funds between bank accounts of different customers. A fund transfer is initiated by the transmission of a payment message requesting the transfer of funds to the payee. In principle the payment message will instruct a credit transfer or a debit transfer. Banks as payment intermediaries will process the payment messages according to pre-defined rules and procedures. Processing the payment messages would include the stages of identification, reconciliation and confirmation. The global trend is to go for electronic by automating the transmission and processing of payment messages utilizing information technology.

8. Inter-bank fund transfers (Contd.)
The second key element is clearing, at a central location, through which payment instructions are passed. The clearing operations require the collecting, together, the details of in-and-out payments submitted over a specified time period. Here the inter-bank credit and debit transfers are netted out and the positions for the actual transfer of funds between the payer’s bank and the payee’s bank is established and confirmed. These positions are then forwarded to the Central Bank for settlement.
Accordingly, there is a time-lag between the submission of payment instructions and final settlement. In some systems payment instructions pass through the clearing process on to the funds receiving bank before settlement takes place. This has implications for the risks in the payment system.

9. Inter-bank fund transfers (Contd.)
It is the third element the settlement which discharges the obligation of the payer bank to the payee bank in respect of the fund transfer. The final settlement of the inter-bank fund transfers is based on the transfer of balances from the payer to payee on the books of the Central Bank, the banker’s Bank. The settlement systems are grouped into two types; gross settlement systems and net settlement systems. Gross settlement systems involve settlement of individual payments, where each payment is settled if sufficient liquid funds are available in the settlement account of the payer bank. Generally the gross settlement principle is adapted in high value transfers among banks for their own account payments in open market operations, securities transactions, the domestic currency leg in foreign exchange transactions or transfers involving their corporate customers. Net settlement is prevalent in settling the payment obligations of banks arising from transactions of their customers, which are of relatively smaller in value but substantially higher in volume compared to wholesale payments. The number of settlement account entries is reduced by the process of netting each bank’s out-payments against in-payments.

10. Current Scenario in Retail Payments in Sri Lanka
Being a pioneer in the South Asian Region to adopt technology based financial services, Sri Lanka has a wide range of payment instruments and payment services to support the country’s Banking and Finance Industry. In a nutshell, payment services of financial service providers such as banks provide paper-based instruments, Cheques and Pay Orders, card-based instruments namely, Credit Cards, Debit Cards and Pre-paid Cards and electronic payments such as SLIPS, Internet Banking and Mobile Banking. Meanwhile, infrastructure service providers supply island-wide communication networks for the safe and secure transmission of payment instructions to financial and commercial entities. The Clearing of the various payment instruments from paying parties to receiving parties is performed by LankaClear Pvt Limited, the national clearing house which is jointly owned by the licensed commercial banks and the Central Bank.

11. The final step of the aforesaid processes on fulfilling the inter-bank payment obligations is realized through the transfer of funds between banks of transacting parties by debiting the settlement account of the paying bank and crediting the account of the receiving bank, maintained at the Central Bank. The stability, security and operational reliability of payment systems and clearing and settlement operations are always ensured through the closely integrated processes adopted by Banks, LankaClear and the Central Bank. The framework for the country’s payment infrastructure incorporating futuristic payment technologies has been developed under a medium term plan formulated by the National Payment Council which is chaired by the Deputy Governor of the Central Bank in charge of the Financial Stability cluster. The envisaged developments under this exercise are focused on creating a conducive environment for spearheading electronic payments for the financial services industry.
Contd..
In Sri Lanka, currency is the predominant mode of payment. A number of recent trends and developments that affect the use of established retail payment infrastructure are apparent from the data in Table 1 & 2.

12. Table 1: Payment Instruments – Comparison of Usage; 2004 to 2008 in Volume (‘000)
Growth Rate %
2004
2007
2008
2008 over 2007
Cheque
38,992
46,148
44,550
- 3.5
Direct Transfer
2,914
9,062
11,483
26.7
Credit Cards
9,759
18,261
18,866
3.3
Debit Cards
355
863
2,174
157.0

13. Table 2: Payment Instruments – Comparison of Usage; 2004 to 2008 in Value (Rs.Bn.)
Growth Rate %
2004
2007
2008
2008 Over 2007
Cheque
3018
4296
4693
9.2
Direct Transfer
175
380
437
15.0
Credit Cards 33 67 73
9.0
Debit Cards 1 3 6
100.0

14. Cheque volumes which has been growing, at decelerated annual rates in recent years have displayed a marginal drop in The other non-cash based instrument, credit transfers and card based payments have undergone a sharp growth. Possibly the most fundamental element leading to growth in these instruments is the application of information technology for executing and processing payments electronically by individual banks. The strength of the legal framework and the regulatory environment has also led to wider acceptance of electronic payments. Rapid growth in direct transfer is solely due to private and public sector organizations increasingly resorting to Sri Lanka Inter-bank Payment System (SLIPS) for payments of employee salaries. Using SLIPS, salaries of employees could be credited to their accounts, wherever they are, without using the laborious practice of writing cheques and posting them to the banks where employees’ accounts are maintained. SLIPS support both credit transfers and direct debit facilities. However, the potential of SLIPS for using direct transfers in bill payments and payments in recurring transactions such as insurance premia, rates and tax payments remain largely unexploited

15. Proposed On-line Electronic Fund Transfer System
The Monetary Board, in keeping in line with the objective of promoting a nation-wide non-cash retail payments system, recently sanctioned LankaClear to operate a Common Payment Switch (CPS) for integrating the transmission and clearing of electronic payments between banks to meet the following objectives:
Introduce international best practices in clearing and settlement of electronic
fund transfers among banks for retail payments;
Improve efficiency and service to bank customers;
Improve efficiency and service to participant institutions i.e. banks;
Reduce the clearing and settlement risks among participants;
Serve as an infrastructure for on-line real-time fund transfers, paving the way
to Straight Through Processing (STP);
Enable rapid economic activity through faster payments; and
Facilitate the integration of future financial services.

16. The CPS system will consist of three main components:
A Central On-line Transaction Processing system providing transaction interchange (switching) facility to Member Banks.
On-line Bank Interface Module System at each Member Bank linking Core Banking and Card Authorization Hosts to the On-line Transaction Processing system centrally located at LankaClear
A private communication network connecting each bank to the CPS

17. During its full operation, CPS is expected to be functional 24 hours a day, supporting on-line real time fund transfers/payments between banks to enable bank customers to initiate transactions at any time of the day and to make payments through telephone, SMS or Internet even during non-banking hours.. Payment instruction would be transmitted through CPS only if sufficient funds are available in the sender’s account to cover the transaction value. In order to mitigate settlement risks, inter-Bank settlement of CPS transactions will be conducted twice on any business day at 9.00a.m and 2.00 p.m. via the Central Bank’s RTGS system.

18. Transaction Types Phase 1 Phase 2 Account to account fund transfers
Transactions to be supported during the Phase 1 and Phase 2 implementations of the CPS are -.
Phase 1
Account to account fund transfers
Loan repayments
Salary payments
Bill payments
Inward remittances
Direct debit transactions
Local credit card payments
Phase 2
Personal Identification Number (PIN) based transactions
Electronic Cheque payments

19. Other Salient Features
CPS will initially focus on giving same day value for retail fund transfers/payments effected by bank customers until 2.00 p.m. For transactions performed after 2.00 p.m., the availability of funds will occur on the next business day. Transaction Limits and Bank Exposure Limits are imposed on the switch to control money laundering and bank liquidity exposures. The CPS is tailor-made for retail value fund transfers. Also, to ensure confidentiality, authenticity and integrity of data and non-repudiation of transactions, CPS will apply digital signatures and data encryption standards complying with international best practices. LankaClear would also be the Certification Service Provider for the financial sector.
The new payment system will commence operations from mid May 2009 with seven participant banks. A further set of eight banks is due to join in, by end July All licensed commercial banks are expected to function as member participants of CPS before end National Savings Bank to would join the system through Bank of Ceylon.

20. Other Salient Features (ContD..)
It is noteworthy to mention that all activities of the CPS project from planning to implementation stages, including the development of the switch, have proceeded entirely with local expertise. Leadership and guidance from the Central Bank and the National Payment Council and the proactive and enthusiastic participation by all commercial banks and Sri Lanka Bankers’ Association have immensely contributed to maintaining steady progress on developing the Common Payment Switch, which is a first in payment switching in the South Asian Region.
In conclusion, the main challenge ahead is to promote wider use of the electronic mode of payment across the country. This requires addressing the constraints that impede the adoption of electronic payments. The primary reason for slow space of adoption is the lack of awareness, particularly on the part of the bank staff at the branch level the primary interface with the public. The other side of the coin is the lack of customer education and awareness about the features and benefits of the electronic fund transfer system, which precludes its adoption.

21. Other Salient Features (ContD..)
Along with the announcement of implementation of the CPS, banks should launch a systemic awareness campaign for their customers to educate the suite of electronic products offered to them. This would reduce the avoidable paper work in the operation of the banks. It would also improve the quality of customer service and eventually would bring greater business volume. Companies and business establishments have incentives to switch over to electronic payments, owing to the savings from having accounting, invoice and payment information, all, in electronic form. Currently when internal accounting information is electronic, actual invoice, billing and payment process is paper based. This is an expensive and error prone arrangement which if eliminated can result in reduced costs. The government sector is an important player in the payment system. With rapid computerization taking place in government institutions they should pursue on the advantages of migrating to electronic means in making and receiving payments.

22. Thank You..
Published by :
Clearing Association of Bankers