Sr Joint Director Payment Systems Department State Bank of Pakistan Agenda Understanding Payment Systems Payment Instruments Clearing Settlements Regulatory Objectives Regulatory Framework ID: 1028884
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1. Payment SystemsZamir Afzal KhanSr. Joint DirectorPayment Systems DepartmentState Bank of Pakistan
2. AgendaUnderstanding Payment SystemsPayment InstrumentsClearingSettlementsRegulatory ObjectivesRegulatory FrameworkInitiatives
3. Payment SystemsDefinition “A set of instruments, procedures, and rules for the transfer of funds between or among participants; within a geographical boundary. The system includes the participants and the entity operating the arrangement e.g. retail payment system and LVPS”MarketsRetail and WholesaleCapital and CommodityMoneyFX
4. Payment SystemsDelivery Systems (Ownership Transfer like CDC etc)Relationship (Market & Infra)Market Related Trade Reporting System(s)4RetailWhole Sale (Corporate)Foreign Exchange MarketCommodity MarketCapital MarketMoney MarketTradingBuyerSellerBanksDeal MakingDeal CompletionDeliveryPaymentSource: NPS South Africa
5. Relationship (Market & Infra)Trade Reporting SystemsKATSReutersDelivery SystemsCDCPRISM (securities)Payment & Settlement SystemsCheque Clearing SystemsInterbank Fund TransfersPRISM (RTGS) System
6. Payment InstrumentsCashCardsCredit Transfers (IBFT, RTGS, SWIFT)ChequesDigital Currencies (BitCoin)
7. Characteristics of Payment InstrumentsPush InstrumentCredit Transfers, No Credit RiskLess Complicated Pull InstrumentCheques, Cards Credit RiskMore ComplicatedPush Instrument are preferred choice for digital payments
8. Payment CardsCards (Credit Card, Debit Card, Prepaid Cards)ParticipantsCustomerMerchantIssuing BankAcquiring BankPayment SchemesTransaction TypesCard PresentCard Not Present
9. Payment Card SecurityFraud protection and data securityEMV chip: Technology that uses secret cryptographic keys to help protect against fraud at the point of sale and make payment cards more difficult to counterfeit.3-D Secure is an XML-based protocol designed to be an additional security layer for online credit and debit card transactionsPCI Security Standards: Security controls for making sure that customer's card data is kept secure throughout the entire transaction process.
10. Payment cardsFor FY 2017-18 (for period 01-Jul-17 to 30-Jun-18)Credit Cards 1,453,867 Debit, ATM only, Prepaid and Social Welfare Cards 39,465,126 POS Terminals 53,511 Credit Card Issuers 12 Debit Card Issuers 31 Debit Card Transactions - Volume438.4 million Debit Card Transactions - Value5075.9 billion Credit Card Transactions - Volume35.4 million Credit Card Transactions - Value201.5 billion POS Acquirers 9 POS per 100,000 Population 26
11. Credit TransfersIBFT (1-Link)For retail paymentsEnables banks to offer Inter Bank Fund Transfers using ATMS, Internet Banking and Call CentersCharges determined by the banks individually. PRISM Transfers (SBP) For Large Value Payment Credit transfers through bank branches Charges determined by SBP
12. Cheque Clearing12CUSTOMER AOF MCB“PAY B Rs 100”CUSTOMER BOF CITIBANK1. A SENDS CHECK TO BCLEARING HOUSE(NIFT)MCBBANK A. . .BANK ZCITIBANK4. CITI SENDS CHECKTO CLEARING HOUSE5. CLEARING HOUSE ADDS Rs 100 TO CITI, SUBTRACTS Rs 100 FROM MCB7. CLEARING HOUSE SENDS CHECK TO MCB8. MCB DEDUCTS Rs 100 FROM A ACCOUNTMCB BANKCUSTOMER CCUSTOMER A. . .CUSTOMER YCUSTOMER Z6. CLEARINGHOUSE SENDS MCB DEBIT INFO3. CITIBANK CREDITS B WITH Rs 100CITIBANKCUSTOMER ACUSTOMER B. . .BCUSTOMER Z2. B DEPOSITS CHECK AT CITI+100-100+100-100
13. Clearing-Paper InstrumentsClearing ProcedureFrom banks to clearing house to banksClearing BatchesSame day, Normal & IntercityClearing House (NIFT)More than 28 offices & HubsProcessing of cheques based on MICR using sortersPreparation of Clearing BatchesSubmission of Clearing Batches
14. ClearingClearing Infrastructure is required to process payment instruments’ settlement between different financial institutions and their customersE.g. Cheques drawn on other banks, credit transfers sent to other banks’ customerClearing can be physical, automated or electronicMajor clearing institutions in Pakistan (NIFT, 1-Link, NCCPL)The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of instructions and the establishment of final positions for settlement. Sometimes the term is used (imprecisely) to include settlement. (BIS)
15. Clearing MethodsBilateral SettlementsBetween two financial institutions. Typically used FX transactionsLow risk but inefficient for retail paymentsMultilateral NetNet settlement between multiple institutions. Used for retail paymentEfficient Settlement but high risk as any participants default can result in systemic risk Done by clearing houses like NIFT and 1-Link etc.
16. Bi Lateral Netting16Bank ABank BPayment ObligationsBank CBank D458530259010075A-B=2575C-A=5085D-B =55
17. 17Bank ABank BBank CBank DFunds Transfers Under Bilateral Clearing55 (85-30)30902550(75-25)
18. 18Bank ABank BBank CBank DFunds Transfers Under Multilateral ClearingClearinghouse1402409010
19. SettlementThe completion of transaction or of processing with the aim of discharging participants’ obligations through the transfer of funds and/or securities.Settlement methods can be Gross or Net.Gross Settlement used for Wholesale payments. Requires more liquidity but less riskyNet Settlement used for retail payment. More risk but requires less liquidity.Wholesale Payment Systems such as PRISM settles on Real Time Gross Settlement (RTGS) basis.
20. Trading and Payment (Distinction)Source NPS: South Africa
21. Payment System &Economy Real Economy and Financial MarketsPurchase and Sale of goods and servicesBanking SystemProvision of Payment ServicesIBFTClearing and Settlement ProcessesCentral Bank Source NPS: South Africa
22. Regulatory ObjectivesSafety and Efficiency in Payment SystemsPayment Instruments, Alternate Delivery Channels, Clearing Houses, Payment Systems Operators and Payment Service Providers, Financial Institutions.RisksLegal, Liquidity, Credit, Settlement, Custody, Agent, FX SettlementImplementation PowersLegal Powers under BCO 1962 and PS&EFT Act 2007
23. Regulatory FocusPayment SystemsPayment InstrumentAlternate Delivery ChannelsClearing HousesPayment SchemesPayment System OperatorsPayment Service Providers
24. Payment Card SecurityPayment Cards security Regulations (2016)MilestonesAcquiring Infrastructure Compliance – Dec 31, 2017Issuing of EMV compliant Cards – Jun 30, 2018Chip and PIN – Dec 31, 2018ChallengesAvailability of Vendors (TPS and Avanza)Inadequate testing facilities and certification slotsCapital Intensive (Hardware, Middleware, Development costs etc.)
25. Regulatory FrameworkElectronic Fund Transfer Rules Payment Message Transparency and standardization by routing originator and beneficiary informationName of the Originator, beneficiary Name of the Beneficiary Originator’s IBAN / Mobile Account Number (if applicable) Originating AFI Name, Beneficiary AFI NameTransaction reference number Amount of transactionResponsibilities of originating and beneficiary financial institutions and PSOs/PSPSsCompensation policy
26. Regulatory FrameworkInternet Banking Security Regulations (2015)Risk Management frameworkMinimum set of operational, administrative, technical and physical safeguards to secure Internet Banking offered Two Factor Authentication Clearing GuidelinesFixing responsibilities of each participants in Clearing CycleCentralized Intercity ClearingClearing Operations in Remote Areas and its settlement through RTGS on bilateral basis Compensation for Delayed PaymentsStandardized Return codes
27. Digital Payments Security CircularVulnerability assessment and penetration testing of systemsSetting bank-wise limits with international payment schemes.Activation of any internet banking after biometricsDeployment of fraud monitoring systems, use of threat intelligence Customers to activate or block their cards for online/cross-border transactions Free of cost SMS transaction alerts Bank/MFB to compensate customers within two (02) business daysBanks to issue chip and pin cards, pin authentication for e-commerce transaction,
28. New Initiatives Guidelines for White Label ATM OperatorsAllow non banks to own and operate ATMsPricing based on consumer consentEMI RegulationsAllow non banks to hold consumer money for the purpose of paymentsCredit product is not allowedthe amount taken by EMI shall not be treated as depotsCustomer Due diligence Transactions limits licensing Criteria oversight and supervision
29. Infrastructure Initiatives Automated Transfer SystemsAutomated Clearing HouseBulk TransfersDelivery Vs Payment SettlementPayment Vs Payment Settlement International Messaging StandardsMicro Payment GatewayFocus on Micro Payments and Financial InclusionInstant Retail Payments
30. Thanks