Innovations in Payments

Innovations in Payments

 

Key Trends

  • Instant Payments
  • DLT/Block Chain Technology
  • Cross Border Payments
  • Non Bank Credit Providers
  • Non Bank Payment Providers
  • Mobile Technology
  • POS Technology
  • Digital Cashless Payments
  • Regional RTGS Systems
  • China CIPS

 

Since my last posts on the subject, several new studies have been published.  Please see the references below.

At a rapid pace changes are taking place in payments systems and technology.

Innovative use of block chain and Distributed Ledgers Technology are creating new opportunties.

Emergence of Non bank or Payment Banks is another innovation.  India has approved several payment banks. Such as PayTM.

In retail payments, fast Immediate real time payments are a reality now.

Innovations in Cross Border payments are another trend.  Services like XOOM from Paypal is an example of such an innovation.

Regional Economic Integration is taking place through adaptation of Regional RTGS systems.

 

Please see my related posts

Cross Border/Offshore Payment, Clearing, and Settlement Systems -Update October 2019

Instant, Immediate, Real Time Retail Payment Systems (IIRT-RPS)

Evolving Networks of Regional RTGS Payment and Settlement Systems

Cross Border/Offshore Payment and Settlement Systems

Large Value (Wholesale) Payment and Settlement Systems around the Globe

Structure and Evolution of EFT Payment Networks in the USA, India, and China

Next Generation of B2C Retail Payment Systems

 

 

Key Sources of Research

 

Click to access r_qt2003f.pdf

Click to access keynote_pereira_da_silva_bis.pdf

Click to access r_qt1703g.pdf

Click to access er-2019_1-payment-systems–historical-evolution-and-literature-review.pdf

Click to access sp191205.pdf

Click to access r_qt2003h.pdf

Click to access SIWP-2017-001-The-Future-of-Correspondent-Banking_FINALv2.pdf

Click to access d154.pdf

Click to access ecb.op229~4c5ec8f02a.en.pdf

Click to access other20190805a2.pdf

 

Cross Border/Offshore Payment, Clearing, and Settlement Systems -Update October 2019

Cross Border Payment, Clearing, and Settlement Systems -Update October 2019

 

There have been several new developments in Cross Border Payments Solutions landscape.

  • Interbank Cross Border Payments
  • Retail Cross Border Payments

 

Interbank Payments

  • Ripple
  • SWIFT
  • SWIFT GPI
  • JPMCoin
  • IBM Blockchain World Wire {BWW}

 

RIPPLE

From {https://digital.hbs.edu/platform-digit/submission/ripple-the-disruptor-to-the-forty-years-old-cross-border-payment-system/}

Cross-border payments today are inefficient, expensive and opaque.

The Global Interbank Financial Telecommunication Company (SWIFT) established in 1973 is still the most widely used method to send cross-border payment using the transmission of financial messages via the international SWIFTNet network.

However, the SWIFT financial messages do not hold accounts for its members nor make any form of clearing or settlement. It essentially only sends payment orders which need to be settled by the correspondent account that the institution has with each other. For this reason, each financial institution needs to have a banking relationship to exchange banking transactions.

This is why it requires 6 players linked up – payer, payer’s bank, payer’s bank’s correspondent, beneficiary bank’s correspondent, beneficiary bank, beneficiary to complete cross-border payments.

[1]

There are many obvious drawbacks of such system:

  • Cross-border payments can be expensive and sometimes even charged a percentage fees
  • Extra fees such as “lifting fees” or correspondent banking fees by intermediary banks are common
  • Bank keep the money for extra time and delay the payout “float money theft”
  • Exchange rate can have big spread

The high processing costs, lengthy settlement times and a poor customer experience prevents many new usage scenarios such as on-demand, low-value cross-border payment or mobile wallets. It is estimated that $1.6T per year for all parties in the ecosystem has spent yet unable to meet today’s cross-border payment need[2].

Ripple Labs (formerly OpenCoin) launched in 2012 with a mission to build a cross-border, interbank payment and settlement network using the concepts behind bitcoin. Ripple offers sub-second cross-border payments with automated best pricing from its network. As payments are nearly instant, it helps to remove the credit and liquidity risk from the process, lowering overall costs considerably.

 How is it done?

The core of its solution is RippleNet, a single, global network of banks that send and receive payments via Ripple’s distributed financial technology — providing real-time messaging, clearing and settlement of transactions.

RippleNet utilizes a subset of blockchain technology used in bitcoin. It uses the consensual validation of encrypted hashes to secure the messages across the Ripple network but does not hold the ledger, unlike bitcoin. Ripple names this open, neural protocol Interledger Protocol (ILP). ILP allows Ripple to connect existing bank ledgers, similarly to how banks connect their core system to the SWIFT network.

 

SWIFT GPI

From https://www.bellin.com/blog/swift-gpi-transparent-cross-border-payments/

Challenges in cross-border payments

Cross-border payments usually pass through several banks until the funds have been transferred from the payer to the account of the beneficiary. This is referred to as correspondent banking. This results in four obstacles that are virtually insurmountable for treasurers as things stand today:

1)   Time: Traditional cross-border payment orders can take several days from being released to being credited – way too long for efficient cash management.

2)   Transparency: Several correspondent banks can act as intermediaries between the bank initiating the payment and the beneficiary bank – an impenetrable banking jungle that causes treasurers sleepless nights for security and compliance reasons.

3)   Tracking: Today, treasurers neither know where a specific payment is located nor when it will be credited to the beneficiary – an incalculable business risk and a situation that often leads to time-consuming queries, trying to chase a payment.

4)   Remittance data: Remittance data is often altered somewhere along the line or information is lost. Sometimes the amount eventually credited to the account does not match the initial payment order because correspondent banks have deducted fees, resulting in a tedious reconciliation process once the money has arrived.

SWIFT global payments innovation – SWIFT gpi

In January 2017, SWIFT introduced the gpi Service that can be used to process global payments in a fast and traceable manner. The objective is for every one of the around 10,000 SWIFT Network banks to be able to offer money transfers within 24 hours with continuous end-to-end tracking and complete transparency along the entire payment chain by the end of 2020. This transparency and efficiency is made possible by using a specific gpi reference, the Unique End-to-End Transaction Reference UETR.

SWIFT GPI Instant Payment Cross Border

How the Unique End-to-End Transaction Reference (UETR) works 

You can compare the UETR to the tracking number of a parcel: The sender issues a unique, unalterable reference that shows you where the order is located at any one time. This reference ensures complete transparency as well as fully digitized and therefore speedy processing. In addition, the sender is automatically notified of any payment status changes. Conventional transfers often drop off the radar for quite some time, and you’re left wondering where your money has gone, not to mention the effort it will take you to retrace and reconcile afterwards.Conversely, gpi transfers generate an abundance of messages that keep you up to date on the status of your payment.

The same applies to the respective bank departments who can also trace corporate payments, enabling them to react to queries much faster. Some banks have integrated functionality in their online banking applications that enables corporate clients to track their gpi payments. Not a bad idea – the only downside is that most corporates use more than one bank for their international payments, which would mean checking several banking portals. This is why a bank-independent treasury management system such as tm5  is a much more elegant solution. All tracking and status information converges in one centralized hub, no matter how many banks are involved.

SWIFT gpi for Corporates (g4C) – new dynamic and transparency in treasury

In November 2018, SWIFT launched the SWIFT g4C project in order to enable corporates to directly benefit from the gpi technology. The objective was to offer corporates a solution for initiating gpi payment orders directly in their payments system. BELLIN was selected as one of the Early Adopters and was the first TMS provider with a client live on g4C. The pilot phase has been completed and the technology is fully integrated in the tm5 treasury management system and BELLIN’s SWIFT offering.

What does this mean for banks and companies?

The role of banks

Banks must be able to process certain information in order for it to be included in gpi payment orders. More than 280 financial institutions worldwide, including 49 of the TOP 50 banks, have agreed on a standardized SLA. With so many banks participating, communication is guaranteed. i.e. funds are transferred quickly from one bank to the next. By now, most banks have started processing cross-border payments as gpi payments.

The role of companies

The UETR is crucial for processing gpi payments. Companies that initiate their own payments, for example through a treasury management system integrated payment solution need to attach this reference to a payment order in line with SWIFT requirements or extend the format of a payment in the right place to include this information. The information transmitted by way of the UETR simplifies reconciliation and can be matched automatically, depending on the system.

BELLIN offers integrated SWIFT g4C technology

The BELLIN treasury management system, tm5, offers integrated SWIFT gpi technology. The system generates the unique and unalterable tracking reference UETR that is required for gpi payments. In addition, tm5 automatically processes incoming gpi status messages, enabling users to check the status of a payment at any time.

Corporates need a SWIFT BIC (Business Identifier Code) to make use of SWIFT g4C technology. They register their BIC for gpi for Corporates and connect financial institutions that offer g4C. All in all, SWIFT g4C unlocks completely new opportunities for automating treasury processes, in turn leading to efficiency gains and increased security.

How will gpi change treasury?

gpi is fast, creates transparency regarding fees and currencies and provides a wealth of information about the location of a payment and other aspects that simplify reconciliation. The SWIFT gpi initiative is clear evidence that corporate payments are moving towards real-time processing. In turn, this will change processes and the way treasurers work.

 

Retail Cross Border Payments Systems

 

Retail Payments/Transfers to India

{From ManiKarthik.com}

  • XOOM
  • Remitify
  • Remitly
  • Ria
  • Western Union
  • State Bank of India
  • Transfast
  • Transwise
  • ICICI Bank Money to India
  • WorldRemit
  • IndusInd Bank

 

Block Chain Based Cross Border Payment Systems

  • AIRFOX
  • CIRCLE PAY
  • ZCASH
  • RIPPLE
  • VEEM
  • IVY
  • GLUWA
  • STELLAR
  • ABRA

 

 

Top Cross Border Payment Companies

{https://www.ventureradar.com/keyword/Cross%20Border%20Payments}

  • Ripple
  • Seedrs
  • CurrencyFair
  • Transferwise
  • Payoneer
  • WorldRemit
  • Trustly Group
  • TransferGo
  • Raisin
  • Zooz
  • TransferMate Global Payments
  • Calastone
  • Airwallex
  • Hufsy
  • InstaReM
  • Caxton
  • Veem
  • nanoPay
  • Credorax
  • Transfast
  • wyre
  • Bitbound GmbH
  • Currency Transfer
  • Earthport PLC
  • Bitso
  • WB21
  • iSignthis
  • Currency Cloud
  • BitPay
  • MoneyTrans
  • Moni
  • Traxpay
  • Qwikwire
  • Streami Inc
  • PiP iT
  • Swych
  • HoneSend
  • Afrimarket
  • Fonmoney
  • Lala World
  • Flime
  • Smart Token Chain
  • TransferTo
  • EQ Global
  • Weeleo
  • SimbaPay
  • KUARIX
  • REMITWARE Payments
  • PingPong
  • Buckzy Payments

 

 

Please see my related posts:

Cross Border/Offshore Payment and Settlement Systems

Instant, Immediate, Real Time Retail Payment Systems (IIRT-RPS)

Evolving Networks of Regional RTGS Payment and Settlement Systems

Large Value (Wholesale) Payment and Settlement Systems around the Globe

Structure and Evolution of EFT Payment Networks in the USA, India, and China

Next Generation of B2C Retail Payment Systems

Understanding Global OTC Foreign Exchange (FX) Market

Sources of Research:

 

Ripple wants a piece of the global payment system

 

https://www.cnbc.com/2019/01/07/ripple-wants-a-piece-of-the-global-payment-system.html

How IBM Blockchain World Wire revolutionizes cross-border payments

IBM

https://www.ibm.com/downloads/cas/YW3W2JPZ

NAVIGATING A WORLD OF PAYMENT SOLUTIONS

WHAT YOU NEED TO KNOW FOR TODAY — AND TOMORROW

George H. Hoffman, CTP, CERTICM, Senior Vice President, Manager, International Advisory, PNC

Kacie V. Johnson, Assistant Vice President, International Advisor, PNC

 

Click to access navigating-payment-solutions.pdf

Siam Commercial Bank Of Thailand To Use Ripple For Cross-border Payments With Easy Pay App

Siam Commercial Bank Of Thailand To Use Ripple For Cross-border Payments With Easy Pay App

Ripple and Xendpay partner for cross-border payments

https://www.fxcompared.com/magazine/news/ripple-and-xendpay-partner-cross-border-payments

The Future Of Cross-Border Payments

FORBES

Click to access d173.pdf

 

A vision for the future of cross-border payments

McKinsey

 

https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/A%20vision%20for%20the%20future%20of%20cross%20border%20payments%20final/A-vision-for-the-future-of-cross-border-payments-web-final.ashx

FASTER, CHEAPER, SAFER: 9 COMPANIES USING BLOCKCHAIN PAYMENTS

https://builtin.com/blockchain/blockchain-payments

Global Payments 2020: Transformation and Convergence

BNY Mellon

Click to access global-payments-2020-transformation-and-convergence.pdf

 

Top 10 Trends in Payments 2018 : What You Need to Know

Cap Gemini 2018

Click to access payments-trends_2018.pdf

 

 

Strategies for Improving the U.S. Payment System

Federal Reserve Next Steps in the Payments Improvement Journey

Click to access other20170906a1.pdf

 

 

SWIFT gpi: A New Era in Treasury

Fast, transparent, traceable and system-integrated cross-border payments

https://www.bellin.com/blog/swift-gpi-transparent-cross-border-payments/

 

 

The Use of RMB in International Transactions:

-Background, Development and Prospect

Click to access pdf-rmb-JinZhongxia.pdf

 

 

 

The Cross-Border Payments Landscape

 

Click to access 9308A_1-2018-9-17.pdf

 

 

Swift to test real-time cross border payments in Europe

https://www.finextra.com/newsarticle/33852/swift-to-test-real-time-cross-border-payments-in-europe

 

 

Singtel’s cross-border payments system expands to Japan

The Via cross-border payments system has expanded into Japan thanks to a partnership with Netstars.

https://www.zdnet.com/article/singtels-cross-border-payments-system-expands-to-japan/

 

 

THE FUTURE OF CORRESPONDENT BANKINGCROSS BORDER PAYMENTS

RUTH WANDHÖFER

BARBARA CASU

PUBLICATION DATE: 10 OCTOBER 2018

 

Click to access SIWP-2017-001-The-Future-of-Correspondent-Banking_FINALv2.pdf

 

 

 

How are Asian FIs meeting the challenges and opportunities of cross-border payments?

A Survey on Trends in Cross-Border Payments in Asia Pacific

Click to access TAB_DEUTSCHE_BANK_WHITE_PAPER_-_FI_CROSS_BORDER_PAYMENT.pdf

 

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

VISA

 

Click to access crossborder.pdf

 

 

 

CROSS-BORDER INTERBANK PAYMENT AND SETTLEMENTS

Emerging opportunities for digital transformation

 

Click to access Cross-Border-Interbank-Payments-and-Settlements.pdf

 

 

Global Payment Systems Survey (GPSS)

December 4, 2018
World Bank

https://www.worldbank.org/en/topic/financialinclusion/brief/gpss

 

 

 

Beijing creates its own global financial architecture as a tool for strategic rivalry

Govt of Canada

https://www.canada.ca/en/security-intelligence-service/corporate/publications/china-and-the-age-of-strategic-rivalry/beijing-creates-its-own-global-financial-architecture-as-a-tool-for-strategic-rivalry.html

 

 

 

SWIFT Vs. Ripple — The Importance of Speed in Cross-Border Payments

https://cointelegraph.com/news/swift-vs-ripple-the-importance-of-speed-in-cross-border-payments

 

 

Visa looks to speed up cross-border payments with new network launch

https://www.reuters.com/article/visa-payment/visa-looks-to-speed-up-cross-border-payments-with-new-network-launch-idUSL2N23H1NO

 

 

Cross-border Payment systems: SWIFT, RippleNet or BWW?

 

Cross-border Payment systems: SWIFT, RippleNet or BWW?

 

Rise of the yuan: China-based payment settlements jump 80%

Data shows Beijing attracting countries targeted by US sanctions

https://asia.nikkei.com/Business/Markets/Rise-of-the-yuan-China-based-payment-settlements-jump-80

 

 

 

http://www.cips.com.cn/cipsen/7052/7057/index.html

https://www.treasury-management.com/article/1/355/2929/cips-chinas-hybrid-net-settlement-clearing-system.html

 

 

SWIFT’s Battle For International Payments

Forbes

https://www.forbes.com/sites/francescoppola/2019/07/16/swifts-battle-for-international-payments/#64699a4e758e

 

 

EU Cross Border Payments: An evolving concept

 

Click to access lu-eu-cross-border-payments.pdf

 

 

 

INTERNATIONAL PAYMENTS IN A DIGITAL WORLD

YET ANOTHER BANKING BUSINESS THREATENED BY DIGITALIZATION

Click to access accenture-international-payments-digital-world-international-payments-digital-world.pdf

 

 

 

SWIFT gpi Time for action

Deutche Bank

 

Click to access Deutsche_Bank_SWIFT_gpi_White_Paper_December2017.pdf

 

 

 

B2B Payments and Fintech Guide 2019

Innovations in the Way Businesses Transact

 

Click to access B2B%20Payments%20and%20Fintech%20Guide%202019%20-%20Innovations%20in%20the%20Way%20Businesses%20Transact.pdf

 

 

Paying across borders – Can distributed ledgers bring us closer together?

  • RODRIGO MEJIA-RICART
  • CAMILO TELLEZ
  • MARCO NICOLI

MARCH 26, 2019

https://blogs.worldbank.org/psd/paying-across-borders-can-distributed-ledgers-bring-us-closer-together

 

 

Reinventing Payments

In An Era of Modernization

 

Click to access reinventing-payments-in-an-era-of-modernization.pdf

 

 

 

WORLD PAYMENTSREPORT

2018

 

Click to access World-Payments-Report-2018.pdf

 

 

 

Fundamentals of Global Payment Systems and Practices

Click to access Fundamentals_of_Payment_Systems.pdf

 

 

 

Global Payments 2018

REIMAGINING THE CUSTOMER EXPERIENCE

 

BCG

Click to access BCG-Global-Payments-2018-Oct-2018_tcm9-205095.pdf

 

 

 

Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies

CEPR

 

Click to access GenevaP223.pdf

 

 

 

Cross-Border Settlement Systems: Blockchain Models Involving Central Bank Money

Xiaohang Zhao, Haici Zhang, Kevin Rutter, Clark Thompson, Clemens Wan

Click to access CrossBorder_Settlement_Central_Bank_Money_R3-1.pdf

 

Supply Chain Finance (SCF) / Financial Supply Chain Management (F-SCM)

Supply Chain Finance (SCF) / Financial Supply Chain Management (F-SCM)

 

 

From STANDARD DEFINITIONS FOR TECHNIQUES OF SUPPLY CHAIN FINANCE

fscm8

There are two Areas where FSCM/SCF names are used but in different contexts.

  • Inter firm FSCM
  • Intra firm FSCM

 

Inter firm F-SCM

  • Trade Finance
  • Supply Chain Finance (SCF)
  • Value Chain Finance
  • Supplier Finance
  • Inter firm Finance
  • Reverse Factoring
  • Collaborative  Cash to Cash Cycles Management

During 2008 global financial crisis, the trade financing dried up resulting in decline in trade of goods and services.

Since the crisis, Financial De-globalization and Decline of Correspondent Banking has also made availability of financial credit harder.

Cash flow and working capital management is helped by inter firm collaboration among Suppliers and Buyers.

Financial Institutions which provide trade credit also benefit from inter firm collaboration.

 From SUPPLY CHAIN FINANCE FUNDAMENTALS: What It Is, What It’s Not and How it Works

What Supply Chain Finance is Not

The world of trade finance is complex and varied. There are numerous ways to increase business capital on hand and, in many cases, the differences are slightly nuanced. Given this landscape, it’s not just important to understand what supply chain finance is; it’s also important to understand what it is not.

It is not a loan. Supply chain finance is an extension of the buyer’s accounts payable and is not considered financial debt. For the supplier, it represents a non-recourse, true sale of receivables. There is no lending on either side of the buyer/supplier equation, which means there is no impact to balance sheets.

It is not dynamic discounting or an early payment program. Early payment programs, such as dynamic discounting, are buyer-initiated programs where buyers offer suppliers earlier payments in return for discounts on their invoices. Unlike supply chain finance, buyers are seeking to lower their cost of goods, not to improve their cash flow. Dynamic discounting and early payment programs often turn out to be expensive for both suppliers (who are getting paid less than agreed upon) and buyers who tie up their own cash to fund the programs.

It is not factoring. Factoring enables a supplier to sell its invoices to a factoring agent (in most cases, a financial institution) in return for earlier, but partial, payment. Suppliers initiate the arrangement without the buyer’s involvement. Thus factoring is typically much more expensive than buyer-initiated supply chain finance. Also, suppliers trade “all or nothing” meaning they have no choice to participate from month-to-month to the degree that their cash flow needs dictate. Finally, most factoring programs are recourse loans, meaning if a supplier has received payment against an invoice that the buyer subsequently does not pay, the lender has recourse to claw back the funds.

 

From Mckinsey on Payments

fscm10

 

From Financial Supply Chain Management

financial-supply-chain-management-4-728

 

From Best Practices in Cash Flow Management and Reporting

46_-3571_20

 

From STANDARD DEFINITIONS FOR TECHNIQUES OF SUPPLY CHAIN FINANCE

fscm9

 

From Financing GPNs through inter-firm collaboration?
Insights from the automotive industry in Germany and Brazil

fscm 3

 

Intra Firm F-SCM

  • Working Capital Management
  • Cash Flow Management
  • Liquidity Management
  • Cash to Cash Conversion Cycle Management (C2C Cycle/CCC)
  • Financial Supply Chain Management (F-SCM) in Manufacturing companies
  • Financial Supply chain management in financial institutions
  • Supply Chain Finance
  • Accounts Payable Optimization
  • Accounts Receivable Optimization
  • Operations and Finance Interfaces
  • Current Asset Management (Current Ratio Analysis)

This is not a new subject.  Corporate Finance, Financial Controls, and working capital management have been active business issues.  Benefits of Supply chain management include increase in inventory turnover and decline in current assets.

There are many world class companies who manage their supply chains well and work with minimal working capital.  Lean Manufacturing, Agile Manufacturing, JIT manufacturing are related concepts.  Just-In-Time manufacturing developed in Toyota Corp. reduces inventory portion of C2C cycle.  Other examples include

  • Apple
  • Walmart
  • Dell

Currently, most of the Supply Chain analytics efforts unfortunately do not integrate analysis of financial benefits of operating decisions.

There are many studies recently which suggest that Cash to Cash Conversion Cycle is a better determinant of corporate liquidity.  C2C Cycle is a dynamic liquidity indicator and Current Assets is a static indicator of liquidity.  I would like to point out that none of the studies relate C2C cycle with Current Ratio.  Current Ratio is based on balance sheet positions of current assets and current liabilities.  C2C cycle is based on flows in supply chains.  Accumulation of flow results in Current assets (Stock).  To make it Stock-Flow Consistent, more work is required.

 

From Supply Chain Finance: some conceptual insights.

fscm2

From Financial Supply Chain Management

financial-supply-chain-management-5-728

 

From The Interface of Operations and Finance in Global Supply Chains

fscm4

 

From SUPPLY CHAIN-ORIENTED APPROACH OF WORKING CAPITAL MANAGEMENT

ifscm5

 

From IMPROVING FIRM PERFORMANCE THROUGH VALUE-DRIVEN SUPPLY CHAIN MANAGEMENT: A CASH CONVERSION CYCLE APPROACH

fscm6

 

From IMPROVING FIRM PERFORMANCE THROUGH VALUE-DRIVEN SUPPLY CHAIN MANAGEMENT: A CASH CONVERSION CYCLE APPROACH

fscm7

 

From THE CYCLE TIMES OF WORKING CAPITAL: FINANCIAL VALUE CHAIN ANALYSIS METHOD

fscm12

 

Call for papers: Supply Chain Finance

Call for papers for Special Topic Forum in Journal of Purchasing and Supply Management (Manuscript Submission:  March 31, 2017)

Supply chain finance is a concept that lacks definition and conceptual foundation.  However, the recent economic downturn forced corporates to face a series of financial and economic difficulties that strongly increased supply chain financial risk, including bankruptcy or over-leveraging of debt.  The mitigation and management of supply chain financial risk is becoming an increasingly important topic for both practitioners and academics leading to a developing area of study known as supply chain finance.  There are two major perspectives related to the idea of managing finance across the supply chain.  The first is a relatively short-term solution that serves as more of a “bridge” and that is provided by financial institutions, focused on accounts payables and receivables.  The second is more of a supply chain oriented perspective – which may or may not involve a financial institution, focused on working capital optimization in terms of accounts payable, receivable, inventory, and asset management.  These longer-term solutions focus on strategically managing financial implications across the supply chain.

Recent years have seen a considerable reduction in the granting of new loans, with a significant increase in the cost of corporate borrowing (Ivashina and Scharfstein, 2010). Such collapse of the asset and mortgage-backed markets dried up liquidity from industries (Cornett et al., 2011). In such difficult times, firms (especially those with stronger bargaining power) forced suppliers to extend trade credit in order to supplement the reduction in other forms of financing (Coulibaly et al., 2013; Garcia-Appendini and Montoriol-Garriga, 2013). The general lack of liquidity, in particular for SMEs, has directly affected companies’ ability to stay in the market, reflecting on the stability of entire supply chains. There are many other factors influencing liquidity and financial health that are critical to assess.

These trends and the continued growth of outsourced spend have contributed considerably to the need for and spread of solutions and programs that help to mitigate and better manage financial risk within and across the supply chain.  One of the most important approaches is what is being termed Supply Chain Finance (SCF) (Gelsomino et al., 2016; Pfohl and Gomm, 2009; Wuttke et al., 2013a). SCF is an approach for two or more organizations in a supply chain, including external service provides, to jointly create value through means of planning, steering, and controlling the flow of financial resources on an inter-organizational level (Hofmann, 2005; Wuttke et al., 2013b).  It involves the inter-company optimization of financial flows with customers, suppliers and service providers to increase the value of the supply chain members  (Pfohl and Gomm, 2009).  According to Lamoureux and Evans (2011) supply chain financial solutions, processes, methods are designed to improve the effectiveness of financial supply chains by preventing detrimental cost shifting and improving the visibility, availability, delivery and cost of cash for all global value chain partners.  The benefits of the SCF approach include reduction of working capital, access to more funding at lower costs, risk reduction, as well as increase of trust, commitment, and profitability through the chain (Randall and Farris II, 2009).

Literature on SCF is still underdeveloped and a multidisciplinary approach to research is needed in this area. In order to better harmonize contributions of a more financial nature with ones coming from the perspective of purchasing & supply chain, there is a need of developing theory on SCF, starting with a comprehensive definition of those instruments or solutions that constitute the SCF landscape. SCF has been neglected in the Purchasing & Supply Management (PSM) literature, although PSM plays a critical role in managing finance within the supply chain.  PSM uses many of the processes and tools that are part of a comprehensive supply chain financial program to better manage the supply base, in terms of relationships, total cost of ownership, cost strategies and pricing volatility (see for example Shank and Govindarajan 1992). Reverse factoring is a technique which is also widely used to manage the supply base (Wuttke et al, 2013a) as is supplier development and investment in suppliers.

Research on SCF from a PSM perspective needs further development. In particular, empirical evidence would prove useful for testing existing models and hypotheses, addressing the more innovative schemes and investigating the adoption level and the state of the art of different solutions. Research is also needed for the development of a general theory of supply chain finance.  There is also limited research that focuses on the link between supply chain financial tools and supply chain financial performance.  Finally, considering the plurality of solutions that shape the SCF landscape, literature should move towards the definition of holistic instruments to choose the best SCF strategy for a supply chain, considering its financial performance and the contextual variables (e.g. structure, bargaining power) that characterize it.

Potential topics

The purpose of this special topic forum is to publish high-quality, theoretical and empirical papers addressing advances on Supply Chain Finance. Original, high quality contributions that are neither published nor currently under review by any other journals are sought. Potential topics include, but are not limited to:

  • Theory development, concept and definition of SCF
  • Taxonomy of SCF solutions
  • Strategic cost management across the supply chain
  • Total cost of ownership
  • Life cycle assessment and analysis
  • Commodity risk and pricing volatility
  • Supply chain financial metrics and measures
  • Cost-benefit analysis
  • Relationship implications of supply chain finance
  • Tax and transfer pricing in the supply chain
  • Foreign exchange and global currency and financing risk
  • Financial network design and financial supply chain flows
  • The organizational perspective on SCF and the implementation process
  • Role of innovative technologies to support SCF ( (e.g. block chain, internet of things)
  • Supply chain collaboration for improved supply chain financial solutions
  • SCF adoption models, enablers and barriers
  • SCF from different party perspectives (especially suppliers and providers)
  • SCF and risk mitigation and management

Manuscript preparation and submission

Before submission, authors should carefully read the Journal’s “Instructions for Authors”. The review process will follow the Journal’s normal practice. Prospective authors should submit an electronic copy of their complete manuscript via Elsevier’s manuscript submission system (https://ees.elsevier.com/jpsm) selecting “STF Supply Chain Finance” as submission category and specifying the Supply Chain Finance topic in the accompanying letter. Manuscripts are due March 31, 2017 with expected publication in June of 2018.

FOR COMMENTS OR QUESTIONS PLEASE CONTACT THE GUEST EDITORS:

Federico Caniato, Politecnico di Milano, School of Management, federico.caniato@polimi.it

Michael Henke, TU Dortmund and Fraunhofer IML, Michael.Henke@iml.fraunhofer.de

George A. Zsidisin, Virginia Commonwealth University, gazsidisin@vcu.edu

References

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Coulibaly, B., Sapriza, H., Zlate, A., 2013. Financial frictions, trade credit, and the 2008–09 global financial crisis. Int. Rev. Econ. Financ. 26, 25–38.

Garcia-Appendini, E., Montoriol-Garriga, J., 2013. Firms as liquidity providers: Evidence from the 2007–2008 financial crisis. J. financ. econ. 109, 272–291.

Gelsomino, L.M., Mangiaracina, R., Perego, A., Tumino, A., 2016. Supply Chain Finance: a literature review. Int. J. Phys. Distrib. Logist. Manag. 46, 1–19.

Govindarajan, Vijay, and John K. Shank. “Strategic cost management: tailoring controls to strategies.” Journal of Cost Management 6.3 (1992): 14-25.

Wuttke, D. A., Blome, C., Foerstl, K., & Henke, M. (2013a). Managing the innovation adoption of supply chain finance—Empirical evidence from six European case studies. Journal of Business Logistics, 34(2), 148-166.

Wuttke, D. A., Blome, C., & Henke, M. (2013b). Focusing the financial flow of supply chains: An empirical investigation of financial supply chain management. International journal of production economics, 145(2), 773-789.

Hofmann, E., 2005. Supply Chain Finance: some conceptual insights. Logistik Manag. Innov. Logistikkonzepte. Wiesbad. Dtsch. Univ. 203–214.

Ivashina, V., Scharfstein, D., 2010. Bank lending during the financial crisis of 2008. J. financ. econ. 97, 319–338.

Lamoureux, J.-F., Evans, T.A., 2011. Supply Chain Finance: A New Means to Support the Competitiveness and Resilience of Global Value Chains. Social Science Research Network, Rochester, NY.

Lekkakos, S.D., Serrano, A., 2016. Supply chain finance for small and medium sized enterprises: the case of reverse factoring. Int. J. Phys. Distrib. Logist. Manag.

Pfohl, H.C., Gomm, M., 2009. Supply chain finance: optimizing financial flows in supply chains. Logist. Res. 1, 149–161.

Randall, W., Farris II, T., 2009. Supply chain financing: using cash-to-cash variables to strengthen the supply chain. Int. J. Phys. Distrib. Logist. Manag. 39, 669–689.

 

 

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Częstochowa University of Technology

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Christopher P. Holland

Timothy Westcott

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Herbert Kotzab

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Franke, J./ Pfaff, D./ Elbert, R./ Gomm, M./ Hofmann, E. (2005):

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Financial-Chain-Management
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Developing and discussing a supply chain-oriented model of collaborative working capital management

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Erik Hofmann, University of St.Gallen, Switzerland
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The link between Purchasing and Supply Management maturity
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SUPPLY CHAIN FINANCE
A Buyer-Centric Supplier Payables Financing Initiative

Martin Jemdahl
Lund, 2015

http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=8870575&fileOId=8870576

 

 

Supply Chain Finance: Optimal Introduction and Adoption Decisions

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Protopappa-Sieke

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Supply Chain Finance “Is SCF ready to be applied in SMEs?”

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Win-win and no-win situations in supply chain finance: The case of accounts receivable programs

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Introducing a financial perspective in Supply Chain Management: a literature review on Supply Chain Finance

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Alessandro Perego, Angela Tumino

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Towards A Theory Of Supply Chain And Finance Using Evidence From A Scottish Focus Group

R. de Boer, R. Dekkers, L. M. Gelsomino, C. de Goeij, M. Steeman Q. Zhou,
S. Sinclair, V. Souter

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Award date:
2016

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Simona Cristea
Sebastian Lupu
Mihaela Mihaila
Andreea Nita
Adriana Screpnic

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https://www.jpmorgan.com/pdfdoc/jpmorgan/cash/pdf/global_supply_chain_front_and_center_for_treasurers

 

 

 

Supply Chain Finance

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2011

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Supply chain financing: Using cash-to-cash variables to strengthen the supply chain

Wesley S. Randall

M. Theodore Farris II

2009

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The Interface of Operations and Finance in Global Supply Chains

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Supply Chain Finance A conceptual framework to advance research

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COORDINATING WORKING CAPITAL MANAGEMENT MODEL IN COLLABORATIVE
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A. Ivakina, N. Zenkevich

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Jan H Jansen

2017

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Cash Flow Management and Manufacturing Firm Financial Performance: A Longitudinal Perspective

James R. Kroes

Andrew S. Manikas

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TOWARDS INTER-ORGANIZATIONAL WORKING CAPITAL MANAGEMENT

Sari Monto

2013

https://www.doria.fi/bitstream/handle/10024/90028/isbn9789522653840.pdf?sequence=2

 

 

 

THE CYCLE TIMES OF WORKING CAPITAL: FINANCIAL VALUE CHAIN ANALYSIS METHOD

Miia Pirttilä

2014

https://www.doria.fi/bitstream/handle/10024/102180/Pirttilä_A4.pdf?sequence=2

 

 

Impact of Cash Conversion Cycle on Working Capital through Profitability: Evidence from Cement Industry of Pakistan

Afaq Ahmed Khan1, Mohsin Ayaz2, Raja Muhammad Waseem3, Sardar Osama

Bin Haseeb Abbasi4, Moazzam Ijaz

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Cash Conversion Cycle and Firms’ Profitability – A Study of Listed Manufacturing Companies of Pakistan

1Raheem Anser, 2Qaisar Ali Malik

2013

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The Power of Supply Chain Finance

How companies can apply collaborative finance models in their supply chain to
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M. Steeman

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Supply Chain Finance Payable and Receivable Solutions Guide

2012

JP Morgan

A Conceptual Model of Supply Chain Finance for SMEs at Operational Level

 Jan H Jansen

21 November 2017

 

Click to access A-conceptual-model-for-supply-chain-finance-for-SMEs-at-operational-level-An-essay-on-the-Supply-Chain-Finance-paradigm-Vestnik-Chelyabinsk-State-University-Version-2-18-April-2017.pdf

 

 

Cash-to-cash: The new supply chain management metric

M Theodore Farris II; Paul D Hutchison

International Journal of Physical Distribution & Logistics Management; 2002

Click to access 02e7e5312767de88df000000.pdf

 

 

 

Integrating financial and physical supply chains: the role of banks in enabling supply chain integration

Rhian Silvestro

Paola Lustrato

2012

 

Click to access 552f9c840cf21cb2faf005c0.pdf

 

 

 

Integration of Finance and Supply Chain: Emerging Frontier in Growing Economies

(A Case Study of Exporting Companies)

Muhammad Ahmar Saeed

Xiaonan Lv

 

Click to access FULLTEXT01.pdf

 

Research at the Interface of Finance, Operations, and Risk Management (iFORM): Recent Contributions and Future Directions

Volodymyr Babich

Panos Kouvelis

2017

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3054711

 

 

 

PROCEEDINGS

Interface of Finance, Operations, and Risk Management (iFORM) SIG

2011

Click to access 947ccbd42b1fe0e90f298ab96cfcef8f0448.pdf

 

 

 

Cash to Cash Cycle with a Supply Chain Perspective

Can Duman
Sawanee Sawathanon

2009

 

Click to access FULLTEXT01.pdf

 

DYNAMIC AND STATIC LIQUIDITY MEASURES IN WORKING CAPITAL STRATEGIES

Monika Bolek, PhD

 

http://eujournal.org/index.php/esj/article/viewFile/764/798

 

 

 

Does working capital management affect cost of capital?
A first empirical attempt to build up a theory for supply chain finance

Erik Hofmann, Judith Martin

2016

 

Click to access Final%20paper_working%20capital%20management.pdf

 

 

 

Principle of Accounting System Dynamics – Modeling Corporate Financial Statements –

Kaoru Yamaguchi

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.615.6514&rep=rep1&type=pdf

 

 

 

Money and Macroeconomic Dynamics

Accounting System Dynamics Approach

Edition 3.2

 

Kaoru Yamaguchi Ph.D.

Japan Futures Research Center

 

Click to access Macro%20Dynamics.pdf

 

 

 

Working Capital Management Model in value chains

Timo Eskelinen

2014

 

http://www.doria.fi/bitstream/handle/10024/96733/Working%20Capital%20Management%20Model%20in%20value%20chains_Timo%20Eskelinen.pdf?sequence=2&isAllowed=y

 

 

 

STANDARD DEFINITIONS FOR TECHNIQUES OF SUPPLY CHAIN FINANCE

Global Supply Chain Finance Forum

2016

 

Click to access ICC-Standard-Definitions-for-Techniques-of-Supply-Chain-Finance-Global-SCF-Forum-2016.pdf

Click to access download-the-scf-definitions.pdf

 

 

IMPROVING FIRM PERFORMANCE THROUGH VALUE-DRIVEN SUPPLY CHAIN MANAGEMENT: A CASH CONVERSION CYCLE APPROACH

Pan Theo Große-Ruyken
Stephan M. Wagner
Wen-Fong Lee

Baltic Management Review

Volume 3 No 1

2008

 

 

 

Best Practices in Cash Flow Management and Reporting

Hans-Dieter Scheuermann

http://www.financepractitioner.com/cash-flow-management-best-practice/best-practices-in-cash-flow-management-and-reporting?full

Financial Supply Chain Management

 

Instant, Immediate, Real Time Retail Payment Systems (IIRT-RPS)

Instant, Immediate, Real Time Retail Payment Systems (IIRT-RPS)

 

There are Five different kinds of Payments

  • B2C Business to Consumer
  • C2B Consumer to Business
  • B2B Business to Business
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From Real-time payments are changing the reality of payments

IMPS

Existing Real Time Retail Payment Systems around the Globe

From THE U.S. PATH TO FASTER PAYMENTS FINAL REPORT PART ONE: THE FASTER PAYMENTS TASK FORCE APPROACH

IMPS2

Planned Real Tine Retail Payments Systems around the Globe

 

From Global Trends and Developments in Instant Payments

imps3

Current Payments Ecosystem

  • Faster Payments
  • ACH
  • Cards
  • Closed Loop
  • Distributed Ledger

 

From 2017 Advanced Payments Report

IMPS4

Evolving Landscape of Payment Systems

From 2017 Advanced Payments Report

imps5

 

New RTP Developments

 

From Federal Reserve Payment Trends Update

imps6

USA – The Clearing House RTP System

From Federal Reserve Payment Trends Update

imps7

USA – How Payment Platforms Compare?

  • Wires
  • Next Day ACH
  • NACHA Same Day ACH
  • EWS Zelle
  • TCH RTP
  • Mastercard Send

 

From Federal Reserve Payment Trends Update

imps8

Key Sources of Research:

 

 

Real-time payments are changing the reality of payments

Deloitte

Click to access us-cons-real-time-payments.pdf

 

 

 

THE U.S. PATH TO FASTER PAYMENTS
FINAL REPORT PART ONE: THE FASTER PAYMENTS TASK FORCE APPROACH

Federal Reserve

2017

Click to access US-path-to-faster-payments-pt1-201701.pdf

 

 

Zelle

https://www.zellepay.com

 

 

 

Real-Time Payments for P2P
.
Eric Foust
Early Warning
Mike Wolf

2017

Click to access 12.10-Zelle-53-RTP-conference-deck-005.pdf

 

 

Banks Re-enter the P2P Payments Fray: With Mobile, Will this Time Be Different?

By Terri Bradford, Payments Research Specialist

Fed Reserve

Click to access psr-briefingjan2017.pdf

 

 

 

Faster Payments Finds Its Future

NACHA

2016

Click to access Faster-Payments-Tracker-December-2016.pdf

 

 

 

Faster payments: Building a business, not just an infrastructure

McKinsey

https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Faster%20payments%20Building%20a%20business%20not%20just%20an%20infrastructure/Faster%20payments.ashx

 

 

The Road to Faster Payments

As Real-Time Payments Rise, Payment Hubs See a Resurgence

The Clearing House

2017

https://www.theclearinghouse.org/research/banking-perspectives/2017/2017-q4-banking-perspectives/payment-hubs

 

 

 

Real-Time Payments and Settlement Comes to the United States

How U.S. Banks Can Realize the Full Opportunities of Immediate Payments for Their Customers

D+H

2016

Click to access D+H-US-Real-Time-Payments-and-Settlement-whitepaper-coauthored-PNC-TCH-15-April%202016.pdf

 

 

 

Real-Time, Cross-Border Payments Survey

2017

IPFA

Click to access Real-time-Cross-Border-Payments-Final.pdf

 

 

 

Strategies for Improving the U.S. Payment System Federal Reserve Next Steps in the Payments Improvement Journey

Federal Reserve

2017

Click to access other20170906a1.pdf

 

 

 

Strategies for Improving the U.S. Payment System

Federal Reserve

2015

Click to access strategies-improving-us-payment-system.pdf

 

 

 

Strategies for Improving the U.S. Payment System
Feb 2016 Progress Report

Fed Reserve

2016

Click to access usfed-criteria.pdf

 

 

Strategies for Improving the U.S. Payment System

Progress Report | January 2017

Federal Reserve

Click to access sips-progress-report-201701.pdf

 

 

 

Strategies for Improving the U.S. Payments System

Claudia Swendseid

2016

https://www.minneapolisfed.org/~/media/files/news_events/events/payments-swendseid.pdf?la=en

 

Strategies for Improving the U.S. Payment System

2015

http://aftweb.com/aws/AFT/asset_manager/get_file/110552

 

 

Making Payments Faster in the United States

Clearing House

2015

https://www.theclearinghouse.org/~/media/puertoricosamedayach2015/making%20payments%20faster%20in%20the%20us%20tim%20mills.pdf?la=en

 

 

 

The Clearing House RTP System “Back to The Future”: Emerging Payment Systems Legal and Regulatory Issues

2017

Click to access back_to_the_future_emerging_payment_systems_-_krebs.pdf

 

 

The Federal Reserve Faster Payments and Secure Payments Task Forces
2016 Smart Card Alliance Payments Summit

April 5, 2016

Click to access PACIFICA-7_TUE_445_AADLAND_Smart-Card-Alliance_Faster-and-Secure-Payments-Task-Forces_4-5-16.pdf

 

 

 

Understanding and Regulating Twenty-First Century Payment Systems: The Ripple Case Study

Marcel T. Rosner
Delaware Court of Chancery
Andrew Kang
University of Michigan Law School

2016

https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1239&context=mlr

 

 

 

US Retail Payment Instruments and Systems

Structure, Transformation & Public Policy

NY Fed Reserve

2015

Click to access 15-Retail-Payments-2015-Littman.pdf

 

 

 

Digital Payments Strategy for U.S. Retail Banks

Cognizant

2015

Click to access Digital-Payments-Strategy-for-U.S.-Retail-Banks-codex1358.pdf

 

 

US Real Time Payments Technology Playbook

The Clearing House

2016

https://www.theclearinghouse.org/-/media/tch/pay%20co/rtp/tch%20rtp%20technology%20playbook%20111716%20v1.pdf?la=en

 

 

 

16 in 2016: Trailblazing trends in global payments

McKinsey

2016

https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/16%20in%202016%20Trailblazing%20trends%20in%20global%20payments/16%20in%202016%20Trailblazing%20trends%20in%20global%20payments_2015.ashx

 

 

 

Earthport

https://www.earthport.com/

 

 

 

Flavors of the Fast

A trip around the world in immediate payments

FIS

Click to access Flavours_Of_Fast.pdf

 

 

 

Global Trends and Developments in Instant payments

Edger Dunn

14th February, 2017

Click to access MPE-Track-A-Afternoon-Session-Global-Trends-and-Developments-in-Instant-Payments-Ulf-Geismar-14-02-2017-VF-1.pdf

 

 

 

EXECUTIVE GUIDE TO IMMEDIATE/ REAL-TIME PAYMENTS

Accenture

Click to access executive-guide-to-immediate-payments-tl.pdf

 

 

 

INTERNATIONAL PAYMENTS IN A DIGITAL WORLD

Accenture

2017

Click to access Accenture-International-Payments-Digital-World.PDF

 

 

 

Ripple as an Innovative Solution to the Ways We Pay

RIPPLE

Click to access candian_comment_letter.pdf

 

 

 

Instant revolution of payments?

The quest for real-time payments

Deutsche Bank

2015

Click to access Deutsche-Bank-Research-Instant-revolution-of-payments-The-quest-for-real-time-payments.PDF

 

 

 

Retail payments and the real economy

ECB

Iftekhar Hasan, Tania De Renzis
and Heiko Schmiedel

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1572.pdf?0568b27871896eb01f54b0c4c40a8f63

 

 

 

NATIONAL RETAIL PAYMENT SYSTEMS TO SUPPORT FINANCIAL INCLUSION

AFI

2017

Click to access DFS_GN_29_stg4.pdf

 

 

 

Real-time payments for real-time banking
How banks can seize the full opportunities of immediate payments

Accenture

2015

Click to access Accenture-Banking-Realtime-Payments-Realtime-Bank.pdf

 

 

 

The New Payments Platform: Fast-Forward to the Future

Cognizant

Click to access the-new-payments-platform-fast-forward-to-the-future-codex1299.pdf

 

 

 

24/7 Domestic Real-time Payments

SWIFT

Click to access 16577_Expl1_SWIFT2020_2.pdf

 

 

Innovations in retail payments

Report of the Working Group on Innovations in Retail Payments

BIS

May 2012

Click to access d102.pdf

 

 

Fast payments – Enhancing the speed and availability of retail payments

BIS

November 2016

 

Click to access d154.pdf

 

Is a Global Real-Time Payment System Possible?

TCH

2015

https://www.theclearinghouse.org/research/2015/2015-q3-banking-perspectives/global-real-time-payments

Federal Reserve Payment Trends Update

2017

Federal Reserve Bank of Richmond

Click to access 04192017%20Retail%20Payments.pdf

 

 

 

THE IMPORTANCE OF THE RETAIL PAYMENT SYSTEM

Hal S. Scott

Nomura Professor and Director, Program on International Financial Systems Harvard Law School

December 16, 2014

 

https://dash.harvard.edu/bitstream/handle/1/16883011/hal-scott—mastercard-retail-payment-systems.pdf?sequence=1

 

Mechanism Design for Near Real-Time Retail Payment and Settlement Systems

Zhiling GUO
Singapore Management University, ZHILINGGUO@smu.edu.sg

Robert John UFFMAN
Singapore Management University, rkau man@smu.edu.sg

Mei LIN
Singapore Management University, mlin@smu.edu.sg

Dan MA

2015

 

http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=3494&context=sis_research

 

 

 

2017 Advanced Payments Report

Edgar Dunn & Company

2017

http://edgardunn.com/2017/06/2017-advanced-payments-report/

Network Economics of Block Chain and Distributed Ledger Technology

Network Economics of Block Chain and Distributed Ledger Technology

 

Quadruple Accounting System

Morris Copeland, and Hyman Minsky emphasized quadruple entry accounting system envisioning interrelated interlocking balance sheets of economic agents.  Interlocking balance sheets create a network of economic agents.

I attach a slide from a presentation by Marc Lavoie given at Minsky Summer school in 2010 at the Levy Institute of Economics (Bard College).

 

Minsky

 

There are several FINTECH innovations which are bringing about dramatic changes in the financial services business.

  • Block Chain and Distributed Ledgers
  • Payment Banks
  • Retail P2P Payment services
  • Mobile Payments
  • Secured Wallets
  • Domestic Real Time Payments and Transfers
  • Cross Border Near Real time Money Transfers

 

Block Chain and Distributed Ledgers, in my opinion, are/can be implementation of quadruple accounting principles envisioned by Morris Copeland and Hyman Minsky.  Two economic agents engage in financial transactions which are recorded in distributed ledgers.

Some of the key components of distributed ledger technology are:

  • Peer-To-Peer Networking
  • Cryptography
  • Distributed Data Storage

In contrast with centralized ledgers, distributed ledgers store data at each node in the P2P network.  So there is no need for an intermediating institution.  From a payment system perspective, each node in the P2P network can be thought of as a bank.   Each node will have its own ledger and balance sheet which will record assets and liabilities.

Ripple is a Cross Border money transfer solution which is based on block chain technology.

 

Recent rise of retail P2P payment services such as

  • Xoom
  • M-Paisa
  • PayTM

indicates a trend toward real time payments/money transfers domestic and international.  This trend also indicates decoupling of these services from traditional deposit/lending banks. XOOM is a service provided by PAYPAL for international Money Transfers.  Money transfers are within a few minutes.

In USA, there are new P2P services offered to facilitate faster near real time payments/money transfers through mobile and online interfaces.

  • Venmo (Paypal)
  • Zelle (clearXchange Network)
  • Square Cash
  • Braintree (Paypal)

There are also social media payments available now through which consumers can quickly send money using social media applications such as

  • Facebook (through Messanger app)
  • Snapcash (through SnapChat)
  • Apple PayCash (through imessages app)
  • TenCent via WeChat

 

Rise of payment banks such as PayTM is one such example.  Reserve Bank of India has granted PayTM a payment bank status.  But transfers are still between bank accounts of transacting consumers where deposits are kept. Payment Bank acts as a technology provider and acts as an intermediary.

As per the RBI guidelines, payments banks cannot lend they can only take deposits or accept payments.

There are four payment banks in India now.

  • PayTM Payment Bank
  • Airtel Payment Bank
  • India Post Payment Bank
  • FINO Payment Bank

 

Mobile payments using secured wallets is another such example.

  • Consumer to Business payments and transfers
  • Consumer to Consumer payments and transfers
  • Google Wallet
  • Apple Pay
  • Android Pay
  • Alipay

 

Cross Border Payment Solutions:

  • XOOM
  • Earthport
  • TransferWise
  • RIPPLE
  • Remitly
  • WorldRemit

 

 

Please see my other related posts:

Next Generation of B2C Retail Payment Systems

Cross Border/Offshore Payment and Settlement Systems

 

 

Key sources of Research:

 

Minsky and Godley and financial Keynesianism

Marc Lavoie
University of Ottawa

2010

Click to access Lavoie.pdf

 

Block Chain:  A Primer

2016

Click to access MPRA_paper_76562.pdf

 

Distributed Ledger Technologies/Blockchain: Challenges, opportunities and the prospects for standards

Advait Deshpande, Katherine Stewart, Louise Lepetit, Salil Gunashekar

2017

www2.caict.ac.cn/zscp/qqzkgz/qqzkgz_zdzsq/201708/P020170818579005375876.pdf

 

Banking on Distributed Ledger Technology: Can It Help Banks Address Financial Inclusion?

By Jesse Leigh Maniff and W. Blake Marsh

2017

Click to access 3q17maniffmarsh.pdf

 

 

Distributed ledger technology in payments, clearing, and settlement

Mills, David, Kathy Wang, Brendan Malone, Anjana Ravi, Jeff Marquardt, Clinton
Chen, Anton Badev, Timothy Brezinski, Linda Fahy, Kimberley Liao, Vanessa Kargenian,
Max Ellithorpe, Wendy Ng, and Maria Baird (2016).

Finance and Economics Discussion
Series 2016-095. Washington: Board of Governors of the Federal Reserve System,

2016

Click to access 2016095pap.pdf

 

 

Distributed Ledger Technology: beyond block chain

A report by the UK Government Chief Scientific Adviser

Click to access gs-16-1-distributed-ledger-technology.pdf

 

Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality

Deloitte

Click to access au-deloitte-technology-bitcoin-blockchain-distributed-ledgers-180416.pdf

 

 

Distributed ledger technology in payment, clearing and settlement
An analytical framework

BIS

2017

Click to access d157.pdf

 

 

The Truth About Blockchain

HBR
January–February 2017 Issue

 

https://hbr.org/2017/01/the-truth-about-blockchain

 

THE USE OF BLOCKCHAIN IN CLEARING AND SETTLEMENT

MARECHAL Baptiste

 

 

Peer-to-peer payments: Surveying a rapidly changing landscape

By Jennifer Windh

August 15, 2011

 

Click to access 110815wp.pdf

Bank of Finland’s Payment And Settlement System Simulator (BoF-PSS2)

Bank of Finland’s Payment And Settlement System Simulator (BoF-PSS2)

 

From Payment and Settlement System Simulator

BOF-PSS2

The Bank of Finland provides a simulator called BoF-PSS2 for replicating payment and securities settlement systems. The simulator is adaptable for modelling multisystem setups that can be a combination of payment, securities settlement systems and CCP’s. The simulator is known to be unique and the first of its kind. Since its launch in 2002 it has been distributed to more than 90 countries and has contributed to numerous studies and research papers.

The simulator can be used to fulfill some of the regulatory requirements stated in the PFMI’s and BCBS requirements such as identifying the liquidity risks inpayment systems. Here under are topics the simulator can be used for:

  • Settlement, liquidity and credit risks in FMI’s
  • Systemic Risks and Counterparty risks in FMI’s
  • Identification of critical counterparts
  • Policy change impact evaluation
  • Network analysis
  • Liquidity dependency analysis
  • Relationship analysis of Monetary policy and liquidity needs for settlement of payments
  • Evaluation of sufficiency of liquidity buffers and margins
  • System merger effects on liquidity needs
  • System performance benchmarking
  • Netting algorithm testing and development
  • System development and prototyping

In comparison to static calculations of indicators, the simulation results naturally incorporate network (or systemic) effects rising from the payments flows and the technical properties of the infrastructures themselves. The results obtained from simulations are directly interpretable and have a self-evident meaning which is not always the case with all indicators. The results can directly be used for risk management purposes for example when evaluating the sufficiency of liquidity buffers and margins. Computer simulations take advantage of using the available information in full without losing micro-level information due to indicator aggregations.

The simulator is freely available for research purposes, and has already been introduced in numerous countries. It is possible to tailor and adapt the simulator to specific payment systems. Several adaptations of the simulator have already been made, eg. for TARGET2. The simulator team provides trainings, consultation and tailored adaptations which are priced for cost recovery. The training course aims at providing necessary skills for efficient use of BoF-PSS2 with hands on computer class exercises. It also presents numerous examples from real studies where the tool has been used. For more details see the training course outline. Minimum attendance to the session is four participants.

Basically, trainings are organised upon demand and it is also possible to order a training course to be held onsite outside the proposed dates.

 

From Payment and Settlement System Simulator / Product Page

product_en_144ppi

From Payment and Settlement System Simulator / Documentation page

The Bank of Finland Payment and Settlement System Simulator, version 2 (BoF-PSS2), is a powerful tool for payment and securities settlement system simulations. The simulator supports multiple system structures and various settlement models.

The simulator is designed for analysing liquidity needs and risks in payment and settlement systems. Special situations, often difficult or impossible to test in a real environment, can be readily simulated with BoF-PSS2. Thus, users can study how behavioral patterns and changes in policy and conventions impact the payment and settlement systems and participants. The efficiency of gridlock-resolution and liquidity-saving measures can be analyzed as well.

The application is divided into three sub-systems:

  • Input sub-system for preparing and defining the input data,
  • Execution sub-system for running simulations,
  • Output sub-system for basic analyses of simulation results.

Different settlement logics are implemented into separate algorithms. To replicate specific systems, appropriate algorithms must be selected with appropriate parameters. Different algorithm combinations can be used to replicate a large number of current and potential settlement conventions and structures. Real-time gross settlement systems (RTGS), continuous net settlement systems (CNS), deferred net settlement systems (DNS) and hybrid systems can be implemented with the simulator as well as securities settlement and multicurrency systems. Inter-system connections and bridges make it possible to define multi- system environments consisting of various types of interdependent systems. E.g. it is possible to replicate the interaction of RTGS and securities settlement systems.

Advanced users of BoF-PSS2 can define and build their own user modules/algorithms and expand the basic features of the simulator to analyse new types of settlement processes. It is also possible to implement agent based modeling by adding algorithms replicating the participants’ behavior and decision making to control and alter the flow of submitted transactions. As a later addition, the simulator also has a network analysis module for generating networks and network indicators from either input data or results of simulations.

BoF-PSS2 has an easy to use graphical user interface. It is also possible to automate the use of the simulator via its command line interface (CLI).

 

From Payment and Settlement System Simulator / Product Page

TARGET2 SIMULATOR

A separate TARGET2 simulator version of BoF-PSS2 has been developed and delivered for the European System of Central Banks. It is based on the same basic software architechture and features of BoF-PSS2. Additional features are implemented as separate algorithm modules which replicate the proprietary algorithms of actual TARGET2 system. It is used by Eurosystem for quantitative analyses and numerical simulations of TARGET2.

TARGET2 simulator has been jointly delivered by Suomen Pankki (Bank of Finland) and the 3CB (Banca d’Italia, Deutsche Bundesbank, Banque de France) based on a decision of ECB Governing Council.

 

 

Key Terms

  • Liquidity Simulator
  • Payment System
  • Risk Management
  • Financial Stability
  • Cascades of Failures
  • Congestions and Delays
  • Financial Market Infrastructures
  • Payment Networks
  • Contagion
  • RTGS
  • Simulation Analysis
  • TARGET2
  • Intraday Payments

 

Key People

  • Harry Leinonen
  • Tatu Laine
  • Matti Hellqvist
  • Kimmo Soramäki

 

 

Key Sources of Research:

 

Payment and Settlement System Simulator – A tool for analysis of liquidity, risk and efficiency

Bank of Finland Payment and Settlement Simulator

2006

 

Click to access 2006_11a_hl.pdf

 

 

BoF-PSS2 Technical structure and simulation features

Harry Leinonen

Click to access 20031519seminarpresentationleinonen2.pdf

 

 

Payment and Settlement System Simulator

https://www.suomenpankki.fi/en/financial-stability/bof-pss2-simulator/

https://www.suomenpankki.fi/en/financial-stability/bof-pss2-simulator/product/

https://www.suomenpankki.fi/en/financial-stability/bof-pss2-simulator/events/

 

 

Publications

https://www.suomenpankki.fi/en/financial-stability/bof-pss2-simulator/publications/

 

 

Quantitative analysis of financial market infrastructures: further perspectives on financial stability

E50

https://helda.helsinki.fi/bof/handle/123456789/13990

 

 

Diagnostics for the financial markets : computational studies of payment system : Simulator Seminar Proceedings 2009-2011

E45

https://helda.helsinki.fi/bof/handle/123456789/9381

 

 

Simulation analyses and stress testing of payment networks

E42

https://helda.helsinki.fi/bof/handle/123456789/9369

 

 

Simulation studies of liquidity needs, risks and efficiency in payment networks : Proceedings from the Bank of Finland Payment and Settlement System Seminars 2005-2006

E39

https://helda.helsinki.fi/bof/handle/123456789/9370

 

 

Liquidity, risks and speed in payment and settlement systems : a simulation approach

E31

https://helda.helsinki.fi/bof/handle/123456789/9355

 

 

Simulation Analysis and Tools for the Oversight of Payment Systems

 

Click to access 2012-12-vigilanciasistemasdepago-10.pdf

 

 

Utilizing the BoF simulator in quantitative FMI analysis

Tatu Laine

Banco de México

15.10.2014

 

Click to access %7B15D9D1D3-D455-1E98-6FA6-AFB3B30C4ACB%7D.pdf

 

 

TARGET2 Simulator

Click to access target_newsletter_7_2013.pdf

 

 

Intraday patterns and timing of TARGET2 interbank payments

Marco Massarenti

Silvio Petriconi

Johannes Lindner

 

Click to access 0b5a0eb557b478843891449221c6ed2e7502.pdf

 

 

Communities and driver nodes in the TARGET2 payment system

Marco Galbiatiy, Lucian Stanciu-Vizeteuz

June 17, 2015

 

Click to access 5593d39c08ae1e9cb42a1904.pdf

 

 

Payment Delays and Contagion

Ben Craig† Dilyara Salakhova‡ Martin Saldias§

November 14, 2014

Click to access CraigSalakhovaSaldias_2014_preview.pdf

 

 

Federal Reserve Bank of New York Economic Policy Review

September 2008 Volume 14 Number 2

Special Issue: The Economics of Payments

 

Click to access EPRvol14n2.pdf

 

 

Contagion in Payment and Settlement Systems

 

Matti Hellqvist

2006

 

Click to access mh.pdf

 

 

Applications of BoF-PSS2 simulator and how to use it in agent based models

 

Click to access Hellqvist(presentation)_ABM-BaF09.pdf

 

 

Simulation and Analysis of Cascading Failure in Critical Infrastructure

Robert Glass, Walt Beyeler, Kimmo Soramäki, MortenBech and Jeffrey Arnold

Sandia National Laboratories, European Central Bank,  Federal Reserve Bank of New York

Click to access 07-glass_pres.pdf

 

 

Simulation analysis of payment systems

 

Kimmo Soramäki

2011

Click to access 2011-11-vigilancia-07.pdf

 

 

Simulating interbank payment and securities settlement mechanisms with the BoF-PSS2 simulator

Harry Leinonen

Kimmo Soramäki

 

2003

 

Click to access bof_dp_2303.pdf

 

Evolving Networks of Regional RTGS Payment and Settlement Systems

Evolving Networks of Regional RTGS Payment and Settlement Systems

 

Globalization has created incentives for nations to form regional economic unions to take advantage of scale and resource pooling.

There are a lot of efforts underway to develop and implement regional RTGS between central banks.  There are several models for integration.

  • Many States, Many Currencies – Hong Kong SAR
  • Many States, Single Currency – EU uses EURO and Central America uses USD, SADC uses South African RAND

RTGS systems designed to facilitate such economic integration.

  • RTGS – RTGS – Interlink model – Hong Kong, ASEAN 5
  • RTGS-RTGS – SSP Single Shared Platform model – EU

 

 

 

From  Payment System Interoperability and Oversight: The International Dimension

Several factors may prompt the international interlinking of PSIs. In most cases, linking national PSIs to achieve international interoperability of certain payment services comes from a country’s decisions to exploit the benefits of international economic and financial integration (i.e., greater international trade and investment activities, attraction of foreign investment capital, risk diversification, and deepening and broadening domestic financial and capital markets), since integration requires economic units to have convenient access to cross-border payment service facilities. A powerful driver to regional PSI interlinking is constituted by the political agreements among countries in a region on a broad, long-term economic and financial development cooperative program. Usually, in this case, the efforts to link payment system (as well as other financial market) infrastructures are supported actively by a core group of countries in organized regional development policy and planning forums.5 In some cases, interlinking may result from decisions by national financial authorities to address the demand from market participants (and/or their customers, including asset managers, other securities servicers, and other types of businesses) for cross-border access to international markets at lower end-to-end transaction costs.

Cross-border transactions can be made possible by establishing bilateral links between national PSIs.8 Perhaps the simplest form of PSI interlinking is achieved when two central banks agree on a scheme to support or facilitate cross-border transactions. This likely requires linking the large-value transfer systems of the countries involved by developing technical interfaces between them. Some other solutions are possible which link national payment systems through central bank bilateral accounts, whereby participating central banks hold settlement accounts either with one another or with a common commercial bank.

More advanced solutions for PSI interlinking are characterized by the adoption of a unified scheme and a common technical-operational facility to process the transactions defined under the scheme. The common (regional or global) technical-operational facility follows one of two basic architectures: the decentralized model, or the single or fully centralized model. Arrangements adopting a decentralized model for regional, cross-regional and/or global payments link existing national settlement systems (Figure 1). These normally feature different degrees of sophistication and complexity. Most decentralized regional payment systems are designed in a “hub-spoke” structure, in which there is a central administrative and technical-operational facility referred to as the “hub entity”, which links the participating systems.9 The interlinking mechanism is usually a standardized messaging and connectivity technology, which links account management and the various national operating systems together, while participants access the hub entity through the national settlement infrastructure of their jurisdiction.

In the centralized platform model, the national payment system infrastructures are replaced by a single international system (Figure 2). In this case, it is more appropriate to talk about international payment system integration. Participants access the system directly through the relevant telecommunications network or indirectly through any direct participant in the system. Centralized platforms are mostly identified with international integration projects, most notably regional, which have evolved into monetary unions with the use of a regional currency. They minimize or even eliminate the distinction between cross-border and domestic payments, and allow for processing both types of transactions in the same system seamlessly.

Various examples illustrate the different technical modalities of interlinking discussed above. One example of bilateral links between national payment systems is the linking of the Hong Kong Monetary Authority’s U.S. dollar real-time gross settlement (RTGS) system with the RTGS systems of other central banks in the region, specifically Bank Negara Malaysia’s RENTAS and Bank Indonesia’s BI-RTGS. These systems operate on a common operating platform. Their links, which are independent from each other, allow payment-versus-payment settlement between the national currencies of those countries and the U.S. dollar. Other illustrative examples are the East African Payments System (EAPS), which shows the case of national payment systems linked through the holding of bilateral accounts among central banks, and the Sistema de Pagos en Moneda Local involving the national RTGS systems of Argentina and Brazil, which is an example of the national payment systems linked through their respective central banks which hold settlement accounts with a common commercial bank. Currently, two SML systems are operational: one linking the RTGS systems of Argentina and Brazil, and other linking the RTGS systems of Brazil and Uruguay.

Other cases exemplify the decentralized and centralized models of international payment system integration. Schemes with a decentralized settlement system involving multiple parties have been developed in regions where there is a regional currency, as well as for settling cross-border payments denominated in a single foreign currency. The most well-known example of a unified scheme with a decentralized settlement system for a regional currency was the original TARGET in Europe, which linked the Euro RTGS systems of EU national central banks. Another example is the Sistema de Interconexión de Pagos in Central America and the Dominican Republic, which uses a decentralized architecture for settling cross-border payments in U.S. dollars.11

With regard to the centralized model of PSI interlinking (or integration), relevant examples are TARGET2 and EURO1 supporting euro denominated payments in the European Union,12 the STAR-UEMOA for the West African CFA Franc throughout the West African Economic and Monetary Union, and the RTGS system of the Eastern Caribbean Central Bank (ECCB) for the EC dollar in the Eastern Caribbean Currency Union. Over the past decade, centralized payment system infrastructures have also been developed regionally, where no regional currency existed, to facilitate settlement of domestic, regional, and cross-regional payments in more than one settlement currency (e.g., RAPID in the United Arab Emirates, and CHATS in Hong Kong). Finally, an example of a unified global system for settlements denominated in multiple currencies is CLS Bank International, which links the national RTGS systems of the participating jurisdictions/currencies, with a strong reliance on the legal agreement of the rulebook and the technical standards.

The Southern African Development Community (SADC) regional payment integration project in the Southern African region captures aspects of a centralized model. The project develops on the International Payments Framework (IPF) concept to construct a regional payment infrastructure composed of a regional automated clearing house (ACH) and settlement system.14 The current architecture consists of the SADC Integrated Regional Electronic Settlement System (SIRESS), an electronic central system that facilitates cross border trade in the SADC region. SIRESS, and excludes domestic inter-bank payments and settlements. It allows participating banks to settle regional transactions denominated in South African Rand (ZAR) within SADC countries, on an RTGS basis. The system is operated by the South African Reserve Bank (SARB) on behalf of the SADC Committee of Central Bank Governors, with SARB also acting as the ZAR settlement bank. It is a safe and efficient payment/settlement system which reduces the cost to banks since there is no correspondent bank (intermediary) involved.15 The project should eventually evolve into a single regional payment settlement infrastructure, in tandem with the planned monetary union.

The prototypal regional systems for retail payments were multilateral arrangements governed by service agreements and operational protocols of limited standardization between participating banks in different countries. For example, TIPANET, which was designed as a cross-border retail payment service for credit transfers between cooperative banks in Europe and Canada, provided participating members with somewhat lower cost and faster payment delivery than the usual correspondent banking arrangements of that time.16 The widespread growth of credit and debit card payment schemes since the late 1980s provided a second wave of regional and crossregional PSI linkages and integration.

Some regional cross-border arrangements have developed across direct (horizontal) linkages between national schemes. This is the case of the arrangement linking the Interac debit card system in Canada, the NYCE Payments Network and PULSE systems in the United States, and Union Pay in China for access by the schemes’ cardholders to the cross-border debit and ATM networks. Global card payment schemes such as VISA and MasterCard provide cross-border interoperability in transaction systems for credit and debit payments and ATM cash withdrawals for cardholders and (vertical) integration of these systems with proprietary clearing and settlement systems. As global card payment schemes, they deal with domestic, regional, and cross-regional payments.17

Regional and cross-regional interlinking of national and funds transfer systems in general is a fairly recent development. Some, such as EBA Clearings’ STEP2 in Europe and SICA-UMEOA in the West African Monetary and Economic Union, are single regional schemes and systems for both domestic and cross-border payments among member countries using the euro and the CFA franc, respectively. Others are generally constructed through (horizontal) bilateral linkages between national ACHs. These linkages allow the ACH members in one country to transmit customer payments, typically via credit transfers, to end-receivers holding accounts with ACH members in other countries. The network architecture for regionally or cross-regionally linked payment clearing infrastructure and for single regional ACHs can be either a hub-spoke arrangement with a central hub connection, a centralized network structure, or a distributed bilateral network structure, which contemplates the operation of large providers of payment clearing and processing services (Box 1). Another example, in Europe, is the Single Euro Payments Area (SEPA) scheme compliant clearing and settlement mechanisms (CSMs). Services offered by competing CSMs, based on the SEPA payment schemes, are governed by market forces and are outside the remit of the European Payments Council (EPC). The EU regulation provides that, within the EU, a PSP reachable for a national euro credit transfer or direct debit shall be reachable for euro credit transfers or direct debits initiated through a PSP located in any member state. Any PSP participating in any of the EPC SEPA Schemes (SEPA Credit Transfer, SEPA Direct Debit), under the relevant scheme adherence agreement with the EPC and the relevant EPC SEPA Scheme Rulebook, is permanently obligated to comply with reachability from its readiness date. Each PSP needs to determine how to achieve full reachability for the EPC SEPA Scheme(s) it has adhered to. There are several ways for PSPs to send and receive euro payment transactions to and from other PSPs across SEPA. PSPs can choose and use any solution or combination of solutions, directly or indirectly, as long as reachability and compliance with the EPC SEPA Schemes are effectively ensured.

 

Main Regions with Regional RTGS Systems

  • EU TARGET2
  • Hong Kong SAR
  • West Africa – WAMZ
  • East Africa – EAPS
  • South Africa (SADC) – SIRESS
  • ASEAN AEC – ASEAN 5 RTGS
  • Central America – USD based RTGS – SIP

 

crossbor3crossbor4

 

Europe TARGET2 

Since the establishment of the European Economic Community in 1958 there has been a progressive movement towards a more integrated European financial market. This movement has been marked by several events. In the field of payments, the most visible were the launch of the euro in 1999 and the cash changeover in the euro area countries in 2002.
The establishment of the large-value central bank payment system TARGET was less visible, but also of great importance. It formed an integral part of the introduction of the euro and facilitated the rapid integration of the euro area money market.
A unique feature of TARGET2 is the fact that its payment services in euro are available across a geographical area which is larger than the euro area. National central banks which have not yet adopted the euro also have the option to participate in TARGET2 to facilitate the settlement of transactions in euro. When new Member States join the euro area the participation in TARGET2 becomes mandatory. The use of TARGET2 is mandatory for the settlement of any euro operations involving the Eurosystem.
As of February 2016, 25 central banks of the EU and their respective user communities are participating in, or connected to, TARGET2:
The 20 euro area central banks (including the ECB) and
five central banks from non-euro area countries: Bulgaria, Croatia, Denmark, Poland and Romania.

 

 

 

Hong Kong RTGS System

System Links

Hong Kong’s financial infrastructure is designed to cater for cross-border as well as domestic economic activities. Links with payment systems and debt securities systems in other economies provide an easily accessible payment and settlement platform for cross-border economic transactions and financial intermediation.

Payment Links

Links with Guangdong (including Shenzhen) – Launched in phases since January 1998, these links cover cross-border RTGS payments in Hong Kong dollars and US dollars, and cheque clearing in Hong Kong dollars, US dollars and renminbi, with Guangdong Province including Shenzhen.1 The use of these links, which helps expedite payments and remittances between Hong Kong and Guangdong, has been rising gradually with the increasing economic integration between Hong Kong and the Mainland.

Cross-border payment arrangements with Mainland – Cross-border payment arrangements involving the Mainland’s Domestic Foreign Currency Payment System were established in March 2009 to facilitate foreign currency funding and liquidity management of Mainland banks and commercial payments. The cross-border payment arrangements currently cover four currencies – the Hong Kong dollar, US dollar, euro and British pound.

Link with Macau – The one-way joint clearing facility for Hong Kong dollar and US dollar cheques between Hong Kong and Macau was launched in August 2007 and June 2008 respectively, reducing the time required for clearing Hong Kong dollar and US dollar cheques drawn on banks in Hong Kong and presented in Macau from four or five days to two.

Link with Malaysia – A link between the Ringgit RTGS system in Malaysia (the RENTAS system) and the US dollar RTGS system in Hong Kong came into operation in November 2006. The link helps eliminate settlement risk by enabling PvP settlements of foreign exchange transactions in ringgit and US dollars during Malaysian and Hong Kong business hours. This is the first cross-border PvP link between two RTGS systems in the region.

Link with Indonesia – The PvP link between Hong Kong’s US dollar RTGS system and Indonesia’s Rupiah RTGS system was launched in January 2010. The link helps eliminate settlement risk by enabling PvP settlements of foreign exchange transactions in Rupiah and US dollars during Indonesian and Hong Kong business hours.

Link with the Continuous Linked Settlement (CLS) system – The CLS system, operated by CLS Bank International, is a global clearing and settlement system for cross-border foreign exchange transactions. It removes settlement risk in these transactions by settling them on a PvP basis. The Hong Kong dollar joined the CLS system in 2004.

Regional CHATS – This is an extension of the RTGS systems in Hong Kong in the regional context. Regional payments in Hong Kong dollars, US dollars, euros and renminbi can use the RTGS platform in Hong Kong to facilitate cross border/cross bank transfers in those currencies.

Link with Thailand

In 2014, Hong Kong started operating PvP link between HK’s US dollar RTGS system and Thailand’s BAHT RTGS system.

 

regionalrtgs

 

 

US FEDWIRE RTGS System

This is surprisingly subtle.

When, for instance, when bank A in the Richmond Federal Reserve district sends $1000 in reserves to bank B in the Minneapolis Federal Reserve district, reserves are taken out of bank A’s account at the Richmond Fed and placed into bank B’s account at the Minneapolis Fed.

Now, bank A’s reserves are a liability on the books of the Richmond Fed, while bank B’s reserves are a liability on the books of the Minneapolis Fed. Without any offsetting change, therefore, the process would result in the Richmond Fed discharging a liability and the Minneapolis Fed gaining a liability – and if this continued, regional Fed assets and liabilities could become highly mismatched.

The principle, then, is that there should be an offsetting swap of assets. It would be too complicated to swap actual assets every time there is a flow of reserves between banks in different districts. (There’s over $3 trillion in transactions every day on Fedwire, the Fed’s RTGS system – and if even a fraction of those are between different districts, the amounts are really enormous.) Instead, in the short run the regional Feds swap accounting entries in an “Interdistrict Settlement Account” (ISA). In the example above, the Minneapolis Fed’s ISA position would increase by $1000, while the Richmond Fed’s ISA position would decrease by $1000, to offset the transfer of liabilities.

So far, this is all very similar to the controversial TARGET2 system in the Euro area, in which large balances between national banks have recently been accumulating. The American system is different, however, because ISA entries are eventually settled via transfers of assets. Every April, the average ISA balance for each regional Fed over the past year is calculated, and this portion of the balance is settled via a transfer of assets in the System Open Market Account (the main pile of Fed assets, run by the New York Fed). Hence, if in April the Minneapolis Fed has an ISA balance of +$500, but over the past year it had an average balance of +$2000, its balance is decreased (by $2000) to -$1500, and it has an offsetting gain of $2000 in SOMA assets.

As this example shows, since it is average balances over the past year that are settled, not the current balances, ISA balances do not necessarily go to zero every April. Historically, they were fairly tiny anyway, but since QE brought dramatic increases in reserves, these balances have sometimes been large and irregular. In the long run, though, the system prevents any persistent imbalances from accumulating.

(Note: the process in April is a little bit more complicated than I describe, since some minor transfers of gold certificate holdings are also involved. Basically, gold certificates are transferred between regional Feds to maintain a constant ratio of gold certificates to federal reserve notes; the transfers of SOMA assets are adjusted to account for this. Wolman’s recent piece for the Richmond Fed is one of the few sources that describes the system in detail.)

 

Twelve Districts of Federal Reserves

Federal Reserve Banks

  • Boston
  • New York
  • Philadelphia
  • Cleaveland
  • Richmond
  • Atlanta
  • Chicago
  • St. Louis
  • Minneapolis
  • Kansas City
  • Dallas
  • St. Francisco

Structure of Federal Reserve

Inter district Settlement Account Balances

 

 

East African Community

EAC Payment and Settlement Systems Integration Project (EAC-PSSIP)

 

The East African Community Secretariat has received financing from the African Development Fund (ADF) toward the cost of the establishment of EAC Payment and Settlement Systems Integration Project (EAC- PSSIP) and intends to apply part of the agreed amount for this grant to payments under the contract for Audit Services for the EAC Payment and Settlement Systems Integration Project (EAC-PSSIP).

The EAC-PSSIP is an integral part of the EAC Financial Sector Development and Regionalisation Project’s (FSDRP) higher objective of broadening and deepening the financial sector and is aimed at complementing the integration of the regional financial market infrastructure to facilitate the undertaking of cross border funds transfer in support of the economies of the region as a whole. The project objective is to contribute to the modernization, harmonization and regional integration of payment and settlement systems.

The project specifically aims at: enhancing convergence and regional integration of payment and settlement systems; and strengthening a harmonized legislative and regulatory financial sector capacity in the Partner States. The Project is structured under the following components: Component 1: Integration of Financial Market Infrastructure; Component 2: Harmonization of Financial Laws and Regulations; and Component 3: Capacity Building.

The project commenced its operation in January, 2014 and it was officially launched in March, 2014.

Towards A Single Currency

The latest development is the 2013 Monetary Union protocol, which sets out the terms for the introduction of a single currency by 2024. The IMF has stated that greater integration is “expected to help sustain strong economic growth and improve economic efficiency. A larger regional market will lead to economies of scale, lower transaction costs, increased competition, and greater attractiveness as a destination for FDI.” The first step towards this goal has already been taken. In May 2014 the East African Payment System (EAPS) was launched. The new system will facilitate real-time cross-border payments between member states. Initially, the EAPS was operational between Kenya, Tanzania and Uganda, linking the Tanzania Interbank Settlement System, the Kenya Electronic Payment and Settlement System, and the Uganda National Interbank Settlement. Lucy Kinunda, director of national payment systems at the Tanzanian central bank, told the local press, “We see the enthusiasm among commercial banks and traders building up as it facilitates intra-regional trade by reducing costs and risks in money transfers across border.”

While there is much expectation for the single currency and the political and economic integration it will bring, the main challenge will be the process of macroeconomic convergence. There has been substantial variation in inflation and economic growth rates within the EAC. For Kenya, there will also be a challenge in meeting the macroeconomic criteria laid out in the Monetary Union Protocol. In the decade to the end of 2013, Kenya only achieved the inflation target of below 8% in 2010 and 2013. The country fares better on the ratio of public debt to GDP, maintaining a ratio below the target level of 50% every year between 2008 and 2013. The member states have almost a decade to meet the convergence criteria.

 

Member States

  • Burundi
  • Kenya
  • Rawanda
  • Tanzania
  • Uganda

 

 

 

SADC – Southern African Development Community – uses RAND as settlement Currency

The Southern African Development Community (SADC) aims to achieve economic development, peace and security, alleviate poverty, and enhance the standard and quality of life of the peoples of Southern Africa through regional integration. Current status In order to achieve the above objective, a comprehensive development and implementation framework – the Regional Indicative Strategic Development Plan (RISDP) – was formulated in 2001 guiding the regional integration over a period of fi fteen years (2005-2020). The RISDFP outlines key integration milestones in fi ve areas: free trade area, customs union, common market, monetary union and single currency. The free trade area was achieved in August 2008, meaning that for 85% of intra-regional trade there is zero duty. The second milestone, to establish a customs union, has been postponed, with a new target date of sometime in 2013. Although the ultimate goal of monetary union with a single currency is several years away, the SADC Payment System integration project is already in motion. This has strategic objectives to: harmonise legal and regulatory frameworks to facilitate regional clearing and settlement arrangements; implement an integrated regional cross-border payment settlement infrastructure; and establish a co-operative oversight arrangement based on the harmonised regulatory framework. The first phase of the cross-border payment settlement infrastructure (SIRESS) went live for the Common Monetary Area countries that use the South African rand (South Africa, Lesotho, Namibia and Swaziland) in July 2013. The new system allows the settlement of payment transactions in a central location using rand as the common settlement currency. Next steps – towards an Economic Union If successful, the new system will be rolled out to the rest of the SADC Member States as the region advances towards its eventual establishment as an economic union. In parallel, the immediate next step is the establishment of the SADC customs union, which presents a number of challenges; the major one is the establishment of a single Common External Tariff, which requires convergence of all individual tariff policies into a single and uniform tariff regime.

The first stage of the Sadc Integrated Regional Electronic Settlement System (SIRESS), being the first go-live involving countries in the Common Monetary Area (CMA) namely Lesotho, Namibia, South Africa and Swaziland, was initiated in July 2013. Phase Two involved Malawi, Tanzania and Zimbabwe going live in April 2014 followed by Mauritius and Zambia which went live in September 2014 under Phase Three. Since the launch of Siress, 43% of payments in the Sadc region are now executed through the system, which settles payments in South African rand. By April 2015 Siress had reached the ZAR1 trillion (US$85,1 billion) settlement mark. This phenomenal growth of Siress is emblematic of the growing importance and influence of regional payment systems in general, the rationale of which is the subject of this article.

 

Member States

  • Angola
  • Botswana
  • Congo
  • Lesotho
  • Madagascar
  • Malawi
  • Mauritius
  • Mozambique
  • Namibia
  • Seychelles
  • South Africa
  • Swaziland
  • Tanzania
  • Zambia
  • Zimbabwe

As of 2015, 9 out of the 15 countries have joined the RTGS system.

  • Lesotho
  • Malawi
  • Namibia
  • Mauritius
  • Soth Africa
  • Swaziland
  • Tanzania
  • Zambia
  • Zimbabwe

 

sadc_member_states_lowres

 

 

 

ECOWAS – West Africa Monetary Zone (WAMZ)

The Economic Community of West African States (ECOWAS)’ Monetary Cooperation Programme (EMCP) provided the blueprint for the economic integration of the countries of West Africa. Amongst other measures, the EMCP called for the creation of a single monetary zone in the sub-regions known as the West African Monetary Zone (WAMZ). The WAMZ was created in April 2000 with the goal to establish an economic and monetary union of the member countries. In 2001, WAMZ created the West African Monetary Institute (WAMI) to undertake preparatory activities for the establishment of the West African Central Bank (WACB), and the launching of a monetary union for the Zone. The WAMZ programme aims to increase trade among the ECOWAS/WAMZ member countries, reduce transaction costs for the users of payment systems, domesticate cross-border transactions within the WAMZ through the use of a single currency, develop safe, secure and effi cient payment systems that conform to global standards and build a payment system that will facilitate monetary policy management for the WACB.

Ahead of the establishment of the WACB, having a modernised, safe and stable financial infrastructure in place is a prerequisite to introduce a monetary union successfully. To this effect, a grant of about USD 30 million from African Development Bank Fund was approved for the WAMZ Payments System Development Project, which aims to improve the basic infrastructure of the fi nancial sector through upgrade of the payment systems of our countries – The Gambia, Guinea, Sierra Lone and Liberia. The system components of the project include Real-Time Gross Settlement (RTGS) system, Automated Clearing House (ACH) / Automated Cheque Processing (ACP) systems, Central Securities Depository (CSD) / Scripless Securities Settlement (SSS) systems, Core Banking Application (CBA) system and infrastructure upgrade (telecommunication and energy). The Gambia’s high-value payment system went live in July 2012 and Sierra Leone is currently going through the implementation. The target date of the project completion in all four countries is June 2014.

Member States

  • Ghana
  • Nigeria
  • Gambia
  • Guinea
  • Sierra Leone
  • Liberia

 

 

 

COMESA – Common Market for East and Southern Africa

The COMESA launched the COMESA Customs Union in 2009 and the COMESA Regional Payment and Settlement System (REPSS) to facilitate crossborder payment and settlement between Central Banks in the COMESA region. The new system provides a single gateway for Central Banks within the region to effect payment and settlement of trades.

Member States

Burundi, Comoros, DRC, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe

 

 

 

ECOWAS – WAEMU/UEMOA – West African Economic and Monetary Union

created as a single monetary zone is the West African Economic and Monetary Union (WAEMU) / Union Economique et Monétaire Ouest Africaine (UEMOA). The WAEMU was established to promote economic integration among member countries and a common market that share West African francs (CFA francs) as a common currency, monetary policies, and French as an official language. It is a trade zone agreement to encourage internal development, improve trade, establish uniform tariffs for goods, establish a regional stock exchange and a regional banking system.

The UEMOA/WAEMU has successfully implemented macro-economic convergence criteria and an effective surveillance mechanism; adopted a customs union and common external tariff; and combined indirect taxation regulations, in addition to initiating regional structural and sectoral policies. Uniquely amongst Africa’s regionalisation projects, UEMOA/WAEMU has a single central bank, Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), which governs all of the fi nancial institutions across the Union. As part of the project for modernisation of the payment and financial infrastructure, the BCEAO launched a regional Real Time Gross Settlement (RTGS) system in 2004 and the regional Automated Clearing House (ACH) system in 2008.

Member States

Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, Togo

 

 

 

Central America

SIP — A NEW INTEGRATED REGIONAL PAYMENT SYSTEM

  • Guatemala
  • Costa Rica
  • Honduras
  • El Salvador
  • Nicaragua
  • Dominican Republic

Uses US Dollar as settlement Currency.

mapasip

 

The SIP is a novel framework in the Americas, with several elements that dis- tinguish it from other cross-border arrangements: it involves participants in various countries, allows for payment flows in all directions among participants, uses an RTGS concept for its ‘hub’ and interlinks exclusively central bank RTGS systems, not ACHs, and uses a foreign currency for its settlement accounts.

There may certainly be some doubts as to whether the degree of existing commercial integration among the countries of Central America and the Dominican Republic will suffice to make SIP a commercially viable proposition.

But one can see the SIP as part of a wider initiative which seeks to develop the financial infrastructure with a view to furthering a regional financial market. The SIP will be an integral part of the local payment systems of CMCA member countries and, as such, will widen the coverage of available services to the benefit of participants of the national payment systems. Furthermore, the SIP could act as a direct stimulus for those banks that operate in only one of the member countries to offer affordable cross-border payment services to its clients and thus assist in the strengthening of regional financial integration.

 

 

Asia – South East Asia – ASEAN 5

Payment issues: Deputy Trade Minister Bayu Krisnamurthi (second right), accompanied by Artajasa president director Arya Damar (right), inspects a booth during the Integrated Payment System seminar in Jakarta on Wednesday. The seminar aimed at informing business players about the integrated payment system ahead of the ASEAN Economic Community in 2015. (Antara/Prasetyo Utomo)

Bank Indonesia (BI) is currently developing tools to create a more time-efficient and low-cost payment system ahead of the launch of the ASEAN Economic Community (AEC) in 2015, when there will be a free flow of goods, services and people among ASEAN member countries.

‘€œWe are working to develop a more integrated national payment system before having an integrated payment system within the ASEAN region,’€ BI payment system executive director Rosmaya Hadi said at a seminar held by electronic payment service provider PT Artajasa Pembayaran Elektronik on Wednesday.

With the new system, the Indonesian banking industry will have a new real-time gross settlement system (RTGS) in which bank customers can carry out multi currency transactions on a real-time basis, she said.

‘€œWith this system, a bank customer can carry out multicurrency transactions in only minutes through non-cash payments,’€ she said, adding that BI would launch the new system this year.

Rosmaya also said the Indonesian central bank and its counterparts in five ASEAN members, including Malaysia, the Philippines, Singapore and Thailand, had agreed to prepare for an integrated payment system.

‘€œCentral banks of the ASEAN 5 have formed task forces on trade settlements, retail payments, monthly remittances, capital market settlements and standardization to formulate a set of regulations and schemes with which we will have an ASEAN integrated payment system,’€ she said.

Under the regional integrated payment system, people in ASEAN will be able to make financial transactions through ATMs, credit cards or electronic money without sacrificing much time and money.

According to a report by the ASEAN Working Committee on Payment and Settlement Systems (WC-PSS), the integrated payment system will reduce bank charges (such as foreign exchange spread among ASEAN currencies and handling fees), and encourage regulated non-bank remittance service providers to adopt international/common standards in retail payment systems.

Of all the ASEAN member countries, only Indonesia, the Philippines and Thailand currently have full ATM interoperability, according to an Asian Development Bank Institute report published in 2013.

‘€œWhen the AEC commences, ASEAN member countries will have greater need for an integrated payment system as people from across the region will have to carry out transactions from and to their home countries,’€ said Deputy Trade Minister Bayu Krisnamurthi at a similar event.

The AEC, also known as the ASEAN single market, will commence at the end of 2015. Under the AEC, the ASEAN 5 and Brunei Darussalam will have free trade agreements, while Cambodia, Laos, Myanmar and Vietnam will fully participate in the community in 2018.

Artajasa president director Arya Damar said that Indonesia should also develop its banking sector to tap its large market by utilizing more cashless transactions, otherwise other ASEAN countries’€™ banks would do so.

Citing BI data, Artajasa said that with a total of 800,000 local branches, commercial banks in Indonesia could reach only 20 percent of the total working-age population of around 150 million people.

‘€œMeanwhile, with only 15,000 ATMs, Malaysian commercial banks can reach 66 percent of its total working-age population,’€ he said.

Thai commercial banks, with around 66,000 ATMs, can reach about 30 percent of Of Thailand’€™s total working-age population, he added. (koi)

 

SINGAPORE – The five largest members of ASEAN – Indonesia, Malaysia, Singapore, the Philippines and Thailand – have agreed to implement an integrated payment system to enable real time gross settlement (RTGS) systems to be in effect by next year.

“With this system, a bank customer can carry out multi-currency transactions in minutes through non-cash payments,” said Rosmaya Hadi with Bank Indonesia.

The ASEAN 5 Central Banks are currently working on establishing protocols for intra-trade settlement, retail payments, monthly remittances, capital market settlements and standardization to enable the system to be up and running by the time the ASEAN Economic Community (AEC) unification occurs next January.

“When the AEC commences, ASEAN member countries will have greater need for an integrated payment system as people from across the region will have to carry out transactions from and to their home countries,” according to Deputy Trade Minister Bayu Krisnamurthi.

Under the system, individual users across ASEAN will be able to make financial payments through ATMs, credit cards, or electronic money without spending a significant amount of time or money doing so. As ASEAN currently has no plan to establish a unified currency, this program is expected to increase multi-currency transactions.

ASEAN members are also developing their ATM networks; Indonesia, for example, has an ATM reach of 20 percent of its total working population of 150 million, compared with 66 per cent for Malaysia.

Indonesia, Malaysia and Thailand are currently the only ASEAN members to have full ATM integration according to the Asian Development Bank. This will soon change as the other ASEAN member nations work towards greater integration.

Member States

Indonesia, Thailand, Phillipines, Singapore, Malaysia and Brunei Darussalam in 2015

Cambodia, Laos, Myanmar and Vietnam to join in 2018

 

 

 

ASEAN +3 Cross Border Infrastructure

In Delhi in May 2013, the Finance Ministers and Central Bank Governors of the Association of Southeast Asian Nations (ASEAN), the People’s Republic of China (PRC), Japan, and the Republic of Korea—collectively known as ASEAN+3—agreed to set up a Cross-Border Settlement Infrastructure Forum (CSIF) to discuss detailed work plans and related processes for the improvement of cross-border settlement in the region, which included the possibility of establishing a regional settlement intermediary (RSI). Members, observers, and the CSIF Secretariat are listed in Appendix 1.

Based on the intensive discussions among CSIF members, the first report, Basic Principles on Establishing a Regional Settlement Intermediary and Next Steps Forward, was published by the Asian Development Bank in May 2014 after being endorsed by the ASEAN+3 finance ministers and Central Bank governors at their 17th meeting held in May 2014 in Astana. The members agreed that the central securities depository (CSD)–real-time gross settlement (RTGS) linkages, which connect national CSD systems and RTGS systems in a flexible

way, would be an achievable model for cross-border settlement infrastructure in the short term and medium term. This model linking existing infrastructure enables local bonds to be settled in delivery versus payment (DVP) via central bank money, which ensures the safety of settlement and is compliant with international standards, as well as being cost- efficient. As such, the CSD–RTGS linkages are to be studied as the most feasible model for implementing the RSI in ASEAN+3.

The Joint Statement of the 17th ASEAN+3 Finance Ministers and Central Bank Governors Meeting reads as follows:

We welcomed the recommendations submitted by the Cross-Border Settlement Infrastructure Forum (CSIF) and the direction of developing the implementation roadmap of CSD-RTGS linkages as short-term and medium-term goals and integrated solution as a long-term goal for making it possible to deliver securities smoothly and safely versus payment across borders. We are of the view that this is a practical and efficient approach to advance regional settlement infrastructure that promotes cross-border securities transactions in the region.

The 4th and 5th CSIF meetings were held in Hong Kong, China (September 2014) and Manila (January 2015), respectively. Specific topics to develop an implementation plan for the CSD–RTGS linkages—such as a desktop study, possible road map—were discussed at these meetings. As an initial step, the Bank of Japan (BOJ) and the Hong Kong Monetary Authority (HKMA) agreed to conduct a desktop study.

 

 

Regional Integration in South Asia:  BIMSTEC, SAARC, SAPTA, SAFTA

 

January 1, 2016, marked the tenth anniversary of the South Asian Free Trade Area (Safta). The agreement, which was reached in January 2004 at the 12th Saarc Summit in Islamabad, Pakistan, came into force on January 1, 2006, and became operational after the agreement was ratified by seven nations (Afghanistan, the eighth member, ratified it in May 2011).

It created a free trade area for the people of eight South Asian nations and aimed at reducing custom duties of all traded goods to zero by 2016.  That year is here but the South Asian nations see trade among them making up a meagre five per cent of their total transactions.

The purpose of Safta was to promote common contract among the member-nations and provide them with equitable benefits. It also aimed at increasing the level of cooperation in economy and trade among the Saarc nations by lowering the tariff and barriers and give special preference to the least developed countries in the Saarc region.

Safta had a potential

At a time when regional trade blocs and free trade area have emerged as models of cooperative economic growth, the Safta had offered a great opportunity to take forward the process of South Asian integration.

But South Asia has too much problems

But South Asia is a unique regional entity in the entire world. It is a region which has remained a prisoner of the past and pressing geopolitical realities involving India, Pakistan and China.

Thanks to the relentless rivalry between India and Pakistan and the latter’s proximity to the Chinese who have included the strategy of containing India in its scheme of things in South Asia, the idea of integration of South Asia in other forms have remained elusive.
Other smaller countries like Nepal, Bengladesh, Maldives and Sri Lanka, too, have played the China card against India time and again, hurting the prospects of mutual confidence.

In such an atmosphere of suspicion, achieving what the Safta had envisioned a decade back has been next to impossible. Despite a free trade pact since 2006, trade among South Asian nations makes up five percent of their total trade. They share few transport and power connections between them.

We saw how Saarc fell apart at its 2014 summit

We saw how the Saarc was split during the 18th summit held in Kathmandu in 2014 end when India and Nepal accused Pakistan of creating an obstacle on the way of regional integration by refusing to sign three multilateral agreements, including road trade and sharing of electricity.

Indian Prime Minister Narendra Modi even went to the extent of warning at that time, saying the integration would happen through the Saarc or without it.

He found backing in the Nepali ranks. India then went ahead with ties (visa, energy, road) with other neighbours like Nepal and Bangladesh and also promised to cut its trade surplus with the South Asian nations. But in all, Modi expressed displeasure that the progress was too slow.

Despite the presence of instruments like Safta and Bimstec (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), South Asia has only languished. The state of affairs in connectivity, financial infrastructure including banking and mobility of people and goods have remained stuck in the complex cobweb of customs, visa and transit norms.

India, too, is responsible for the poor state of affairs

India, being the largest nation in South Asia, has been equally guilty by not attaching much significance to the forum in the past, as it did in nurturing relation with the West and Russia. There has been a sheer lack of continuity in the country’s successive governments’ priorities towards South Asia.

For most, a combative policy towards Pakistan and dominating approach towards the smaller neighbours have been the most-after stand. No wonder, opportunities like Safta were lost without a trace.

Can Narendra Modi govt turn the tables around?

However, the Narendra Modi regime has attached much importance to the issue of South Asian integration which is a silver lining. The way India’s PM invited all South Asian heads of states or representatives to his swearing-in ceremony or kicked off his foreign tours with visits to small states like Bhutan and Nepal or suddenly landed in Lahore to reach out to his Pakistani counterpart-all these suggest that his government aspires to see a better surroundings.

Yes, there have been a serious goof-up by India’s foreign-policy makers in Nepal in the wake of its ratifying a new constitution, which has left the Himalayan neighbour distraught, but yet going by PM Modi’s general intent of improving the state of South Asian cooperation, the decade-old Safta could still have a future.

As of now, the wait will be for the 19th Saarc summit in Islamabad later this year.

 

Towards South Asia Economic Integration

Payment systems to facilitate South Asian integration

SAARC Payment Initiative

Asian Clearing Union

A review of the Asian Clearing Union

 

 

 

 

Key Sources of Research:

 

TARGET2

https://www.ecb.europa.eu/paym/t2/shared/pdf/professionals/SIBOS_13_Target2_HQ.pdf?ddee08326301ecfe43123f036ade4322

 

 

 

Regional Monetary Co-operation in the Developing World Taking Stock

Barbara Fritz / Laurissa Mühlich

2014

Click to access Paper-Stocktaking-Regional-Monetary-Cooperation-Fritz-Muehlich-22-07-14-end.pdf

 

 

 

 

Redefining the Landscape of Payment Systems

Summary of Proceedings of the World Bank Conference

2009

 

Click to access 705740ESW0P1100Cape0Town0April02009.pdf

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

 

Click to access Development%20Paper_1403.pdf

 

 

 

 

Regional Integration and Economic Development in South Asia

 

Click to access regional-integration-economic-development-south-asia.pdf

 

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

No. 422 May 2013

 

Click to access adbi-wp422.pdf

 

 

 

 

BASIC PRINCIPLES ON ESTABLISHING A REGIONAL SETTLEMENT INTERMEDIARY AND NEXT STEPS FORWARD

CROSS-BORDER SETTLEMENT INFRASTRUCTURE FORUM

ADB

 

Click to access establishing-regional-settlement.pdf

 

 

 

PAYMENT AND SECURITIES SETTLEMENT SYSTEMS IN THE MIDDLE EAST AND NORTH AFRICA

MASSIMO CIRASINO AND MARCO NICOLÌ

JUNE 2010

 

Click to access MENAFlagshipPaymentsandSettlementsSystems12_20_10.pdf

 

 

 

HKMA RTGS System Links

 

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/system-links.shtml

 

 

 

Payments Systems and Intra African Trade

 

Click to access chap8.pdf

 

 

 

Africa Payments: Insights into African transaction flows

SWIFT

 

 

 

PAYMENT SYSTEMS DEVELOPMENT IN THE WEST AFRICAN MONETARY ZONE (WAMZ)

BY TEMITOPE W. OSHIKOYA

 

Click to access Temitope_WOshikoya.pdf

 

 

 

SADC Regional payments integration Project – Annexure 6

Brian Gei-Khoibeb

 

http://209.88.21.122/documents/899832/1426693/SADC+Regional+Payments+Integration+18+06+2014.pdf/d5228610-a512-4a06-8ef2-03bba1c2be58

 

 

 

CROSS-BORDER LOW VALUE PAYMENTS AND REGIONAL INTEGRATION: ENABLERS AND DISABLERS

DR. LEO LIPIS COLIN ADAMS

 

Click to access SWIFT-Institute-Working-Paper-No-2014-005-Cross-border-LVP-Regional-Integration-Lipis_v4-FINAL.pdf

 

 

 

 

 

SADC Payments Project

 

http://www.sadcbanking.org/paymentsproject.aspx

Click to access SADC_Payments_Project.pdf

 

 

 

The development of a regional payment system in Central America: A step towards further integration and economic development.

Gregor Heinrich and Enrique Garcıa Dubon

2011

 

Click to access MPRA_paper_47398.pdf

 

 

 

Implementing Cross-border Payment, Clearing and Settlement

Systems: Lessons from the Southern African Development Community

 

Albert Mutonga Matongela

 

http://www.iiste.org/Journals/index.php/RJFA/article/viewFile/7798/7942

 

 

 

Payment System Interoperability and Oversight: The International Dimension

 

Click to access ITUFGDFS_REPORT%20ON%20Payment%20System%20InteroperabilityandOversightThe%20InternationalDimension-11-2016.pdf

 

 

 

Payment systems to facilitate South Asian integration

2014

 

Click to access WP-2015-021.pdf

 

 

 

Towards South Asia Economic Union

2015

 

Click to access Towards%20South%20Asia%20Economic%20Union.pdf

 

 

 

RBI suspends euro transactions via Asian Clearing Union

 

http://economictimes.indiatimes.com/markets/forex/rbi-suspends-euro-transactions-via-asian-clearing-union/articleshow/53001118.cms

 

 

 

Financial Infrastructure in Hong Kong

2013

Click to access facb1-657-4-e.pdf

 

 

 

PEOPLE’S REPUBLIC OF CHINA––HONG KONG SPECIAL ADMINISTRATIVE REGION

OVERSIGHT AND SUPERVISION OF FINANCIAL MARKET INFRASTRUCTURES–TECHNICAL NOTE

 

IMF Country Report No. 14/208

July 2014

FINANCIAL SECTOR ASSESSMENT PROGRAM

 

Click to access cr14208.pdf

 

 

 

PAYMENT AND SETTLEMENT SYSTEMS

Bonk of Malaysia

 

Click to access cp04.pdf

 

 

 

Financial Sector Reforms and Prospects for Financial Integration in Maghreb Countries

Amor Tahari, Patricia Brenner, Erik De Vrijer, Marina Moretti, Abdelhak Senhadji, Gabriel Sensenbrenner, and Juan Solé

 

Click to access Financial%20sector%20reforms%20IMF.pdf

 

 

 

The Southern African Development Community Integrated Regional Settlement System (SIRESS): What? How? and Why?

 

Click to access July%202013%20Economic%20Revivew.pdf

 

 

 

The Payment and Settlement Systems in the Republic of China (Taiwan)

October 2010

 

Click to access 010269422971.pdf

 

 

 

PAYMENT SYSTEMS IN JAPAN

 

2010

Click to access paymentsystems.pdf

 

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

VISA

 

Click to access crossborder.pdf

 

 

 

BI prepares for ASEAN integrated payment system

The Jakarta Post

Jakarta | Thu, January 30, 2014

http://www.thejakartapost.com/news/2014/01/30/bi-prepares-asean-integrated-payment-system.html

 

 

 

ASEAN Financial Integration towards ASEAN 2025:

Call for a well-coordinated supervisory and regulatory framework

Satoru (Tomo) Yamadera

 

Click to access 4.presentation_by_satoru_yamaders_adb_0.pdf

 

 

 

UK Payments Infrastructure: Exploring Opportunities

31 August 2014

 

Click to access kpmg-infrastructure-report-for-psr.pdf

 

 

 

Payment Systems in Latin America: Advances and Opportunities

By Nancy Russell, NLRussell Associates

 

Click to access la_advances.pdf

 

 

 

PROGRESS REPORT ON ESTABLISHING A REGIONAL SETTLEMENT INTERMEDIARY AND NEXT STEPS

Implementing Central Securities Depository–Real-Time Gross Settlement Linkages in ASEAN+3

CROSS-BORDER SETTLEMENT INFRASTRUCTURE FORUM

2015

 

Click to access progress-report-regional-settlement-intermediary.pdf

 

 

 

ASEAN+3 Information on Transaction Flows and Settlement Infrastructures

ASEAN+3 Bond Market Forum Sub-Forum 2 (ABMF SF2)

December 2013

 

Click to access asean3-information-transaction-flows-settlement-infrastructures.pdf

 

 

 

 

BASIC PRINCIPLES ON ESTABLISHING A REGIONAL SETTLEMENT INTERMEDIARY AND NEXT STEPS FORWARD

CROSS-BORDER SETTLEMENT INFRASTRUCTURE FORUM

2014

 

Click to access establishing-regional-settlement.pdf

 

 

 

 

ASIAN ECONOMIC INTEGRATION REPORT

WHAT DRIVES FOREIGN DIRECT INVESTMENT IN ASIA AND THE PACIFIC?

 

Geert Almekinders, Satoshi Fukuda, Alex Mourmouras, Jianping Zhou and Yong Sarah Zhou

February 2015

 

Click to access wp1534.pdf

 

 

 

 

Guidelines for the Successful Regional Integration of Financial Infrastructures

September, 2013

 

Click to access Guidelines_for_the_Successful_Regional_Integration_of_Financia_Infrastructures_DRAFT.pdf

 

 

 

ASEAN 5 Prepares for Integrated Payment System

Posted on January 31, 2014

http://www.aseanbriefing.com/news/2014/01/31/asean-5-prepares-integrated-payment-system.html

 

 

 

Establishing an integrated payment system (real-time gross settlement) in ASEAN

Kusumo Wardhono, Dwi Tjahja

 

Click to access Complete_dissertation.pdf

 

 

 

a Practical approach to International Monetary System Reform: Building Settlement Infrastructure for Regional Currencies

Changyong Rhee and Lea Sumulong

 

Click to access BRICS_ASIA_no3.pdf

 

 

 

 

Strengthening Financial Infrastructure

Peter J. Morgan and Mario Lamberte

No. 345 February 2012

 

Click to access 09869.pdf

 

 

 

 

Why Complementarity Matters for Stability— Hong Kong SAR and Singapore as Asian Financial Centers

V. Le Leslé, F. Ohnsorge, M. Kim, S. Seshadri

2014

 

Click to access wp14119.pdf

 

 

 

 

Navigating Rise of Global RMB

JP Morgan

https://www.jpmorgan.com/cm/BlobServer/Navigate_the_Rise_of_the_Global_RMB_.pdf?blobkey=id&blobwhere=1320642032360&blobheader=application/pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs

 

 

 

Cross-border payment link established with Hong Kong

2014

http://www.nationmultimedia.com/news/business/aec/30239651

 

 

 

 

Hong Kong’s role in facilitating the use of Renminbi as a currency for settling international transactions

2010

 

Click to access Yip_HK_use_of_RMB_intl_transactions.pdf

 

 

 

 

TARGET2: a global hub for processing payments in euro

ECB

https://www.ecb.europa.eu/paym/intro/news/newsletter/html/mip_qr_1_article_5_target2_global_hub.en.html

 

 

 

THE EAST AFRICAN PAYMENT SYSTEM (EAPS)

 

Click to access Bosco_EAPS.pdf

 

 

 

 

Hong Kong and Thailand launch a new cross-border payment-versus-payment link

http://www.hkma.gov.hk/eng/key-information/press-releases/2014/20140728-3.shtml

Click to access r140729c.pdf

 

 

 

Settlement Systems of East Asian Economies

 

Click to access Settlement_systems.pdf

 

 

 

 

Payments in ASEAN post AEC

Vengadasalam Venkatachalam, Head of Product Management South East Asia

https://globalconnections.hsbc.com/australia/en/articles/payments-asean-post-aec

 

 

 

 

PSSR – Payments and Settlement Systems Report

Click to access psr160624.pdf

 

 

 

 

Payment, clearing and settlement systems in Hong Kong SAR

 

Click to access d105_hk.pdf

 

 

 

 

Interdependencies of payment and settlement systems: the Hong Kong experience

 

Click to access fa2_print.pdf

 

 

 

 

Payment Systems

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/payment-systems.shtml

http://www.hkma.gov.hk/eng/key-functions/international-financial-centre/infrastructure/financial-infrastructure-hong-kong.shtml

 

 

 

Creating an Integrated Payment System: The Evolution of Fedwire

Adam M. Gilbert, Dara Hunt, and Kenneth C. Winch

Click to access 9707gilb.pdf

 

 

 

Federal Reserve Interdistrict Settlement

 

Click to access wolman.pdf

 

 

 

TARGET2 and Central Bank Balance Sheets

Karl Whelan

1 University College Dublin New Draft

March 17, 2013

 

Click to access T2Paper-March2013.pdf

 

 

 

Ontology and Theory for a Redesign of European Monetary Union

Sheila Dow

 

Click to access 5935449525f59deca84c16c4dce251122592.pdf

 

 

 

TARGET2: Symptom, Not Cause, of Eurozone Woes

By Thomas A. Lubik and Karl Rhodes

Click to access eb_12-08.pdf

 

 

 

The Idiot’s Guide to the Federal Reserve Interdistrict Settlement Account

http://jpkoning.blogspot.com/2012/02/idiots-guide-to-federal-reserve.html

 

 

 

Mutual aSSiStance betWeen Federal reServe bankS

1913-1960 aS ProlegoMena to the target2 debate

Barry Eichengreen, Arnaud Mehl, Livia Chiţu and Gary Richardson

 

https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1686.pdf?1ad840394e67a3aedb6e1b1fa9401431

 

 

 

Interpreting TARGET2 balances

by Stephen G Cecchetti, Robert N McCauley and Patrick M McGuire

Monetary and Economic Department December 2012

 

Click to access work393.pdf

Cross Border/Offshore Payment and Settlement Systems

Cross Border/Offshore Payment and Settlement Systems

 

There are several ways by which international payment transactions are done around the globe.

Main mechanisms for payment and settlements are as follows:

  • Correspondent Banks Network – loosely coupled network of private banks.
  • Clearing Bank Model -using international clearing banks – China’s RMB Clearing Banks
  • Cross border RTGS – used mainly in regional economic and monetary blocs such as EMU – TARGET2.
  • Clearing House model – Offshore Payment, Clearing, and settlements through systems such CHIPS in USA and CIPS in China.

 

Central Banks also have created a Currency Swap network for providing liquidity in international financial markets.

Recently, there has been a decline in correspondent banks network transactions.  Many global banks have withdrawn correspondent relationships with other banks due to increased regulations.

There is also a newer trend in using ACH networks for international transactions.  SEPA in Europe and FedGlobal ACH in USA are two examples.

SWIFT and CLS bank also play a critical role in international payments.

There is also very large OTC FX market in which 5.1 trillion USD per day are traded.  I am not yet sure about the clearing and settlements of these transactions.

There are some newer technology platforms which have started providing Global payment services.  Earthport in UK and Ripple Labs are two such examples.

 

Large Value Transfer Methods (B2B Transfers)

  • Cross border, Same Currency – TARGET2, SEPA, EURO1
  • Offshore, currency specific – CHIPS for USD, CIPS for RMB
  • Cross border, multiple currencies – SWIFT, CLS
  • Offshore Clearing Houses – Hong Kong, Singapore, London, Japan, Frankfurt, USA
  • OTC FX markets (FX SWAPS, FX SPOT, FX Forward, FX Futures)
  • Network of Correspondent Banks
  • Network of Clearing Houses
  • CB FX Swap Network
  • Intra bank payment networks: Multinational Banks (Branch or subsidiary in a foreign country)
  • FEDGlobal ACH
  • Hawala System

 

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Regional Blocs (where new RTGS are being developed)

  • East Africa Community (EAC)
  • West African Monetary Zone (WAMZ)
  • Common Market for East and South Africa (COMESA)
  • South African Development Community (SADC) – SIRESS RTGS
  • Automated Clearing House in Common Monetary Area (CMA)
  • ASEAN  AEC ?
  • South Asian (Asian Clearing Union) ?

 

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LVPS used for International Payments

  • EURO1 ( Pan Europe)
  • euroSIC (Frankfurt) used for Euro transactions between countries in EU but not in EMU.
  • FXYCS (Japan)
  • EAF (Germany)
  • SIC (Switzerland)
  • CHIPS ( USA)
  • CHAPS (UK)
  • LVTS (Canada)
  • CIPS (China)

 

 

I am not sure how many of these networks are currently operational since countries in EU have migrated to TARGET2 since 2008.

G-LVTN (Global Large Value Transfer Networks)

  • ELLIPS (Belgium)
  • IIPS (Canada)
  • SNP (France)
  • EAF2 (Germany)
  • Ingrosso (Italy)
  • Top (Netherland)
  • RIX (Sweden)
  • SIC (Switzerland)
  • CHAPS (UK)
  • CHIPS (USA)
  • FXYCS (Japan)

 

There are several newer solutions for international payment and money remittances at retail level.  B2C and C2C international money transfers.  They are listed here along with old solutions but are not discussed in this post.

New and Old Solutions (Retail B2C, C2C)

  • Block chain
  • Ripple
  • Earthport
  • Transferwise
  • Xoom (A Paypal service)
  • Paypal
  • Bitcoins
  • Western Union (Old)
  • MoneyGram (Old)
  • Money2India/ICICI Bank
  • State Bank of India
  • Global ACH with FX Conversion
  • International ACH Transactions

 

 

China CIPS

One of the main reasons for this discrepancy is the inadequacy of the infrastructure for cross-border renminbi payments. Cross-border payments are currently made via a patchwork of clearing hubs and correspondent banks. These payments are hindered by complicated routing procedures, the need to maintain multiple foreign correspondent accounts, liquidity shortages in some offshore RMB centers, different hours of operations between clearing centers, a lack of common standards between international and Chinese domestic payment systems, and China’s capital controls.

Despite these hurdles, the use of the renminbi as an international payments currency has continued to grow rapidly. In the first half of 2015, there were more than RMB 5.7 trillion (USD 866.7 billion) worth of payments made to and from China using the renminbi. Currently, around a third of payments between China and the Asia Pacific region are conducted using renminbi. These numbers are projected to increase substantially over the coming years due to the desirability for Chinese businesses to use their own currency for trade transactions.

The increased use of the renminbi has led to around RMB1.5 trillion (USD 231 billion) in offshore renminbi deposits, with the largest amounts in Hong Kong, Taiwan and Singapore, respectively. As more renminbi accumulate outside of China, investors will increase their demands for channels to repatriate funds back onshore.

China’s Cross-border Inter-bank Payment System (CIPS) seeks to address many of the existing problems facing cross-border renminbi payments. CIPS provides one-point entry by participants and a central location for clearing renminbi payments It allows participation by both onshore and offshore banks and provides direct access to China National Advanced Payment System (CNAPS). These features reduce the need for banks to navigate complicated payment pathways via offshore clearing hubs or through correspondent banks. This should result in faster payment processing and reduced costs for cross-border payments.

CIPS is a real time gross settlement system, meaning that banks settle payments immediately between each other on a gross rather than a net basis. This reduces credit risks that can arise in systems where payments are netted before settlement.

Payment messages sent within CIPS are written in both English and Chinese. This eliminates the necessity of translating messages into Chinese before they can be transmitted to CNAPS. CIPS utilizes the ISO20022 messaging standard, a widely used international messaging scheme for cash, securities, trade and foreign exchange transactions. CIPS will also utilize SWIFT bank identifier codes, rather than CNAPS clearing codes. These factors will allow CIPS to smoothly process payments flowing between offshore banks using SWIFT and mainland banks using CNAPS. As a result, cross-border payments made through CIPS should be able to achieve straight through processing.

CIPS operating hours will extend from 9:00am to 8:00pm Shanghai-time. This allows the system to overlap with business hours in Europe, Africa, Oceania, and Asia. Banks within these jurisdictions will be able to settle renminbi transactions during their business day. Though North and South America are not currently covered, the People’s Bank of China (PBoC) has stated that an expansion of CIPS’ operating hours is possible.

As of the launch in October 2015, CIPS had 19 direct participants and 176 indirect participants. The initial direct members of CIPS include 11 Chinese banks and the Chinese subsidiaries of 8 foreign banks. There is currently only one American bank that is a direct participant in the system, Citibank. Of the indirect participants, 38 were Chinese banks and 138 are foreign banks.

Details on plans for the future development of CIPS are sparse. Chinese officials have spoken of a Phase II for CIPS that will improve liquidity management and the efficiency of cross-border clearing and settlement. PBoC officials have also stated that Phase II will include longer operating hours, support for securities settlement and central counterparties.

The creation of CIPS is an important milestone on the renminbi’s road to becoming a major global currency. It has the potential to significantly improve the efficiency of cross-border payment transactions and increase liquidity in the offshore market. CIPS provides a more direct pathway for processing transactions, improving speed and lowering fees. Liquidity in the offshore renminbi market will be improved due to the large number of participating financial institutions and the direct link the system has with CNAPS.

The fact that the renminbi has progressed so quickly despite the underlying deficiencies in the payments infrastructure is a testament to the global demand for the currency. CIPS seeks to rectify these deficiencies and is likely to play a critical role in the renminbi’s future growth as an international payments currency.

 

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USA  CHIPS

The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments system.

CHIPS is both a customer and a competitor of the Federal Reserve’s Fedwire service.

The average daily value of CHIPS transactions is about $1.2 trillion a day.

The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS enables banks to transfer and settle international payments more quickly by replacing official bank checks with electronic bookkeeping entries. As of January 2002, CHIPS had 59 members, including large U.S. banks and U.S. branches of foreign banks.

History

The New York Clearing House Association, a group of the largest New York City commercial banks, organized CHIPS in 1970 for eight of its members with Federal Reserve System membership. Participation in CHIPS expanded gradually in the 1970s and 1980s to include other commercial banks, Edge corporations, United States agencies and branches of foreign banks, and other financial institutions.
Until 1981, final settlement, or the actual movement of balances at the Federal Reserve, occurred on the morning after a transfer. Sharply rising settlement volumes raised concerns that next-day settlement exposed funds unduly to various overnight and over-weekend risks. In August 1981, the Federal Reserve agreed to provide same-day settlement to CHIPS participants through Fedwire, the Fed’s electronic funds and securities transfer network.

The number of CHIPS members has fallen from about 140 in the late 1980s, mainly because of consolidations in the banking industry. Membership might have fallen even more sharply if CHIPS had not acted in 1998 to eliminate a requirement that members maintain an office in New York City.

CHIPS is governed by a ten-member board consisting of senior officers of large banks that establishes rules and fees and admits and reevaluates participants. CHIPS handles about 240,000 transactions a day with a total dollar value of about $1.2 trillion. Historically, CHIPS specialized in settling the dollar portion of foreign exchange transactions, and CHIPS estimates that it handles 95 percent of all U.S. dollar payments moving between countries. However, the CHIPS focus has shifted to domestic business since CHIPS introduced intraday settlement in January 2001.

Intraday Settlement

Until January 2001, CHIPS conducted all of its settling at the end of the business day. Now, however, CHIPS provides intraday payment finality through a real-time system. CHIPS settles small payments, which can be accommodated by the banks’ available balances, individually. Other payments are netted bilaterally (e.g., when Bank A has to pay $500 million to Bank B, and Bank B has to pay $500 million to Bank A), without any actual movement of funds between CHIPS participants.

Other payments are netted multilaterally. Suppose Bank A must pay $500 million to Bank B, and Bank A is also expecting to receive $500 million from Bank C. Without netting, Bank A would send $500 million to Bank B, and it would thus experience a decline in its available cash while it was awaiting the payment from Bank C.

Using the CHIPS netting system, however, Bank A submits its $500 million payment for Bank B to a payments queue, where it waits until Bank C’s offsetting payment is received. The effect of matching and netting these payments is that Bank A’s cash position is simultaneously reduced by its payment to Bank B and increased by receipt of its payment from Bank C. The overall effect on Bank A’s cash position is thus zero.
Payments for which no match can be found are not made until the end of the day, but each payment is final as soon as it is made. To facilitate the working of the intraday netting system, each participant pre-funds its CHIPS account by depositing a certain amount between 12:30 and 9:00 a.m. The size of this “security deposit,” which is recalculated weekly, is set by CHIPS based on the number and size of the bank’s recent CHIPS transactions, and none of it can be withdrawn during the day. At the end of the day, CHIPS uses these deposits to settle any still-unsettled transactions. Any participant that has a negative closing position at the end of the day (that is, it owes more than what it has in its security deposit) has 30 minutes to make up the difference. The 30-minute period is referred to as the final prefunding period. If any banks do not meet their final prefunding requirement, CHIPS settles as many of the remaining payments as possible with funds that are in the system, and any payments still unsettled must be settled outside of CHIPS.

Banks that have positive closing positions at the end of the day receive the amounts that they are due in the form of Fedwire payments. Because the ultimate CHIPS settlements are provided by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire. The vast majority of CHIPS members are also Fedwire participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.

CHIPS has recently added electronic data interchange (EDI) capability to its payment message format. EDI allows participants to transmit business information (such as the purpose of a payment) along with their electronic funds transfers.

 

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USA FedGlobal ACH Payments

To facilitate this mapping process, the Federal Reserve Bank of Atlanta joined with U.S. and foreign depository institutions, international clearing and settlement service providers, and other interested parties to form the International Payments Framework Association (IPFA). The IPFA is a nonprofit membership association comprising 29 members representing Brazil, Canada, Europe, Japan, South Africa, the United Kingdom, and the United States whose purpose is to create a framework for bridging national formats for non-urgent international credit transfers. IPFA establishes rules, standards, and operating procedures for the exchange of these payments. The first effort by IPFA was to create rules that would facilitate a bridge between the IAT format for ACH credit transfers and the payment format, ISO 20022, which supports the several retail networks within the single euro payments area (also known as SEPA), under the SEPA credit transfer scheme. The next step underway is to leverage the framework created for the United States and SEPA in order to add other countries—such as Brazil, Canada, and South Africa—that want to exchange payments with the United States or SEPA ACH networks.

The Reserve Banks, through FedGlobal, launched their first commercial international ACH service with Canada in 1999.43 The service began as a pilot program for outbound commercial ACH transfers from the United States to Canada and became a production service in December 2001. Subsequent to the Canadian service, the Reserve Banks launched individual services to Europe,Mexico, Panama, and Latin America, covering 34 countries in total.44 In 2010, the Reserve Banks processed 1.3 million international ACH transfers—accounting for about 20 percent of the total volume of international payments being cleared and settled through the U.S. ACH network.45

The Reserve Banks offer FedGlobal account-to-account services to Canada, Mexico, Panama, and 22 countries in Europe. The Reserve Banks offer FedGlobal A2R services to Argentina, Brazil, Colombia, Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Peru, and Uruguay.

 

 

Europe Cross Border LVPS

  • Target 2
  • Euro1
  • SEPA
  • CLS/SWIFT
  • STEP 2
  • STEP 1

 

EU EBA Clearing – EURO1, STEP1, STEP2, MyBank

EBA Clearing is a provider of pan-European payment infrastructure with headquarters in Paris. It is wholly owned by its shareholders.

Its initial mission consisted in the operation of the clearing and settlement system for single euro transactions of high value EURO1, which the Euro Banking Association (EBA) had transferred to EBA Clearing for the launch of the system in 1999. Besides EURO1, EBA Clearing also owns and operates STEP1, a payment system for single euro payments for small and medium-sized banks, and STEP2, a Pan-European Automated Clearing House (PE-ACH) for euro retail payments. In March 2013, EBA CLEARING launched MyBank, an e-authorisation solution for online payments, which is geared at facilitating the growth of e-commerce across Europe.[1]

Both EURO1 and STEP2 have been identified as Systemically Important Payment Systems (SIPS) by the European Central Bank (ECB). EBA CLEARING is also planning to deliver a pan-European instant payments infrastructure solution in the course of 2017.

The organisation is based in Paris and has representative offices in Brussels, Frankfurt and Milan.

EURO1
EURO1 is a RTGS-equivalent large-value payment system on a multilateral net basis, for single euro transactions of high priority and urgency, and primarily of large amount. EURO1 is owned and operated by EBA CLEARING. It is open to banks that have a registered address or branch in the European Union and fulfil a number of additional requirements. EURO1 is subject to German law (current account principle/single obligation structure) and is based on a messaging and IT infrastructure provided by SWIFT.

STEP1
Since 2000, EBA CLEARING has been offering a payment service named STEP1 for small and medium-sized banks for single euro payments of high priority and urgency. The technical infrastructure is the same as that of the EURO1 system, both use the messaging and IT infrastructure of SWIFT.

STEP2
STEP2 was put into operation in 2003 with Italian payment system provider SIA S.p.A. It processes mass payments in euro. STEP2 is a Pan-European Automated Clearing House (PE-ACH). This means that it complies with the principles set by the European Payments Council (EPC) for a PE-ACH Compliant Clearing and Settlement System.

From the beginning of Single Euro Payments Area (SEPA) on 28 January 2008, STEP2 has been offering SEPA Credit Transfer processing services across all SEPA countries through its SEPA Credit Transfer (SCT) Service. Since 2 November 2009, the transposition date of the Payment Services Directive, EBA CLEARING has been processing SEPA Direct Debits with its STEP2 SDD Core and STEP2 SEPA Direct Debit (“Business to Business”) Services. Through its SEPA Credit Transfer and Direct Debit offerings, STEP2 provides banks across Europe with one channel through which they can send and receive their SEPA Credit Transfers and SEPA Direct Debits. The STEP2 platform reaches nearly 100 percent of all banks that have signed the SCT and SDD Scheme Adherence Agreements of the European Payments Council (EPC).

MyBank
MyBank is a pan-European e-authorisation solution for online payments that was launched in March 2013 by EBA CLEARING. The solution enables customers across Europe to pay for their online purchases via their regular online or mobile banking environment without having to disclose confidential data to the merchant or other third parties. The solution can be used for authorising SEPA Credit Transfers as well as the creation of SDD mandates. At a later stage, MyBank may also be used for transactions in currencies other than euro or for e-identity services.

Today, MyBank is owned and managed by PRETA S.A.S., a wholly owned subsidiary of EBA CLEARING.[2]

 

From ECB website

ECB identifies systemically important payments systems

21 August 2014

Four systems were identified: TARGET2, EURO1, STEP2-T and CORE(FR);

Goal is to ensure efficient management of risks and sound governance arrangements
The European Central Bank (ECB) has identified four key payment systems that are now under the new ECB Regulation on oversight requirements for systemically important payment systems (SIPS), which entered into force on 12 August 2014. The regulation covers large-value and retail payment systems in the euro area operated by both central banks and private entities, and aims at ensuring efficient management of legal, credit, liquidity, operational, general business, custody, investment and other risks as well as sound governance arrangements, namely with a view towards promoting the smooth operation of safe and efficient payment systems in the euro area.

The four systems identified today are: TARGET2, operated by the Eurosystem; EURO1 and STEP2-T, operated by EBA CLEARING; and CORE(FR), operated by STET, a joint initiative of six major French banks. They were identified according to the combination of at least two of four main criteria, i.e. the value of payments settled, market share, cross-border relevance and provision of services to other infrastructures. The Eurosystem will review this list annually on the basis of updated statistical data.

 

 

From CLS Bank & the World of FX Settlement

 

Starting my career as a trader on Wall Street, one of the big mysteries I had, was just how all these trades on the NYSE got executed and reported. Within the maze of specialist booths and flying paper, trades were being crossed and buyers and sellers were recognized. While the occasional errors occur, the wild system is highly efficient at reporting and settling trades.

In the world of OTC, settlement represents a larger factor, as participants are not bound by a central exchange system that insures against counterparty risk. As such, companies are on their own to ensure that trades are settled correctly with their counterparties, and an exchange of funds takes place.

In Forex Magnates’s Q1 2013 Industry Report, we took a look at the world of FX settlement and post-trade flow and researched CLS Bank and Traiana. We wanted to know just what they did, and how their products help FX players handle their settlement needs, create efficient markets, and lower overall transaction costs. In this first part, we focus on CLS Bank.

CLS Bank

Launched in 2002, CLS Bank was created as a private sector initiative, to deliver and operate services to mitigate settlement risk in the FX market. Owned and operated by member institutions and working alongside central banks, CLS offers members the ability to settle trades within a central location, thus, providing efficiencies to FX markets.

To understand what CLS does, it is first important to know how settlement works. Settlement is the process in which the payment and securities of a transaction are delivered. Within the securities world, this occurs in a three day window. For example, if a trader buys 100 shares of IBM stock at $100/share, the broker has three days to collect the $10,000 from the client, transfer it to the seller, and collect the shares back for the client.

Within FX, settlement does not involve securities, but instead different currencies. Therefore, in a EUR/USD trade, the seller sends dollars while receiving euros. For OTC participants, one of the greatest worries is settlement risk, which occurs when a counterparty is unable or unwilling to provide either the payment or transfer of securities.

While a deal between two parties can easily be voided, thus limiting impact of a problematic counterparty, the greater concern is the systemic risk. As traders are simultaneously trading with multiple parties, if one party fails to honor a transaction, it can affect counterparties and could prevent them from having the funds and/or securities to settle other trades.

Jake Smith, Head of Communications at CLS, explained that “FX settlement risk is also known as ‘Herstatt Risk’ ”. The name is derived from the failure of a privately owned German bank in 1974. At the time, Bankhaus Herstatt had received delivery of Deutsche marks from US counterparty banks, but had been put into receivership before the corresponding dollars were sent, due to the time zone difference.” Smith explained that, while this occurred nearly 40 years ago, “due to volumes growing substantially since that time, settlement risk has grown significantly.”

To mitigate this risk, CLS was created. Currently, there are over 60 members, who represent some of the largest financial institutions from around the world. CLS provides a central settlement network for FX transactions between its members and their customers. To facilitate settlement, all members are required to have a single multi-currency account with CLS, supporting the 17 currencies that are settled by its system.

Settlement

After conducting a trade, members send transactional details to CLS Bank, including trade details, counterparties, and settlement data. On the day of settlement, CLS Bank multilaterally nets all the instructions between the settlement members, calculating each institution’s pay-in obligations for the day, to ensure settlement of all their instructions on a payment-versus- payment basis. As settlement completes, pay-out of multi-laterally netted long balances will occur.

Example: GBP/USD = 1.50, EUR/USD = 1.25
Member 1: Buys 1,000,000 GBP/USD from Member 2
Member 2: Buys 1,000,000 EUR/USD from Member 3
Member 3: Buys 1,000,000 GBP/USD from Member 1

Member 1: Owes 1.5M USD & 1M GBP, collects 1.5M USD & 1M GBP
Member 2: Owes 1.25M USD & 1M GBP, collects 1M EUR & 1.5 USD
Member 3: Owes 1.5M USD & 1M EUR, collects 1.25M USD & 1M GBP

CLS then multi-laterally nets the total obligations:
Member 1: Pays 0.0
Member 2: Pays 1M GBP
Member 3: Pays 0.25M USD & 1M EUR

These obligations are funded into each member’s respective multi-currency account.

Settlement occurs
CLS then redistributes the obligations to the corresponding members
Member 1: Receives 0.0
Member 2: Receives 1M EUR & 0.25M USD
Member 3: Receives 1M GBP

By multi-laterally netting (also known as trade compression) payment obligations for each currency, CLS eliminates the need to fund trades on an individual basis per currency, resulting in approximately 96% netting efficiency. This increases to 99% with In/Out Swaps (an In/Out Swap is an intraday swap consisting of two equal and opposite FX transactions.)

That means, that for every $1 trillion of In/Out swaps settled, members need to provide funding for less than $10 billion, and $40 million for spot FX. With CLS handling nearly $5 trillion worth of daily settlements, the netting rates are a key element in allowing firms to grow their transactional volumes, while substantially reducing the amount of funding required. According to Smith, “CLS believes this safer and efficient process is one of the factors that led to the increase in FX volumes over the last 10 years.”

Smith explained that CLS provides a number of benefits to the FX industry, including, settlement risk mitigation, multi-lateral netting, operational and IT efficiencies, business growth opportunities, and the ability to develop industry solutions best practices, common standards and rules that benefit the FX market.

Within settlement risk mitigation also comes credit recognition. By being CLS members, credit departments have a greater understanding of each other and the counterparty risk. This allows firms to allocate less risk between trades to other members. For example, while a bank may decide to trade up to $10 billion with another member, they are more likely to limit their trade exposure to non-members.

In terms of operational efficiencies, a key factor is with regard to CLS’s one rule and oversight committee. Having one set of guidelines for members and central banks, provides all participants with a clearer understanding of their counterparties. When adding a new currency, the corresponding central bank needs to follow the standardized guidelines. These rules provide protection for members who benefit from the increased transparency a participating central bank will need to follow.

Regulatory Recognition

In July 2012, the critical role that CLS plays in global financial markets was recognised by the US Department of the Treasury’s Financial Stability Oversight Council, when it designated CLS as a systemically important Financial Market Utility (FMU). CLS’s importance was highlighted further in November 2012, with the announcement of the US Treasury Department’s exemption of FX swaps and forwards from the clearing requirements required for many financial products under the Dodd-Frank legislation. The role that CLS plays in the mitigation of FX settlement risk was believed to be a contributing factor towards that decision.

Technology

CLS’s increased investment in technology, has enabled it to materially expand peak capacity as it updated core technologies, to meet the elevated standards required of a systemically important FMU. The result is that CLS can now accommodate trade matching volumes of up to five times the average daily volume, and process 20 per cent of a peak day’s volume in a one hour period.

Furthermore, CLS has put in place a flexible technology infrastructure, which enables “capacity on demand”, supporting future software upgrades to be delivered to increase capacity in a matter of days and weeks. This structure, allows CLS to pay for technology only when required, while fulfilling obligations to the market to settle all eligible FX settlement instructions.

The need to build capacity was demonstrated on January 22, 2013, when CLS settled more than 2.6 million instructions, 18 per cent more than the previous high, recorded on 19 September, 2012.

Future

Looking to the future, as emerging markets grow, CLS has received interest from settlement members to include additional currencies. As such, CLS has been evaluating the addition of the Brazilian real, Chilean peso, Chinese renminbi, Russian ruble and Thai baht, amongst others.

Another area where CLS is extending its services is in same day settlement. A significant percentage of USD/CAD trades are intra-day and are not currently included in CLS settlement, due to the time of day. CLS is developing a same day settlement service between US and Canadian dollars to address this settlement risk, which has a proposed launch date in late 2013.

 

 

From The complexity of correspondent banking

Correspondent Banking Network

Correspondent banking, which can be broadly defined as the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank”), is essential for customer payments, especially across borders, and for the access of banks themselves to foreign financial systems. The ability to make and receive international payments via correspondent banking is vital for businesses and individuals, and for the G20’s goal of strong, sustainable, balanced growth. At the extreme, if an individual bank loses access to correspondent banking services, this may affect its viability and if a country’s banks more generally face restricted access then it may affect the functioning of the local banking system. In addition, loss of correspondent banking services can create financial exclusion, particularly where it affects flows such as remittances which are a key source of funds for people in many developing countries.

Banks have traditionally maintained broad networks of correspondent banking relationships, but there are growing indications that this situation might be changing. In particular, some banks providing these services are reducing the number of relationships they maintain and are establishing few new ones. The impact of this trend is uneven across jurisdictions and banks. As a result, some respondent banks are likely to maintain relationships, whereas others might risk being cut off from international payment networks. This implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow.

Rising costs and uncertainty about how far customer due diligence should go in order to ensure regulatory compliance (ie to what extent banks need to know their customers’ customers – the so-called “KYCC”-) are cited by banks as among the main reasons for cutting back their correspondent relationships. To avoid penalties and the related reputational damage correspondent banks have developed an increased sensitivity to the risks associated with correspondent banking. As a consequence, they have cut back services for respondent banks that (i) do not generate sufficient volumes to overcome compliance costs; (ii) are located in jurisdictions perceived as very risky; or (iii) provide payment services to customers about which the necessary information for an adequate risk assessment is not available.

The regulatory framework, and in particular the AML/CFT (Anti-Money Laundering/Counter Financing of Terrorism) requirements and the related implementing legislation and regulations in different jurisdictions, are taken as given in this report. It is acknowledged that these requirements, as agreed by the competent authorities, along with strict implementation, are necessary to prevent and detect criminal activities and ensure a healthy financial system.

 

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From Redefining the Landscape of Payment Systems

Regional Integration of Payment Systems

Cross-border and cross-currency commercial and financial payments have traditionally been made through regional and global correspondent banking networks. Correspondent banking networks typically involve multiple levels of intermediation to link national payment systems. Similar arrangements exist for cross-border securities and other market-based transactions. Such decentralized, highly-tiered cross-border arrangements for payment and securities transfer, clearing and settlement involve substantial liquidity, operating and user costs. Moreover, the services provided are often too slow and unreliable for the rising volume of payments associated with closer regional commercial and financial ties. Consequently, more tightly organized and integrated regional and even inter-regional payment and securities infrastructures are developing as a result of integration initiatives in the African, Asian and Latin American regions, among others. The discussions around the theme of regional integration of systems extended even further to the need for harmonized development of central bank payment system and monetary policies.

 

Integration in Wholesale Systems

The regional integration of national payment systems directly links the large-value payment systems of the participating countries. The link-up is through a distributed payment communications network involving either bilateral connectivity and system-to-system intra-regional payment settlement or connectivity to a central hub operating an intra-regional clearing and settlement facility. With large-value payment systems typically operated by national central banks, the distributed connectivity model of a regional payment system can substitute for the private correspondent banking network. The correspondent central banking arrangement concentrates intra-regional payments into a single central bank correspondent that participates in a network having more standardized service levels and agreements than the private system (i.e. correspondent banking). Over the medium-term, relative liquidity, operating and user costs should generally be lower and intra-regional payment settlement faster and more predictable than in the private system. A centralized model with a regional settlement bank can facilitate even greater standardization and more effective settlement risk control and, given a common settlement currency, permits multilateral netting that can lower liquidity costs even more as payment values and volumes rise.

The successful regional integration of national large-value payment systems does, however, require several pre-conditions. In addition to the obvious business case, the most critical pre-conditions are the harmonization of key institutional and structural elements in the national systems of the member countries and a sustainable commitment to the regional payment system, and the regional commercial and financial initiatives that underpin it. Experiences cited in a number of regional payment system initiatives indicate that unreasonable expectations of immediate pay-offs from integration and inadequate harmonization of key institutional elements during network expansion, such as those involving sound legal and oversight requirements, cause commitment to the project to waver and can sometimes cause the initiative to collapse. Organized and focused collaboration among all the key stakeholders and cooperation among the overseers of the national payment systems of the member countries is considered critical to sustaining commitment to the regional integration program.

Although several national securities depositories and securities settlement systems have developed bilateral system-to-system links in recent years, only a few have begun to integrate regionally or inter-regionally into an organized multilateral system. While the most developed cross-border systems are within the Eurozone, others have begun to develop elsewhere, as in the South African Development Community. The discussion concerning the role of CCPs in securities and derivatives settlement extended to consideration of regional, and even global, developments.

 

 

Integration of Retail Payment Systems

Aside from the major global card payment systems, which are expanding their products and services into new payment applications for cross-border retail payments, there are only a few bilateral and multilateral system-to-system links that facilitate the clearing and settling of cross-border payments. Correspondent banking arrangements, even for the ultimate settlement of cross-border card payments, are still the primary network arrangements for the ultimate settlement of cross-border retail payments. The regional integration of large-value payment systems, in conjunction with the integration of retail and large-value payment systems at the national level, has spawned some initiatives for the regional integration of national retail payment systems. The SEPA (Single European Payment Area) initiative is perhaps the most ambitious of these integration initiatives. Triggered by policy action and driven by industry initiatives, SEPA is aimed at creating a single integrated market for retail payment instruments and services throughout the Eurozone. The most critical challenges faced by the SEPA initiative have been the set-up of public and private sector collaboration mechanisms for decision-making, user support from public sector administrations, and the harmonization of national legal barriers. SEPA-compliant credit and debit transfers are now in place and work is proceeding on the introduction of SEPA-compliant card payments and on the development of SEPA-based online and mobile payment channels.

 

Transnational Payment Systems

While once there were only domestic payment channels in each country, we have witnessed the emergence of transnational systems such as TARGET, CLS (Continuous Linked Settlement), the Federal Reserve’s International ACH Project, known as FedACH International and the proposed pan-European automated clearinghouse known as PE-ACH. On the other end of the spectrum, card systems such as those operated by Visa and MasterCard are truly global in scope and have been expanding from consumer based transactions into commercial payments for more than a decade. Transnational systems have traditionally focused on providing payments within a region or to a small number of countries and usually support a single currency. Although none of these systems are yet global in scope, it is likely they will continue to expand their coverage to additional countries and currencies. Networks such as Visa and MasterCard are examples of global payment systems that also support multiple currencies, though they are primarily used for retail payments and ad hoc/T&E commercial transactions. Recently, in countries like Switzerland and Hong Kong13, new arrangements have been developed for the settlement of local payments in foreign currency. These arrangements neither fit perfectly in the traditional category of “correspondent banking” or in that of “payment systems”. The main common characteristic of these arrangements or systems is that they do not settle in central bank money but across accounts held with a commercial bank and that they are based on clearly defined and transparent rules for payment activities. Compared to traditional correspondent banking, these new solutions are standardized and settle payments in real time with continuous finality. In 1999, Swiss financial institutions established a cross-border solution in order to facilitate their cash management in euros. This solution involves a fully licensed bank in Germany, Swiss Euro Clearing Bank (SECB). To process euro transactions, SECB uses the euroSIC platform in Switzerland, which is often referred to as the euro payment system of Switzerland. EuroSIC is a replication of the Swiss franc RTGS system, Swiss Interbank Clearing (SIC). SIC and euroSIC are operated by Swiss Interbank Clearing AG. SECB is the settlement institution and shares the role of settlement agent with the operator SIC AG. SECB is also the liquidity provider in euroSIC. It extends intraday and overnight credit to the participants of euroSIC against collateral. SECB provides a link to the euro area, as it is a direct participant in RTGSPLUS through which access to TARGET is established. In Hong Kong, the U.S. dollar and euro clearing systems, USD CHATS (Clearing House Automated Transfer System) and Euro CHATS, were introduced in 2000 and 2003, respectively. They enhance the safety and efficiency of settling these foreign currencies in the local time zone. These systems are almost exact replicas of the Hong Kong dollar RTGS system (HKD CHATS). The key functions of both systems are to enable settlement of foreign exchange transactions between HK dollars, US dollars and euros in their respective currencies through a linkage with the Central Moneymarkets Unit (CMU) in Hong Kong.

The Hong Kong Monetary Authority has appointed the Hong Kong and Shanghai Banking Corporation as the settlement institution for USD CHATS and Standard Chartered Bank (Hong Kong) Limited as the settlement institution for Euro CHATS. Both institutions provide intraday liquidity to the direct participating banks by means of repos as well as overdraft facilities. One of the key benefits of both the US dollar and euro systems is the same day clearing of transactions. Also driving transnational systems is the implementation of “straight through processing (STP)” standards for transfers between banks as well as between banks and customers. To ensure simultaneous and dependable deliveries, payment-versus-payment (PVP), delivery-versus-payment (DVP), and delivery-versus-delivery (DVD) processes have also been established. The growth in transnational systems can improve the efficiency of cross-border payments by reducing clearing and settlement times, minimizing float. Better visibility of funds flows supports improved cash forecasting. Finally, standardized formats will reduce costly errors and repairs.

 

Intra bank Payments Networks – Multinational Banks

Mergers and acquisitions have been the single biggest force reshaping the global payments landscape over the past two decades. The most recent round of consolidation has left a disparity between large and small never before seen. For example, we have witnessed the emergence of mega banks such as the combining of Bank of America and Nations Bank, as well as JP Morgan Chase combining Chase Manhattan Bank, Manufacturers Hanover Bank, Morgan Guaranty Trust and Bank One. In a scale-driven, technology-intensive business like payments, the emergence of true mega-players may lead to markedly different competitive dynamics. Acting as their own transnational systems, large international banks such as JP Morgan Chase, Citibank, Bank of America, and Hongkong Shanghai Banking Corporation operate their own internal global payments networks. Through these, they can route payments to destinations in different countries. Such internal networks do not necessarily differentiate between domestic and cross-border payments as these flows are all within the bank. The trend toward consolidation in the banking sector, both globally and in domestic markets, exerts influence on payment systems. Increased concentration of payment flows may have important credit, liquidity and operational risk implications. For example, the credit exposures that arise within a payments system that does not achieve intraday finality are likely to become concentrated on a smaller number of banks. Operational problems experienced by a single large bank could have significant repercussions for other participants in the system. A concentration of payment flows in commercial banks has emerged to reflect the increasing role that modern commercial banks, especially large global banks, have played in the payment systems around the world. The volumes and values settling across their books are, in some countries, quite substantial. Such traffic has often been accompanied by increased formalization of the correspondent relations within, as well as across, national boundaries. Banks that achieve global economies of scale can further drive down per transaction costs and derive higher revenues by keeping payments within their own networks. For global corporations, it has allowed them to match their global needs with a handful of banks rather than managing a large number of local relationships.

 

From The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

A survey of major systems facilitating cross-border payments

American Express: is a publicly traded company that issues charge and credit card products both directly and through nearly 100 financial institutions around the world. American Express had $484 billion in global sales in 2005.15

CHAPS (Clearing House Automated Payment System): CHAPS, established in 1984, is the United Kingdom’s high-value payment system, consisting of two systems: CHAPS Sterling and CHAPS Euro, which provide settlement facilities for sterling and euro payments, respectively. Over a dozen large banks and building societies are “direct” or settlement members, while there are also over 400 “indirect” members – typically smaller banks and building societies – who have access to the system through a settlement member.

CHIPS (Clearing House Interbank Payment System): CHIPS is a bank-owned, privately operated, real-time, multilateral electronic payments system that transfers funds and settles transactions in U.S. dollars. CHIPS began operations in 1970 with 9 participating banks and, as of mid 2006, it processes about 300,000 payments a day with an average daily amount of $1.5 trillion. It currently has 46 participants from 19 countries around the world, including large U.S. banks and U.S. branches of foreign banks. The payments transferred over CHIPS are often related to international interbank transactions, including the payments resulting from foreign currency transactions (such as spot and currency swap contracts) and Euro placements and returns.

CLS (Continuous Linked Settlement): The CLS system is the private sector response to a G-10 strategy to reduce foreign exchange settlement risk. CLS was founded in 1997 to create the first global settlement system, eliminating settlement risk in the foreign exchange market. Formed in response to regulatory concern related to the temporal and systemic risks (Herstatt risk) associated with foreign exchange transactions, CLS simultaneously settles both sides of foreign exchange trades using a multi-currency payment-versus-payment (PVP) mechanism. CLS is a unique real-time process enabling simultaneous foreign exchange settlement across the globe, eliminating the settlement risk caused by delays arising from time-zone differences. CLS settles well over $1 trillion per day, accounting for a substantial majority of cross-currency transactions across the globe.

Eurogiro: owned by 16 banks/postal financial service companies, is an electronic payment network for postal and giro (postbank) organizations that exchange cross-border credit transfers and cash-on-delivery orders. Established in 1989, Eurogiro has more than 40 participants from 37 countries in Europe, Asia, Africa, South America and the U.S. Members act as correspondents for one another and hold reciprocal accounts with each other to execute payments.

EURO1: a private sector-owned high-value payment system, operated by the EBA Clearing Company for cross-border and domestic transactions in euro between banks operating in the European Union, and it is the largest of Europe’s four large-value, net settlement systems, processing on average 170,000 payments a day with a total value of about €170 billion. Launched in 1998, EURO1 was developed to provide an efficient, secure and cost-effective infrastructure for large-value payments in the new single currency environment of the EU. EURO1 is based on state-of-art messaging infrastructure and computing facilities supplied by SWIFT.

FedACH International Services: This international gateway arrangement service is owned and operated by the Federal Reserve System. Currently, the Federal Reserve Banks offer a suite of FedACH International Services as part of FedACH Services and provide U.S.- originating depository financial institutions with the ability to send international non-time-critical payments via the same process used to send domestic transactions for many decades. FedACH International Services offer an integrated, uncomplicated method to ensure straight-through processing (STP) of cross-border transactions, using NACHA formats that are supported by most software vendors.

Fedwire (Federal Reserve Wire Network): This is a high-speed electronic network through which the U.S. Federal Reserve provides the Fedwire Funds Service, the Fedwire Securities Service, and the National Settlement Service. The Fedwire Funds Service provides an RTGS system in which more than 9,500 participants initiate funds transfers that are immediate, final, and irrevocable when processed.

LVTS (Large Value Transfer System): The fully electronic LVTS, Canada’s real-time gross settlement system, became operational in early 1999. As Canada’s wire payment mechanism, it facilitates the electronic transfer of Canadian dollar payments across the country in real-time. Canada’s national payments system has been operated by the Canadian Payments Association (CPA) since 1980.

MasterCard: is a publicly-traded company that operates a global payment system. In addition to the MasterCard brand, the Maestro and Cirrus brands are also part of the company. MasterCard branded cards generated $1.7 trillion in global sales in 2005.16

RTGSPLUS: is the German Bundesbank’s new liquidity-saving RTGS, which became operational in November 2001. It combines the risk-reducing benefits of gross settlement of the former German RTGS system known as the Euro Link System (ELS) with the advantages of liquidity-saving processing of the former hybrid system known as Euro Access Frankfurt (EAF).

SWIFT (Society for Worldwide Interbank Financial Telecommunications): SWIFT is an industry-owned limited liability cooperative that supplies secure messaging services and interface software for financial transactions to more than 7,650 banks, securities brokers and investment managers in more than 200 countries.

SWIFT payment messages are processed by the Financial Information Network (FIN), which operates on a secure IP network called SWIFTNet. SWIFT is integrating into the ACH market segment as a payment service provider via its FileAct messaging service. ACH networks such as the EBA Clearing Company and the South African Automated Clearing Bureau are already using SWIFT’s messaging platform.

STEPS (Straight Through Euro Payment System): The STEPS program was launched by the Euro Banking Association (EBA) to offer a full range of euro payments across Europe. STEPS has evolved into two systems aimed at accommodating a broad base of processing needs within the European Union: STEP1 (a pan-European system designed to process single cross-border, low-value retail payments) and STEP2 (a pan-European ACH for bulk/high volume, low-value, cross-border and domestic interbank payments).

STEP2: a pan-European ACH solution, is a joint venture between the EBA and Italy’s ACH operator SIA. STEP2 processes high-volume, commercial and retail payment orders sent to the system via files through a secure network. Characteristics of payment orders that are processed via STEP2 are commercial and retail transfers in euro that are formatted to agreed technical standards. Accessible through SWIFTNet, STEP2 offers payment processing and settlement in euro.

TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer): The Eurosystem, which comprises the European Central Bank (ECB) and the national central banks (NCBs) of the 12 EU member states which have adopted the euro, has created TARGET for large-value payments in euro. The TARGET system is a “system of systems” composed of the national payment systems of 16 of 25 countries that are currently members of the EU, the ECB payment mechanism (EPM) and an interlinking mechanism that enables the processing of payments between the linked systems.

TARGET2: The current structure of TARGET was decided on in 1994 and was based on the principles of minimum harmonization and interconnection of existing infrastructures. This was the best way of ensuring that the system would be operational from the very start of the European Economic and Monetary Union (EMU) in 1999. TARGET2 is an enhanced version of the current TARGET incorporating technical consolidation, a single system-wide pricing structure for domestic and cross-border payments, a harmonized service level, and the system-wide pooling of available intraday liquidity. The go-live date for TARGET2 is set for November 19, 2007, with gradual migration to the new system by the member states in four waves. All central banks participating in TARGET2, together with their national banking communities, are expected to be using the new system by May 2008.

Visa: is a private, membership association jointly owned by more than 20,000 member financial institutions around the world. Visa develops common standards and specifications to facilitate commerce and provide member financial institutions with the global payment platform to support transactions on 1.46 billion cards that generate more than $4.3 trillion in global transactions in over 160 countries.17

Voca: was formed in 1968 and was known as the “Bankers Automated Clearing System” or BACS which is similar to ACH in the US. BACS changed its name to Voca in 2004. Voca is one of a number of domestic ACH-type systems in Europe and owns the BACS infrastructure that processes the majority of non-RTGS, non-card, electronic credit and debit payments for B2C, C2B and B2B in the UK. VOCA performed 5 billion transactions in 2005. 28

 

China’s Central Bank RMB Currency Swap Lines

 

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China’s Offshore RMB Clearing Centers

 

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Key Sources of Research:

 

Explaining cross-border large-value payment flows: Evidence from TARGET and EURO1 data

Simonetta Rosati, Stefania Secola

 

 

The Inefficiencies of Cross-Border Payments: How Current Forces Are Shaping the Future

Written by Yoon S. Park, PHD & DBA, George Washington University

 

Click to access crossborder.pdf

 

 

 

There Is No Such Thing As An International Wire

by ERIN MCCUNE on MAY 15, 2014

http://paymentsviews.com/2014/05/15/there-is-no-such-thing-as-an-international-wire/

 

 

 

The Elements of the Global Network for Large-Value Funds Transfers

James F. Dingle

2001

 

Click to access wp01-1.pdf

 

 

 

The Payment System

ECB

 

Click to access paymentsystem201009en.pdf

 

 

 

Cross-border RMB Settlements

 

Click to access cross_border.pdf

 

 

 

China launch of renminbi payments system reflects Swift spying concerns

https://www.ft.com/content/84241292-66a1-11e5-a155-02b6f8af6a62

 

 

 

Possible RMB – Clearing model for the city of Frankfurt

RMB Initiative Frankfurt Frankfurt, December 2013

Working Group on the establishment of an RMB clearing house

 

 

 

CIPS and the International Role of the Renminbi

 

 

 

CHIPS

https://www.newyorkfed.org/aboutthefed/fedpoint/fed36.html

 

 

 

Correspondent banking July 2016

BIS

Click to access d147.pdf

 

 

 

Rethinking correspondent banking

2016

mckinsey

 

 

 

The complexity of correspondent banking

http://thefinanser.com/2015/11/the-complexity-of-correspondent-banking.html/

 

 

 

CLS Bank & the World of FX Settlement

Ron Finberg

2013

http://www.financemagnates.com/institutional-forex/execution/cls-bank-the-world-of-fx-settlement/

 

 

 

Foreign exchange trading and settlement: Past and present

by John W. McPartland, financial markets consultant

Chicago Fed Letter 2006

 

 

Settlement risk in foreign exchange markets and CLS Bank

Click to access r_qt0212f.pdf

 

 

 

 

Cross-Border Payments Perspectives

September 2011

Research conducted by Glenbrook Partners

 

Click to access Cross-Border-Payments-Perspectives-A-Glenbrook-Earthport-Research-Brief.pdf

 

 

 

Redefining the Landscape of Payment Systems

Summary of Proceedings of the World Bank Conference

 

Click to access 705740ESW0P1100Cape0Town0April02009.pdf

 

 

 

Report to the Congress on the Use of the Automated Clearinghouse System for Remittance Transfers to Foreign Countries

July 2011

 

Click to access ACH_report_201107.pdf

 

 

 

ESTABLISHING AN INTEGRATED PAYMENT SYSTEM

(REAL-TIME GROSS SETTLEMENT) IN ASEAN

A Proposal for a Cross-Border Mechanism to Support the AEC 2015

 

Click to access Complete_dissertation.pdf

http://www.rug.nl/research/portal/en/publications/establishing-an-integrated-payment-system-realtime-gross-settlement-in-asean(59f7f186-51c5-47e3-8e1a-2745e19fd998).html

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

 

Click to access Development%20Paper_1403.pdf

 

 

 

Implementing Cross-border Payment, Clearing and Settlement Systems: Lessons from the Southern African Development Community

Albert Mutonga Matongela

 

 

 

The emerging single market in South-East Asia 

SWIFT

 

 

 

 

 

 

Regional Monetary Co-operation in the Developing World Taking Stock

Barbara Fritz / Laurissa Mühlich

Click to access Paper-Stocktaking-Regional-Monetary-Cooperation-Fritz-Muehlich-22-07-14-end.pdf

 

 

 

ASIA FINANCE 2020

FRAMING A NEW ASIAN FINANCIAL ARCHITECTURE

 

Click to access Asia_Finance_2020.pdf

 

 

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

2013

 

Click to access adbi-wp422.pdf

 

 

 

Payments in ASEAN post AEC

 

Click to access 5-Payments-in-ASEAN-post-AEC.pdf

 

 

 

Regional Integration and Economic Development in South Asia

Sultan Hafeez Rahman

Sridhar Khatri

Hans-Peter Brunner

Click to access regional-integration-economic-development-south-asia.pdf

 

 

 

Towards South Asia Economic Union

 

Proceedings of the
7th South Asia Economic Summit (SAES)

5-7 November 2014 New Delhi, India

 

Click to access Towards%20South%20Asia%20Economic%20Union.pdf

Large Value (Wholesale) Payment and Settlement Systems around the Globe

Large Value (Wholesale) Payment and Settlement Systems around the Globe

 

LVPS are managed by the Central Banks.

LVPS are Systemically important financial market infrastructure and critical for smooth functioning of the national and International financial system.

The FEDWIRE is the LVPS in the USA.  TARGET2 is the LVPS in the European Monetary Union.  TARGET2 is a unique system  as it is a common LVPS among many nations in the EMU. CNAPS is the LVPS in China.  CLS System is unique as it is a global FX settlement system.

CIPS of China and CHIPS of USA are also LVPS but are used as offshore clearing and settlement system.

 

From Reducing risk and increasing resilience in RTGS payment systems

1.1 The benefits of RTGS

Real Time Gross Settlement (RTGS) is a clumsy term for a crucial process in the financial markets. This is the reduction of counterparty credit risk by the delivery of cash or the delivery of securities in exchange for cash, instantaneously and without the netting of the obligations outstanding between the parties. Since the 1980s, the central banks which operate payment market infrastructures (PMIs)1 around the world have gradually adopted RTGS for the settlement of high value payments (HVP). Their private sector equivalents which settle low value payments (LVP) are also gravitating towards RTGS. In RTGS settlement, credit risk is reduced because cash is transferred between banks continuously in real time, transaction by transaction. Every payment is settled finally and irrevocably in central bank money, obviating the need to settle obligations between banks in batches on a net basis.

1.2 What is an RTGS?

The role of a PMI is to provide predictable and secure multilateral payment services to banks and their corporate and retail clients, usually within a single country, but sometimes across several countries within a region. They tend to divide into two broad groups.

The first are HVP systems, which settle a relatively low volume of high value and high priority payments.

The second are LVP systems, which are also known as Retail Payment Systems (RPS), because they net relatively high volumes of low value and low priority payments.

There is a further distinction to be made between HVP systems. Not all HVP systems settle on a gross basis in real time (RTGS). Some settle on a net basis, in which case they are technically described as High Value Payment Deferred Net Settlement (HVP DNS) systems. This is because settlement of transactions does not take place instantaneously but is instead deferred until transactions can be aggregated into batches, and the sums owed by one bank to another netted into a single net payment, made either at the end of the business day or at regular intervals throughout the business day. The net settlement typically takes place in central bank money at the RTGS. LVP or RPS systems tend to net transactions in a fashion comparable with HVP DNS systems. Operated mainly by automated clearing houses (ACHs), they aggregate and net transactions between banks, and then settle net amounts between banks in central bank money at the RTGS either in a single payment at the end of the business day or in multiple payments made at regular intervals throughout the day. Although a variety of net settlement systems persist, more than half the PMIs in the world are now RTGS, and even net settlement systems ultimately settle in RTGS (see Chart 1).

It follows that RTGS systems are crucial to the settlement of both HVP, LVP and CSD transactions. In fact, the purpose of every RTGS is to provide final, irrevocable settlement of transactions in a specific currency, usually through the transfer of the reserves held by banks at the central bank. They act on payment instructions, and settle transaction by simultaneously debiting the account of the paying bank and crediting the account of the receiving bank. Reserves are a vital tool of monetary policy. They are the cash balances that banks are required to hold at central banks, both to limit the ability of banks to lend deposits without limit, and to guarantee the stability of the financial system by ensuring banks can always settle their obligations to each other. This makes RTGS an essential tool for every central bank in managing the stability of the financial system, because it is a means by which it can inject and withdraw liquidity (see Chart 2).

 

From Reducing risk and increasing resilience in RTGS payment systems

lvps5lvps6

 

From Reducing risk and increasing resilience in RTGS payment systems

History and Evolution of RTGS

Since they emerged in the late 1990s, RTGS systems have become the industry standard for settlement of high value payments. In 1985, only three countries in the world operated an RTGS system. By December 1999, when the Bank for International Settlements (BIS) published the first draft of what became the ten Core Principles for Systemically Important Payment Systems, the number had risen to 25 countries. After the publication of the final version of the Core Principles, the number of countries operating RTGS systems grew exponentially (see Chart 4). In July 2000, the final version of the BIS Core Principles paper declared, “there has been extensive progress in payment system design in the course of the past ten years, notably in the development and widespread adoption of systems involving real-time gross settlement (RTGS), which can very effectively address the financial risks highlighted by the Core Principles”.3 Today, the adoption of RTGS systems continues to grow, and has reached 124 systems supporting payments in 160 countries.4

 

Regional (Cross Border) RTGS

The fact that more countries enjoy the benefits of an RTGS system than there are RTGS systems in existence reflects the fact that several RTGS systems are used by more than one country. Obvious examples include the TARGET2 system operated by the European Central Bank (ECB) in the euro-zone, the shared platform operated by the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) in west Africa, and the equivalent platform operated by the Banque des Etats de l’Afrique Centrale (BEAC) in central Africa.

 

Systemic Importance of RTGS

As RTGS systems are adopted by more countries, their systemic importance is increasing. Cross-border transactions mean domestic RTGS systems are also becoming part of a global network of RTGS systems, which in turn links the capital market infrastructures of each country with the capital infrastructures of every country. Domestic PMIs, CSDs and banks are now all part of a complex international eco-system.

In some parts of the world, such as the European Union and west and central Africa, RTGS systems are now formally operating on a regional basis (see Table 1). Some of these regional systems operate from a single shared RTGS platform, while others link a number of separate RTGS platforms. In these regions, it is obvious that the failure of an RTGS system can no longer be confined to one country only. But the same is true of RTGS systems everywhere. They are systemically important, and on a global scale.

 

From Global Trends in Large-Value Payments

Global Trends in LVPS

Globalization and technological innovation are two of the most pervasive forces affecting the financial system and its infrastructure. Perhaps nowhere are these trends more apparent than in the internationalization and automation of payments. The evolving landscape is most obvious in retail payments. The use of paper checks is in rapid decline or has been eliminated in most of the industrialized world. Credit and debit cards can be used in the most surprising places. Internet banking with money transfer capabilities is common, and several providers are competing to service consumers’ payments over the Internet and mobile devices.

In wholesale, or interbank, payments, the effect of globalization and technological innovation is probably less obvious to the casual observer—but it has been equally impressive. Given the importance of payments and settlement systems to the smooth operation as well as resiliency of the financial system, stakeholders need to understand and assess the potential consequences of this evolution. This article offers an in-depth look at the current environment for large-value payments systems (LVPSs). We describe ten trends common to LVPSs around the world and identify the key drivers of these developments and the most important policy issues facing central banks (see box). Furthermore, we provide empirical support for each of the trends by using numerous publicly available sources, including Bank for International Settlements (BIS) statistics on payments and settlement systems in selected countries (the “Red Book”). We focus on large-value payments systems in countries where the central bank is a member of the Committee on Payment and Settlement Systems (CPSS), a body under the auspices of the BIS (Appendix A).

Technological innovation, structural changes in banking, and the evolution of central bank policies are the three main reasons for the recent developments in large-value payments. First, technological innovation has created opportunities to make existing large-value payments systems safer and more efficient. Such innovation has also accommodated the industry’s growing need for new types of systems that are not limited to a single country or a currency. Second, the financial sector has experienced immense growth over the last few decades accompanied by changes in the role of individual firms and the products they offer. In addition, financial institutions and their services have become increasingly globalized. These structural changes have affected how participants use largevalue payments systems. Third, the role of central banks in large-value payments systems has changed significantly in recent years. Central banks have become more involved in payments systems and have created formal and systematic oversight functions. The main focus lies in promoting safety and efficiency in LVPSs and in maintaining overall financial stability. Central banks therefore have taken more active roles in monitoring existing and planned systems, in assessing systems according to international standards, and, if necessary, in inducing change.

 

From Global Trends in Large-Value Payments

lvps4

From Global Trends in Large-Value Payments

As the box illustrates, the ten trends that we describe can be assigned to three key drivers.

The first four trends

  • the diffusion of real-time gross settlement (RTGS) systems,
  • the take-off of hybrid systems,
  • the emergence of cross-border and offshore systems,
  • and the rise of Continuous Linked Settlement (CLS) Bank

are all associated with settlement technology and fall into the first category. Technological innovation has enabled new settlement methodologies to emerge that allow a better balance between settlement risks, immediacy, and liquidity requirements. RTGS systems have to a large extent replaced deferred net settlement (DNS) systems. However, the high liquidity needs associated with RTGS have led some system operators to explore liquidity-saving mechanisms and have motivated them to develop hybrid systems. Developments in payments system technology have also facilitated the emergence of systems that settle payments across national borders in one or more currencies. In addition, the clearing of payments is in some instances moving offshore and the ability of participants to connect remotely—eliminating the need for a physical “footprint” in the jurisdiction of LVPSs—is becoming more widespread. Foreign exchange (FX) settlement and counterparty risk are being managed more tightly in part because of the use of payment-versus-payment (PvP) mechanisms.1 CLS Bank operates a multicurrency payments system for the simultaneous settlement of both sides of a foreign exchange transaction on a PvP basis. With CLS Bank, existing risks associated with FX trades are virtually eliminated.

The next three trends

  • increasing settlement values and volumes,
  • shrinking average payment sizes,
  • and falling numbers of system participants

as well as the emergence of crossborder and offshore systems (Trend 3) fall into the second category. They are determined largely by how the banking sector uses payments systems and by the structural changes taking place therein. The values and volumes originated over LVPSs grew exponentially until the turn of the century. However, in terms of value, growth has since slowed and is no longer outpacing economic growth as measured by GDP.  Because many LVPSs process a large amount of relatively low-value payments, the average payment size settled has shrunk. Hence, the dichotomy between small- and large-value payments systems is not always applicable. In addition, consolidation in the banking sector has led to fewer participants in LVPSs. Structural changes have also resulted in the emergence of global banks that require a global payment infrastructure, which in turn has led to the creation of new systems that accommodate these needs.

The last three trends and the rise of CLS Bank (Trend 4) fall into the third category. They are associated with central banks’ operating policies regarding LVPSs. The service level of all systems is improving with longer operating hours. Some systems are even approaching a twenty-four-hour settlement cycle. Transaction costs in various LVPSs have been falling since the late 1990s because the savings achieved through improvements in operating efficiency have been passed on to system participants in the form of lower fees. Through the adoption of common standards, such as the CPSS’ Core Principles for Systemically Important Payments Systems, risk management in LVPSs has become more standardized. Furthermore, the central bank community was the driving force behind the development of CLS Bank.

 

These networks are also known as High Value payment (HVPS) networks.

 

List of LVPS Systems in some countries

UK

  • CHAPS Sterling
  • CHAPS Euro

Canada

  • LVTS

China

  • CIPS
  • CNAPS

India

  • RTGS

EU

  • TARGET2
  • EURO1

USA

  • CHIPS
  • FEDWIRE

International Foreign Exchange FX Networks

  • CLS

 

From Global Trends in Large-Value Payments

From  Clearing and Settlement Systems from Around the World: A Qualitative Analysis

lvpslvps3lvps2

 

From Cross-Border Inter-Bank Payments System/Wikipedia

China’s Cross-border Inter-bank Payment System (CIPS)

The Cross-Border Interbank Payment System (CIPS) is a payment system which, offers clearing and settlement services for its participants’ in cross-border RMB payments and trade. It is a significant financial market infrastructure in China. As planned, CIPS will be developed in two phases. On 8th October 2015, CIPS (Phase I) went live. The first batch of direct participants includes 19 Chinese and foreign banks which were set up in mainland China and 176 indirect participants which cover 6 continents and 47 countries and regions. On 25th March 2016, CIPS signed an MoU with SWIFT with mu- tual understanding of deploying SWIFT as a secure, effi- cient and reliable communication channel for CIPS’s con- nection with SWIFT’s members, which would provide a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardised and reliable environment. CIPS is sometimes referred to as the China Interbank Pay- ment System.

CIPS would not facilitate funds transfer; rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

However, it was reported in July 2015 that CIPS would be ‘”watered down” and used only for cross-border yuan trade deals rather than including capital-related transac- tions, which would delay billions of dollars worth of trans- actions, including securities purchases and foreign direct investment, that would have gone through the system. It was reported to be a second setback to the plan to provide a unified network for settling deals in yuan after technical problems delayed its launch, and that other measures to open up China’s financial infrastructure have been dented by the 2015 Chinese stock market crash. It was said to now offer, at best, a complementary network for settling trade-related deals in the Chinese currency to a current patchwork of Chinese clearing banks around the world.[1]

 

From ECB Website

TARGET2 – Eurosystem Cross Border RTGS System

TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer System) is the real- time gross settlement (RTGS) system for the Eurozone, and is available to non-Eurozone countries. It was devel- oped by and is owned by the Eurosystem. TARGET2 is based on an integrated central technical infrastructure, called the Single Shared Platform (SSP).[1] SSP is operated by three providing central banks: France (Banque de France), Germany (Deutsche Bundesbank) and Italy (Banca d’Italia). TARGET2 started to replace TARGET in November 2007.

TARGET2 is also an interbank RTGS payment system for the clearing of cross-border transfers in the eurozone. Participants in the system are either direct or indirect. Di- rect participants hold an RTGS account and have access to real-time information and control tools. They are re- sponsible for all payments sent from or received on their accounts by themselves or any indirect participants op- erating through them. Indirect participation means that payment orders are always sent to and received from the system via a direct participant, with only the relevant di- rect participant having a legal relationship with the Eu- rosystem. Finally, bank branches and subsidiaries can choose to participate in TARGET2 as multi-addressee access or addressable BICs (Bank Identifier Code).

Since the establishment of the European Economic Community in 1958, there has been a progressive movement towards a more integrated European financial market. This movement has been marked by several events: In the field of payments, the most visible were the launch of the euro in 1999 and the cash changeover in the euro area countries in 2002. The establishment of the large-value central bank payment system TARGET was less visible, but also of great importance. It formed an integral part of the introduction of the euro and facilitated the rapid integration of the euro area money market.

The implementation of TARGET2 was based on a decision of the ECB Council of autumn 2002. TARGET2 started operations on 19 November 2007, when the first group of countries (Austria, Cyprus, Germany, Latvia, Lithuania, Luxembourg, Malta and Slovenia) migrated to the SSP. This first migration was successful and con- firmed the reliability of SSP. After this initial migration, TARGET2 already settled around 50% of overall traffic in terms of volume and 30% in terms of value.

On 18 February 2008, the second migration successfully migrated to TARGET2, comprising Belgium, Finland, France, Ireland, the Netherlands, Portugal and Spain.

On 19 May 2008, the final group migrated to TARGET2, comprising Denmark, Estonia, Greece, Italy, Poland and the ECB. The six-month migration process went smoothly and did not cause any operational disruptions.

Slovakia joined TARGET2 on 1 January 2009, Bulgaria joined in February 2010, and Romania joined on 4 July 2011.

A unique feature of TARGET2 is the fact that its payment services in euro are available across a geographical area which is larger than the euro area. National central banks which have not yet adopted the euro also have the option to participate in TARGET2 to facilitate the settlement of transactions in euro. When new Member States join the euro area the participation in TARGET2 becomes mandatory. The use of TARGET2 is mandatory for the settlement of any euro operations involving the Eurosystem.

As of February 2016, 25 central banks of the EU and their respective user communities are participating in, or connected to, TARGET2:

  • The 20 euro area central banks (including the ECB) and
  • five central banks from non-euro area countries: Bulgaria, Croatia, Denmark, Poland and Romania.

 

From ECB website

lvps8

 

From The Continuous Linked Settlement foreign exchange settlement system (CLS)

 

Continuous Linked Settlement (CLS)

Continuous Linked Settlement (CLS) is an international payment system which was launched in September 2002 for the settlement of foreign exchange transactions. In the conventional settlement of a foreign exchange transaction the exchange of the two currencies involved in the trade is not normally synchronous. For one party to the trade there is therefore a risk that it will transfer the currency it has sold without receiving from the counterparty the currency it has bought (settlement risk). Even if a bank’s risk position vis-à-vis a counterparty is short-term, it may be many times greater than its capital. With CLS, an infrastructure has been created which eliminates settlement risk by means of a payment-versus-payment (PvP)2 mechanism.

CLS has 59 direct participants and more than 6,000 indirect participants (as of October 2009), and in 2008 it settled on average around 546,000 instructions to a value of around USD 4 trillion a day.3 Because of the vast volume of transactions on the global foreign exchange market, with its risk-reducing settlement mechanism CLS makes a significant contribution to the stability of the global financial system. By now, around a half of all foreign exchange transactions in the world are settled via CLS.4 The Swiss franc was one of the currencies settled in CLS from the very start, together with the US dollar, the pound sterling, the Japanese yen, the Canadian dollar, the Australian dollar and the euro. By now, the number of currencies settled in CLS has expanded from seven to 17. The Danish krone, the Norwegian krone, the Singapore dollar and the Swedish krona joined in September 2003, followed by the Hong Kong dollar, the Korean won, the New Zealand dollar and the South African rand in December 2004. The last two currencies up to now, the Israeli shekel and the Mexican peso, joined in May 2008.

 

From CHIPS website

CHIPS

CHIPS is the largest private-sector U.S.-dollar funds-transfer system in the world, clearing and settling an average of $1.5 trillion in cross-border and domestic payments daily. It combines best of two types of payments systems: the liquidity efficiency of a netting system and the intraday finality of a RTGS.

The Clearing House Interbank Payments System (CHIPS®1) is a funds-transfer system that transmits and settles payment orders in U.S. dollars for some of the largest and most active banks in the world. On an average day, CHIPS transmits and settles over 430,000 “payment messages”2 worth an aggregate of $1.5 trillion. It has been estimated that CHIPS carries a very high percentage of all international interbank funds transfers that are denominated in U.S. dollars. For these reasons, CHIPS has been widely regarded as a systemically important payment system, and on July 18, 2012, FSOC designated The Clearing House Payments Company L.L.C. (), which owns and operates CHIPS, as a systemically important financial market utility (SIFMU) under Title VIII of the Dodd-Frank Act on the basis of its role as the operator of CHIPS.3

The Clearing House

The Clearing House11 was founded in 1853, and is the oldest, most innovative bank association and payments processor in the United States. Established to simplify the daily check exchanges in New York City, The Clearing House later became a pioneer in the emerging field of electronic funds transfers and continues to be a leader in the payments arena, operating in addition to CHIPS, an automated clearinghouse (ACH) known as EPN (Electronic Payments Network), and a check-image clearinghouse. PaymentsCo continues to pioneer in emerging areas of the payment system in its work to protect account credentials through tokenization12 and to design and build a new low-value real-time payment system13 for the United States.

CHIPS

CHIPS is a real-time system for transmitting and settling high-value U.S.-dollar payments among its participating banks. The Clearing House began operating CHIPS in 1970 to simplify and expedite interbank payments in New York City.

Backed by over 44 years of reliable operation, CHIPS serves 49 foreign and domestic banks,14 representing 21 countries, through a network of sending and receiving devices, which range from microcomputers to large-scale mainframe computers. CHIPS participants include U.S. commercial banks and foreign banks with offices in the United States.

 

 

 

Key Sources of Research:

 

Payment and settlement systems in selected countries

Prepared by the Committee on Payment and Settlement Systems of the Group of Ten Countries

April 2003

 

Click to access d53.pdf

 

 

Payment, clearing and settlement systems in the CPSS countries

Volume 1

2011

 

Click to access d97.pdf

 

 

Payment, clearing and settlement systems in the CPSS countries

Volume 2

November 2012

Click to access d105.pdf

 

 

 

Payment, clearing and settlement systems in the United States

 

Click to access d105_us.pdf

 

 

 

Payment, clearing and settlement systems in Japan

Click to access d105_jp.pdf

 

 

 

Payment, clearing and settlement systems in the United Kingdom

 

Click to access d105_uk.pdf

 

 

 

 

 

Payment, clearing and settlement systems in India

 

Click to access d97_in.pdf

 

 

A Primer on Canada’s Large Value Transfer System

 

Click to access lvts_neville.pdf

 

 

 

Payment, clearing and settlement systems in Canada

 

Click to access d97_ca.pdf

 

 

 

Global Trends in Large-Value Payments

Morten L. Bech, Christine Preisig, and Kimmo Soramäki

2008

 

Click to access 0809prei.pdf

 

 

 

Reducing risk and increasing resilience in RTGS payment systems

SWIFT

2014

https://www.swift.com/node/4001

 

 

 

The Continuous Linked Settlement foreign exchange settlement system (CLS)

2009

Click to access continuous_linked_settlement.en.pdf

 

 

 

 

Overview of the U.S. Payments, Clearing and Settlement Landscape

2015

 

Click to access 03.Overview-US-PCS-landscape-Merle.pdf

 

 

International payment arrangements

 

Click to access d53p16.pdf

 

 

International Settlements: A New Source of Systemic Risk?

ROBERT A. EISENBEIS

 

Click to access 82b045cb0c5c7a82da1f43ff61006fe73c18.pdf

 

 

 

Clearing and Settlement Systems from Around the World: A Qualitative Analysis

 

Click to access sdp2016-14.pdf

 

 

 

SYSTEMIC RISK IN INTERNATIONAL SETTLEMENTS

ESRC Centre for Business Research, University of Cambridge

Rahul Dhumale

1999

 

Click to access wp152.pdf

 

 

PAYMENT SYSTEMS IN INDIA VISION 2009-12

RBI

 

Click to access VDF16022010.pdf

 

 

 

Payment systems to facilitate South Asian integration

 

Click to access WP-2015-021.pdf

 

 

 

PAYMENT SYSTEMS TO FACILITATE SOUTH ASIAN INTRA- REGIONAL TRADE

Ashima Goyal

September 2014

Click to access Development%20Paper_1403.pdf

 

 

 

Federal Reserve Policy on Payment System Risk

As amended effective September 23, 2016

 

Click to access psr_policy.pdf

 

 

 

Contagion in Payment and Settlement Systems

 

Matti Hellqvist

2006

 

Click to access mh.pdf

 

 

 

Overview of payment system settlement

BOE UK

http://www.bankofengland.co.uk/markets/Pages/paymentsystem/default.aspx

 

 

 

A Guide to the Bank of England’s Real Time Gross Settlement System

2013

Click to access rtgsguide.pdf

 

 

 

Evolution of payment systems in India – or is it a revolution?

Speech by Mr R Gandhi, Deputy Governor of the Reserve Bank of India

Banaras Hindu University, Varanasi, 22 October 2016.

http://www.afi-global.org/speeches/2016/10/evolution-payment-systems-india

 

 

 

How Modernizing India’s Payment System can Drive Financial Inclusion

April 26, 2016

By Sean Creehan

 

http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/how-modernizing-indias-payment-system-can-drive-financial-inclusion/

Click to access Asia-Focus-Modernizing-the-Payment-System-to-Increase-Financial-Inclusion-in-India.pdf

 

 

 

Payment Systems in India: Opportunities and Challenges

DEEPANKAR ROY

 

Click to access payment-systems-in-india-opportunities-and-challenges.pdf

 

 

Payment Systems in India and Current Status: A Perspective

March 2016 by Graham Wright and Anil Kumar Gupta

 

http://blog.microsave.net/payment-systems-in-india-and-current-status-a-perspective/

 

 

 

PAYMENT AND SETTLEMENT SYSTEMS

RBI India

https://www.rbi.org.in/scripts/paymentsystems.aspx

https://www.rbi.org.in/scripts/PaymentSystems_UM.aspx

http://www.npci.org.in/aboutus.aspx

 

 

NPCI playing a key role in India’s push towards cashless economy

http://www.livemint.com/Industry/Sp5XB4G687Kq5eCAI8Y51O/NPCI-playing-a-key-role-in-Indias-push-towards-cashless-eco.html

 

 

India Has The Most Sophisticated Payments System In The World – And Six Men Made It Happen

R Jagannathan – Apr 12, 2016,

https://swarajyamag.com/economy/india-has-the-most-sophisticated-payments-system-in-the-world-and-six-men-made-it-happen

 

 

Supervision of U.S. Payment, Clearing, and Settlement Systems: Designation of Financial Market Utilities (FMUs)

 

Marc Labonte

Specialist in Macroeconomic Policy

September 10, 2012

 

Click to access 8a3d9e1f088d8cba80d4fd5cf6f28d62a462.pdf

 

 

Interdependencies among payment and settlement systems Overview of forms and

challenges for risk management

 

Denis Beau

 

Click to access slides2beau.pdf

 

 

 

SELECTED ISSUES ON LIQUIDITY RISK MANAGEMENT IN FEDWIRE FUNDS AND PRIVATE SECTOR PAYMENT SYSTEMS

TECHNICAL NOTE MAY 2010

 

Click to access FSAP_Technical%20Note_Payment%20Systems_Liquidity%20Risk%20Management_Final_5%2011%2010.pdf

 

 

 

Managing Operational Risk in Payment, Clearing, and Settlement Systems

by

Kim McPhail

 

Click to access 17521118.pdf

 

 

Interdependencies of payment and settlement systems: the Hong Kong experience

 

Click to access fa2_print.pdf

 

 

Fundamentals oF Payment systems

 

Click to access Fundamentals_of_Payment_Systems.pdf

 

 

GLOSSARY OF TERMS RELATED TO PAYMENT, CLEARING AND SETTLEMENT SYSTEMS

Click to access glossaryrelatedtopaymentclearingandsettlementsystemsen.pdf

 

 

Central bank oversight of payment and settlement systems

May 2005

 

Click to access d68.pdf

 

 

Creating an Association of Southeast Asian Nations Payment System: Policy and Regulatory Issues

Tanai Khiaonarong

No. 422 May 2013

 

Click to access adbi-wp422.pdf

 

 

 

Oversight of payment and settlement systems

2012

 

http://www.dnb.nl/en/binaries/Oversight%20of%20payments%20and%20settlement%20systems%202012_tcm47-286470.pdf?2016122522

 

 

 

Payment & Settelment System in India

 

Click to access All%20about%20Payment%20and%20Settlement%20Systems%20in%20India.pdf

 

 

 

Payment and Settlement Systems in India

VISION-2018

 

Click to access VISION20181A8972F5582F4B2B8B46C5B669CE396A.PDF

 

 

 

Clearing House Interbank Payments System (“CHIPS®”)

Self-Assessment of Compliance with Standards for Systemically Important Payment Systems

January 2016

 

https://www.theclearinghouse.org/-/media/files/payco%20files/standards%20self%20assessment%202016.pdf?la=en

 

 

 

Supervision of Payment, Clearing and Settlement

 

Click to access FSR_Supervision_of_Payment_Clearing_and_Settlement.pdf

 

 

The Continuous Linked Settlement foreign exchange settlement system (CLS)

 

Click to access continuous_linked_settlement.en.pdf

 

 

Indian Payments Industry: Mobile POS Solutions

Click to access IE%20Insight%20-%20India%20Payments%20-%20Mobile%20POS%20Solutions.pdf

 

 

 

Payment systems in Sweden

 

Click to access swedencomp.pdf

 

 

 

CIPS and the International Role of the Renminbi

January 27, 2016

By Nicholas Borst

http://www.frbsf.org/banking/asia-program/pacific-exchange-blog/cips-and-the-international-role-of-the-renminbi/

 

 

Chinese Central Bank has introduced CIPS (Cross-Border Interbank Payment System)

 

Click to access chinese-central-bank-cips.pdf