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
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
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
International Foreign Exchange FX Networks
From Global Trends in Large-Value Payments
From Clearing and Settlement Systems from Around the World: A Qualitative Analysis
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.
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). 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
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 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 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
Payment, clearing and settlement systems in the CPSS countries
Payment, clearing and settlement systems in the CPSS countries
Payment, clearing and settlement systems in the United States
Payment, clearing and settlement systems in Japan
Payment, clearing and settlement systems in the United Kingdom
Payment and securities settlement systems in the euroPean union
Payment, clearing and settlement systems in the euro area
Structure and Evolution of EFT Payment Networks in the USA, India, and China
Payments Systems are going through revolution particularly in developing countries. Since they lack the infrastructure to follow traditional options, they are opting for innovative solutions using mobile technologies and are attempting to leapfrog. Networks through which payment transactions are processed are equally important.
Below is a brief introduction to EFT networks used in payments industry in USA, India and China.
From A Guide to Debit and ATM Card Industry
EFT (Electronic Funds Transfer) Networks in USA
EFT networks are the telecommunications and payments infrastructure linking consumers, ATMs, merchants, and banks. The physical components consist of ATMs, POS terminals, telecommunication connections, apparatus that route transaction information to appropriate parties, and computers that store deposit and transaction information. Two characteristics of an EFT network distinguish it from other payments systems that may use similar physical components. First, transactions are PIN-based. Second, consumer accounts are immediately debited (funds are immediately transferred from demand deposit accounts).
There are two types of EFT transactions. The first are ATM transactions. The second are online debit transactions at POS terminals. EFT networks can be used for either ATM transactions or online POS debit card payments or both. In practice, most EFT networks process ATM transactions, and a subset of these also processes POS transactions. A few EFT networks have been devoted solely to POS transactions.
EFT networks are typically separated into two types. Regional EFT networks serve specified regions of the United States. There are three large regional networks: NYCE, Star, and Pulse. The NYCE network serves primarily the Northeast and Midwest, Star serves the West and the midsouth Atlantic regions, and Pulse serves the Central and Southern regions. Today it is something of a misnomer to call these large networks regional because they have grown to the point of near-national coverage. Examples of smaller regional networks include Shazam, located primarily in the Midwest, and Presto, serving the Southeast.
National networks are fewer in number than regional network but are distinguished by their national territory. National territory does not necessarily translate into large size. The Armed Forces Financial Network is comparable in size to some of the larger regional networks, but its mission of serving the armed forces community leads it to a national geographic territory. Visa and MasterCard operate EFT networks that are truly national in size and territory. Each uses its own physical infrastructure to run ATM and POS transactions, and for marketing purposes their ATM and POS networks carry different names. Visa’s Plus and MasterCard’s Cirrus are ATM networks, while Visa’s Interlink and MasterCard’s Maestro are POS networks.
Another important distinction for national networks is that they may serve as a bridge between regional networks. If a transaction conducted on a regional network is initiated using a card from another regional network, a national network may link the two regional networks so that the transaction information may be routed from one regional network to the other. In a sense, national networks serve as networks of networks.
There are many types of ownership and membership structures among EFT networks. A single bank may own a shared network, but ownership by multiple banks is more common, a legacy of the fact that many of the first shared networks were typically joint ventures among banks. Some of these joint ventures included many banks, while others had a few. Nonbank ownership of networks ranges from complete ownership of the network (as with Concord EFS’s Star network) or as a joint venture with banks (such as First Data and NYCE).
Membership in an EFT network is typically limited to financial institutions (banks, savings institutions, and credit unions) and can be, but is not necessarily, tied to ownership.
Offline debit card networks
The second component of the ATM and debit card infrastructure is offline debit card networks. Offline debit card networks are a telecommunications/payments infrastructure linking consumers, merchants, and banks. There are two offline debit card networks, one run by Visa and the other by MasterCard, which essentially piggyback off the card associations’ credit card networks. Visa has named its offline debit product Visa Check Card and MasterCard refers to its product as MasterMoney.
The physical components of the offline debit network consist of POS terminals, telecommunication connections, apparatus that route transaction information to appropriate parties, and computers that store deposit and transaction information. Information necessary for the authorization of an offline debit transaction as well as information for processing the payment follow the same infrastructure routes as for credit card transactions.
Two characteristics distinguish offline debit transactions. First, transactions are signature- based. Second, consumer accounts are debited one or two days after the transaction (that is, there is a lag before funds are deducted from demand deposit accounts).
To complete this section, it may be useful to emphasize the similarities and differences between online and offline debit transactions. Both transactions are conducted at a POS terminal. Both represent payments in exchange for goods or services. But online debit requires the use of a PIN and funds are debited immediately, while offline debit does not require a PIN and funds are not debited immediately. Online debit transactions are processed over an EFT network. By contrast, offline debit transactions are processed over credit card networks. Online debit allows the consumer to obtain cash back at the point of sale, while offline debit does not. Finally, consumers and merchants face differing fees for online and offline debit (detailed in Chapter 4).
From Point of Sale (POS) Systems and Security
Debit Cards and ATM Networks
A. Regional EFT Interbank Networks
B. National EFT Interbank Networks
Debit POS (Point of Sale) Networks (PIN based)
Transactions are processed over EFT Network
Touch Bistro (iPad)
Offline Debit Card Networks (Signature Based)
Transactions are processed over Credit Card Networks
Visa Check Card
EFT Networks in India
India is mostly cash based economy. Manual Paper based and Wooden Drawer based Cash Registers are the predominant form of payment transactions systems.
In last few years, many innovative solutions have come up but penetration is very low.
Issues of Data Privacy and Cybersecurity are not yet on the minds of Developers of these new solutions.
Regulations and Oversight of these newer platforms is non existent.
People use debit cards predominant to withdraw cash from ATM machines. Online payment transactions are done for paying utilities bills and making bookings for Air, Train, and Bus Transportations. Credit cards are used by very small segment of people in cities.
From Innovative payment systems for financial inclusion
Innovative payment systems for financial inclusion
Over INR 8743 bn in payments to be made through prepaid Instruments in FY20
India Point of sale terminals lowest amongst BRIC nations
Overall business opportunity for business correspondents estimated at INR 567 bn per year and revenue opportunity for POS –related shared services at INR 16 bn per year
24 OCTOBER DELHI/MUMBAI:
Disruptive game changing innovations in the payment systems will be critical to accelerate financial inclusion agenda of India, states a latest report on financial inclusion by EY, the global professional services organization. The report titled ‘Accelerating financial inclusion- The role of payment systems’, was released at a global conference on Financial Inclusion and Payment Systems in Delhi today.
The report aims to provide an outlook on India’s financial inclusion agenda, the growth drivers for its success and the supporting infrastructure that will be needed. As per the report, with current trends like growing urbanization, rising middle class and aspirations, this is the right time to tap the large unbanked population of India.
Mahesh Makhija, Partner – Advisory (Financial Services), EY says, “India is an exceptional country with unique consumer needs. To accelerate financial inclusion in India, we will need to understand what combination of payment products and services will work in the Indian context. Innovations in payment systems will occur at the intersection of different industries like financial services, telecom and retail.”
The report lists 6 key elements that make up the financial inclusion agenda of India:
New game, new rules — evolving prepaid instruments landscape in India
Prepaid Instruments (PPI) are at their nascent stage in India, but have the potential to play a vital role in the country’s struggle to reduce dependence on cash in its economy, says the report. EY estimates that although prepaid market represented only 3.62% of the Indian card market, this will increase dramatically over the next decade. EY recommends that the Government look closely at PPI’s as an option to disburse Government benefits (currently estimated at INR 4800 billion). Market growth in PPI’s will also emanate from the proliferation of m-wallets, money transfer and other new applications of the product. According to the report, these new segments are expected to collectively contribute 47% of the prepaid market in FY 20. Over INR 8743 billion in payments is likely to be made through PPIs in FY 2020. This will be more than 12 times the volumes in FY2013.
Rethinking mobile money — the case for electronic rupees issued by the RBI
Mobile money has the power to democratize banking in India by bringing large numbers of the country’s unbanked population into its formal financial system. As per the report, almost 83% of India’s population is expected to own and use mobile phones by 2014. However, for several reasons mobile money adoption in India has been low. Consumers and merchants are not incentivized to make the transition to mobile money and Banks and Telco’s have adopted a ‘wait and watch’ approach. According to the report, the challenge is to take a transformative step that will lead to a paradigm shift in the mobile money paradigm. One such step would be creation of electronic rupee. These would be issued by the Reserve Bank of India as legal tender, just as it currently issues currency notes and coins.
“We think that the creation of electronic rupee is a transformative solution to today’s issues with mobile money in India and in fact across the globe” said Mahesh.
Enabling payments —increasing Point Of Sales (POS) penetration in India
As financial inclusion gathers momentum, there is an urgent need to enhance POS acceptance infrastructure in India. India still has one of the lowest number of POS terminals (per million people) in the world. According to the report, penetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS. Moreover, only 1.1 million of the more than 10 million retail touch points have POS installed for electronic payments acceptance. Technology will play an important role with the implementation of new POS capabilities. Large urban retailers seek technologies like Mobile POS (Mpos) which help them in “line-busting” whereas the smaller merchants seek a cheap and easy-to-use solution like a card-reader attached to a phone. Rural merchants on the other hand are likely to adopt biometric POS terminals, which enables them to accept Aadhaar enabled debit cards that are likely be issued in large numbers for financial inclusion. As per the report, there could be close to 3.5 million POS in the next five years if necessary initiatives and actions are taken to increase the POS penetration.
Evolving payment ecosystems – shared services models for inclusion and growth
The report states that to enhance their reach, banks are introducing payment ecosystems that work across organizational boundaries to deliver innovative payment services. The report discusses 7 different models of shared services that Banks are leveraging aimed at acquiring, engaging and retaining customers. EY estimates the overall opportunity for shared services like business correspondents at around INR567 billion per year in the next 2-3 years and an overall revenue opportunity of INR16 billion per year for POS-related shared services by 2018 at the present rate of growth in card-related transactions and merchant terminals.
Pathways to excellence — the transformation agenda for banks
Changing consumer behavior, the increasing urgency of financial inclusion and ubiquitous mobile telephony are powerful external factors that will transform the Indian payments industry over the next 10 years. In the last decade, India has witnessed significant achievements in its efforts to migrate from traditional payment methods through cash to modern electronic payment systems. In 2012 the percentage of non-paper based payments transactions was 48% up from 27% in 2008. While there has been significant progress made on various parameters, a lot still needs to be done in the next few years. According to the report, India is at an interesting point in its payments journey wherein the foundation is laid, but its future growth will depend on innovation in products, business models, consumer interfaces, security and infrastructure under the umbrella of enabling regulations.
Cashless in India – Government imperatives to promote electronic payments
From taxes to social welfare benefits, the Government of India cumulatively receives and disburses billions of rupees to and from its citizens. The Interbank Mobile Payment Service and Aadhaar Enabled Payment System platforms have the potential to integrate the payment systems of various Government to Public (G2P) schemes and enable mobile phones to be used as front-end technology instruments states the report.
By digitizing this flow of money, the Government can lead a strategic shift from the high dependence on cash to a more efficient, electronic payment system, which leverages online and mobile channels to cut costs and bring social benefits to millions.
The establishment of a strong payment and settlement framework and associated enabling institutions has aided a conducive environment for financial inclusion in India.
From Why it is difficult to scale POS machines in India
Why it is difficult to scale POS machines in India
Shashidhar KJ October 19, 2016
Earlier this month, the Reserve Bank of India (RBI) said it would be setting up an acceptance development fund (ADF) to boost the card payment infrastructure in the country. The proposed ADF which will be funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund. Money from the fund is then invested in structured initiatives to expand acceptance infrastructure such as POS terminals.
We have the dubious honour of having one of the lowest POS terminal penetration, according to an Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.
This was back in 2015 and the number of POS machines issued from banks has improved to over 14 lakh in July, as shown by RBI data.
Isn’t it odd that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country?
Indeed, the RBI, in its concept paper to boost card acceptance, points out that people primarily used their debit cards to withdraw money from ATMs.
Closer look at POS terminal data
However, a if we look at closer at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.
The RBI counts 56 scheduled commercial banks in the country. Not to mention that there are 56 functioning regional rural banks and 93 cooperative banks.
It’s interesting to note that the banks mentioned above generally have a well developed credit card business portfolios which contribute to their balance sheet in a significant way.
Enter the MDR
An explanation for the skew of POS terminals within these banks could be that they get to charge merchants a higher merhcant discount rate (MDR), an inter-bank interchange fee, for credit card transactions.
The MDR is fee collected by banks from merchants for a card transaction. When a customer uses a HDFC Bank credit card on a POS terminal, the merchant is charged a fee to settle the payment in another bank.
Typically banks charge around 2-2.5% per transaction on credit cards. However, the RBI has capped the MDR for debit cards at 0.75% for transactions below Rs 2,000 and 1% for transactions above Rs 2,000.
The devil, however, lies in how the MDR is split between the bank issuing the card and bank accepting the payment. For credit cards, the issuing bank gets around 1.8% of the 2-2.5% MDR. Meanwhile for debit card transactions, issuing banks make around 0.5% out of the 0.75% interchange fee.
No incentive to develop the system
Currently, other banks (public, regional and cooperative banks) have no incentive to develop card acceptance networks. They are not interested or do not have the expertise to develop a credit card business to command a higher MDR. They would rather have their customers use debit cards as a dumb instrument to withdraw cash at ATMs instead.
Rahul Kothari, vice president and head of business at PayUbiz explained that banks look at POS as a means to retain customers through current accounts and offer them other products.He added that right now there is no level playing field between third party companies who develop POS solutions and banks. RBI guidelines say that third party companies need to take permission from banks to process POS payments, Kothari added.
Third party POS players in India include PayU, MSwipe, Ezetap and Oxigen.
Industry sources also pointed out that banks charge around 5-10 basis points (bps) for getting a bill of sponsorship to handle POS payments. MediaNama was unable to independently verify this.
What needs to be done
There needs to be a more equitable distribution of the MDR between banks which will open up competition between smaller banks who will now have a reason to build their card acceptance networks. To an extent, the ADF aims to do that by taking a portion of the fees got by the issuing bank and put it into a corpus to get more POS terminals in the country.
However, the RBI should ensure that the proceeds of the fund should go to banks who do not have a proper card acceptance network.
Secondly, third party POS players must also be brought into the discussion. For example, Oxigen has a product called Super POS which also doubles as a mini ATM and has biometric and Aadhaar authentication. The RBI recently issued a notification which instructed banks to upgrade ATMs and POS machines to accept Aadhaar. Banks should figure out a way to work with non-bank entities to push for a cash less environment.
Perhaps, banks can employ third party players as banking correspondents in rural areas and get give a cut from the MDR to them.
What about QR codes
Paytm has an interesting approach to offline merchants. Recently the company announced that it has more than a half a million offline merchants. Paytm’s offline merchants have a QR code which a customer has to scan on the app to make a payment. Effectively, it has turned the POS system on its head by cutting the costs of installing and maintaining a POS terminal.
Once a customer decides to move his/her money to a bank account, they need to pay a fee of 1% to Paytm which is considerably lesser than the MDR charged by banks. I spoke to a mom-and-pop shop owner in the neighbourhood who said that this was a lot more cheaper than the costs associated with cards. He explained that he wants acceptance of Paytm to increase so that savings on transactions will be reduced.
To sum up
There are a number of factors which are inhibiting the growth of POS terminals in India:
– Allowing only banks to lead the way on POS.
– The bank interchange fee (MDR) for merchants is too high.
– The cost of handling and maintaining machines are an added cost for merchants.
– The split of MDR disproportionately favours the banks issuing cards. There needs to be a more equitable distribution of the fee between the issuing bank and the accepting bank.
From Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma
Paytm has more offline merchant transactions than online: CEO Vijay Shekhar Sharma
Shashidhar KJ September 26, 2016
We’ve been seeing Paytm stickers coming in offline stores all over, at least in Delhi, Mumbai and Bangalore. In the month of August, Paytm’s offline merchant transactions exceeded online transactions on the platform, CEO Vijay Shekhar Sharma (VSS) told MediaNama, and a large part of this has been owing to a change in technology approach by the company. The company claims over half a million offline merchants now. Edited excerpts from MediaNama’s interview with VSS:
Took a call to focus on offline in 2016: “Every year we pick up a theme. When we first started, it was online recharges, the second year was online payment. Now, this year when we started we thought we would take up offline as a plan that we would have Paytm in every nook and corner (of the country). We thought that after Paytm, there should not be any pain-point left for anyone else to solve.
Online is great, online is nice and but this is where the bus is moving. But ultimately there is a larger customer base and transaction base which happens in the offline world. It was a very, I would say, uncanny for an online company to think of offline.
So we built our own software where we can track offline signups, sales-force automation and a lot things, so that we are disciplined. And I think we have more than half a million merchants signed up.
Update: VSS has clarified that the company refers to a transaction as “offline” when the merchant doesn’t have their own application, and is integrated only using the QR code, and not via the API. Thus, these will not include transactions made on the Uber app.
Dumb card, smart POS; smart phone and dumb POS: “I mean if you look at it, first of all, our understanding is that we have a different process versus other offline payment methods. Offline right now is dominated by Visa and MasterCard. American Express is also very small.
But the consumer has a dumb device called card, and what merchants carry is a smart device called POS with Internet connection. So, we are changing that structure. We are saying that merchant will not have a smart device or Internet connection, and consumer will have that. So payment happens via a QR code and the processing happens on the consumer side.
NFC versus QR code: “I think we saw it first in China, where QR codes dominate massively, and we had discussions with our friends in China (Alibaba) on why they chose to have QR code. I have personally have been a total non-believer of QR code in advertising, but when it came to payments it became important because the consumer and merchant have to communicate in a non technical way,and some way for the data to be given from consumer to merchant easily.
Whether you look at NFC, there is an investment that the merchant has to do. And if you use the smartphone as a consumer device the cost structure works in reverse in our case. The idea that we had is that every smartphone, technically, might not have NFC. But every smartphone does have a scanner.
So on the Paytm app, when you click on pay, the QR code scanner comes up.
Challenges in going offline: “So, it was three layers of new things. One for the consumer, it was new because they have never gone in the offline world and paid in any online payment instrument. We had to help with consumer mindset. Second is towards the merchant who are okay with cash and have no obligation to build a non-cash business. The third was that we had chosen a new technology, where the consumer and the merchant had to learn. But the thing that we found out was, in the end, it was so fast that I don’t think OTP or NFC or any other thing like MMID will work.
The point is that this is tokenization for your digital wallet.”
Sector choices for offline rollout: We started with the transportation vertical – autorickshaw, taxi, Uber, parking or petrol pump – where there is a lot of sale. Second place where we found the spends were in the groceries, fruits and vegetables etc and the third category was discretionary spends which was like shopping, quick service restaurants and restaurants. So we created three beats for these.
Our approach was that Delhi is the first city where you have to find the correct solution. Because in verticals like in parking, there would be Internet connectivity problems, while in QSR, payments need to happen very fast, and OTP would be very slow.
So we built the beta run in one city and then went to multiple cities. There is a team which builds solutions, and there is a second team which takes it to the market.
The teams which go to market look at top cities, mid-tier cities and long tail cities. We found it very surprising that in long tail cities, it increases sales for a merchant when they say that they accept Paytm.
There is also a number where you can dial and say that you want Paytm, and through this tens of thousands of merchants have been signed up. Consumers and merchants reach out to us just because somebody else has used it. Then there is a front-tail where we go to the shop, and we explain to them what the product is where they do merchant on-boarding, verification and give them QR codes. So two different processes, but both require the merchant to be on-boarded with full verification and documentation.
Merchant transaction charges: In our case, the merchant pays 0%. So consumers will load money through credit cards and debit cards and pay to the merchant. So effectively, the merchant is effectively receiving credit and debit card payments at 0%. We make money which comes through the wallet, which is used on the Paytm network.
Another interesting thing is the money these merchants receive goes back to the network to be used and only 5% is sent back to the bank account.
(Editor’s note: Paytm charges charges 4% for wallet-to-bank account transfers for customers who have not completed their KYC and 1% for KYC compliant customers. That still is effectively lesser than card companies who effectively charge around 2.5% on transactions)
Paytm by the numbers
Paytm wallet users: 140 million
Monthly transactions: 75-90 million (as per media sources)
GMV (current): $5 billion
GMV projected by financial year end: $10 billion
Offline merchants: 500,000
Monthly offline transactions: 10 million per month
Payments bank launch: Diwali 2016
Investors: Ant Financials (AliPay), Alibaba Group, SAIF Partners, Sapphire Venture and Silicon Valley Bank
Online vs offline growth: Our online was a bit like iOS growth. One successful merchant gave us another one. While with offline, it was more like Android growth: it just grew very fast. In the month of July, we just had it at the same level between offline and online. And in August offline overtook online. Basically now, Paytm does more offline merchant transactions than online.
Recharge now constitutes less than 20% of our business. That number is very small now because we have created so many uses cases. One thing we found out was, when you give your payment system to a merchant, the merchant’s experience becomes a part of the total experience. Consumer might prefer to pay through an instrument, but the process to reach the merchant payment instrument is so difficult, that the consumer might give up before that. We found out that the payment system should be there on the merchant’s side.
Concentration of cities & Ticket sizes: “Right now we are there in about 900 cities and towns. When we look at our payment consumer, where the median is bigger, as expected, it is coming from cities where the Internet connectivity is there. So top 10 cities will be constitute about 50%. Online transactions go through ecommerce merchants and have a larger ticket size. But if you look at offline transactions, payments in offline usage of wallet, there is a smaller order value.
From RBI concept paper looks to boost card payments at POS terminals
RBI concept paper looks to boost card payments at POS terminals
Shashidhar KJ March 11, 2016
The Reserve Bank of India came out with a concept paper earlier this week for improving the card acceptance infrastructure and is seeking comments, suggestions and views from relevant players on the same.
“The “economics” of card payments plays an important role in ensuring greater and wider participation of all stakeholders involved in the card payments value chain and, as such, any strategy geared towards expansion of the infrastructure in a “managed” way has to also address these issues,” the RBI said.
Accordingly, the RBI has outlined a broad strategy to enhance the growth in acceptance infrastructure through POS terminals and usage of cards which includes further rationalisation of merchant fees for debit card transactions. Here are some of the take aways from the paper:
Card payments in India
– The RBI noted that growth in electronic payments is not uniform across all segments nor is it visible at all locations across the country. Particularly, in the context of cards, while the card base is increasing rapidly, activation or usage rates are quite low, especially for purchase of goods and services. Card usage at ATMs, on the other hand, is quite high.
– Debit cards registered a growth of 64% between Oct 2013 and Oct 2015 while credit cards grew at 23% during the same period. As at end-December 2015, the total number of credit cards stood at 22.74 million while debit cards stood at 636.85 million cards in the country.
– Between Oct 2013 and Oct 2015, ATMs increased by around 43% while POS machines increased by around 28%. As of end-December 2015, the number of ATMs has increased to 193,580 while POS machines had increased to 1,245,447 in the country.
– From April 2015 to December 2015, the usage of debit cards at ATMs continues to account for around 88% of the total volume and around 94% of total value of debit card transactions. Usage of debit cards at POS machines accounts for only around 12% of total volume and 6% of total value of debit card transactions.
– From April 2015 to December 2015, credit card usage at ATMs accounted for around 0.73% of volume and 1.25% of value of total credit card transactions. Use of credit cards for POS transactions accounted for 99.27% of volume and 98.75% of value of total credit card transactions in the country.
– While almost every bank is a card issuer, very few banks are engaged in the activity of merchant acquiring and setting up of card acceptance infrastructure. Thus, there is concentration in acquiring business with the top 5 acquirer banks accounting for nearly 81% of the POS infrastructure and top 10 acquirers’ share of POS being above 90%.
– The number of merchant establishments accepting card payments has increased from 0.85 million merchant establishments in Oct 2013 to around 1.15 million establishments in Oct 2015, a growth rate of 34%. As on Dec 2015, the number of such merchant establishments was 1.26 million.
Factors inhibiting growth for card acceptance
– High cost of acquiring business that include high capital cost of POS machine, recurring maintenance, difficulty of servicing POS machines in rural areas.
– Low utilization of cards makes acceptance for small merchants and in rural areas unviable due to low card footfalls and low transaction values besides other costs associated with merchant acquiring, ultimately forcing acquiring banks to withdraw the POS terminal.
– Lack of adequate and low cost telecommunication infrastructure
– Lack of incentive for merchants to accept card payments is another inhibiting factor. Further, transparency and audit trails associated with card payments often act as deterrent for accepting card payments by merchants.
– Insufficient awareness about the costs associated with use of cash apprehension of using non-cash payments, especially concerning its safety and security, anonymity associated with cash payments, surcharge and convenience fees being levied for use of card and electronic payments, difficulties in changing consumer behavior, etc. also inhibit growth / usage of card of payments for purchase of goods and services.
– Merchant Discount Rate (MDR) also often acts as a disincentive. Strategies for enhancing acceptance
Mandate installations of POS terminals in proportion to cards issued: The RBI said that banks issuing cards should install proportionate number of POS terminals to the number of cards issued. However, it noted that not every bank is equipped to run merchant acquisition business. The lack of expertise may lead to some banks entering this business through outsourcing model which later might prove costly.
Setting up of Acceptance Development Fund (ADFs): The RBI also mooted for setting up an ADF where different stakeholders in the card payment chain come together to set up a program to encourage wider deployment of card acceptance infrastructure. These are generally funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund which is then invested in structured initiatives to expand acceptance infrastructure.
ADFs are usually managed by third parties who establish the framework for use of funds which include subsidies for installation of terminals, development of new technologies / segments / geographies, marketing and education to increase awareness for acceptance as well as for usage.
Rationalisation of Merchant Discount Rate
The major source of revenue in the card business is the Merchant Discount Rate (MDR) or Merchant Service Fee. MDR comprises other cost segments such as the interchange fee (fee paid by acquirer to card issuing bank), processing and other fees payable to the card network, and other costs incurred by the acquirer along with acquirer’s margin. The RBI has proposed a number of options for the rationalization of the MDR some of them are:
Uniform MDR across all merchant categories & locations proportionate to transactions size: RBI had fixed a cap on MDR for debit card usage as
not exceeding 0.75% of the transaction amount for value upto Rs. 2000/-
not exceeding 1% for transaction amount for value above Rs. 2000/-
This is basically maintaining status quo for the regulatory structure. However, the growth in deployment of POS terminals has come down as lower MDR was cited as on of the reasons making the business unviable.
Differentiated MDR at select merchant categories at all locations: Another approach is to have a differentiated MDR framework for some select merchant categories across all locations. For example, some merchant categories could include utility bill payments (electricity, water, gas, telephone), municipal taxes, primary hospitals and health centres, primary educational institutions, public distribution system outlets ( like ration shops), fertilizers, seeds and similar agricultural products, public transport, etc.
Differentiated MDR at select merchant categories in Tier III to VI locations: An another alternative is to rationalise MDR in select categories in Tier III to VI locations with the objective of ensuring wider deployment of POS terminals.
From Update: Card payments on POS terminals suffered outages and failures over the weekend
Update: Card payments on POS terminals suffered outages and failures over the weekend
Shashidhar KJNovember 14, 2016
Update: MediaNama spoke to Manish Patel, CEO of POS machine company Mswipe who spoke told us that card networks are unable to deal with the sudden surge in payments on their networks. He added that on Saturday between 7 pm to 9.30, pm Visa’s servers failed but POS machines were still able to process payments from MasterCard.
MediaNama was unable to independently verify this but we have written to Visa and will update once we hear from them.
Meanwhile, Mswipe said that it saw a huge surge in the number of transactions it processed. Typically, Mswipe processes 45,000-50,000 transactions a day. On Friday, this number went up to 1 lakh transactions and to 1.25 lakh transaction on Saturday. On Sunday, Patel added the number of transactions went above their capacity to process them and that they are currently adding more capacity.
Earlier: POS terminals across the country suffered outages for several hours over the weekend and many card transactions were declined according to multiple people who spoke with MediaNama. For example, card transactions at a restaurant in Mumbai’s Mulund West was down from 7 pm to 10 pm on Friday, and there was a similar outage the next day. The restaurant owner told MediaNama that he had contacted ICICI Bank about the outages, and they attributed it to the demonetization drive, saying they needed some more time to recalibrate. Many stores in the neighbourhood also could not process card payments, and insisted that customers pay by cash. MediaNama’s Salman SH and Sneha Johari reported similar outages in Bangalore and Pune.
Also read: MediaNama’s Demonetization Liveblog, with the latest updates.
In Bangalore, a pubs POS terminals were down on Saturday morning. The pubs owner also said that he had to to accept bank transfers from customers to his account. The owner added that all six POS terminals were down due to increased volumes on card payment networks. The POS machines displayed an error code “server down”.
On Sunday, Damodar Mall, CEO of Reliance Retail tweeted about card payments getting declined and appealed to ICICI Bank and HDFC Bank for help.
We have written to ICICI Bank, HDFC Bank and Axis Bank for comments regarding the outages. Meanwhile, State Bank of India (SBI) tweeted that it processed 10.05 lakh POS transactions on Sunday. To give context, SBI processed 3,25,00,690 debit card transaction over POS terminals in July, according to RBI data.
Meanwhile Rahul Kotari, business head of PayUbiz, told MediaNama that the payment gateway has seen a spike in the number of transactions from around 750,000 a day to 1.5 million a day following the demonetization. Note that PayU also has a POS machine for offline transactions and process them through its payment gateway. He added that the payment gateway is built to handle five times its current load and is increasing it to 10 times anticipating a surge in online transactions. Kothari added that the company is considering deploying QR codes in the short term for offline merchants to help ease the pain of doing business.
Asymmetry in POS terminals
As we have pointed out many times, India has the dubious honour of having one of the lowest POS terminal penetration, according to a 2015 Ernst and Young report. The report said there were only 693 machines per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people.
The Reserve Bank of India’s data shows that there are over 697 million debit cards and 25.94 million credit cards and there are only 14,43,899 POS terminals in the country.
A closer look at the POS terminals deployed in the country, we see a curious concentration. The top banks in the country – State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and Corporation Bank – have the highest number of POS terminals accounting for 80.94% of all terminals in the country.
From Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments
Paytm Has Just Created Millions Of PoS Across India With A Single Move; Every Paytm User Can Now Accept Card Based Payments
Paytm has just created millions of Point of Sales (PoS) across the nation, with one strategic move. Now, anyone with a merchant account with Paytm can receive payments via debit card/ credit card, which means that digital payments have been super-simplified and scaled beyond imagination.
This is certainly one of the masterstrokes by Paytm for encouraging even more digital transactions and a good move towards an absolute cashless economy.
Paytm founder Vijay Shekhar Sharma said, “India needs a very innovating mobile pos machine and Paytm has already been accepted by many merchants. By extending our merchant network to all other payment networks, we are enabling digital payments to a very large number of Indians.”
How Will It Work?
Suppose you visit a local grocery shop to purchase few items and the shop-keeper has a Paytm account. Now, there can be two scenarios: Either you also have a Paytm account, which means that you can simply transfer the amount. Or, you don’t have a Paytm account, but have debit/credit card to make the payment.
In this case, the merchant can accept your debit/credit card via his Paytm app, and complete the payment.
This is how it will work: Step 1: The merchant raises the bill, and gives you his phone wherein you enter your debit/credit card number
Step 2: The customer receives an OTP on his mobile number
Step 3: Enter the OTP inside merchant’s Paytm app
Step 4: Payment complete
Till December 31, there would be no fees for such card based transactions on merchant’s Paytm app. The new version of the app has been updated, and under ‘Accept Payment’ tab, merchants can receive payments from cards issued by Rupay, Visa, MasterCard and Maestro.
Big Boost For Cashless Economy
There are around 150 million users of Paytm, and almost 1.5 million merchants registered with the. With one single step, these 1.5 million merchants can now accept debit and credit based payments, thereby transforming into a live PoS, instantly.
Besides, RBI has recently increased the limit for merchants to Rs 50,000 per month, which means that they can send upto Rs 50,000 from Paytm app to the bank, without KYC. This, along with PoS transformation means that merchants would now prefer Paytm mode of accepting payments (both from credit/debit card or peer-to-peer money transfer).
Merchants can register with Paytm by visiting here.
Paytm is expecting atleast 10-15 million more merchant accounts after this decision to convert apps into PoS. We will keep you updated as more details come in.
Debit and Credit Card Networks
Government of India Networks
IMPS (Immediate Payment Service)
NEFT (National Electronic Funds Transfer) -Online Banking Transfer
SBI Chhota (little) ATM (using POS devices for Cash)
RTGS (Real Time Gross Settlement System) – Large Value Real Time Network
UPI (Unified Payment Interface) -using BHIM app
NACH (National Automated Clearing House)
AEPS (Aadhaar enabled Payment System) -MicroATM
BBPS (Bharat Bill Payment System) – for paying Utilities Bills
RUPAY – Credit and Debit card network
*99# (uses USSD channel)
*99*99# (Uses USSD channel)
NFS in India
National Financial Switch (NFS) is the largest network of shared automated teller machines (ATMs) in India. It was designed, developed and deployed by the Institute for Development and Research in Banking Technology (IDRBT) in 2004, with the goal of inter-connecting the ATMs in the country and facilitating convenience bank- ing. It is run by the National Payments Corporation of India (NPCI).
AEPS from NPCI website
In order to further speed track Financial Inclusion in the country, Two Working Group were constituted by RBI on MicroATM standards and Central Infrastructure & Connectivity for Aadhaar based financial inclusion transactions with members representing RBI, Unique Identification Authority of India, NPCI, Institute for Development and Research in Banking Technology and some special invitees representing banks and research institutions.
The working group on MicroATM standards & Central Infrastructure & Connectivity has submitted its report to RBI. As a part of the working group it was proposed to conduct a Lab level Proof of concept (PoC), integrating the authentication & encryption standards of UIDAI, to test the efficacy of MicroATM standards and transactions using Aadhaar before they are put to actual use. The PoC was successfully demonstrated at various venues.
AEPS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business correspondent of any bank using the Aadhaar authentication.
The four Aadhaar enabled basic types of banking transactions are as follows:-
Aadhaar to Aadhaar Funds Transfer
The only inputs required for a customer to do a transaction under this scenario are:-
IIN (Identifying the Bank to which the customer is associated)
Fingerprint captured during their enrollment
From RUPAY from NPCI website
The National Payments Corporation of India (NPCI) is a pioneer organization in the field of retail payments in India. It is a body promoted by RBI and has presently ten core promoter banks (State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC). It has been incorporated as a Section 25 company under Companies Act and is aimed to operate for the benefit of all the member banks and their customers.
The vision of NPCI being able to provide citizens of our country anytime, anywhere payment services which are simple, easy to use, safe, and secure, fast and also cost effective. NPCI aims to operate for the benefit of all the member banks and the common man at large.
Reserve Bank of India, after setting up of the Board for Payment and Settlement Systems in 2005 released a vision document incorporating a proposal to set up an umbrella institution for all the Retail Payment Systems in the country. The core objective was to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. This led to the formation of National Payments Corporation of India, (NPCI).
RuPay, a new card payment scheme launched by the National Payments Corporation of India (NPCI), has been conceived to fulfill RBI’s vision to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments.
“RuPay”, the word itself has a sense of nationality in it. “RuPay” is the coinage of two terms Rupee and Payment. The RuPay Visual Identity is a modern and dynamic unit. The orange and green arrows indicate a nation on the move and a service that matches its pace. The color blue stands for the feeling of tranquility which is the people must get while owning a card of the brand ‘RuPay’. The bold and unique typeface grants solidity to the whole unit and symbolizes a stable entity.
From ICICI Bank Website
The IMPS (Immediate Payment Service)
from ICICI Bank helps you access your bank account and transfer funds instantly and securely. You can send money using ICICI Netbanking on an internet-powered laptop or PC. We enable you to transfer funds from your ICICI account to any ICICI or non-ICICI account. The beneficiary account is credited immediately when a fund transfer request is made from your side.
This service is available 24×7, throughout the year including Sundays and any bank holiday.
Use IMPS service to transfer funds anytime, from anywhere using: Netbanking, Imobile, and M.DOT
What is RTGS ?
The acronym ‘RTGS’ stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds individually on an order by order basis (without netting). ‘Real Time’ means the processing of instructions at the time they are received rather than at some later time.’Gross Settlement’ means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.
What is NEFT?
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals can electronically transfer funds from any bank branch to any individual having an account with any other bank branch in the country participating in the Scheme.
Use NEFT service to transfer funds anywhere using the following modes:
Unified Payment Interface (UPI) is here
Discover a quick and easy way to send and receive money using a Virtual Payment Address (VPA) without entering additional bank information.
From Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM
Ezetap ties-up with SBI to launch PoS and ATM solution Chota ATM
Vivek Pai October 6, 2014
Ezetap SBIBangalore-based point of sale (PoS) startup Ezetap has partnered with the State Bank of India to launch ‘Chota ATM’, a solution that can double as an ATM device as well as a PoS terminal that can accept payments from any debit and credit card.
Targeted at neighborhood Kirana shops, the solution will be offered to merchants for a non-refundable deposit of Rs 499 along with a monthly fee of Rs 150 and a commission of Rs 5 per cash-back transaction.
Sanjay Swamy, Managing partner of AngelPrime (which incubated Ezetap) writes that merchants can sign up for this service by opening a zero balance current account with SBI and use this solution over an Android or Windows phone or tablet with an active data connection.
It’s worth noting that SBI had earlier selected Ezetap to deploy 500,000 PoS terminals in the next 5 years for the customers of SBI and its five associate banks.
Cash Withdrawal limits & commission
Ezetap Chota ATM
Through this solution, credit and debit card holders can swipe their card to carry out three types of transactions – Sale, Sale + Cash withdrawal and Cash withdrawal only.
As per SBI’s Chhota ATM FAQs (pdf), cash can be withdrawn in multiples of Rs 100. There is a minimum daily withdrawal limit of Rs 100 per card holder and a maximum daily limit of Rs 1,000 per card holder, in line with the RBI guidelines.
There is also an additional 1% charge on customers having State Bank group debit cards to a minimum of Rs.7.50 and maximum of Rs 10 per transaction. For other bank holders, this charge will be decided by their respective banks. As for merchants, they will receive a commission of Rs 5 per cash withdrawal transaction.
In January last year, Ezetap had partnered with Citibank to launch a mobile payment solution for merchants targeting credit and debit card holders in India. As part of the partnership, merchants were expected to receive real time information during the payment and collection process, when customers transact using Ezetap. Citibank had then claimed to have partnered with companies like Shoppers Stop, Bajaj Allianz, Flipkart, BookMyShow and Vodafone to deploy this solution for payment and collection.
The company had also launched a debit card supporting mobile PoS solution in July last year and had acquired Hyderabad-based loyalty platform Clinknow in June this year to launch an integrated payments and loyalty solution for merchants across India.
Ezetap has raised around three rounds of investments until now – a strategic undisclosed investment from American Express in March this year, a $8 million investment in Series B funding led by Helion Advisors with participation from existing investors Chamath Palihapitiya’s The Social+Capital Partnership and Berggruen Holdings in February this year and $3.5 million in series A funding from Peter Thiel, Chamath Palihapitiya, Nicolas Berggruen and David Sacks in November 2011.
(With Inputs from Vikas SN)
India POS Devices
All three major POS devices providers in USA have business offices in India. Their business has boomed since demonitization was announced in November 2016. But there is shortage of these devices in India. On Feb 1, 2017, Government slashed import duties on POS devices. But procurement times are several months long. Devices are manufactured in China.
There are other manufacturers in Asia who provide POS devices.
PAX Technology (China)
SZZT Electronics (China)
Fujian Newland (China)
CyberNet (South Korea)
Bitel (South Korea)
Shenzhen Xinguodu (China)
Castles Technology (Taiwan)
New POS Technology (China)
There are other devices which are required for a complete solution. There are:
POS Terminal (CPU)
Data Collection Devices
Bar Code Printers
Signature Capture Device
India m-POS Devices
EZEPAY has linked with State Bank of India to bring Micro ATM solution to get cash from POS devices. In USA, this service is known as Get Cashback option in all POS devices at the merchants. Another Mini ATM solution is from Oxigen known as OxiShaan. SBI has tied with Oxigen to provide miniATM solution known as MobiCash. Oxigen has a business correspondent relationship with SBI.
MRL Posnet PayTivo
Paymate India PayPos
Mobi Swipe (Ingenico)
SBI MAB Pos
ICICI MBS MPos
Union Bank of India POS
PBOC and Union Pay control following networks:
nationwide inter-bank system (the existing EIS will be replaced by the next-generation CNAPS)
regional (cities and counties) payment systems (LCHS)
commercial banks’ intra-bank payment systems.
Internet Banking Payment System (IBPS)
Interbank Bankcard Transaction Clearing System (IBTCS) – Union Pay
From Chapter 2: Payment Systems of China
The China National Advanced Payment System (CNAPS) is composed of the High-Value Payment System (HVPS), the Bulk-Entry Payment System (BEPS), and the Settlement Account Processing System (SAPS).
HVPS is an RTGS that performs real-time processing of large-value funds on a gross amount basis, and has the same functions as Bank of Japan’s financial network system (BOJ-NET).
BEPS is for small-value funds, with daily netting night batch processing, and has the same function as Data Telecommunication System of All Banks in Japan.
SAPS is the system for common operations related to settlement accounts, including receipt and payment of money, settlement of LCHS, and management of overdraft limits. Although such a SAPS function makes up a part of the entire payment system in many other countries, CNAPS uses each of them independently.
Local Clearing House System
The Local Clearing House System (LCHS) is for local payments related to exchange, bill, and check transactions within the same region (cities and counties). There are approximately 2,300 clearing houses throughout the country, and although most LCHS sites are owned and managed by PBC, some are jointly owned by participants. All receipts and payments of funds on a written basis are cleared and settled via LCHS.
Commercial Banks’ Intra-office Payment Systems
China’s four largest banks have the most extensive centralization and integration hardware and software, on which each spends RMB1–3 billion annually, in their efforts to consolidate computer service centers and improve nationwide networks. If a credit remittance is performed within the same bank, it can process the transaction within approximately 24 hours. Although these banks can carry out payments within two or three hours, based on priority-processing agreements for such transactions as urgent large-amount securities settlements, the determination of priority order still often requires manual processing. Large private banks—such as Minsheng Bank of China and Shanghai Pudong Development Bank—have focused on systems investment, made efforts to centralize data on customers who are subject to international standards, and have focused on Internet banking services to make up for a lack of branches. Most banks’ customer account databases are still dispersed, and real-time processing is not possible. Databases should be combined in host centers.
National Interbank System
The National Interbank System (NIS) conducts manual inter-bank payments between distant places. After a payment instruction, either cabled or written, is sent by a sending bank directly to a receiving bank, daily netting is performed for funds payment and the final balance of payment. At each stage, notification of payments between correspondent banks are cabled and completed between PBC branches. After all crediting data are sent to NIS’s computer center and inspected there, checking sheets are sent to the sending and receiving banks. NIS’s status has decreased.
Non Bank Payment Networks
Key Sources of Research:
A Guide to Debit and ATM Card Industry
Fumiko Hayashi Richard Sullivan Stuart E. Weiner
Federal Reserve of Kansas City
Mobile Payments in the United States at Retail Point of Sale: Current Market and Future Prospects
Marianne Crowe, Marc Rysman, and Joanna Stavins
Public Policy Discussion Papers.
Federal Reserve Bank of Boston 10:2 (2010)
Competing Technologies for Payments: ATMs, POS Terminals and the Demand for Currency
Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative
From G-20 Data Gaps Initiative II: Meeting the Policy Challenge
In 2009, the G-20 Finance Ministers and Central Bank Governors (FMCBG) endorsed 20 recommendations to address data gaps revealed by the global financial crisis. The initiative, aimed at supporting enhanced policy analysis, is led by the Financial Stability Board (FSB) and the International Monetary Fund (IMF). The Inter-Agency Group on Economic and Financial Statistics (IAG)1 plays the global facilitator role to coordinate and monitor the implementation of the DGI recommendations.
The financial crisis which started in 2007 with problems in the U.S. subprime market, spread to the rest of the world becoming the most severe global crisis since the Great Depression. One difference between the global financial crisis and earlier post-war crises was that the crisis struck at the heart of the global financial system spreading throughout the global economy. This required global efforts for recovery. As one element of the global response, in October 2009, the G-20 Finance Ministers and Central Bank Governors (FMCBG) endorsed a DGI led by the Financial Stability Board (FSB) Secretariat and the IMF Staff. DGI was launched as an overarching initiative of 20 recommendations to address information gaps revealed by the global financial crisis.
Following the global financial crisis, in 2008, the G-20 leaders, at their meeting in Washington,9 committed to implement a fundamental reform of the global financial system to strengthen financial markets and regulatory regimes so as to avoid future crises.10 As part of the reform agenda, the FSB was established in April 2009 as the successor to the Financial Stability Forum (FSF) and started working as the central locus of coordination to take forward the financial reform program as developed by the relevant bodies. The obligations of members of the FSB were set to include agreeing to undergo periodic peer reviews, using among other inputs IMF/World Bank Financial Sector Assessment Program (FSAP) reports. The G-20 leaders noted the importance of global efforts in implementing the global regulatory reform so as to protect against adverse cross-border, regional and global developments affecting international financial stability.
The components of the G-20 regulatory reform agenda complement each other with an ultimate goal of strengthening the international financial system. The DGI has been an important element of this agenda as the regulatory reform agenda items mostly require better data. The collection of data on Global Systemically Important Banks’ (G-SIBs) exposures and funding dependencies is among the steps towards addressing the “too-big-to-fail” issue by reducing the probability and impact of G-SIBs’ failing. The FSB work on developing standards and processes for global data collection and aggregation on securities financing transactions aims to improve transparency in securitization towards the main goal of reducing risks related to the shadow banking system. Over-the-counter (OTC) derivatives markets including Credit Default Swap (CDS) were brought under greater scrutiny towards the main goal of making derivatives markets safer following the global crisis. DGI supported this goal by improving information in CDS markets. A number of other G-20 initiatives have strong links with the DGI project including the FSB work on strengthening the oversight and regulation of the shadow banking system; and on the work on global legal entity identifiers (LEI)11 which contribute to the robustness of the data frameworks with a more micro focus. The changing global regulatory reforms particularly the implementation of Basel III was also taken into consideration in the development of the DGI.
The importance of closing the data gaps hampering the surveillance of financial systems was also highlighted as part of the IMF’s 2014 Triennial Surveillance Review (TSR).12 The 2014 TSR emphasized that due to growing interconnectedness across borders, financial market shocks will continue to have significant spillovers via both capital flows and shifts in risk positions. Also, new dimensions to interconnectedness will continue to emerge such as through the potential short-run adverse spillovers generated by the financial regulatory reforms. To this end, the TSR recommended improving information on balance-sheets and enriching flow-of funds data. The IMF has overhauled its surveillance to make it more risk-based. To this end, the IMF Managing Director’s Action Plan for Strengthening Surveillance following the 2014 TSR13 underlined that the IMF will revive and adapt the Balance Sheet Approach (BSA) to facilitate a more in-depth analysis of the impact of shocks and their transmission across sectors, and possibly initiate the global flow of funds to better reflect global interconnections (Box 1). This work requires data from the DGI as it will help support the IMF’s macro-financial work including in the key exercises and reports (i.e., Early Warning Exercise, FSAP, and GFSR).
Global Flow of Funds
Through the use of internationally-agreed statistical standards, data on cross-border financial exposures (IBS, CPIS, and Coordinated Direct Investment Survey (CDIS)) can be linked with the domestic sectoral accounts data to build up a comprehensive picture of financial interconnections domestically and across borders, with a link back to the real economy through the sectoral accounts. This work is known as the “Global Flow of Funds (GFF).”14 The GFF project is mainly aimed at constructing a matrix that identifies interlinkages among domestic sectors and with counterpart countries (and possibly counterpart country sectors) to build up a picture of bilateral financial exposures and support analysis of potential sources of contagion. The concept of the GFF was first outlined in the Second Progress Report on the G-20 Data Gaps Initiative and initiated in 2013 as part of a broader IMF initiative aimed at strengthening the analysis of interconnectedness across borders, global liquidity flows and global financial interdependencies. In the longer term, the GFF matrix is intended to support regular monitoring of bilateral cross-border financial positions through a framework that highlight risks to national and international financial stability. IMF Staff is working towards developing a GFF matrix starting with the largest global economies.
How Does the DGI Address the Surveillance Agenda?
As noted above, in the wake of the 2014 TSR the IMF Managing Director published an Action Plan for Strengthening Surveillance. Among the actions to be taken was that “The Fund will revive and adapt the balance sheet approach to facilitate a more in-depth analysis of the impact of shocks and their transmission across sectors.” This responded to a call from outside experts David Li and Paul Tucker in their external study for the 2014 TSR on risks and spillovers.37
Even though the 2007/2008 crisis emerged in the financial sector, given its intermediary role, the problems in the financial sector also affected other sectors of an economy. To this end, analysis of balance sheet exposures is essential given the increasingly interconnected global economy. As it is pointed out in the IMF TSR 2014, the use of balance sheets to identify sources of vulnerability and the transmission of shocks, could have helped detect risks associated with European banks’ reliance on U.S. wholesale funding to finance structured products. In June 2015, the IMF set out the way forward in a paper for the IMF Executive Board on Balance Sheet Analysis in Surveillance. 38 Sectoral accounts and balance sheet data are essential, including from-whom to-whom data, in providing the context for an assessment of the links between the real economy and financial sectors. The sectoral balance sheets of the SNA is seen as the overarching framework for balance sheet analysis as the IMF Executive Board paper makes clear. Further, the paper sets out a data framework for such analysis.39 Putting the sectoral balance sheets of the SNA in a policy context, the IMF has developed a BSA, which compiles all the main balance sheets in an economy using aggregate data by sector. The BSA is based on the same conceptual principles as the sectoral accounts, providing information on a from-whom-to-whom basis with an additional focus on vulnerabilities arising from maturity and, currency mismatches as well as the capital structure of economic sectors.
While currently not that many economies compile from-whom-to-whom balance sheet data, BSA data can be compiled from the IMF’s Standardized Report Forms, IIP, and government balance sheet data—a more limited set of data than needed to compile the sectoral accounts. The DGI-2 recommendations address key data gaps that act as a constraint on a full-fledged balance sheet analysis. The DGI recommends addressing such gaps through improving G-20 economies’ dissemination of sectoral accounts and balance sheets building on 2008 SNA, including for the non-financial corporate and household sectors. (Annex 1, Recommendation II.8) Given the multifaceted character of the datasets, implementation of this recommendation is challenging and progress has been slow. However, all G-20 economies agree on the importance of having such information and have plans in place to make it happen.
The crisis emphasized the fact that it is not possible to isolate the problems in a single financial system as shocks propagate rapidly across the financial systems. Indeed, the IMF, since 2010, has been identifying jurisdictions with systemically important financial sectors based on a set of relevant and transparent criteria including size and interconnectedness. Within this identification framework, cross-border interconnectedness is considered an important complementary measure to the size of the economy: it captures the systemic risk that can arise through direct and indirect interlinkages among financial sectors in the global financial system (i.e., the risk that failure or malfunction of a national financial system may have severe repercussions on other countries or on overall systemic stability.48 The 2014 TSR summed up the issue succinctly in its Executive Summary: “Risks and spillovers remain first-order issues for the world economy and should be central to Fund surveillance. Recent reforms have made surveillance more risk-based, helping to better capture global interconnections. Experience so far also points to the need to build a deeper understanding of how risks map across countries, and how spillovers can quickly spread across sectors to expose domestic vulnerabilities.”49 Four existing datasets that include key information on cross-country financial linkages are the IIP, BIS IBS, IMF CPIS and IMF CDIS. Together these datasets provide a comprehensive picture of cross-border financial interconnections. This picture is especially relevant for policy makers as financial connections strengthen across border and domestic conditions are affected by financial developments in other economies to whom they are closely linked financially. DGI-2 focuses on improving the availability and cross-country comparability of these datasets (Annex1, Recommendations II.10, 11, 12 and 13). The well-known IIP is a key data source to understanding the linkages between the domestic economy and the rest of the world by providing information on both external assets and liabilities of the economy with a detailed instrument breakdown. However, the crisis revealed the need for currency and more detailed sector breakdowns, particularly for the other financial corporations (OFCs) sector. Consequently, as part of the DGI, the IIP was enhanced to support these policy needs. Significant progress has also been made in ensuring regular reporting of IIP along with the increase in frequency of reporting from annual to quarterly. By end-2015 virtually all G-20 economies reported quarterly IIP data. The IBS have been a key source of data for many decades providing information on aggregate assets and liabilities of internationally active banking systems on a quarterly frequency. The CPIS data, while on an annual frequency, provided significant insights into portfolio investment assets. That said, both datasets had limitations in terms of country coverage and granularity. CPIS also needed to be improved in terms of frequency and timeliness. To this end, the DGI supported the enhancements in these datasets.
G-20 Data Gaps Initiative (DGI)
Financial Stability Board (FSB)
The Inter-Agency Group on Economic and Financial Statistics (IAG)
Finance Ministers and Central Bank Governors (FMCBG)
Financial Stability Forum (FSF)
Global Systemically Important Banks (G-SIBs)
Credit Default Swap (CDS)
Global legal entity identifiers (LEI)
IMF Triennial Surveillance Review (TSR)
IMF Balance Sheet Approach (BSA)
IMF Global Flow of Funds (GFF)
IMF IIP (International Investment Positions)
BIS IBS (International Banking Statistics)
IMF CPIS (Coordinated Portfolio Investment Survey)
IMF CDIS (Coordinated Direct Investment Survey)
IMF GFSR ( Global Financial Stability Report)
Other Related Terms:
Global Systemically Important Financial Institutions (G-SIFIs )
GLOBAL SYSTEMICALLY IMPORTANT INSURERS (G-SIIS)
Systemically Important Financial Market Utilities (G-FMUs)
Nonbank Financial Companies (G-SINFC)
Financial Stability Oversight Council (FSOC)
The IAG members are
BIS (Bank of International Settlements)
G20 (Group of 20 Nations)
IMF (International Monetary Fund)
OECD (Organisation for Economic Co-operation and Development)
ECB (European Central Bank)
Eurostat (European Statistics/Directorate-General of the European Commission)
UN (United Nations)
From G-20 Data Gaps Initiative II: Meeting the Policy Challenge
From G-20 Data Gaps Initiative II: Meeting the Policy Challenge
Progress of DGI ((DGI-I and DGI-II)
From G-20 Data Gaps Initiative II: Meeting the Policy Challenge
The first phase of the DGI was successfully concluded in September 2015 and the second phase of the initiative (DGI-2) was endorsed by the G-20 FMCBG. The key objective of the DGI-2 is to implement the regular collection and dissemination of comparable, timely, integrated, high quality, and standardized statistics for policy use. DGI-2 encompasses 20 new or revised recommendations, focused on datasets that support: (i) monitoring of risk in the financial sector; and (ii) analysis of vulnerabilities, interconnections and spillovers, not least cross-border.
Following the significant progress in closing some of the information gaps identified during the global financial crisis of 2007/08, the G-20 FMCBG endorsed, in September 2015, the closing of DGI-1. During the six-year implementation of DGI-1, significant achievements were obtained, particularly regarding the development of conceptual frameworks, as well as enhancements in some statistical collection and reporting. Regarding the latter, more work is needed for the implementation of some recommendations, especially in seven high-priority areas across G-20 economies, notably in government finance statistics and sectoral accounts and balance sheets.
In September 2015, the G-20 FMCBG also endorsed the launch of the second phase of the DGI. The main objective of DGI-2 is to implement the regular collection and dissemination of reliable and timely statistics for policy use. Its twenty recommendations are clustered under three main headings: (1) monitoring risk in the financial sector, (2) vulnerabilities, interconnections and spillovers, and (3) data sharing and communication of official statistics. The DGI-2 maintains the continuity with the DGI-1 recommendations while setting more specific objectives with the intention for the G-20 economies to compile and disseminate minimum common datasets for these recommendations. The DGI-2 also includes new recommendations to reflect the evolving users’ needs. Furthermore, the DGI-2 aims at strengthening the synergies with other relevant global initiatives.
The DGI-2 facilitates closing data gaps that are policy-relevant. By achieving its main objective, the DGI-2 will be instrumental in closing gaps in policy-relevant data. Most of the datasets covered by the DGI-2 are particularly relevant for meeting the emerging macro- financial policy needs, including the analysis of international positions, global liquidity, foreign currency exposures, and capital flows volatility.
The DGI-2 introduces action plans that set out specific “targets” for the implementation of its twenty recommendations through the five-year horizon of the initiative. The action plans acknowledge that countries may be at different stages of statistical development and take into account national priorities and resource constraints. The DGI-2 intends to bring the G-20 economies at higher common statistical standards through a coordinated effort; however, flexibility will be considered in terms of intermediate steps to achieve the targets based on national priorities, resource constraints, emerging data needs, and other considerations.
Key Sources of Research:
Second Phase of the G-20 Data Gaps Initiative (DGI-2) Second Progress Report
Prepared by the Staff of the IMF and the FSB Secretariat September 2017
A notable feature of the modern Financial world is its high degree of interdependence. Banks and other Financial institutions are linked in a variety of ways. The mutual exposures that Financial institutions adopt towards each other connect the banking system in a network. Despite their obvious benefit, the linkages come at the cost that shocks, which initially affect only a few institutions, can propagate through the entire system. Since these linkages carry the risk of contagion, an interesting question is whether the degree of interdependence in the banking system sustains systemic stability.
From Contagion Risk in Financial Networks
Recently, there has been a substantial interest in looking for evidence of contagious failures of Financial institutions resulting from the mutual claims they have on one another. Most of these papers use balance sheet information to estimate bilateral credit relationships for different banking systems. Subsequently, the stability of the interbank market is tested by simulating the breakdown of a single bank.
From Contagion in Financial Networks (PG and SK)
In modern financial systems, an intricate web of claims and obligations links the balance sheets of a wide variety of intermediaries, such as banks and hedge funds, into a network structure. The recent advent of sophisticated financial products, such as credit default swaps and collateralised debt obligations, has heightened the complexity of these balance sheet connections still further, making it extremely di¢ cult for policymakers to assess the potential for contagion associated with the failure of an individual financial institution or from an aggregate shock to the system as a whole.
The interdependent nature of financial balance sheets also creates an environment for feedback elements to generate amplified responses to any shock to the financial system.
From Contagion in Financial Networks (PG and SK)
The interactions between financial intermediaries following shocks make for non-linear system dynamics, and our model provides a framework for isolating the probability and spread of contagion when claims and obligations are interlinked. We find that financial systems exhibit a robust-yet-fragile tendency. While greater connectivity reduces the likelihood of widespread default, the impact on the financial system, should problems occur, could be on a significantly larger scale than hitherto. The model also highlights how a priori indistinguishable shocks can have very different consequences for the financial system. The resilience of the network to large shocks in the past is no guide to future contagion, particularly if shocks hit the network at particular pressure points associated with underlying structural vulnerabilities.
From Contagion in Financial Networks (PG and SK)
The intuition underpinning these results is straightforward. In a more connected system, the counterparty losses of a failing institution can be more widely dispersed to, and absorbed by, other entities. So increased connectivity and risk sharing may lower the probability of contagion. But conditional on the failure of one institution triggering contagious defaults, a higher number of Financial linkages also increases the potential for contagion to spread more widely. In particular, greater connectivity increases the chances that institutions which survive the effects of the initial default will be exposed to more than one defaulting counterparty after the first round of contagion, thus making them vulnerable to a second-round default. The impact of any crisis that does occur could, therefore, be larger.
Key Sources of Research:
Kiyotaki and Moore
Credit Chains and Sectoral Comovement: Does the Use of Trade Credit Amplify Sectoral Shocks?
A flow network analysis of direct balance-sheet contagion in financial networks
Contagion in Financial Networks
Paul Glasserman H. Peyton Young
October 20, 2015
Contagion in Financial Networks
Prasanna Gai and Sujit Kapadia
The Effect of the Interbank Network Structure on Contagion and Financial Stability
Contagion Risk in Financial Networks
Financial Fragility and Contagion in Interbank Networks
Complexity, concentration and contagion
Prasanna Gai , Andrew Haldane , Sujit Kapadia
Contagion in financial networks : a threat index
May 23, 2011
Liquidity and financial contagion
TOBIAS ADRIAN HYUN SONG SHIN
Financial globalization, financial crises and contagion
$ Enrique G. Mendoza Vincenzo Quadrini
The International Finance Multiplier
How Likely is Contagion in Financial Networks?
Paul Glasserman,1 and H. Peyton Young
Capital and Contagion in Financial Networks
S. Battiston G. di Iasio L. Infante F. Pierobon
Contagion in the Interbank Network: an Epidemiological Approach
Complex Financial Networks and Systemic Risk: A Review
Spiros Bougheas and Alan Kirman
Systemic Risk, Contagion, and Financial Networks: a Survey
Matteo Chinazzi∗ Giorgio Fagiolo†
June 4, 2015
Systemic Risk and Stability in Financial Networks†
By Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi