Implementation Considerations for Fast Payment Systems June 2021 © 2021 International Bank for Reconstruction and Development / The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. Disclaimer This work is a product of the staff of The World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ii Acknowledgements The lead authors of the paper are Balakrishnan Mahadevan (Payments Consultant), Holti Banka (Financial Sector Specialist, World Bank) and Nilima Ramteke (Senior Financial Sector Specialist, World Bank). The team is grateful to Peter Møller Jensen (Legal Consultant, World Bank) and Ivan Mortimer- Schutts (Senior Operations Officer, IFC) for their inputs. Overall guidance was provided by Harish Natarajan (Lead, World Bank). This paper would not have been possible without the generous support of the Ministry of Foreign Affairs of the Kingdom of the Netherlands and the Bill and Melinda Gates Foundation. The support is provided through the Financial Inclusion Support Framework program. iii Table of Contents 1. Setting the Context ................................................................................................................................ 1 2. Background ............................................................................................................................................... 1 3. An Empirical Framework for Fast Payment System Implementation ..................................... 5 4. Evaluation of Implementations Against the Framework .............................................................. 7 4.1 Examples of high readiness index countries ............................................................................... 7 4.2 Examples of high readiness index countries .............................................................................. 8 4.3 Examples of low readiness index countries ............................................................................... 8 5. Considerations Regarding Messaging Standards .......................................................................... 9 6. Considerations Regarding Settlement Options ........................................................................... 10 7. Ownership Considerations .................................................................................................................. 11 7.1 Examples of central bank ownership ......................................................................................... 11 7.2 Examples of private sector ownership ....................................................................................... 12 7.3 Examples of central bank and private sector co-ownership (hybrid) ..................................13 7.4 Ownership structures and correlation with readiness index ................................................13 8. Other Considerations ........................................................................................................................... 14 9. Conclusion ...............................................................................................................................................16 List of Figures and Tables Figure 1. Fast Payments Emergence Across Time ..................................................................................... 2 Figure 2. List of Overarching Objectives for Decision Making and Desired Outcomes Driving Introduction of Fast payments ..................................................................................................................... 4 Figure 3. Readiness Index ............................................................................................................................... 6 Figure 4. Decision Making Tree...................................................................................................................... 6 Table 1. Messaging Standards Adopted in Select Fast Payment Systems ........................................ 10 iv 1. Setting the Context financial inclusion).2 In addition, central banks are increasingly playing a more prominent role in retail payments, including as operators of retail The World Bank (WB) has been monitoring payment systems. The digital economy is evolving closely the developments of Fast Payment and is changing both the supply and demand side Systems (FPS) by central banks and private in relation to growing expectations. Several players across the globe.1 This comprehensive countries face the dilemma of how to deal with study of FPS implementations across the world legacy retail payment systems as well as the has resulted in the design of a policy toolkit on challenge of defining the particular needs and the implementation of FPS, in order to guide requirements for retail payment system countries and regions on the likely alternatives modernization and concrete steps toward and models that could assist them in their policy meeting those needs. and implementation choices when they embark on their respective FPS journeys. The FPS Toolkit The widespread implementation of Real Time can be found at fastpayments.worldbank.org Gross Settlement (RTGS) systems in the 1990s and and consists of the below components: early 2000s has been considered a critical point in the evolution process of payment systems. RTGS • Main report entitled: Considerations and systems are viewed as a backbone of national Lessons for the Development and payment systems – even though RTGS primarily Implementation of Fast Payment Systems. process large value payments, in principle they • A set of country case studies that have can process any value payments including, retail already implemented fast payments. payments. In terms of purely retail payment • A set of short focus notes on specific systems, the development of Automated Clearing technical topics related to fast payments. Houses (ACHs) for direct debit and credit transfer processing, and card switches for debit and credit This Note is part of the third component of the card processing, marked the initial development Toolkit and aims to provide inputs on several of the domestic and cross-border retail payment critical implementation aspects of FPS such as markets. The majority of such payment networks infrastructure, settlement, ownership, are mainly owned by commercial banks (in some legal/regulatory, oversight, among other. cases central banks) that are also participants in these systems, with the notable exceptions of the 2. Background international payment card majors. In many countries, there was - and often still is - more than Retail payment markets are changing rapidly due one retail payment system, serving different to a number of factors such as new technologies, groups of banks and/or different user segments evolving domestic market demand (i.e. use cases and payment needs. and overlay services), the need for fast and efficient cross-border payments, the need for Different objectives, policy and/or business, are interoperability among payment service often articulated as driving the decision behind providers, the need to reduce cash usage and fast payment system implementation.3 Some of cash dependency, and the need to ensure those include achieving general efficiencies, broader access to digital financial services (i.e. having new functionalities, allowing broader 1 access, improving security, and achieving Gross Settlement (RTGS) system operated by interoperability. The World Bank has formulated the central bank several general policy principles which are also • Promoting wide adoption of electronic relevant for retail payment systems.4 payment mechanisms – which often translates into ensuring an appropriate level • Ensuring operations of a safe and efficient of pricing to achieve balance between right payment and settlement system and incentives for payment service providers and expanding the coverage in a cost-efficient efficient service for consumers. way • Processing arrangements for all payment • Ensuring full interoperability of all payment services in the country should be in the full services including, card payments and oversight of the payment system overseer – mobile payments often the national central bank • Adopting widely accepted international standards for technical infrastructure As part of the new types of retail payment • Settling domestic transactions in domestic systems, the emergence of fast payments over currency and in a safe and efficient the last 10 years in particular, has been settlement system – in general the Real Time prominent around the world. Figure 1. Fast Payments Emergence Across Time Source: World Bank Fast payments have supported innovation in the seamless experience for all types of users, focus wider payment landscape. They have enabled has increased on the interoperability of payment completion of time-sensitive payments quickly systems and types. Technical innovations have and with finality, thereby increasing end-user helped support interoperability. In many confidence in digital payment methods. countries, third-party service providers have used Immediate transfer of payment tends to give fast the fast payments infrastructure to design and payments a near-cash-type characteristic, provide innovative payment solutions to the end thereby increasing consumer confidence in it as a customers. They have provided the basis for mode of payment, in particular for small value service enhancements and value-added services. retail payments. To facilitate a near-cash, Emerging economies have used the fast payments 2 infrastructure to transfer subsidy and welfare often part of national payment strategies for payments in real time, resulting in reduced stakeholder readiness and buyin. The growing transfer costs and losses and improved social market needs for the capabilities that a fast indicators. Online payments have equipped payment system offers has been a sufficient operators and participants with data and motivator for central banks and private sector analytical tools that allow them to understand actors to move ahead with the modernization of payment patterns and offer innovative, their retail payment system (in this case customized solutions. implementing a fast payment system). The main dilemma has not been if modernization should The COVID-19 pandemic has also highlighted the occur but rather if it should be based on growing relevance of fast payments. Countries upgrading existing payment systems (e.g. RTGS, that have implemented fast payments have seen ACH, card switch, e-money switch) and converting a surge in adoption and usage. For example, it into a full-fledged fast payment system or Thailand’s PromptPay system has become quite creating a dedicated new fast payment system popular among the masses for safe, secure, and which stands on its own as both these approaches convenient transactions. It has also been used by have been seen successfully implemented across the government to provide relief measures to the multiple countries. citizens. In India, the National Payments Corporation of India launched a fast payment Eight overarching objectives are presented in system, Unified Payment Interface (UPI) in August terms of retail payment system modernization 2016. Between March and August 2020, UPI (including fast payment system implementation) processed transactions amounting to almost one- and a list of potential outcomes attached to each third of the total amount transacted on UPI since objective (Figure 2). Depending on the country its launch. In Kenya, the central bank mandated context, not all objectives and/ or reasons listed that all participants waive transactions charges might be applicable to a country that is for its fast payment system, PesaLink, for the first implementing a fast payment system. It is up to three months of the COVID-19 pandemic. the central bank (as a regulator, catalyst and system operator, where applicable), payment When it comes to the implementation of fast service providers (PSPs), payment system payment systems, jurisdictions have chosen operators (PSOs), and other relevant stakeholders different paths. Some jurisdictions have upgraded to identify as a first step the priorities and legacy systems to accommodate new capabilities objectives that would necessitate the while others have chosen to build entirely new implementation process. Moreover, it is worth stand-alone systems.5 In the former case, the emphasizing that even though implementation of focus has mainly been on technical infrastructure fast payments might be a necessary condition to and platform modernization of existing systems, achieve the identified objective(s), it might not while in the latter case additional aspects such as necessarily be sufficient in that other types of ownership, governance and operation have also parallel interventions might be needed (e.g. been of importance. legal/regulatory, financial education). Modernization efforts of retail payment systems, including fast payment implementations, are 3 Figure 2. List of Overarching Objectives for Decision Making and Desired Outcomes Driving Introduction of Fast payments •Decreased volumes of retail payments initiated via cash and cheques and consequently, increased volumes of retail payments Reducing retail paper-based payments initiated via electronic payment instruments and reducing the shadow economy •More affordable payment clearing/settlement services to PSPs Reducing electronic retail payment costs •More affordable electronic payments to end users on the initiation and acceptance side •Increased number of merchants accepting electronic payments •Direct/indirect access to clearing/settlement services for more PSPs Increasing competition in relation to retail payment services •Increased number of PSPs in the market •Availability of QR code-based payments acceptance Introducing new features, use cases and •Availability of payments related open APIs and aliases overlay services •Availability of services such as request to pay, future payments, etc. •Increased access to transaction accounts for individuals and businesses Facilitating financial inclusion •Increased number of physical points and access channels that offer financial services •Seamless flow of funds across end user transaction accounts in a fast and cost-effienct manner, regardless of the type of institution Increasing interoperability for domestic the accounts are held at retail payments •Increased number of cross-border payments being channeled via transaction accounts Increasing digital cross-border payments •More affordable digital cross-border payments •Additional resilience features (e.g. cyber resilience) Increasing capacity and resilience and •Back-up systems and back up sites improving security •Additional clearing/settlement cycles (potentially 24/7 operation) •Reduction in execution time for payments Source: World Bank 4 3. An Empirical Framework options / choices of implementation for a given country with a given readiness index. for Fast Payment System Implementation The readiness index is computed by making use of a 3 X 3 matrix and by placing the population levels and digital payment adoption levels (using the per In addition to examining the policy and/ or capital cashless transactions) in two axes for a business objectives (which is more of a qualitative country to get a readiness index score between 1 framework) to determine the path forward, a and 9. The population of the country is taken as basic quantitative framework presented below low of it is < 5 million; medium if it is between 5 can be a starting point. The framework, million and 30 million; and high if it is > 30 million. developed by Balakrishnan (2016),6 using With respect to adoption levels of digital quantitative metrics, allows authorities to payments, this is taken as low if the per capita determine whether they should proceed with cashless transactions in the country < 20; medium modernizing their payment system, and if yes, if if the per capita cashless transactions are they should upgrade a legacy system or build a between 20 and 120 and high if the per capita new one. While the framework focuses on fast cashless transactions are > 120. (It may be noted payment systems (in the framework referred to that while the population levels are classified by as real time retail payment system), in principle World Bank as indicated, the digital payment the logic could also be extended to other types of adoption levels are calculated by arranging the retail payment systems. An enhancement to the per capita cashless transactions in an ascending framework developed by Natarajan and order and by dividing them into three equal Balakrishnan (2020)7 provided additional buckets. World Bank Global Payment Systems implementation considerations on messaging Survey (GPSS) data was used for per capita standards, and settlement models. cashless transactions.8) The framework has two components. The first The readiness index could be high (values 6,9), component is the construction of real-time retail medium (values 3,4) or low (1,2) for each of the payment (RT-RP) readiness index (Figure 3) and countries depending on which grid they fall into the second component consists of a decision tree on the two parameters. A country that is high in based on the readiness index (Figure 4). The population and high on digital payment adoption readiness index for a country is constructed level would achieve a score of 9, and a country taking into consideration the current level of that is low in population and low on adoption penetration / adoption of digital payments by levels would score 1, with other countries falling using the per capita cashless transactions as a in between. A high score on readiness index proxy for this purpose and the population in the indicates that the country has the required country. The population of the country and the financial infrastructure and hence the potential current level of digital payments usage would for fast payments are also high. A lower score on provide the potential for a country for digital the index is perhaps an indication of rather low payments in the coming years. The readiness levels of financial infrastructure in the country index would measure that as high, medium, and and hence low potential for fast payments, and a low. Then, the second component, a decision tree medium score is perhaps an indication of based on the readiness index, provides the relatively better levels of financial infrastructure and hence medium potential for fast payments. 5 Figure 3. Readiness Index Source: Balakrishnan (2016) Figure 4. Decision Making Tree Source: Balakrishnan (2016) 6 4. Evaluation of ideally implement a fast payment system as a new system. Implementations Against the Framework Malaysia: It implemented a new fast payment system (RPP) in 2018. Malaysia has a high population and medium per capita cashless The robustness of this framework for decision transaction giving them a high score in RT-RP making on fast payment system can be tested by readiness index. The RT-RP implementation looking at some of the countries that have already framework suggests Malaysia should ideally implemented fast payments. By placing those implement a fast payment system as a new countries in this framework and looking the system. decisions they have taken and how they have implemented (i.e., new, or expand existing system Mexico: It implemented a fast payment system or wait / implement fast payments along with (SPEI) in 2004 with restricted business hours and other new system implementation), one can converted it into a full-fledged fast payment obtain a clear picture about the robustness of this system by making it 24*7*365 in 2015. Mexico has framework. a high population and medium per capita cashless transaction, giving a high score in the RT-RP 4.1 Examples of high readiness index readiness index. Mexico could have gone ahead countries and implemented a new system for fast payments as the RT-RP implementation framework suggests. The countries with medium readiness index However, Mexico chose to implement the fast (scores of 3,4) have population between 5 million payment capability as part of its legacy large value and 30 million and per capita cashless transactions payment system and implemented a combined between 20 and 120. Such countries have the system that would have RTGS capabilities as well potential for implementing a fast payment system as fast payment capabilities. By doing so, Mexico by upgrading an existing legacy system. ensured that the country could reuse many of the existing capabilities to provide them with the Australia: It implemented a new fast payment much-needed economies of scale and scope. system (NPP) in 2018. Australia has medium population and a high per capita cashless Poland: It implemented a new fast payment transaction, giving a medium score in RT-RP system (Express Elixir) in 2012. Poland has a high readiness index. The RT-RP implementation population and a medium per capita cashless framework suggests Australia should ideally transaction, giving them a high score on the RT-RP implement a fast payment system as a new readiness index. The RT-RP implementation system. framework suggests Poland should implement a fast payment system as a new system. Hong Kong SAR, China: It implemented a new fast payment system (FPS) in 2018. Hong Kong SAR, Thailand: It implemented a new fast payment China has a medium population and a high per system (PromptPay) in 2016. Thailand has a high capita cashless transaction giving a high score in population and a medium per capita cashless RT-RP readiness index. The RT-RP implementation transaction, giving them a high score in RT-RP framework suggests Hong Kong SAR, China should readiness index. The RT-RP implementation framework suggests Thailand should ideally 7 implement a fast payment system as a new Kenya: It implemented its fast payment system system. (PesaLink) in 2017. Kenya has a high population and low per capita cashless transaction, giving USA: It implemented a new fast payment system them a medium score on RT-RP readiness index. (RTP) in 2017. USA has a high population and a high The RT-RP implementation framework suggests per capita cashless transaction, giving a high score Kenya should implement the fast payment system in RT-RP readiness index. The RT-RP by upgrading one of its legacy systems. Kenya implementation framework suggests USA should implemented PesaLink on top of their existing inter ideally implement a fast payment system as a new operable card switch to which most of the banks system. Another new fast payment system were connected. This provided Kenya economies (FedNow) is expected to be launched soon by the of scale and scope and an efficient solution that Fed in the country. makes use of many of the existing features. 4.2 Examples of high readiness index 4.3 Examples of low readiness index countries countries The countries with medium readiness index The countries with medium readiness index (scores of 3,4) have population between 5 million (scores of 1,2) have population < 5 million and per and 30 million and per capita cashless transactions capita cashless transactions < 20. Such countries between 20 and 120. Such countries have the would typically need to wait for further potential for implementing a fast payment system development of the market before implementing a by upgrading an existing legacy system. fast payment systema according to the framework. India: It implemented its first fast payment system Albania: It is yet to implement a fast payment (IMPS) in 2010. India has a high population and a system. Albania has a low population as well as low low per capita cashless transaction, giving a per capita cashless transaction, giving a low score medium score on RT-RP readiness index. The RT- in the RT-RP readiness index. The RT-RP RP implementation framework suggests India implementation framework suggests Albania wait should implement the fast payment system by for the implementation of the fast payment upgrading one of its legacy systems. The IMPS system. A new fast payment system could turn out solution in India was indeed built on top of the to be relatively expensive for the country given the National Financial Switch – the inter operable ATM low population and the current low levels of digital transaction switch – using the ISO8583 message payments usage as the number of possible format. IMPS leveraged existing system, the transactions may not be sufficient to cover the connectivity, message formats to implement a operating expenses. Therefore, if Albania identifies highly cost-effective solution for the country and the need for a fast payment system to further the achieved economies of scale and scope. This was digital payments in the country, it might consider followed by UPI, another (new) fast payment extending and upgrading its ACH system, which is implementation, which was motivated by mobile already supporting credit transfers. phone penetration in the country and a clear articulation of a future vision for payments. Both Bahrain: It implemented its fast payment system IMPS and UPI co-exist and are growing. (FAWRI+) in 2015. Bahrain has a low population and medium per capita cashless transaction, giving it a low score on the RT-RT readiness index. The RT- 8 RP implementation framework suggests that scope. Now in Belize, one single system provides Bahrain should ideally wait to implement a new RTGS, image-based cheque clearing, ACH and fast fast payment system, unless there is already a plan payments in a cost-efficient way. to implement any other payment system in the country, and in which case, the implementation of 5. Considerations Regarding the fast payment system could be done along with that implementation. Bahrain had already Messaging Standards implemented an International Bank Account Number (IBAN) in 2012 and was planning an Fast payment systems typically make use of implementation of a batch file based electronic messaging standards such as ISO 20022, ISO 8583 funds transfer system FAWRI through Bahrain and proprietary message standards. The decision Electronic Network for Financial Transactions on messaging standards is based on several (BENEFIT) company. Therefore, as the framework considerations such as use cases being considered, suggests, the fast payment capability was added to cost of implementation, interoperability, among the same system. Thus, the batch based electronic other. funds transfer system FAWRI and the fast payment capability, FAWRI+, got implemented together in While in majority of cases, the decision to use an 2015. As a matter of fact, the same system also has underlying system (such as ATM switch or ACH or a third component, FAWATEER, a digital bill other Credit Transfer System) may automatically payment feature. This provides Bahrain economies determine the messaging standards, this of scale and scope and efficiency of the payment consideration is more relevant if a new system is systems. being built for fast payments. While the use of use ISO 20022 messaging standard could be Belize: It implemented its fast payment system appropriate and future-proof, countries should (IFT) in 2016. Belize has a low population and a low consider offering some flexibility in the messaging per capita cashless transaction, giving a low score formats for participating institutions. While the on the RT-RP readiness index. The RT-RP new system could be completely run using ISO implementation framework suggests that Belize 20022 message formats internally, providing the should wait for a fast payment system options for financial institutions to send/receive in implementation unless there is already a plan to ISO 8583 format or any native or ACH formats used implement any other payment system in the in the country could be of help. As part of a new country, and in which case, the implementation of system, countries could build message conversion the fast payment system could be done along with functionality to convert ISO 8583 or ACH or native that implementation. In 2014, Belize was planning formats to ISO 20022 and vice versa based on the implementation of an Automatic Transfer mapping, so long as the other messaging format System (ATS) covering RTGS, image-based cheque has enough data to cover the minimum clearing as well as a batch-based credit transfers requirements for ISO 20022 messaging (for and direct debits. The implementers reviewed the example PromptPay in Thailand). If the capability decision and decided to add a fast payment is there, then institutions can join the scheme with capability also along with other capabilities, and their existing messaging formats as they can send eventually implemented an ATS+ (ATS plus fast and receive the message in those formats. Over a payment capability) in 2016. This approach not period, when they must move to ISO 20022 for only provided a fast payment system for the other systems, they could migrate their fast country, but also provided economies of scale and payment systems as well. Such an approach would 9 also reduce the learning curve for participating institutions and would also reduce the Table 1 provides details of the messaging implementation timelines and perhaps even the standards used by select countries that have complexity of fast payment system implemented fast payment systems. implementation. Table 1. Messaging Standards Adopted in Select Fast Payment Systems Method of Country/Jurisdiction System name Message standards implementation Australia NPP New system ISO20022 Bahrain FAWRI+ New system ISO20022 Chile TEF New system ISO8583 China IBPS New system ISO20022 European Union SEPA Instant New system ISO20022 Hong Kong SAR, Faster Payment System New system ISO20022 China Upgraded legacy Kenya PesaLink ISO8583 system Malaysia Real time Payment Platform (RPP) New system ISO20022 Upgraded legacy Mexico SPEI Proprietary system Nigeria Instant payment New system Proprietary Poland Elixir New system ISO 20022 Thailand PromptPay New system ISO20022/ISO8583 Upgraded legacy UK FPS ISO8583 system USA RTP New system ISO20022 Source: World Bank 6. Considerations Regarding and the deferred settlement is only for the settlement between the service providers. In the Settlement Options latter model (i.e., real-time settlement model), the settlement among service providers is conducted The CPMI 2016 publication on Fast Payments9 at the same time of the successful processing of describes two settlement models for system the transaction. In this mode, transactions are participants: (1) deferred - net settlement (DNS) settled in real time and on a gross basis. In both and (2) real-time gross settlement (RTGS). In the cases, the settlement could be carried out in first model, the settlement between the payment central bank or commercial bank money. service providers is conducted on a deferred net Thailand’s PromptPay, India’s IMPS and UPI, settlement basis. In most cases, there is more than Malaysia’s RPP, Kenya’s PesaLink, Bahrain’s one settlement cycle per day and in many FAWRI+ are examples of fast payment systems instances, there are risk mitigation measures like using the deferred net settlement model. net debit caps which may also be collateralized, Australia’s NPP, China’s IBPS are examples fast partially or fully. It must nevertheless be noted system using the real time settlement mode. that for the end recipient, funds clear instantly, Mexico’s SPEI is a hybrid model where deferred net 10 settlement is done every 3 seconds of when 300 settlement. Of late, many countries are thinking transactions are in the que. USA’s RTP achieves the in terms of making their large value RTGS system real time settlement by making use of the joint available 24*710 for a variety of needs, including account concept. In all these examples, the to facilitate fast payment settlements, more settlement is in central bank money. frequent settlement of net payment obligation files during normal days and during the Conceptually, in the RT-RP implementation weekend, and to reduce the risks. framework discussed earlier, the ‘extend’ paradigm is for extending / upgrading the services In addition, generally, while the retail payment of an existing system to also offer fast payments transactions volume tends to be large, the value capability. In this regard, the extension/upgrade of may not be as high in comparison with the values services need not change the existing settlement that get settled in a large value payment system. model of the underlying system. For example, if Indeed, many of the retail payment net the system being extended is an ACH or payment settlements are done on a large value payment card system — then going with the first settlement system in line with the Principles for Financial model (i.e., DNS) is considered; if the system being Market Infrastructures (PFMIs). Therefore, one extended is a large value real time gross must also consider at what level of value will a settlement (RTGS) - like system then going with the retail system become systemically important and second settlement model (i.e., RTGS) is will transactions have to settle on a real-time basis. considered; and if a completely new system is It may also be noted that the DNS mode has been being planned, evaluation of both options is the norm for settling existing retail payments till considered. Where net settlement options are the advent of fast payments. used, given that the funds are made available to end users immediately, additional risk mitigations 7. Ownership Considerations measure such as a net debit cap that is fully or partially collateralized are also observed in many A key aspect of fast payment system countries. implementation is the decision on the ownership of the implementation and operations of the While the decision on settlement models will system on an on-going basis. Country examples are depend on the intensity of usage and scale of provided first to get a perspective on the different adoption of payment services in general, it kinds of ownership approaches adopted in would also depend on other aspects such as the implementing and operating fast payment systems availability of liquidity tools for market and then a broader categorization is provided. participants to track and the feasibility of real- time linkage with the country’s large value payment system or the equivalent. In the 7.1 Examples of central bank absence of robust liquidity tools like inter-bank ownership markets or collateralized overnight facilities, using the second model could pose liquidity risks Belize: The Central Bank of Belize implemented its and potentially also impact market confidence. fast payment system along with the Automatic The other aspect to consider is the scalability of Transfer System, resulting in an ATS+ system. The an existing large value payment system and its ownership and operation of the ATS+ lies with the ability to handle the larger volume of retail Central Bank of Belize. transactions that will come through for 11 Bhutan: The Royal Monetary Authority (RMA) of commercial banks in the country. The shareholding Bhutan has been operating all of the country’s has subsequently been made more widespread payment infrastructures, including the inter with many more banks and non-banks that are part operable Bhutan National Switch. Therefore, RMA of the payment ecosystem now having decided to implement the fast payment system for shareholding in NPCI. NPCI remains a not-for-profit Bhutan – Bhutan Instant Payment Service – by company. upgrading the Bhutan National Switch. Since Bhutan National Switch was already owned and Kenya: The fast payment system (PesaLink) in operated by RMA, the fast payment system built Kenya has been implemented and operated by on top of it is also owned and operated by RMA. Integrated Payments Service Limited (IPSL), Kenya. IPSL was established by the Kenya Bankers Mexico: The fast payment system (SPEI) was built Association (KBA) in 2012 as a wholly owned on top of the RTGS system operated by the central limited liability company of KBA under the National bank. Therefore, the ownership and operation of Payment Systems Act to address the challenge of fast payment system lies with Banco De Mexico – integrating retail payments in the country. The the central bank of Mexico. shareholders of IPSL are the commercial banks in the country. 7.2 Examples of private sector Thailand: The fast payment system in Thailand ownership (PromptPay) has been implemented and operated by the National Inter Bank Transaction Bahrain: The Bahrain fast payment system Management Exchange (NITMX). The Company (FAWRI+) was implemented by the Bahrain was founded under the name ATM Pool Company Electronic Network for Financial Transactions Limited in 1993 and was renamed ‘National (BENEFIT). BENEFIT company was formed by 17 Interbank Transaction Management and Exchange banks in the country back in 1997 as a national (ITMX) Company Limited’ in July 2005 in order to ATM and POS switch of Bahrain. The Central Bank expand and extend the Company’s business scope of Bahrain (CBB) also licensed BENEIFT to be ‘the as per Bank of Thailand Strategic Payment provider of ancillary services for the financial Roadmap. NITMX is set up to be the key inter-bank sector’. BENEFIT’s range of services include the payment infrastructure and central data operation of Automated Teller Machines (ATM), processing operator that exchanges, manages, and Point of Sale (POS), Bahrain Credit Reference processes data across member Bureau (BCRB), Electronic Fund Transfer System banks/organizations to support e-payments. The (EFTS), Telecom Bill Payment (Tele BP), Payment shareholders of National ITMX are major domestic Gateway (PG), Bahrain Cheque Truncation System commercial banks in Thailand. (BCTS), BenefitPay as a national e-wallet across Bahrain and Know Your Customer Electronically USA: The fast payment system (RTP) (EKYC). As of now, because of mergers / implementation and operation in the US has been acquisitions, 13 banks in the country are the under The Clearing House (TCH). TCH is a banking shareholders of the company. association and payments company that is owned by some of the largest commercial banks in the India: India National Payment Corporation of India country. While the TCH is owned by large (NPCI) owns and operates the fast payment commercial banks in the country, non-owner systems – both IMPS and UPI. NPCI, a not-for-profit banks also participate in the various payment company, when setup, was owned by 10 large 12 schemes managed and operated by the TCH. TCH merger of MEPS (Malaysian Electronic Payment owns and operates core payments infrastructures System) - an interbank network service provider in the US, and it is the only private sector ACH and in Malaysia, and MyClear (Malaysian Electronic wire operator in the United States. It may be noted Clearing Corporation Sdn Bhd) - a wholly owned that the second fast payment system subsidiary of Bank Negara Malaysia. Bank implementation in the USA – FedNow- is Negara Malaysia (BNM), the Malaysian Central spearheaded by the Federal Reserve with an Bank, is PayNet’s single largest shareholder, with implementation timeline of 2023. FedNow will be 11 other Malaysian’s financial institutions as owned and operated by Federal Reserve. joint shareholders. Nigeria: The fast payment system is owned and 7.3 Examples of central bank and operated by the Nigeria Inter Bank Settlement private sector co-ownership System (NIBSS). NIBSS is a key financial (hybrid) infrastructure provider to the banking sector in Nigeria providing various services relating to the Australia: The fast payment system (NPP) in operations of payment systems. NIBSS is jointly Australia was implemented and operated by NPP owned by all licensed banks and the Central Bank Australia. NPPA was formed in 2014 as a of Nigeria. separate company and 13 financial institutions in Australia are the shareholders of NPPA. The Poland: The fast payment in Poland (Express Elixir) Reserve Bank of Australia is also a shareholder in has been implemented and operated by Krajowa NPP. Most non-central bank implementations do Izba Rozliczeniowa S.A. (KIR) which is a key not mandate the shareholding in the operating infrastructure institution of the Polish banking company to participate in the fast payment sector, providing clearing and settlement services. scheme. However, in Australia, the organizations KIR is a company in the private sector owned by that wish to connect directly to NPP to clear and the major banks in the country. The Polish Central settle payments are required to join NPP Bank Narodowy Bank Poliski (NBP) has a significant Australia Limited as a shareholder. shareholding in the company11. Hong Kong SAR, China: The fast payment system 7.4 Ownership structures and (FPS) in Hong Kong was developed jointly by the correlation with readiness index Hong Kong Monetary Authority & Hong Kong Interbank Clearing Limited (HKICL). HKICL was An analysis of several select countries (as shown entrusted with the responsibility to operate the above) indicates that ownership of fast payments system in the country. HKICL was established in has taken different forms in different countries. 1997 as a private company jointly owned by the Ownership could be broadly categorized in three HKMA and the Hong Kong Association of Banks ways: central bank ownership; private sector12 (HKAB). HKCIL provides interbank clearing and ownership; hybrid ownership (co-ownership settlement service to all banks in Hong Kong. between central bank and the private sector). Malaysia: The fast payment system (RPP) in There is a correlation between the RT-RP readiness Malaysia has been implemented and operated index and ownership of fast payment systems. In by PayNet. PayNet, the operator of shared countries with low RT-RP readiness score, payment infrastructures was formed by a generally central banks taking the role of 13 implementation and operation is observed (Belize, based on the needs of users and the Bhutan are examples) and in countries where RT- capabilities of the economy. RP readiness index is medium or high, the ii. The process should be inclusive and preference seems to be of private sector stakeholders and their roles from the ownership (Australia, India, Kenya, Malaysia, conceptualization of the design of the Nigeria, Poland, Thailand and USA are examples). system should be defined. iii. The plan should consider which elements The decision on ownership of implementation of the existing system can be an avenue for and continued operations also depends on the future development. method of implementation. If the fast payment iv. The implementation process should be is implemented on top of an existing system, considered as a critical part of the plan. generally the owner of the same system also This involves commitment of all owns the payment system implementation and stakeholders, project governance, defining operation. If it is a new system and there is the deliverables and milestones, resources already a private sector firm, other than central and financing strategy, and a rollout bank, running any retail payment system, then strategy. This to be coupled with effective the choice becomes easier to use that entity to oversight of the central bank. implement and operate the fast payment v. The implementation management team system. Only when one of these conditions are should have the appropriate qualifications not met, the real ownership question would for the task both technical and project need to be addressed. management/implementation. vi. Timing and milestones regarding the 8. Other Considerations implementation and up-start need to be defined. vii. Procedures for documentation of and It is important that both, the private sector and communication regarding the the central bank (in its different roles as implementation process should be in place. regulator, overseer, catalyst, operator) work together to ensure the efficiency and safety of b. Foster innovation retail payment systems, including in the case of i. The legal and regulatory framework can at fast payment system implementations. The times inhibit innovations and outcome should be aiming to: (a) ensure a developments in retail payments and at thorough and inclusive implementation process; times restrict opening of market to non- (b) foster innovation (c) establish effective bank operators/ service providers. The oversight; (d) support the development of efforts regarding modernization have to be effective standards and infrastructure supported by an appropriate legal and arrangements; (e) provide central bank services regulatory framework and such efforts in the manner most effective for the market13. should include an assessment of the existing legal and regulatory framework a. Ensure a thorough and inclusive leading to relevant changes. implementation process ii. The issue is equally applicable for cross- i. There needs to be a strategic approach border payments. The inconsistency or that defines the vision for the national legal and regulatory regimes in different payment system and sets clear priorities, jurisdictions may impede modernization of 14 cross-border payments. Such justifications domestic infrastructure may have should identify the issues and consider links/ dependence to cross-border measures for addressing, including systems/ infrastructures, establishing cooperation between central banks and oversight over infrastructures which other authorities. are not legally or physically established iii. Central banks should make relevant in the country, but which are used for changes to aspects of the legal and processing of in-country transactions regulatory framework, and at times needs to be explored by way of using their discretionary powers. coordination and cooperation with iv. Regulations should facilitate the other regulators and with the relevant opening up of the payment markets international payment system operator and allowing new players to enter the as well. market with the aim of increasing iv. As part of the assessment, the competition through establishing a availability of the payment level-playing field between the infrastructure established outside the incumbent and new providers of country in case of any eventuality payment services. The Payment needs more attention. The potential Services Directive 2 (PSD2)14 has led the impact on operations of the national way for how the payments markets in retail payments market which could be Europe are evolving and PSD2 is also potentially hampered also needs being used as the basis for developing attention from a business continuity or inspiring payments legislation planning angle. outside the EU. Third-party payment initiation has also been facilitated in d. Implement effective standards and India through NPCI operated UPI by infrastructure arrangements changes to the Procedural Guidelines i. Regulators should ensure the of UPI on lines of PSD2 in Europe and continued proper functioning of equivalent in UK and Brazil. markets, maintain an appropriate level of security and a level playing field c. Establish effective oversight without hampering further i. Encouraging transparency in pricing technological developments. and access policies should be Technology will likely continue to be encouraged by all providers of one of the primary global drivers for payment systems and service. changes in the payment markets in ii. Cooperation with the market as more developed markets, and while catalyst or facilitator can be an technology is leading the way in important adjunct in designing and changing the markets, it may also providing appropriate services. spark disruptions in the markets with iii. Oversight can be set-up over payment new business models combined with a systems and infrastructures which are repositioning of the different market established in a country. As the players and the regulators need to 15 balance to ensure safe and efficient 9. Conclusion functioning of markets. ii. Regulations framed should help The optimal process guiding the implementation promote more stable, safe, inclusive choice of a fast payment system implementation and promoting innovation in digital should be dynamic. The exact requirements of a payment systems within a given country regarding modernization of existing / jurisdiction and acting as enabler for legacy payment systems will differ depending on cross-border payments. factors such as general market conditions, iii. Reviewing of existing regulations and / maturity and the technical state of the existing payments infrastructures. The cost / benefit or issuance of new regulations as per implications will matter, and so will the market conditions needs to be an ambitions of particular markets as well as the ongoing exercise. resources available. iv. The regulator should work in tandem Countries need to take a broad view regarding and in coordination for ensuring the fast payment system implementation and regulatory framework is in line with the ownership, thereby ensuring that both the overall objective set. immediate and wider aspects are considered. In v. The authorities need to have adequate this context, identifying the policy objectives resources with the requisite expertise that call for such a need will be important and for analyzing the ecosystem and will also help answer the question of which decision making. approach to take. Moreover, countries should also go over particular steps and considerations e. Provide access to central bank services regarding the process in order to ensure that it is i. The appropriate adaptation of central done in the most efficient way and aligned with bank services can contribute to the overall market needs. objective of safety and efficiency. Modernization initiatives in payment systems ii. Use of central bank settlement services, should ideally be based on broader strategic where appropriate for the settlement of plans such as an overall national payments obligations, needs to be encouraged and strategy.15 16 Modernization undertaken by the facilitated. private sector should be undertaken in iii. Policies on access to clearing and conjunction with other relevant stakeholders, settlement services can affect innovation including the regulator. A national payments and competition, but these effects need to strategy is typically developed in co-operation be balanced against any adverse with a national payments council / committee or implications for the central bank, including similar body comprised of relevant stakeholders from the angle of moral hazard. spanning regulators, system operators, payment service providers, government agencies and representative bodies of end users (i.e. consumers and businesses). 16 ENDNOTES 1 According to the Committee on Payments and Market Infrastructures (CPMI), a fast payment can be defined as a payment in which the “transmission of the payment message and the availability of ‘final’ funds to the payee occur in real time or near-real time on as near to a 24-hour and seven-day (24/7) basis as possible. Fast payments are also referred to as real time, instant, and immediate in the literature. 2 A retail payment is defined as a transfer of relatively low value funds (typically not time-critical) between entities that are not financial institutions (could be via physical instruments such as cash and cheques, or electronic instruments such as cards, credit transfer, direct debit, e-money) and a payment system is defined as a formal arrangement based on a private contract or legislation, with multiple membership, common rules and standardized arrangements, for the transmission, clearing, netting and/or settlement of monetary obligations arising between its members. 3 Fast Payment System implementation is used to describe two scenarios in this Note: (i) a scenario whereas a new stand along system is implemented (including infrastructure and scheme rules); (ii) a scenario whereas an existing system is simply upgraded from an infrastructure perspective and/or scheme perspective in order to fulfil the criteria of a fast payment system. 4 “Developing a National Retail Payments Strategy”. World Bank, 2012. http://documents1.worldbank.org/curated/en/839121469729131991/pdf/84076-REPLACEMENT-FILE- PUBLIC-Developing-comprehensive-national-retail-payments-strategy.pdf 5 In some rare instances, countries have pursued both: upgrade existing infrastructures to accommodate short term needs while planning to build new infrastructures for the medium to long term. 6 “Real-time retail payments systems or Faster payments: A quick framework for decision making”. Balakrishnan. Journal of Payments Strategy & Systems, Vol.10, Number 3, 2016. 7 “Real-time retail payments systems or faster payments: Implementation considerations”. Natarajan & Balakrishnan. Journal of Payments Strategy & Systems, Vol.14, Number 1, 2020. 8 World Bank Global Payment Systems Survey: https://www.worldbank.org/en/topic/financialinclusion/brief/gpss 9 Committee on Payments and Market Infrastructures (2016) ‘Fast payments — enhancing the speed and availability of retail payments’, available at: https:// www.bis.org/cpmi/publ/d154.pdf 10 India RTGS is now available 24*7 from December 2020. 11 Source: https://www.kir.pl/en/about-us/shareholders/ accessed on 5 May 2021. 12 This is a broad categorization. No difference is made between private and public sector. For example, in India, the majority of ownership of NPCI is with ‘public sector banks’. Since in public sector banks the majority shareholder is Government of India, NPCI can also be classified as public sector. The idea here is to distinguish between Central Bank ownership and non-central bank ownership as a separate company. 13 Policy issues for central banks in retail payments: https://www.bis.org/cpmi/publ/d52.pdf 14 Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market. 17 15 For more information, see: “General Guidance for National Payment System Development”. CPSS, 2006. https://www.bis.org/cpmi/publ/d70.pdf 16 For more information, see: “Developing a National Retail Payments Strategy”. World Bank, 2012. http://documents1.worldbank.org/curated/en/839121469729131991/pdf/84076-REPLACEMENT-FILE- PUBLIC-Developing-comprehensive-nation al-retail-payments-strategy.pdf 18