ITU-T Focus Group Digital Financial Services

Interoperability

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© ITU 2017

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Foreword

An estimated 2 billion adults are still without access to a bank account, but some 1.6 billion of them have access to a mobile phone. ‘Mobile money services’ show great promise to expand financial inclusion by bringing basic financial services to people that remain on the margins of society.

In 2014, the Bill & Melinda Gates Foundation joined ITU to establish an ITU-T Focus Group on Digital Financial Services (DFS). The financial-services and information and communication technology (ICT) sectors are converging, and the aim of the Focus Group was to bring all the key players together to build a common understanding of the route to broader financial inclusion.

The Focus Group was successful to an extent that exceeded expectations. After two years of extensive consultation, the Focus Group concluded its work in early 2017 with the publication of 85 policy recommendations and 28 supporting thematic reports.

The Focus Group’s work was driven by the collaboration of more than 60 organizations from over 30 countries. Asked what made the Focus Group unique, all of the group’s participants highlighted its diversity. This was the first initiative to bring together all the actors working in the interests of financial inclusion. We opened new lines of communication to build a strong understanding of the components of the DFS ecosystem.

In the next phase of our collaboration, we will be certain that we are speaking on the same terms.

This next phase of collaboration – the ‘Financial Inclusion Global Initiative’ – will be a three-year programme of collective action led by ITU, the Bill & Melinda Gates Foundation, the World Bank Group, and the Committee on Payments and Market Infrastructure.

The new multi-partisan will provide targeted assistance to selected countries in their pursuit of financial-inclusion targets. This implementation work stream will be supported by annual symposia and thematic working groups.

Our Focus Group responded to a diverse set of challenges by mobilizing a diverse set of expertise. We are moving forward in exactly this spirit. The Focus Group demonstrated DFS stakeholders’ commitment to collaboration. ITU was glad to provide a neutral platform for this collaboration and we look forward to our continued work together to achieve universal access to financial services.

Dr Chaesub Lee

Director, ITU Telecommunication Standardization Bureau

Table of Contents

Foreword

I Cooperation frameworks between Authorities, Users and Providers for the development of the National Payments System

Executive Summary

1 Introduction and Background

2 Assessment of barriers to the development of digital financial services

3 Development of a vision statement, including policy objectives for DFS

3.1 National retail payments strategy and policy framework

3.2 DFS, financial inclusion objectives and national financial inclusion strategies

3.3 Vision statement and policy objectives for DFS

4 Roles of public and private sector actors in achieving the vision for the NPS/financial inclusion

4.1 Central Bank oversight and other roles

4.2 Role of other public sector entities

4.3 National payment council (or similar) to oversee implementation of the vision

4.4 Industry arrangements

4.5 Regulatory framework to support the vision

5 National Payments Council

5.1 The role of a NPC

5.2 Typical features/terms of reference for a NPC

5.3 Case studies

6 Other types of cooperation fora

6.1 Public sector-led

6.2 Payments associations and private payments councils

6.3 Consumer and business associations

7 Conclusions

Annex 1: The World Bank’s Guidelines for Developing a Comprehensive Strategy for Reforming Retail Payments

II Payment System Oversight and Interoperability

Executive Summary

The Oversight of Payment Systems

A. The critical role of payment systems in contemporary economies

B. Payment systems need oversight

Payment System Interoperability

A. Relevance of interoperability

B. Interoperability and oversight policy

C. Oversight principles for interoperability in RPS

Annex I: Payment system risk glossary

III Payment System Interoperability and Oversight: The International Dimension

Executive Summary

International Interlinking of Payment System Infrastructures

A. Drivers of international payment system infrastructures (PSIs) interlinking

B. Modalities of international PSI interlinking

C. Examples of international PSI interlinking

PSI interlinking and interoperability

A. National Interoperability

B. International interoperability: At the regional level

C. Challenges and risks of international interoperability

Implications for Oversight Policy

A. The cross-border dimension of payment system oversight

B. Oversight principles for international payment system interoperability

Annex 1: Oversight of payment systems in the SADC

IV Access to Payment Infrastructures

Executive Summary

1 Involvement of banks and non-banks in the payments business

2 Payment infrastructures

3 Types of access to payment infrastructures

A. Access for PSPs

B. Other variants of access to payment infrastructures for PSPs

C. Access for operators of other payment systems

4 Legal & regulatory, ownership and governance aspects

A. System access rules

B. International standards and other guidance

C. Ownership and governance of payments infrastructures

5 International evidence and trends

A. Access to RTGS systems

B. Access to ACHs

6 Insights and conclusions

A. Implications for operators, banks and non-banks

B. Implications for central banks and other authorities

Annex I: Case studies

Bibliography

V The Regulator's Perspective on the Right Timing for Inducing Interoperability

Executive summary

1 Introduction

2 Methodology

3 Reported answers

4 Final remarks

References

Annex: Questionnaire

List of tables and figures

Tables

Table 1 – Aspects of the legal and regulatory framework that can act as barriers to the development of DFS

Table 1 – Access of non-bank institutions to the RTGS system

Table 2 – Access of payment system operators to the RTGS system

Table 3 – Direct access of non-bank institutions to ACHs

Figures

Figure 1: Cooperative mechanisms for payments worldwide

Figure 2: Tanzania’s Financial Inclusion Coordination Structure

Figure 1 – Decentralized payments system

Figure 2 – Centralized payments system

Figure 3 – Interoperability scenarios at the national level

Figure 4 – Interoperability scenarios at the regional level

Figure 5 – Interoperability scenarios at the global level

Payment Systems in the Southern African Development Community

Boxes

Box 1. Payment systems and payment system infrastructures

Box 2. Risk implications of interdependencies

Box 3. Safety and efficiency in payment systems

Box 4. Licensing and overseeing PSPs

Box 5. Terminology

Box 1. Architecture of Regional Clearing Infrastructures

Box 2. Relevant standards for regional financial infrastructure integration

Box 3. Links

I Cooperation frameworks between Authorities, Users and Providers for the development of the National Payments System

About this report

The authors of this Technical Report are Jose Antonio Garcia and Hemant Baijal. Contributions were received from the members of the FG DFS Interoperability Working Group and in specific from Lara Gidvani, Thomas Lammer, Shahbaz Nasir, Ariadne Plaitakis, Peter Potgieser, and Gordon Swaby. The Technical Report was reviewed by the Focus Group Digital Financial Services. Thomas Lammer provided the overall guidance for this project.

If you would like to provide any additional information, please contact Vijay Mauree at tsbfgdfs@itu.int

List of acronyms

ACH Automated Clearing House

AML Anti-Money Laundering

ATM Automated Teller Machine

CFT Combating the Financing of Terrorism

CPMI Committee on Payments and Market Infrastructures

DFS Digital Financial Services

ECB European Central Bank

ERPB Euro Retail Payments Board

ITU International Telecommunication Union

KYC Know Your Customer

NFIS National Financial Inclusion Strategy

NPC National Payments Council

NPS National Payments System

PCI-DSS Payment Card Industry Data Security Standard

PIN Personal Identification Number

PIP Payment Infrastructure Provider

POS Point of Sale

PSP Payment Service Provider

SEPA Single Euro Payments Area

Executive Summary

In recent years the development of national payments systems, in particular of retail payments, has being geared in many countries to increasing the overall efficiency of payments and to the promotion and achievement of financial inclusion objectives.

Development of digital financial services (and in general the shift from cash and paper-based instruments to electronic) and the expansion of the networks of service delivery/customer access points to bring financial services closer to where people live and transact have been regarded as critical tools for the achievement of financial inclusion and overall efficiency objectives.

Beyond the expansion of networks through new branches, agent banking, and delivery channels such as ATMs, POS terminals or mobile banking platforms, achieving interoperability of the various payment services offered is another key tool to enhance the proximity of financial services to all individuals and to increase overall convenience to the end-users. Retail payments in many countries are therefore being deliberately developed in these directions.

Wide-reaching objectives like the ones mentioned earlier affect multiple layers of stakeholders (i.e. from regulators to typical payment service providers, to new/innovative payment service providers, to payment network operators, to end-users, etc.) and are therefore highly complex and difficult to attain.

Experience shows that these objectives are very often only achievable with the deliberate, collaborative and organized actions by a broad range of stakeholders from the public and private sectors, typically implemented through cooperation fora.

1 Introduction and Background

The purpose of this document is to analyze the role and usefulness of cooperation frameworks in the development of a national payments system (NPS), with a particular focus on the implementation of retail payments reforms aimed at advancing financial inclusion and improving overall efficiency, and to discuss the design of the structure/conformation of these cooperation frameworks.

This document builds on the collective experience of the members of the Interoperability Working Group and the broader Focus Group on Digital Financial Services, convened by the International Telecommunication Union (ITU).

The document is organized as follows: the first section discusses the main barriers to the development of digital financial services (DFS), highlighting the need for concerted actions to address those barriers; the second section discusses the issuance of a vision statement for the NPS, including financial inclusion objectives and the development of DFS; the third section highlights the roles of public and private sector actors in achieving the aforementioned vision; the fourth and fifth section discuss in detail the main types of cooperation frameworks/fora, such as a national payments council and other structures led by the public or the private sector. The document ends with a brief section stating the key conclusions.

2 Assessment of barriers to the development of digital financial services

For successful adoption of digital financial services (DFS) in any country environment, it is important that the DFS ecosystem provides safety, security, reliability, and convenience to build trust and drive usage amongst the various stakeholders in the ecosystem’s value chain.

There are a number barriers that can impede the adoption of DFS by a broad of range of players, including payment service providers (PSPs), payment infrastructure providers (PIPs), and users such as consumers and businesses/merchants.

For PSPs and PIPs, the main barriers include:

• Macroeconomic instability: The stability of key macroeconomic variables is key to PSPs and PIPs development, especially for long-term planning. For example, high and/or volatile inflation or interest rates can create an uncertain outlook for investment and overall market development, and can also lead consumers to distrust the financial system.

• Lack of scalability: in a two-sided market for DFS, a payments platform requires a critical mass of users (consumers and merchants) to get to the point where it has so many mutually attractive users that more of each type want to join. There are at least two critical success factors to achieve scalability:

1) The DFS platform should be easy for most merchants/businesses to adopt and should provide more value to them than other existing mechanisms (e.g. create incremental sales). Adoption by merchants/businesses is critical since mainstream consumers will not adopt a new DFS product unless they can use it in many places;

2) The DFS has to be a product that most consumers can adopt relatively easily and be useful and convenient to them. That means that it has to work for multiple payment needs, including being interoperable with other payment mechanisms. In turn, merchants will not go to the trouble of accepting a new DFS method unless a significant share of their consumers want to use it.

• An ineffective legal and regulatory framework for DFS: There are several aspects of the legal and regulatory environment which, under some circumstances, may act as barriers to DFS ecosystem development. These aspects are discussed in Table 1.

Table 1 – Aspects of the legal and regulatory framework that can act as barriers to the development of DFS

Transparency and predictability of regulations

– To promote trust and confidence in DFS by the various stakeholders, the regulatory framework must be sound, predictable, non-discriminatory, and transparent. Lack of these attributes can confuse the roles of different participants and create mistrust in the development and operation of DFS.

– The legal and regulatory framework should provide an adequate balance to promote innovative business models, as well as foster sound risk management practices in the payments industry, including through the supervision/oversight of PSPs and PSOs by regulatory authorities.

– Further, to promote transparency and predictability, before implementing new or amending existing laws or regulations in connection with DFS, regulators should carefully evaluate the full costs and benefits of such proposed laws or regulations. Laws/regulations should be drafted carefully to minimize the risk of unintended consequences and should focus on clear, articulated goals or purposes.

Level playing field, market access and licensing requirements

– Some individuals may be “forced” to use cash as a result of an inability to access ATMs, POS terminals, or bank branches. Reaching these individuals through traditional means may be expensive and impractical. One way to overcome this challenge is to rely on technological innovations and to let a broader range of PSPs to reach out to new segments, or meet a new need in an established market.

– Many countries have regulatory frameworks that are narrow in scope, and non-bank PSPs and/or international PSPs or PIPs may find it difficult to be allowed in, or to compete fairly with “traditional” local players. This may result in an environment where DFS are provided by a smaller number of entities that otherwise would be possible, likely restricting choice and quality of financial services for the end-user.

– To avoid compromising the safety and stability of the payments market, all PSPs and PIPs should be licensed (or at least authorized) and regulated by the payment systems overseer/regulator (i.e. the central bank).1 However, the underlying requirements should depend on the specific type of services offered and the specific risk associated to those services (i.e. functional regulation rather than institution-based regulation).

– Third-party agents (acting on behalf of PSPs) may be prohibited from operating in the market place if the legal and regulatory framework is not modified to explicitly include the roles, responsibilities, requirements, etc. of third-party agents

Competition

– In some cases there is a PIP or PSP that is backed by the government or that is organically dominant, and other PSPs/PIPs are unable to compete openly and fairly in those markets.

– Another matter related to competition policy is imposition of revenue or fee caps to keep consumer prices artificially low. This restricts the ability of PSPs/PIPs to provide services that are commercially viable and discourages investment, and the net result is that the services that are available to end-users are not good enough to promote adoption, and eventually promote scale in DFS.

Proportionality and risk-based approach for KYC, AML/CFT

– The easier and faster it is to open an account, the more likely consumers will take-up and use it. Smooth and simple account opening processes rely heavily on PSP’s ability to tier “Know Your Customer” (KYC) procedures. If the accounts are limited to a small balance and small and simple transactions (i.e. cash-in, bill payment) and all transactions can be monitored so that an account can be suspended right away in case of fraudulent or suspicious use, the KYC risks are very limited. It is only when customers want to use their account more and need larger balances and transactions that additional KYC should be performed.

– Regulations should be able to mirror the various scenarios earlier described. In other words, regulations should be risk-based, being able to cope with both a very low risk environment as well scenarios that may represent greater risks. Thus, in very low risk scenarios, simplified ID requirements that may even allow the possibility of activating accounts remotely (e.g. through SIM registration) could be permitted.

– The lack of proper ID methods creates an additional barrier to undertake proper KYC.

Localization rules

– Some countries impose restrictions that require domestic processing of all DFS transactions as a means of maintaining operational control and data within a country^2. In other cases, rules require the use of a local provider for all transaction processing, effectively creating a monopoly on all processing.

– Localization restrictions can force the building or replication of costly infrastructure domestically. Hence, such rules may prevent some international PIPs from offering certain value-added services that could render better services to the end-users.

1 It is assumed here that mobile network operators that intend to provide payment services have already being licensed by the telecom regulator in their respective countries.

2 For example, for some PIPs international data processing may be crucial to drive down costs.

Other barriers relate to aspects that affect the ability of end-users to adopt DFS. These are:

• Accessibility: This is perhaps the most basic factor influencing successful adoption of any DFS. Without adequate access to a transaction account, a consumer can be excluded from the DFS value chain and most likely will be compelled to use cash. Accessibility also implies access to transaction points within the DFS ecosystem, such as ATMs, POS terminals, branches, third-party agents, etc.

• Convenience: beyond access to DFS, a user must find these services convenient and easy to use. Where the adoption curve for consumers is smooth, usage tends to be high and creates a positive feedback mechanism for other users to adopt such services as well.

• Cost and transparency: the use of any DFS involves a certain cost to the user. These costs include explicit as well as implicit costs. High costs relative to the user’s income and the user’s perception of the value of the service act as a barriers to DFS adoption and usage. In an environment where there are few options available, some end-users will tend to “internalize” the costs and stick to the product they know best. Others will simply refrain from using DFS. In contrast, in a competitive market the costs associated with a payment instrument are more closely scrutinized, and the choice of DFS is made based on user’s perception of the cost structure, as well as other factors such as safety and convenience.

• Safety and reliability: closely associated with cost and transparency is the safety and reliability of DFS. A user’s perception of safety and reliability can drive usage. Systems that are prone to security risks can create mistrust and result in lower usage.

3 Development of a vision statement, including policy objectives for DFS

3.1 National retail payments strategy and policy framework[1]

Payment systems all over the world, as core infrastructures of contemporary market economies, are in constant evolution on the technology, regulatory as well as business front, as they adjust to the changing needs of the population, the economy and the financial sector.

Retail payment systems traditionally have been initiated and operated by private entities that come together to try to address collectively recognized payment needs in a market. Industry initiatives range widely, from setting up common platforms and new services, to adopting standards to increase efficiency and facilitate automated inter-institution communication and transaction processing, among many others.

However, in recent years the evolution of retail payments is increasingly also the outcome of deliberate strategies and policy choices from national authorities. Central banks are increasingly becoming involved in retail payments reforming on the basis of their objectives to ensure the smooth operation of the NPS, improve its overall efficiency and maintain trust in the currency. Other authorities like financial supervisors, telecom regulators and competition authorities, as well as other public sector entities like the national treasury and the social development ministry have also increased their involvement in this field (see section III.a).

Choices of central bank and other authorities, very often in consultation with the industry, are increasingly being reflected in structured documents such as a “national retail payments strategy”, a “retail payments policy framework” or similar. These documents generally aim at achieving comprehensive reforms, with overarching objectives such as increasing overall safety and efficiency, ensuring there is an efficient infrastructure to process modern payment instruments, improving the affordability and ease of access to electronic payments, and ensuring that a socially optimal mix of payment instruments exists in the country. In some cases, these high-level or overarching objectives are further developed through intermediate objectives such as improving proximity of payment services, achieving interoperability and others.

Typical contents of a national retail payments strategy or policy framework include: Vision, Assessment, Strategy Objectives, Coordination and Implementation Mechanisms, Monitoring and Evaluation Systems, and Action Plan.[2]

It should be noted that an additional crucial role of a national retail payments strategy or policy framework is to help stakeholders to strengthen and publicize their goals and commitments in relation to the objectives of the reform effort, clarify complementary roles and resolve any overlaps, and coordinate actions.

3.2 DFS, financial inclusion objectives and national financial inclusion strategies

In recent years the development of the NPS, in particular of retail payments, is being geared in many cases to improving the efficiency of payments and to the promotion and achievement of financial inclusion objectives.

In this context, development of DFS and digital delivery mechanism are regarded as critical tools for the achievement of both financial inclusion and efficiency objectives. Indeed, DFS are recognized as having a high potential to safely expand financial services to under-served market segments (e.g. by improving proximity, which is a basic condition for adopting and using a product/service like a transaction account), and to improve the quality, appropriateness, and impact of financial services.

Proximity and overall convenience can be further enhanced by achieving interoperability of the various payment services offered, which may involve interoperability between payment instruments of the same kind and even across different payment instruments.[3]

Hence, retail payments in many countries are being deliberately developed in this direction.

Developing retail payments to achieve financial inclusion objectives is sometimes documented in the broader national retail payments strategy, or more often in a National Financial Inclusion Strategy (NFIS). In this last regard, according to the World Bank (2012):

“Financial inclusion strategies are roadmaps of actions, agreed and defined at the national or subnational level, which stakeholders follow to achieve financial inclusion objectives. Successful strategies coordinate efforts with the main stakeholders, define responsibilities among them, and state a clear planning of resources by, for example, prioritizing targets. A strategy can promote a more effective and efficient process to achieve significant improvements in financial inclusion. Engagement with the private sector, including through structured consultation, can help ensure the success of the strategy and the relevance of the goals set.”

In some cases, countries may have both a broader payments development strategy as well as a NFIS, in which case the latter generally serves for providing more detailed and/or complementary guidance in the specific areas more related to inclusion (e.g. the development of DFS[4]). In other cases, the NFIs may be the only structured and coordinated document providing an overall framework and roadmap for retail payment system development.

As with a broad payments reform strategy, a NFIS helps stakeholders to publicize their commitments in relation to inclusion objectives, clarify roles and coordinate actions.

3.3 Vision statement and policy objectives for DFS

Often, national retail payments strategies, national retail payments policy frameworks and/or NFIS include an explicit “vision”. Envisioning the desired state of the retail payments system assists in catalyzing action and serves as a reference point for all future endeavors.

A vision should be able to answer the question “What would a successful implementation of the underlying reforms to the retail payments system achieve?”

The desired state of retail payments systems might vary from country to country depending on a variety of factors. In general, however, a vision for an enhanced retail payments system includes dimensions such as:

i) The desired level of penetration of electronic payment mechanisms;

ii) Reduction of the cost of retail payments to the society;

iii) The payment instruments and services that are able to meet the payment needs of individuals and businesses, including base-of-pyramid individuals and micro and small enterprises;

iv) Improving the accessibility (e.g. proximity) of financial services;

v) achieving appropriate levels of customer satisfaction.

For example, Tanzania’s National Financial Inclusion Framework sets forth as its vision the following: “All Tanzanians regularly use financial services and payment infrastructures to manage cash flows and mitigate shocks. These are delivered by formal providers through a range of appropriate services and infrastructure, with dignity and fairness”.

At the global level, the World Bank Group’s vision for Universal Financial Access is that “By 2020, adults globally have access to an account or electronic instrument to store money, and send and receive payments as the basic building block to manage their financial lives.”

As mentioned earlier, development of DFS is often regarded as one of the critical tools for the achievement of financial inclusion objectives. Hence, some countries may wish to develop (or may have already developed) specific policy objectives in connection with DFS (and/or for other key mechanisms that will assist in the achievement of the high-level objectives). This may be useful for a number of reasons. In particular, achieving the overall vision for the national retail payments system will be extremely difficult without ensuring each of the tools, mechanisms and/or actions identified as critical are aligned to the general guiding objectives.

In this context, policy objectives for DFS should not aim at specifying the way in which DFS should be developed but should rather emphasize the way in which DFS is expected to assist in achieving the higher-level objectives for retail payments development in general and financial inclusion in particular. Still, in some cases as part of the policy objectives it may be useful to discuss the broad means through with DFS could have an even greater impact (e.g. by achieving interoperability) and include general statements on the desirable course(s) of action for the industry in this regard, and if needed also potential actions from regulators.

4 Roles of public and private sector actors in achieving the vision for the NPS/financial inclusion

Payments reforms require the active and often continuous involvement of several stakeholders from the public sector and the private sector. This section describes their main roles.

4.1 Central Bank oversight and other roles

Central banks all over the world are heavily involved in the operation, regulation and oversight, and reforming of payment systems.

In an operational role, central banks typically provide settlement services for some or all retail payment systems in a country. In some countries, central banks also play a more direct operational role and operate some retail payment systems like check clearing houses, automated clearinghouses (ACHs) and/or payment card switches. Through this operational role, a central bank can be instrumental in facilitating interoperability of payment instruments and services.

As facilitators/catalysts, most central banks maintain close relationships with commercial banks and other PSPs in order to discuss priorities for payment system development within the country and to promote that those priorities materialize (e.g. achieving interoperability). Through these relationships, central banks also pursue development of strategic initiatives aimed at benefiting all participants uniformly (e.g. connectivity, adoption of standards, fair interchange fees/fee structures, reduction or elimination of paper and paper-based processes, etc.).

As overseers and/or regulators of retail payments, central banks typically monitor existing and new payment systems and services, assess them against relevant standards and best practices, and where necessary induce change. The latter can occur through dialogue and moral suasion, through the issuance of formal regulations, and/or by launching reform initiatives of varying depth. In their oversight role, many central banks also pursue a research agenda to keep abreast with new developments in both the local and foreign contexts.

4.2 Role of other public sector entities

Other public sector entities increasingly play a role in the NPS and in some cases also in the efforts to reform one or more of its elements.

Financial supervisors (when different from the central bank) and telecom regulators may play a role as regulators for certain specific components and/or participants of the NPS. In Pakistan, for example, the Pakistan Telecommunication Authority, in close cooperation with the State Bank of Pakistan, have cooperated closely on the development of regulatory framework for mobile / branchless banking. Recently, both institutions issued joint regulations on the technical implementation and interoperability of mobile / branchless banking.

Other public sector entities like the ID authority (i.e. the entity that issues national identification number or equivalent for the population) is increasingly playing a critical role in the payments field, especially for facilitating access to individuals excluded from the financial sector and (often) from the formal economic sector in general. Likewise, competition authorities are increasingly playing a role in DFS in some countries, for example by monitoring ex ante mergers & acquisitions as well as sanctioning of anti-competitive behavior in this field.

Finally, other public sector entities may be involved because they are heavy users of payment services (e.g. the national treasury, the agency that operates social grants programs, the social security agency,[5] etc.) and are therefore interested in leveraging payments reforms to better fulfil their own statutory mandates and objectives.

4.3 National payment council (or similar) to oversee implementation of the vision

In many countries, central banks have established and usually chair a so-called national payments council (NPC) that serves as a forum for multi-stakeholder consultations. Active consultations are generally initiated as part of a first comprehensive attempt to modernize the NPS. These first attempts typically aim at implementing the basic payment and settlement infrastructure, such as a real time gross settlement system, together with the essential legal, regulatory and oversight infrastructure.

In most cases though, after completion of the first set of reforms, the NPC is maintained as a regular source for consultations for the ongoing development of the NPS, which may include the implementation of DFS and effective interoperability arrangements. The NPC is also used as a tool by the central bank in connection with its roles as catalyst and overseer.

The main features of an NPC are described in further detail in section IV of this document.

4.4 Industry arrangements

Industry arrangements are critical to foster standardization of technical aspects of payment services throughout the industry, as well as for the adoption of minimum product/service features, essential practices, and other agreements among a wide range of stakeholders.

Technical standards are generally developed at a global level, but are implemented and enforced at the regional/national level. Some of the key standards in the payments industry are:

• Payment Card Industry Data Security Standard (PCI DSS): The PCI-DSS is designed to encourage and enhance cardholder data security and facilitate the broad adoption of consistent data security measures globally. PCI DSS provides a baseline of technical and operational requirements designed to protect account data. PCI DSS comprises 12 general requirements for any entity that stores, processes, or transmits payment account data designed around 6 goals: build and maintain a secure network and system, protect cardholder data, maintain a vulnerability management program, implement strong access control measures, regularly monitor and test networks, and ensure the maintenance of information security policies. The “PCI Payment Application Data Security Standard” is designed to help software vendors and others develop secure payment applications. “PCI PIN Transaction Security (PTS) Point of Interaction (POI) Modular Security Requirements” contain a single set of requirements for all PIN terminals, including POS devices, encrypting PIN pads, and unattended payment terminals.

• ISO standards for payment and other financial services. ISO is the world’s largest developer of voluntary international standards. Financial Services Standards are developed by the ISO Technical Committee 68. Some of the most relevant standards for DFS include ISO 8583: 2003 (Financial transaction card originated messages), ISO 9362: BIC (Business Identifier Code), ISO 13616: IBAN (International Bank Account Number) and ISO 17442: LEI (Legal Entity Identifier).[6] The ISO 20022 is a standard for the development of electronic messages. It has been applied for the development of a portfolio of messaging standards, mainly for financial services, including for payment initiation, payment clearing and settlement, cash management, authorities financial investigations, financial invoice, etc.[7] Some standards development projects are of specific relevance to digital financial inclusion (e.g. standards specific to mobile financial services are currently being developed).

• EMVCo: It is a consortium of six payment brands—American Express, Discover Financial Services, Japan Credit Bureau, MasterCard, UnionPay, and Visa. It was established in 1999 to facilitate worldwide interoperability and acceptance of secure payment transactions by managing and evolving special technical standards—the EMV Specifications—and related testing processes. Activities include card and POS terminal evaluation, security evaluation, and management of interoperability issues. The EMV smart chip is among EMVCo’s most important contributions to security in DFS, given its capacity to hold encrypted data, perform cryptography, and generate a unique code that is assigned to each transaction.

As mentioned earlier, in addition to technical standards, industry arrangements have been developed for other kind of topics/areas. One example is the GSMA’s Code of Conduct for Mobile Money Providers, which aims to establish common business principles to support the development of a safe and responsible industry for digital financial services.[8] As with technical standards, this Code of Conduct was developed at a global level for implementation at the national level by mobile money PSPs. Endorsement of the Code of Conduct is voluntary. GSMA has also collaborated with providers to develop and test principles that set a high standard to support the sustainable and safe delivery of mobile money. Mobile money PSPs conduct a self-assessment, with GSMA guidance, to determine compliance level and identify issues to address. Self-assessments are already underway for 2016-2017.[9]

4.5 Regulatory framework to support the vision

The legal and regulatory framework plays a critical role in creating an enabling environment for the development of efficient, innovative and inclusive payment services. As per the “Payment Aspects of Financial Inclusion” report of the Committee on Payments and Market Infrastructures (CPMI) and the World Bank Group (2016), key aspects of the legal and regulatory framework in the context of retail payments and financial inclusion include:[10] (i) regulatory neutrality and proportionality; (ii) risk management; (iii) protection of deposits and e-money customer funds; (iv) financial customer protection; and (v) financial integrity.

However, some countries still lack even more basic legal and regulatory provisions such as those supporting settlement finality, electronic payments, electronic records and electronic signatures, etc. A failure to establish and to effectively oversee adherence to such a framework can stifle competition and innovation, threaten the safety, soundness and efficiency of retail payment services, lead to inadequate protection of customers, and deter usage.

5 National Payments Council

5.1 The role of a NPC

A collaborative approach to payment system modernization is essential. On one hand, relevant changes in any area of the payments industry will most likely have an impact on all of its participants. Moreover, as a network industry, some of the challenges to improve efficiency, safety or security can only be overcome by the industry as a whole. Another crucial reason for cooperation is that no single individual or entity possesses all the knowledge needed to address payment system reforms. Indeed, in market environments characterized by knowledge-intensive and fast-changing processes, as well as by sophisticated products and complex institutions, communication between stakeholders be them market players, regulators and even legislators is a necessary multi-way learning opportunity that also fosters improved decision-making through the sharing of knowledge and experiences.

On the other hand, as discussed earlier, practically any significant reform to the NPS will affect the interests, business and likely also the operations of multiple stakeholders. Hence, a mechanism to exert leadership, to conciliate interests and establish a reasonable level of consensus, and to coordinate actions becomes imperative.

Different mechanisms can be used for these purposes. A National Payments Council (NPC) or National Payments Committee is one of the most commonly used ones, especially in countries that have engaged in larger or more significant reforms. It consists of a rather structured and, in many cases, formal mechanism with leadership from the central bank.

The features of a NPC are described throughout the remainder of this section. Other mechanisms, including those that have been created for discussing specific aspects and/or that are designed in a less structured or less formal to accommodate certain specific objectives are discussed in section V of this document.[11]

5.2 Typical features/terms of reference for a NPC

5.2.1 Objectives and foundation

The NPC is the mechanism through which dialogue on national payment system policies takes place between the various stakeholders, securing a fair representation of the public and private interests involved in payment system activities, and thus setting the conditions for achieving a reasonable level of consensus on policy choices. In other words, the NPC is the place where PSPs, PIPs, overseers and users can voice and discuss their expectations and challenges, and, eventually translate them into new desirable features of the NPS and/or new and improved payment products and services.

Central banks are normally entrusted with the responsibility of setting up and leading the NPC. In addition to being a primary mechanism for cooperation and for coordinating actions in the context of payment reform efforts, central banks often also use the NPC channel to provide stakeholders with indications on its policy orientation in the payments field, to shape its policy agenda by using feedback from the market, and to check the efficiency, reliability, and fairness of the payment services provided.

In some cases the NPC is created by a statutory act (e.g. the payment systems law). There are advantages and disadvantages to this approach. The NPC having statutory powers may be useful to establish its credibility - especially vis-à-vis other authorities - and the legitimacy of the central bank to lead its work. On the other hand, a NPC operating under strict rules and/or composition criteria may face difficulties in fulfilling one of its key purposes which is to ensure effective dialogue and achieve reasonable consensus on its discussions.

5.2.2 General methodology and organizational structure

A well-designed NPC should have different levels, to clearly identify different roles: policy and strategy at the highest level (i.e. ministers, central bank governor, CEOs and similar); a decision-making level for general and operational aspects involving senior management of key stakeholders; and an implementation level involving senior technical staff and other executives.

A specific example is a structure comprised of: (i) a high-level council,[12] normally chaired by the central bank governor, the minister of finance or similar; (ii) a strategic committee, which is normally chaired by a senior manager (e.g. deputy governor) of the central bank; and, (iii) thematic working groups which are chaired by individuals and/or institutions with proven knowledge, experience and interest in the underlying topic(s).

All NPC structures should be supported by a permanent or quasi permanent Secretariat.

5.2.3 Typical functions, activities and composition of the various levels within a NPC

It is crucial that the NPC give fair representation to all the stakeholders of the NPS. These normally include: the central bank, the ministry of finance, other relevant regulators (e.g. telecom regulator), the commercial banks, the non-bank financial institutions, non-bank PSPs, the PIPs (e.g. clearinghouses), and the users (including both major initiators like the national treasury as well as consumers).[13] In some cases, the competition authority and the ID authority have also been invited to join NPC discussions, and to participate in specific development/implementations.

The composition of the NPC should nevertheless be consistent with the objective of having effective discussion in the meetings. Therefore, in most cases having all individual players being represented in the NPC will not be possible. However, it must be ensured that all interests are fairly represented both across the different categories of stakeholders (e.g. banks and non-bank PSPs) and within each category (e.g. large and/or traditional players vs. small and/or new players).[14] In the specific case of the thematic working groups, these may or may not be composed of the totality of the institutions represented in the higher levels of the NPC.

The typical functions/activities of the three levels within a NPC are as follows:

High-level council

• NPC governance

• Setting the overall strategy and key policy decisions (including prioritization)

• General oversight of reforms (e.g. review and approval of action plans, review of progress)

• Final approval/endorsement of guides and rulebooks

• Review any other high-level issues related to implementation.

Although there is no set standard, a high-level council meets at least on a quarterly basis. Meetings may be more frequent in the early stages of a major reform effort, or at critical stages during its implementation.

Strategic Committee

• Coordination and general quality control

• Prepare general and detailed action plan for the reform and its key individual components

• Monitor progress and problems at a detailed level (e.g. technical obstacles, timeline, etc.)

• Provide guidance to activities of the thematic working groups

• Prepare and vet its reports before submission to the high-level council

Although there is no set standard, a steering committee meets normally on a monthly basis.

Thematic working groups

• Deal with actual implementation of the individual components of the reform effort (e.g. on DFS, interoperability, new infrastructures, etc.).

• Define the technical standards, service standards, minimum technical requirements, identify obstacles and other features of each new system and service

• Propose a timeframe for implementation and define progress indicators

• Prepare progress reports on the individual components for the Steering Committee

• Form an effective link between individual market players and the higher levels of the NPC.

Working groups meet on an “as needed basis”. For example, they may meet weekly during the course of a specific implementation, and less frequently thereafter.

Secretariat

The secretariat is the “engine” of the NPC. It should consist of a highly efficient unit of staffs (typically, the payment system oversight and/or payments policy unit of the Central Bank) with capacity to coordinate, organize, supervise and follow-up on technical discussions. The Secretariat is generally responsible for the preparatory work for the meetings of the various bodies of the NPC. In particular, it coordinates and facilitates the work of the thematic working groups, prepares and organizes consultation exercises, drafts and circulates information reports, prepares agendas, takes minutes of meetings, checks work progress, and supports implementation efforts.

5.3 Case studies

Bangladesh

The National Payment Systems Council (NPSC) of Bangladesh, created in 2007, is made-up of representatives from a selected number of commercial banks and from the Ministry of Finance, the Ministry of Commerce, the Comptroller General of Accounts, the Bangladesh Telecommunication Regulatory Commission, and is chaired by the Deputy Governor in charge of the Department of Currency Management and Payment Systems of the Bangladesh Bank.

The NPSC is the central vehicle for formulating strategy, disseminating information on policy and good practices, and promoting technological development in the payments system. It is also the vehicle for mobilizing resources – human, financial, and physical – necessary for payments development. The NPSC defines the long-term strategy and identifies the development priorities.

The NPSC is assisted by four working groups: strategy, law and regulation, remittances, and ACH. Each of these is composed of commercial bank staff and is headed by a senior Bangladesh Bank officer. The Payments Systems Division of Bangladesh Bank provides support services to these groups.

The first strategic directions adopted in 2007 by the NPSC were as follows:

• Implement Bangladesh ACH

• Establish the required legal and regulatory framework

• Promote and encourage e-payments, use of shared ATMs, POS terminals, mobile payments, etc.

• Establish the central bank’s payment system oversight function

• Encourage initiatives for the establishment of payment systems by the private sector

• Encourage on-line banking, adopt a core banking solution and improve the General Ledger and other related departments/offices at the Bangladesh Bank

• Implement Bangladesh real-time gross settlement (RTGS) system.

European Union

In Europe, the organized cooperation bodies bringing together authorities, providers and users pertain mainly to retail payments, for historical reasons.[15] In December 2013, the European Central Bank (ECB) announced the launch of the Euro Retail Payments Board (ERPB), a forum of all Euro area retail payments stakeholders.[16]

The objective of the ERPB is to contribute to and facilitate the further development of an integrated, innovative and competitive market for euro retail payments in the EU by:

• Identifying and studying technical, behavioral and legal obstacles in, among others, credit transfer payments, direct debit payments, card payments, internet payments, mobile payments and payments-related horizontal issues (e.g. standards, fraud, security, etc.)

• Identifying and pursuing ways to address these obstacles

• Identifying and pursuing ways to foster innovation, competition and integration in retail payments in euro in the European Union.

The ERPB is chaired by a high-level representative of the ECB. On the supply side, it is composed of four representatives from the banking community, two representatives of payment institutions and one representative of e-money institutions. On the demand side it includes two representatives of consumers and one representative of each of the following stakeholder categories: (i) retailers with a physical presence, (ii) internet retailers, (iii) businesses/corporates, (iv) small and medium-sized enterprises and (v) national public administrations. In addition, six national central banks take part in the meetings on a rotational basis, and the European Commission is invited to join the ERPB as an observer.

For the execution of its mandate, the ERPB may establish working groups for a limited period of time. Several groups may operate in parallel, depending on the work priorities.

Besides the ERPB, there are other industry fora with different focus (see section V.2).

Moldova

The Statute of the National Payments Council of Moldova (NPCM) was approved on September 16, 2013, at its establishment meeting. The NPCM is a professional forum for high-level consultation between various public and private institutions in order to facilitate the safe and stable functioning of the payment system of the Republic of Moldova, with the objective to promote: i) cashless payments in the Republic of Moldova; ii) operational efficiency, security and integrity of payment systems and services; iii) compliance of payment systems and services with the market demand and the needs of users and their accessibility to the entire population of the Republic of Moldova; and iv) the innovative nature of payments, cashless payment instruments safety and their accessibility for users.

The NPCM has neither legal personality nor entrepreneurial activity. Membership is open to the National Bank of Moldova, the Ministry of Finance, Ministry of Economy, Ministry of Information Technology and Communications, the e-Government Center, the Moldovan Banking Association, PSPs and e-money issuers. The NPCM is articulated into working groups and is chaired by the National Bank of Moldova.

The Bahamas

The bylaws of the National Payments Committee (NPC) were issued in 2012 under the Payment System Act. The NPC is established as an advisory body to the Central Bank of The Bahamas to: i) advise on the implementation of the NPS policy; ii) support the achievement and implementation of the policy through collaboration with relevant stakeholders; iii) advise the Central Bank on the appropriateness of documentation and models to be used as standards; iv) facilitate the necessary cooperation between market participants; v) promote common initiatives; and, vi) facilitate the sharing of information.

The NPC does not have legal personality. Membership is open to any participant or user of a system which is widely used or otherwise significant within the country. Governance is based on the constitution of the Council as the main management body and committees. Procedures for admission and withdrawal are established and duties are imposed to members.

Trinidad and Tobago

The Payments System Council (PSC) was established in 2002 with the objective “to support the achievement of sound and efficient payments clearance and settlement systems in the country and to participate in regional and international efforts aimed at maintaining ordered conditions in regional and international payment systems.” The first projects of the PSC were the planning and implementation of the RTGS system, the ACH, and the government securities system. At that time the membership consisted of representatives of the central bank, each of the commercial banks, the Securities and Exchange Commission, and the Ministry of Finance.

In 2005, the PSC became involved in providing advice on operational issues related to the use of the systems. By 2006, its focus shifted to promoting e-payments and strengthening the legislative framework. In 2008, the PSC broadened its membership, which currently comprises the senior representation of the following stakeholders: Central Bank of Trinidad and Tobago, Securities Regulator, National Treasury, commercial banks, PSOs, business sector, consumers, the Telecommunications Authority, the Chamber of Commerce and Ministry of Legal Affairs.

The Central Bank of Trinidad and Tobago chairs and provides secretariat services for the PSC. The PSC is currently promoting the use of e-payments via an educational program.

6 Other types of cooperation fora

Consultation and coordination on payments topics and reforms are often carried out through a variety of other mechanisms. These mechanisms typically do not substitute a NPC, but are useful for a number of specific purposes or circumstances. Figure 1 shows different cooperation mechanisms with central bank leadership.

Figure 1: Cooperative mechanisms for payments worldwide

Source: Global Payment Systems Survey 2012, The World Bank.

In some countries cooperation fora that to a certain extent resemble a NPS have been created without direct participation of the central bank or other authorities. These bodies may operate as a company with specific operational functions rather than as advisory/consultative body for public policy purposes.

6.1 Public sector-led

Some typical fora with central bank leadership include:

• Consultation workshops: workshops can be organized in the early formulation stages of the reform effort to present the initiative to all public and private stakeholders, collect inputs and contributions from them, and seek their broad sign-off on the proposed strategy prior to launch.

• Periodic events: more formal events can be organized allow different stakeholders to update each other and advance agendas in unison. For instance, some central banks have launched a Financial Sector Forum as a coordination mechanism for relevant financial sector regulators to convene yearly.

Other relevant fora include bodies that have been created in the specific context of financial inclusion. This can serve as a forum for specialized topics of payment system development.

In Mexico, for example, the National Council for Financial Inclusion is a forum for coordination and consultation among government entities whose purpose is to plan, formulate, implement, execute and follow-up on a National Financial Inclusion Policy.

Tanzania has a developed a structure that resembles a NPC, although for the specific purpose of advancing its NFIS. To that effect, three levels of committees comprising members from government ministries, heads of regulatory authorities and agencies and private financial institutions associations have been formed. This structure is illustrated in Figure 2.

Figure 2: Tanzania’s Financial Inclusion Coordination Structure

Pakistan also framed its NFIS in mid-2015, with a well-structured council, steering committee and technical committees/groups. This country’s experience to date is that the achievement of its NFIS targets depends crucially on effective cooperation between financial and telecom regulators, financial institutions, mobile network operators and solutions providers.

6.2 Payments associations and private payments councils

In some countries, private payments associations and/or private payments councils have been created and play an important role in the development and shaping of the NPS.

In most cases, the main role of these organizations is the creation and enforcement of technical standards for the local payments market (though often based in the relevant international standard, where applicable). In this regard, interoperability is very often an industry-driven initiative.[17]

Some relevant examples include the Payments Association of South Africa (PASA) and the European Payments Council (EPC).

PASA is a private sector organization, designated as a “payments system management body” under South Africa’s NPS Act. PASA is responsible for the organization, management and regulation of all payment systems under PASA’s constitution. From a practical perspective, PASA assists the South African Reserve Bank by representing, organizing and managing the conduct of its members in the “clearing layer” or clearing domain of the NPS.

In the European Union, the EPC is the coordination and decision-making body of the banking industry in relation to the support and promotion of the Single Euro Payments Area. The EPC develops payment schemes and frameworks which help to realize the integrated euro payments market. In particular, the EPC defines common positions for the cooperative space of payment services.

6.3 Consumer and business associations

Business and consumer associations exist in most country environments and can play an important role in representing the interests of businesses, merchants and consumers vis-à-vis other stakeholders like regulators, PSPs and PSOs.

Business associations – including chambers of commerce and trade associations – can play a key role in building inclusive DFS ecosystems by providing useful feedback on DFS products and services to PSPs and PIPs, as well as to regulators. They can also provide feedback to policymakers if the enabling environment is not entirely conducive to the growth of commerce.

Consumer associations are typically advocacy groups that seek to protect members or in general citizens from various abuses. Common examples include predatory lending or high transaction fees, among many others. They can also play a strong role in advocacy for adoption of products and services through educational efforts and outreach.

In a NPS-like structure, both types of associations can play a strong role in promoting the use of DFS among stakeholders. Areas of coverage can include:

• Promote best practices through technical assistance, case studies, and toolkits.

• Facilitate public-private dialogue by uniting the stakeholders around common issues and policy proposals.

• Provide program models such as the National Business Agenda to assist business/consumer associations in creating grassroots-driven campaigns that promote adoption of DFS.

• Educate businesses and policymakers on the importance of participatory policymaking.

7 Conclusions

Central banks are a key driving force in any NPS reform effort as they perform multiple functions in the payments arena: from operator, to catalyst, to regulator and overseer.

However, central banks cannot (and should not) act alone in this space. Involvement of other regulators and a broad range of private sector stakeholders is not only highly desirable but of paramount importance, especially in the case of retail payments reforms as these touch the lives of vast sectors of the population, as well as all types of businesses.

Recent reforms to retail payments in many countries have been focusing on advancing financial inclusion objectives and increasing the overall efficiency of payments. In this regard, some of the key intermediate objectives have included the development of DFS, the expansion of the networks of service delivery/customer access points and achieving greater levels of interoperability for the various payment products and services. These intermediate objectives would generally imply major reforms to the NPS, and any such reforms will most likely affect the interests, business and operations of multiple stakeholders. Hence, it is imperative that mechanisms to exert leadership, to conciliate interests and establish a reasonable level of consensus, and to coordinate actions be developed and that they function in an effective manner.

A National Payments Council (NPC) has been one of the traditional mechanisms to promote and enhance cooperation and collaboration across payment system stakeholders. There are many good examples in which NPCs have been particularly useful to facilitate consensus. To this end, it is crucial to ensure that all interests involved in payments activities are fairly represented, both across different categories of stakeholders (e.g. banks and non-bank PSPs) and within each category (e.g. large and/or traditional players vs. small and/or new players).

In some countries, consultation and coordination on payments topics and reforms are also carried out through mechanisms other than a central bank-led NPC. These mechanisms typically do not substitute a NPC, but are useful and even crucial for a number of specific purposes, like the development and enforcement of technical standards.

In summary, evidence from numerous payment system reform efforts around the world shows that the active involvement of the relevant stakeholders from the public sector and the private sector is required in order for those reforms to be implemented successfully, meaning that the solutions implemented are useful and are therefore widely used, and that implementation is achieved in a reasonable timeframe and in a cost-efficient manner.

Annex 1: The World Bank’s Guidelines for Developing a Comprehensive Strategy for Reforming Retail Payments

The World Bank Payment Systems Development Group (PSDG) has developed a strategy for reforming retail payments systems, which contains a number of recommendations for the modernization of the RPS. The framework builds on the following set of public policy objectives:

• Ensure the overall safety and efficiency of the national payment system

• Promote affordability and ease of access to payment services;

• Promote development of efficient infrastructure to support development of payment instruments and mechanisms to meet retail payment needs; and,

• Promote socially optimal usage of payment instruments.

To achieve these public policy objectives, the World Bank has formulated the following guidelines:

Guideline I: The market for retail payments should be transparent, have adequate protection of payers and payees interests, and be cost-effective.

Guideline II: Retail payments require reliable underlying financial, communications, and other types of infrastructure; these infrastructures should be put in place to increase the efficiency of retail payments. These infrastructures include an inter-bank electronic funds transfer system, an inter-bank card payment platform, credit reporting platforms, data sharing platforms, large value inter-bank gross settlement systems, availability of robust communications infrastructure, and also a national identification infrastructure.

Guideline III: Retail payments should be supported by a sound, predictable, non-discriminatory, and proportionate legal and regulatory framework.

Guideline IV: Competitive market conditions should be fostered in the retail payments industry, with an appropriate balance between co-operation and competition to foster, among other things, the proper level of interoperability in the retail payment infrastructure.

Guideline V: Retail payments should be supported by appropriate governance and risk management practices.

Guideline VI: Public authorities should exercise effective oversight over the retail payments market and consider proactive interventions where appropriate.

Bibliography

[1] CPMI and The World Bank Group (2016), “Payment aspects of financial inclusion”, Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d144.htm

[2] The World Bank (2011), “Payment Systems Worldwide: A Snapshot. Outcomes of the Global Payment Systems Survey 2010”, Financial Infrastructure Series, Payment Systems Policy and Research, Washington DC.

[3] The World Bank (2012a), “Reference Framework for Financial Inclusion Strategies”, Washington DC.

[4] The World Bank (2012b), “Developing a comprehensive national retail payments strategy”, Financial Infrastructure Series, Payment Systems Policy and Research, Washington DC, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2015/05/13/090224b082e7a891/2_0/Rendered/PDF/Developing0a0c0il0payments0strategy.pdf

[5] World Bank Group (2014), “National Financial Inclusion Coordination Structures: Country Examples”, Washington DC.

[1] This section draws largely on World Bank (2012b).

[2] The World Bank has developed “Guidelines for Developing a Comprehensive Strategy for Reforming Retail Payments”. These are described in Annex 1.

[3] Interoperability of payment instruments and services entails interoperability of access points/delivery channels.

[4] DFS go beyond payment services to also include other financial services like credit or insurance.

[5] Many social security institutions directly collect contributions and disburse benefits like pensions and others.

[6] The complete list of standards is available at http://www.iso.org/iso/home/store/catalogue_tc/catalogue_tc_browse.htm?commid=49650&published=on&includesc=true

[7] There are currently 325 message standards (available on www.ISO20022.org).

[8] There are eight Code of Conduct Principles aimed at promoting mobile money providers’ adoption of consistent risk mitigation practices in critical areas of their business. These address: i) protection of customer funds, ii) mitigation of risk of money laundering and the financing of terrorism, iii) reliability and trustworthiness of mobile money, iv) reliability of the channel and service performance, v) security of the network and channel, and vi) fair treatment of customers, including disclosure regimes, customer complaint redress procedures, and protection of customer data.

[9] Self-assessment modules have been developed. These leverage on internationally recognized technical and regulatory standards and best practices.

[10] The CPMI and the World Bank Group clearly specify that none of these aspects is actually new. What is new is the attempt to bring it all together in the context of low-value, potentially high-volume retail payment services offered by old and new types of PSPs through traditional and innovative approaches.

[11] For example, in some countries, a body that resembles a NPC has been created not as an advisory/consultative body but as a company with operational functions (e.g. definition and implementation of standards).

[12] The specific names of the various levels tend to vary across countries. Yet, they tend to perform similar roles.

[13] Many NPCs also include institutions that are relevant for securities clearing and settlement, such as the stock exchange, the central securities depository(s), and securities brokers-dealers.

[14] In this last regard, according to World Bank experience having industry associations in the NPC only (i.e. without direct representation of individual market players is often ineffective). Individual market players generally do not want to delegate relevant decisions to their associations, and/or associations may not always be fully representative of the interests of all their members.

[15] Large-value payment and other settlement systems have users’ groups. At the national level, representatives of the industry and users convey their inputs through their national central bank. At the European level, strategic issues are addressed in the Contact Group on Euro Payments Strategy, a forum in which the senior management of commercial and central banks is represented. Joint meetings of the Eurosystem Working Group on TARGET2 (WGT2) and the TARGET Working Group (TWG), which comprises representatives of the European banking industry, take place regularly. These pan-European meetings deal primarily with the management of new system releases.

[16] This new high-level entity replaces the SEPA Council.

[17] Nevertheless, in many cases discussions on interoperability are later on embraced by the NPC (or its equivalent) at the technical level through one of its working groups, or at the political level, or quite often at both levels.

II Payment System Oversight and Interoperability

About this report

The author of this Technical Report is Biagio Bossone, International Financial Consultant. Contributions were received from the members of the FG DFS Interoperability Working Group, and, in specific, from Daniel Gersten Reiss, Lara Gidvani, Yury Grin, Realeboha Lekhanya, and Thomas Lammer. The Technical Report was reviewed by the ITU Focus Group Digital Financial Services. Thomas Lammer provided the overall guidance for this project.

If you would like to provide any additional information, please contact Vijay Mauree at tsbfgdfs@itu.int

Executive Summary

Payment systems have become a vital component of the economic life of contemporary societies. The smooth functioning of payment systems is essential to the overall efficiency and stability of the market systems of which they are core parts. To ensure such smooth functioning, and to facilitate the development of sound payment system infrastructures and services, central banks worldwide have been entrusted with the responsibility to oversee national payment systems. Payment system oversight is essentially about controlling risks in payment systems and promoting payment infrastructure and service development.

As part of their oversight responsibilities, central banks have recently placed increasing emphasis on retail payment systems. Developing efficient and safe retail payment infrastructures has become a key strategic objective of payment system oversight. Critical in this context is the interoperability of payment systems, which allows two or more proprietary payment platforms to interact seamlessly, enabling users to make electronic payment transactions with any other user in a convenient, affordable, fast, and secure way.

Interoperability represents both an important feature of payment system efficiency and, at the same time, an important source of risk. For this reason, pursuing it requires public authorities to adopt suitable oversight provisions, and system operators and payment service providers to implement adequate standards covering legal, organizational, technical, procedural, and business practices.

This report focuses on payment system oversight and the interoperability of payment systems as an increasingly emerging feature of retail payments. The report describes the foundations of payment system oversight and considers how oversight policy should apply to interoperability in retail payment systems. Building on existing international standards for financial market infrastructures, the report elaborates policy principles for public authorities, payment system operators, and payment service providers to ensure that the risks associated with interoperability are managed effectively. Important in this context is the cooperation between relevant authorities, both domestically and internationally, and their effort to cooperate effectively not just in normal circumstances, but, especially, during crisis situations.

The scope of the principles provided in this report extends to several aspects of payment system oversight and interoperability. Besides an opening principle covering the general area of risk identification, monitoring, and management, the other principles are specifically designed to address legal, operational, and financial aspects of interoperability, as well as issues relating to their governance, access, efficiency, and effectiveness. The principles build on international best practices. They assume that the responsibility for managing the risks associated with interoperability lies first and foremost with the operators of and the participants in interoperable systems. The oversight authorities should consider implementing these principles.

This report is not intended to be a regulatory document. Its main aim is to provide policy advice, recommendations, and indications to country authorities, payment system operators and service providers. A companion report on “Payment System Interoperability and Oversight: The International Dimension” elaborates complementary principles for the oversight of interoperability between internationally linked or shared payment system infrastructures.

Purpose of this report

1. Payment systems have become a vital component of the economic life of contemporary societies. They consist of increasingly complex and integrated networks of institutions and people involved in the execution of fund transfers across economies (see Box 1). The smooth functioning of payment systems is essential to the overall efficiency and stability of the market systems of which they are core parts. To ensure such smooth functioning, and to facilitate the development of sound payment system infrastructures, central banks worldwide have been entrusted with the responsibility to oversee national payment infrastructures. To this purpose, and considering the growing interconnectedness and mutual interdependence of payment system and other financial market infrastructures, including across national borders, central banks have developed specific oversight policy frameworks and activities.

2. While for many years central banks have mainly focused their attention on large-value fund transfer infrastructures, more recently, they have placed increasing emphasis on retail payment systems. As the evolution of information and communication technology has dramatically changed the means and channels of transferring money across the economy, a strong interest on retail payments has emerged in a growing number of countries, recognizing their importance in facilitating commerce and improving both the efficiency of day-to-day transactions among consumers and businesses, as well as the distribution and collection of payments made by and to government agencies. Research has shown that switching from traditional paper-based to modern (digital) payment instruments can entail yearly savings to a country’s economy in the order of one percentage point of GDP or more.[1]

As a result, developing efficient and safe retail payment infrastructures has become a key strategic objective of payment system oversight in many jurisdictions. Retail payments are typically the entry point to broader financial services, and their potential weaknesses regarding security and reliability may impact the financial system and the broader economy in general, in particular by affecting the confidence of users. Innovations in retail payments raise relevant oversight policy issues for central banks. It is paramount that the integrity of the design and operation of retail payment systems is protected, so that users can trust payment service providers (PSPs), the payment mechanisms themselves, and the central bank as the institution responsible for overseeing them.

Box 1. Payment systems and payment system infrastructures

A payment system is a set of instruments, procedures, and rules for the transfer of funds between or among participants; the system includes the participants and the entity operating the arrangement. Payment systems are typically based on an agreement between or among participants and the operator of the arrangement, and the transfer of funds is effected using an agreed-upon operational infrastructure. Payment systems are generally categorized as either large-value payment systems (LVPSs) or as retail payment systems (RPSs). A LVPS is a funds transfer system that typically handles large-value and high-priority payments. On the other hand, a RPS is a funds transfer system that handles a large volume of relatively low-value payments in such forms as cheques, credit transfers, direct debits, cards, mobile, and Internet. LVPSs and RPSs may be operated either by the private sector or the public sector, using multilateral deferred net settlement or real-time gross settlement (RTGS) mechanisms. Often, LVPSs are operated by central banks. An increasing number of countries are introducing real-time retail payments systems (RT-RPS), which provide irrevocability, support real-time posting and re-use of funds, as well as immediate payment confirmation to both the payer and the payee.

Payment system infrastructures (comprised of institutions, instruments, rules, procedures, standards, and technical means and platforms) enable the execution of the transfer of monetary value between parties discharging mutual obligations. They include payment systems as defined above, payment technologies and schemes, and all arrangements that facilitate the execution, clearing, settlement, and recording of monetary and other financial transactions, such as payments, funds transfers, securities, and derivatives contracts (including for commodities).

3. Critical to the development and diffusion of modern (digital) retail payment services is the interoperability of payment systems. Generally understood as the property of products or systems to work with other products or systems without friction, when referred to retail payments, interoperability enables users to make electronic payment transactions with any other user in a convenient, affordable, fast, seamless, and secure way, possibly via a single transaction account.[2] Thus, interoperable payment systems allow two or more proprietary platforms to interact seamlessly, enabling the exchange of payment transactions between and among PSPs and, consequently, users.[3] By its very nature, interoperability represents both an important feature of payment system efficiency and, at the same time, a critical source of risks. For this reason, pursuing it requires public authorities to adopt suitable oversight provisions, and system operators and PSPs to implement adequate oversight standards covering legal, organizational, technical, procedural, and business practices.

4. This report focuses on payment system oversight and the interoperability of payment systems as an increasingly emerging feature of retail payments. The report describes the foundations of payment system oversight, and considers how oversight policy should apply to interoperability in retail payment systems (RPSs). This report is not intended to be a regulatory document, as its main aim is to provide policy advice, recommendations and indications to country authorities, payment system operators, and PSPs. The word "should" used in the principles reflects this general intention and should therefore not be misunderstood as imposing rules or requirements.

5. The report is organized as follows: Section II illustrates the role and responsibilities of the oversight of payment systems, and explains the objectives, scope, and instruments of central bank oversight policy. Section III takes on the relevance of payment system interoperability in the context of RPSs development. Based on the premise that establishing interoperability and making sure its associated risks are managed effectively is a key objective of payment system oversight policy, this section proposes a set of oversight recommendations for interoperability in RPSs.

6. A companion report will deal with interoperability and oversight from an international perspective. The report will discuss payment system interoperability and central bank oversight policy in the context of international economic and financial integration.

The Oversight of Payment Systems

A. The critical role of payment systems in contemporary economies

7. To the extent that expanding production and exchange in a market economy requires an increasing interconnection of various, and usually anonymous, decisional units, economic development rests crucially on infrastructures that make those interconnections efficient and reliable. In contexts where many decisions are taken by multitudes of heterogeneous agents, a set of efficient and reliable infrastructures, governed by clear and enforceable rules, is necessary to ensure that transactions are carried out within the terms and conditions agreed to by their originating counterparts. Interconnecting the elements of the infrastructures becomes more essential as modern communication and information technologies make markets independent of specific physical locations. Especially where exchange involves agent commitments to future obligations – as is typically the case with financial contracts – elements of infrastructures, such as the legal system and contract enforcement mechanisms, must be in place to provide trading counterparts with sufficient reassurance that commitments are fulfilled in accordance with their agreed upon terms and conditions.

8. Payment system infrastructures determine the efficiency, safety, and effectiveness with which transaction money is used in the economy, and the risks associated with its use. They contribute fundamentally to the general economic welfare of the society, by underpinning the public’s confidence in money, and by allowing its use, production, investment, commerce, and finance. Efficient, safe, and effective payment systems reduce the cost of exchanging goods and services, and are indispensable to the functioning of the interbank, credit, securities, and capital markets, as well as to the implementation of efficient monetary policy. Weak payment systems, on the other hand, may severely affect the stability and developmental capacity of an economy; its failures can result in inefficient use of financial resources, inequitable risk sharing across the agents, ineffective transmission of monetary policy impulses across the economy, actual losses for participants, and loss of confidence in the financial system and of public trust in the very use of money.

9. Payment systems are designed specifically to transfer monetary assets in order to complete transactions originating in all segments of the financial system, as well as in the markets for goods and services. They are highly organized structures, typically involving high degrees of interconnection between different technical infrastructures and among large numbers of entities and individuals.

10. In recent years, many countries have embarked on programs to reform and modernize their payment systems. Policy makers are thus faced with the formidable task of how best to design a country’s payment system within fast-changing technological and institutional environments, e.g. the increasing importance of non-banks in the payment system and the emergence of new technologies, like virtual currencies and distributed ledger technology. These tasks become increasingly complex as competition and innovation constantly push to the limit the search for better combinations of efficiency, safety, reliability, operational continuity, and system integrity in the provision of payment services to larger numbers of users and institutions.

B. Payment systems need oversight

What is oversight?

11. Because of the central role of payment systems just discussed, failures to transfer liquidity may affect the performance of every sector of the economy. Moreover, because all segments of the economic and financial system link to the payment system, in order to complete the money transfer leg of all the transactions they originate, major failures in one part of the system to complete the money leg of the effected transactions can feed through the payment system – along connectivity channels, interoperable payment platforms, interrelated institutions, and interlinked financial contracts – and disrupt liquidity transfer within the overall economy.

Box 2. Risk implications of interdependencies

The development of interdependencies has several implications for the safety of payment infrastructures. Interdependencies raise the potential for disruptions to spread widely and quickly across the financial system in at least three ways:

First, they can propagate disruptions sequentially from one system to another. This potential effect arises when the smooth functioning of one or more systems is conditional on that of another system. For example, in the case that a LVPS participant experiences an operational disruption or liquidity shortfall, it may be unable to transfer funds to its counterparties. As a result, other LVPS participants may have lower balances than expected. This shortage of funds could prevent these institutions from receiving incoming securities transfers in a linked central securities depository (CSD), causing securities to fail. In this way, a disruption in the LVPS could pass to the CSD. This type of interdependency creates what might be called a “cross-system” risk between the CSD and the LVPS.

Second, interdependencies can also act to spread disruptions simultaneously to several systems. This potential effect stems from systems depending on other critical systems, large financial institutions, or key PSPs. From an international perspective, many systems are dependent on the Society for Worldwide Interbank Financial Telecommunication SWIFT network. An outage of this network could have direct and immediate implications for many systems. From a domestic perspective, many systems are critically dependent on the primary LVPS, and a disruption affecting a LVPS could impair the functioning of those other systems.

Third, in some circumstances, interdependencies may transmit disruptions beyond systems and their participants to financial markets. The functioning of markets with relatively short settlement cycles, such as the markets for uncollateralized overnight loans and repurchase agreements, might be particularly affected.

The actual impact of a given disruption will depend on many factors, and is difficult to predict. First, systems’ and institutions’ risk management procedures can help prevent the transmission of disruptions across systems. Second, interdependencies can sometimes be useful in mitigating the impact of a disruption. For example, “liquidity bridges” can allow institutions to move available liquidity resources between systems, possibly helping to manage potential liquidity disruptions, and preventing their further transmission. Third, the reaction of systems and institutions to a particular disruption may significantly influence whether and how a disruption spreads. These reactions may be very difficult for other parties to anticipate. Moreover, market conditions can influence both the initial intensity of a disruption, as well as systems’ and institutions’ reactions to it.

Source: “The Interdependencies of payment and settlement systems.” Committee on Payment and Settlement Systems,” Report of the Committee on Payment and Settlement Systems No. 84. Bank for International Settlements, Basel.

12. As institutions responsible for preserving the trust of the public in the national currencies, central banks exercise a special form of supervision of payment systems called “oversight”. The oversight of payment systems is a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where, necessary, inducing change.[4] Oversight is a public policy activity focused on the efficiency and safety of systems, as opposed to the efficiency and safety of individual participants in such systems.[5] Overseeing payment systems involves putting in place policies to ensure the smooth and efficient provision of payment services to all participants and users in the economy, to control for the risk of systemic transmitting of shocks through the economy, and to promote the development of technical infrastructures and institutional arrangements to meet the economy’s growing payment needs.

Oversight scope and powers

13. Oversight is mainly intended to cover payment infrastructures that are systemically important.[6] These include infrastructures whose failure can potentially endanger the operation of the whole economy. The scope of oversight therefore covers large-value payment systems. In an increasing number of jurisdictions, however, the oversight scope has been expanded to also cover those retail payment systems that, while not being systemically important, are nonetheless deemed to be relevant for the purpose of protecting public confidence in the currency and the monetary system of the country. To this purpose, effective oversight, today, increasingly requires central banks to extend their control to payment instruments and schemes and to individual PSPs (including banks, nonbanks, and nonfinancial institutions).

14. Effective oversight requires central banks to have the power and resources to effectively carry out their responsibilities to oversee payment systems.[7] While the primary responsibility for ensuring payment system safety and efficiency lies with system owners and operators, central banks need adequate powers and resources to administer their oversight responsibilities effectively. Today, in the majority of national jurisdictions, the law grants the central bank important powers to carry out oversight, in particular those actions to obtain timely information and to induce change or enforce corrective action, as well as to cooperate with other relevant authorities as necessary. Over recent years, central banks have increased considerably the (financial and human) resources assigned to payment system oversight functions.

Oversight objectives

15. Oversight aims to ensure that payment systems:

i. operate smoothly and efficiently for all participants and users,

ii. prove to be robust against risks,[8] in particular, the risk of transmitting shocks through the economy,

iii. pursue over time the level of technological and institutional development necessary to satisfy the payment needs of a growing, open, and internationally integrated economy, and (increasingly),

iv. support financial inclusion.

Box 3. Safety and efficiency in payment systems

The concept of efficiency generally refers to the resources required by a system to perform its functions. Applied to payment systems, efficiency entails several aspects. One is the overall effect of the payment system on the cost of exchanging goods, services, and assets (including money) in the economy: a more efficient payment system reduces that cost. Relatedly, an efficient payment system provides its users with speedy, affordable, and easy to access use of services. Another aspect of efficiency relates to the resources necessary to operate a system: by introducing specific efficiency solutions, some systems may economize on the use of (costly) liquidity to settle payments, for any given level of settlement risk. Further aspects of payment system efficiency refer to the volume of transactions the system makes possible for any given quantity of money or to the speed of the transmission across the economy of monetary policy impulses.

On the other hand, safety is about protecting systems and stakeholders from hazards. Especially as it refers to large value transfer systems, safety means containment of the financial and non-financial risks which typically arise within these systems, or are transmitted by them, and which threaten not only to impair the functioning of the systems, but to jeopardize the financial stability of the overall economy. Safety requires that systems are secure, reliable, and operate without service interruption or recover operation promptly in the event of interruption. As the scope of central bank oversight extends to retail payment systems and instruments, the concept of safety necessarily broadens and involves other aspects, as users’ expectations of payment service quality. Here safety, therefore, refers to the protection of user rights, in particular, those concerning safeguards of user own funds, data integrity and privacy, prevention of fraud and cyber-crime, information disclosure and transparency, and claim redress and dispute resolution.

16. Central banks in many jurisdictions have expanded their payment system strategic vision and, with it, the objectives and responsibilities of their oversight function.[9] In particular, as oversight extends to retail payment systems and instruments, efficiency and safety necessarily involve other aspects, since the expectations of payment service users take center stage in the definition of the criteria to assess how well the systems and instruments perform (see Box 3).

17. A number of other objectives and responsibilities have become integral to the oversight policy framework of central banks. They include:

Inclusiveness

18. Providing easily accessible and affordable payment services to the largest possible number of citizens, especially if unbanked, has become an important goal for many central banks. Since markets alone do not find it commercially convenient to provide payment services to poor communities, especially if located in remote, isolated, or sparsely populated geographical areas, central banks (as well as other financial regulatory agencies) are called upon to create the conditions to extend the availability of at least basic payment and financial services to underserved segments of the population, and to facilitate their progressive inclusion within the financial system.

Fairness

19. The central bank may want to ensure that the country’s payment systems are perceived to be fair. Fairness implies that rules are applied consistently and in a non-discriminatory way across all relevant entities, based on objective, proportional, and transparent criteria. It requires that the rights and obligations of all parties to fund transfers in the payment system are allocated in an equitable manner, that participants and users are not subjected to misleading or abusive business-to-consumer commercial practices, and that disputed matters can find appropriate resolutions. Also, fairness means that system rules are designed in ways that reflect the interest of all stakeholders in a balanced manner, and are implemented consistently across the whole jurisdiction under central bank oversight. Fairness relates to avoiding the use of discriminatory practices on access and pricing, and to adopting adequate incentives (including sanctions) to encourage good behavior and penalize wrongdoings.

Transparency

20. Transparency discourages misconduct and abuses of payment systems and allows stakeholders to be more aware of risks and make better-informed decisions. Transparency ensures that the rights and obligations of participants and users, as well as the mechanisms to enforce them, are publicly disclosed. Central banks set regulations requiring payment system operators, participants, and PSPs to disclose rules, key procedures, and market data. Regulations also require PSPs to disclose charges and maximum execution times, to inform users on how to authorize and execute transactions and revoke payment orders, and to indicate the liability in case of unauthorized use of payment instruments and the right to payment refunds.

Market competition and integrity

21. Another oversight responsibility is to make sure that the market for the provision of payment services is protected against anti-competitive and abusive behaviors. This does not necessarily imply that the central bank should conduct antitrust policy in their market for payment services. However, the central bank is in a privileged position to monitor market developments and to intervene, or collaborate, with the competent authorities, in the event of anti-competitive practices. Also, the central bank may want to be satisfied that payment system operators, participants, and PSPs do not act in ways that breach public confidence in the payment system. In this regard, in cooperation with other relevant authorities, it guards against various forms of criminal abuse of payment systems, such as fraud, breaching of data integrity, cybercrime, money laundering, and the financing of criminal and terrorist activities.

Consumer protection

22. In several jurisdictions, the central bank is given the responsibility to protect payment system users from possible malpractices and abuses. To this end, the central bank ensures that PSPs put in place facilities through which customers can lodge complaints about unsatisfactory or below-standard services, abusive or unfair commercial or financial practices, and cases of non-compliance with legal and financial obligations. The central bank also strengthens its own internal consumer protection facilities, and makes sure that effective dispute resolution mechanisms are established so that users may resort to affordable and time-efficient means to settle payment-related claims. Moreover, the central bank keeps pressure on the payments industry to deploy adequate technological and organizational resources to minimize breaches of information security and privacy.

Interoperability

23. A robust environment of interoperability in the payment system benefits all payment system stakeholders. As discussed in the second part of this report, through interoperability among payment system infrastructures, payment system users (including consumers, merchants, governments, and other types of enterprises) find it easier to make and accept payments. Payment system interoperability can also improve efficiency by reducing cost and increasing safety by enabling better risk management. The role of the central bank as a catalyst can be crucial, especially where interoperability of multi-party systems does not happen on its own, where independent efforts may end up in processes or technologies that are not compatible, or where market competitors oppose interoperability and support proprietary solutions instead.

Oversight instruments

24. Payment system oversight is essentially about controlling risks in payment systems and promoting payment infrastructure and service development. Oversight instruments, therefore, should enable the overseer to be satisfied that critical payment system infrastructures have robust processes in place for identifying, prioritizing, sourcing, monitoring, and managing risks, and that these processes are improved continuously in a fast-changing business environment. Also, the use of oversight instruments should be proportionate to the nature, scale, and complexity of the risks inherent in the business of payment service provision, and the intensity and consequences of their use should be commensurate with the objectives of oversight. Finally, the oversight authorities need instruments to promote the modernization of payment system infrastructures and to foster the development of the market for the provision of payment services.

25. The oversight policy framework typically includes the following instruments:

Licensing & identification

26. The central bank should have the power to license any entity that intends to operate a payment system or to provide payment services after submission of appropriate documents and information, as prescribed by regulation. Licensing should be granted based on the fulfillment by the applicants of the regulatory requirements. The objective of licensing is to bring payment system operators and PSPs within the regulatory jurisdiction of the central bank. Prior to issuing a license, the central bank should be satisfied that the operator or PSP is capable of managing effectively the risks associated to their activity. The central bank should require information and documentation, which allows it to decide whether that system may be operated or the service provided in such a manner as not to pose excessive risks.

27. Through identification, the central bank recognizes the systems that will be subjected to its oversight. The central bank should identify systems that it deems to be systemically important and those it considers to be critical for public confidence. The level of criticality of a payment system should be determined based on a set of objective and transparent criteria. Identified systems should be assessed against selected oversight standards.

Monitoring, analysis & compliance

28. The central bank monitors payment system functioning on a continuous basis. It controls system operation through access to real-time systems and through regular information and data collection. The central bank analyzes payment system incidents and risks, and identifies weaknesses and needs for improvement or change. The central bank assesses the performance of payment systems, and, in particular, their robustness against risks. The central bank assesses the compliance of systems and providers with given rules and standards.

Rules & standards

29. The central bank issues regulations and adopts standards to induce payment system operators and PSPs to operate safely and efficiently. Regulations should be based on functions rather than institutions, and should be proportional to the risk profile of the regulated entities. Regulations should set rules, inter alia, for licensing PSPs, the operation of systems and the provision of services, the issuance of payment instruments, the use agents, the outsourcing of services, and the protection of user rights. In cases of non-compliance with existing laws and regulations, the central bank should administer appropriate sanctions. Regulations should support competition and a level playing field for participants. To induce payment system operators and PSPs to have robust procedures in place to handle risks effectively, the central bank should promote the adoption of best practices in line with internationally accepted principles and oversight standards.

Box 4. Licensing and overseeing PSPs

The issue of licensing PSPs is becoming especially important as the number of non-financial entities offering payment or payment-related services is growing rapidly in an increasing number of jurisdictions, as in the case of business for the provision of mobile and Internet payment services. Identifying the “right” criteria for licensing and overseeing these entities requires a careful balancing act in that the oversight authority should want to ensure the payment system against the risks these entities bring into the systems while being able to avoid subjecting them to disproportionate regulatory requirements that might jeopardize their innovation capacity or put them at a competitive disadvantage vis-à-vis the financial PSPs.

Licensing requirements may include, inter alia, the following information to be provided by the applicant entity to the satisfaction of the oversight authority:

• A program of operations, setting out the type of payment services to be provided.

• A business plan, which should include an initial budget showing the resources available to the applicant, how it would employ them, and indications of business sustainability.

• Evidence of adequate capital: adequacy may vary in relation to the type of payment services to be provided, with higher capital required for services implying the operation of payment accounts or the issuance/acquiring of payment instruments, and smaller capital required for the provision of remittances or transactions that do not imply operation of payment accounts.

• Evidence of adequate own funds (in addition to capital): adequacy may be defined, alternatively, as a share of fixed overhead costs, as an increasing share of the payments volume, or as an increasing share of net income, adjusted for a factor that changes in relation to the type of services provided.

• Measures to safeguard payment service users’ funds.

• A description of the applicant’s governance arrangements and internal control mechanisms (including administrative, risk management, and accounting procedures).

• A description of the applicant’s organizational structure, including, where applicable, a description of the intended use of agents and branches and a description of outsourcing arrangements, and of participation in a national or international payment system.

• A description of the applicant’s technology solutions underpinning its operation and supply of services, and the arrangements adopted to ensure operational continuity under critical events.

• A description of the applicant’s audit arrangements and measures to protect the interests of users and to ensure continuity and reliability in the performance of payment services.

• The identity of persons holding qualifying holdings in the applicant, the size of their holdings, and evidence of their suitability against the PSS oversight objectives.

• The identity of directors and managers, and indications of their suitability for the job.

• The applicant’s legal status of association, and head office address.

Policy, research & development (R&D)

30. The central bank should promote R&D activities on payment system issues. These activities might range across several areas, from operational to legal, institutional, technological, and developmental areas. R&D should study payment system and payment services developments, providing essential inputs to payment system modernization strategy making, as well as methodological inputs to payment system stress testing and risk analysis.

Policy dialogue

31. The central bank should promote an active policy dialogue with all payment system stakeholders, including users. The dialogue should secure a fair representation of all relevant public and private interests involved in payment activities, and should offer a channel for the central bank to communicate its policy orientation and collect stakeholder views. The central bank should undertake consultations with payment system stakeholders on policy issues and options to mobilize knowledge, raise awareness, and build consensus around policy decisions. Thus, where practicable, the central bank and payment system stakeholders should agree on solutions to be adopted.

Inducing change

32. However, oversight should be conducted in the shadow of the powers granted by the law. Therefore, oversight powers should be used where necessary to effect change. In cases where stakeholders fail to act in ways that are consistent with the interests of the payment systems and the collectivity in general, the central bank, in full respect of its legal powers, should exercise the authority to impose the actions it deems necessary.

Payment System Interoperability

A. Relevance of interoperability

33. Interoperability of payment systems is important because of its effect on consumers, businesses, and the economy in general. In advanced markets and where scale has been achieved, interoperability helps businesses to manage costs, increase efficiency through shared infrastructures, and expand transaction volumes. Customers benefit from network effects and lower transaction costs. Governments believe that interoperability may greatly facilitate financial inclusion and reduce the costs associated with traditional cash and paper-based payment instruments.

34. Interoperability can help to achieve a number of strategic payment system objectives. It can enable cost-efficient payments to and from the unbanked population. Distributing physical cash to the unbanked (e.g., through salary payments or government welfare programs) remains expensive and insecure. Governments, businesses, and other large bulk payers should be able to use electronic payments (e.g. e-money, including mobile money) as a cost-efficient and reliable payment channel to reach this population. Industry collaboration, including interoperability, can facilitate these large bulk payments more efficiently. Interoperability also facilitates the use of these electronically received funds from customers without easy access to a physical bank branch. Second, interoperability may facilitate the replacement of cash with electronic means of payment in day-to-day transactions. The current use of e-money is still dominated by a money transfer followed by cash-out. By providing tailored solutions for retailers, and establishing interoperability with existing and future retail payment infrastructures, operators can expand the use of e-money. This would reduce cash conversions, provide convenience for customers, lower costs for operators, and increase the relevance of e-money. However, introducing interoperability alone (be it on a voluntary basis or by regulation), does not ensure that a market can reap all potential benefits – the timing and certain other environmental factors (e.g. the market share of individual providers) seem to be important factors when it comes to the success of interoperability – some of these aspects are discussed in other deliverables of the working group. The CPMI-WBG Payment Aspects of Financial Inclusion Report addresses the basic foundations and catalytic pillars for the universal access to and usage of transaction accounts comprehensively, to which interoperability can contribute.

In the context of electronic payments, the taxonomy of interoperability is extensive and several different types of interoperability have been defined in the existing literature.

• Platform-level interoperability: Permits customers of one PSP to send money to customers of another PSP.

• Agent-level interoperability: Permits agents of one service to serve customers of another service.

• Customer-level interoperability: Permits customers to access their account through any subscriber identity module (SIM) card.

These forms of interoperability entail e-money services in one market interworking with each other. It is also possible for e-money operators to interwork with other platforms outside their country and industry. Such forms of interoperability include:

• E-money interconnection: two PSPs, each offering two commercially and technically independent e-money services, interconnect their respective technical platforms to enable a customer affiliated with one service to send money from his or her e-money wallet to the e-money wallet of a customer affiliated with another service.

Box 5. Terminology

• Interconnection with financial institutions: one PSP, operating its own commercially and technically independent e-money service, interconnects its technical platform with the technical platform of a traditional financial PSP to enable interaction between the two platforms (i.e., a customer sending money from a mobile account to a bank account).

• Interconnection with other payment networks: one PSP, operating its own commercially and technically independent e-money service, interconnects with a separate payment system (i.e., connecting with the Visa or MasterCard payment networks).

Other definitions of interoperability include the following:

• Scheme interoperability: a feature of payment schemes, which consumers and businesses access through their relationships with their banks or other PSPs. Payment schemes are sets of rules and technical standards for the execution of payment transactions that must be followed by adhering PSPs. Banks or other PSPs join a scheme and agree to be bound by the rules set by the scheme. Payments flow from an end user that is the customer of one bank to an end user that is a customer of another bank; both banks are “in the scheme”. Cheques, Electronic Funds Transfer schemes, as well as open-loop debit and credit card schemes are examples of this type of interoperability.

• Network interoperability: when one payment scheme negotiates an exchange agreement with another scheme. This is typically the case of cross-border or cross-regional payments acceptance arrangements, which allow the holder of a domestic credit card to use that card in another country. Network interoperability is rarely used when bank network members compete for business within a single market, since network interoperability would facilitate out-of-network banks competing for business with local banks.

• Parallel system interoperability allows the merchant or agent accepting payment from a consumer to participate in multiple schemes. A commercial PSP acts as an intermediary between the various schemes and the merchant. Although the merchant is technically separately accepting payments in the various schemes, doing so achieves some of the effects of interoperability. In many markets around the world, for example, merchants accept multiple card brands (Visa, MasterCard, American Express, etc.). These brands do not interoperate, but the experience for the merchant is essentially the same.

Source: Davidson N. and P. Leishman, “The case for interoperability: Assessing the value that the interconnection of mobile money services would create for customers and operators,” GSMA, Annual Report 2012, pp.13-24; “Interoperability in Electronic Payments: Lessons and Opportunities,” CGAP, 2012.

B. Interoperability and oversight policy

35. An interoperable payment system and the effective management of risks associated with interoperability should be a key objective of payment system oversight. It is important to have a clear understanding of how and to what extent current international oversight standards provide for effective means to promote safe and efficient interoperability. It will then be possible to consider ways to strengthen the oversight policy framework, including identifying expectations specifically tailored for interoperability, against which payment system operators and PSPs should be held accountable.

Interoperability and international standards

36. Interoperability is addressed by the Principles of financial market infrastructures (PFMIs).[10] As one of the different forms of interdependencies among financial market infrastructures (FMIs), interoperability is addressed in the PFMIs report under various principles. Principle 20 explicitly addresses FMIs links and their risk management by requiring that a FMI that establishes a link with one or more FMIs should identify, monitor, and manage link-related risks. In addition, interdependencies are covered in: (a) Principle 2 on governance, which states that FMIs should consider the interests of the broader markets; (b) Principle 3 on the framework for the comprehensive management of risks, which states that FMIs should consider the relevant risks that they bear from and pose to other entities; (c) Principle 17 on operational risk, which states that a FMI should identify, monitor, and manage the risks that other FMIs pose to its operations and the risks its operations pose to other FMIs; (d) Principle 18 on access and participation requirements, which states that FMIs should provide fair and open access, including to other FMIs; (e) Principle 21 on efficiency and effectiveness, which states that FMIs should be designed to meet the needs of their participants; and (f) Principle 22 on communication procedures and standards, which states that FMIs should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards. The combination of these principles should achieve a strong and balanced approach to interoperability.

Establishing RPS-specific principles for interoperability

37. While the PFMIs address interoperability in several contexts, it should be recognized that they have not been designed specifically to cover the risks associated with interoperability in RPS. In Europe, policy guidelines have been produced for interoperability between EU central counterparties,[11] while the European Central Bank (ECB) has formulated oversight expectations for overseeing links that connect retail payment systems – an area that only broadly relates with interoperability.[12] In fact, no institution or jurisdiction has so far considered setting up oversight criteria especially conceived for interoperability in RPSs.

38. It is therefore advisable to define a consistent set of oversight principles for managing the risks that may arise in connection with interoperability in RPS. The principles elaborated below cover risks associated with the legal, financial, and operational aspects of interoperability, as well as issues relating to their governance, access, efficiency, and effectiveness. The principles build on international best practices.[13] They are based on the principle that the responsibility for managing the risks associated with interoperability lies first and foremost with the RPSs and each retail payment entity (RPE) operating and/or participating in interoperable systems. The oversight authorities should be responsible for making sure that such recommendations are fulfilled.

39. Importantly, any sound oversight framework for managing risks relating to interoperability in RPSs will require strong cooperation between relevant authorities. As interoperability of RPS involves several related dimensions (including legal, financial, operational, technical, procedural, and business aspects), different institutions bearing oversight, supervisory, and regulatory responsibilities – not just in the financial area – may need to be involved (on a regular or an ad hoc basis) to make sure that interoperability is established and sustained in a way that is consistent with overall payment system efficiency and safety.[14]14 Authorities should cooperate with each other, both domestically and internationally, as needed, with a view to fostering efficient and effective communication and consultation in order to support each other in fulfilling their respective mandates. Cooperation needs to be effective in normal circumstances and should be adequately flexible to facilitate communication, consultation, or coordination, as appropriate, especially during crisis situations. Issues of cooperation between different country authorities will be discussed in the companion report on payment system interoperability and central bank oversight policy in an international context.

C. Oversight principles for interoperability in RPS

40. The principles discussed in this section are intended for a broad audience. They are meant to provide policy indications on interoperability to payment system oversight authorities and to supervisory and regulatory institutions that cooperate with the oversight authorities. They are also addressed to operators of interoperable systems, payments scheme administrators, and retail payment entities as defined below. It must be noted that while it would be the responsibility of the oversight authorities to adopt the principles and include them as part of the internationally recognized standards for interoperable payment infrastructures, it would be the responsibility of system operators and payment scheme administrators to design rules that are consistent with the principles, administer the rules, and ensure, rules compliance from participants. The oversight authorities would assess the infrastructures against the principles and hold system operators and scheme administrators accountable for the implementation of the principles. The active involvement of system operators and scheme administrators in the implementation of the principles may help central banks to better accomplish the oversight objectives while reducing their handling of system administration. The companion report on “Payment System Interoperability and Oversight: The International Dimension” elaborates complementary principles for the oversight of interoperability between internationally linked or shared payment system infrastructures.

Definitions

41. In this section, the following definitions are used:

• Retail payment entity (RPE): a payment service provider (PSP) offering payment services to users or a payment infrastructure provider (PIP) supplying infrastructure services to PSPs. PSPs include deposit-taking institutions, credit institutions, and other authorized service providers like postal offices, money transfer organizations or e-money institutions. PIPs include providers of automated clearing houses, automated cheque processing, payment switches, and settlement systems.

• Interoperability agreement: an arrangement among retail payment systems (RPSs) and retail payment entities (RPEs) to facilitate the delivery of interoperable payment services to users, consisting of a combination of: i) technical, legal, commercial and contractual agreements among participating institutions, ii) shared telecommunication links and common standards for the exchange of transaction data between access and acceptance devices of RPEs, and iii) a central coordinating structure to manage the clearing and settlement of transactions as well as related business aspects such as rules, procedures, fees, sanctions, etc.

• Interoperable systems: retail payment systems (RPSs) that are linked by an interoperability agreement.

GENERAL

Principle 1: RPEs that establish an interoperability agreement should identify, monitor, and manage its related risks.

Key issues:

1.1 RPEs should identify and assess all potential sources of risk arising from an agreement before entering into it and continue to assess on an ongoing basis once the agreement is established.

1.2 RPEs participating in an interoperability agreement should be able to meet all of their related obligations to the other participating RPEs in a timely manner.

1.3 RPEs that participate in an interoperability agreement should ensure that the risks generated in one system do not spill over and affect other systems.

1.4 Interoperability should not affect the ability of each RPE to continue to observe all applicable oversight principles to which it is subjected.

42. Prior to entering into an interoperability agreement, RPEs should conduct an initial assessment to evaluate the sources of risks potentially arising from the agreement. The type and degree of risk varies according to the design and complexity of the agreement and depends on whether one or more jurisdictions are involved in the agreement. Interoperability should be designed in such a way that risks are adequately mitigated.

43. RPEs participating in an interoperable agreement should assess their risk management procedures to ensure that they can effectively manage the risks that may arise from the agreement. In particular, RPEs should have robust risk management procedures to manage the legal, financial, and operational risks they are exposed to through other entities, as well as those they pose to other entities. These procedures should include business continuity plans allowing for a rapid recovery and resumption of critical activities, or alternative channels for processing cross-system payments.

44. An RPE participating in an interoperability agreement should be able to meet in a timely manner all of its related obligations to the other participating RPEs. Furthermore, an RPE’s participation in an interoperability agreement should not compromise its ability to meet in a timely manner its obligations toward its own customers.

45. Furthermore, RPEs that participate in an interoperability agreement should ensure that the risks generated in one system do not spill over and affect the soundness of the other systems. Mitigation of such spillover effects may require the use of strong risk management controls. Particular attention should be placed on the links connecting the systems by virtue of the agreement and the risks that could be transmitted through such links.

Principle 2: A RPS that uses a RPE to achieve interoperability should measure, monitor and manage the additional risks arising from the use of the RPE.

2.1 Before establishing an interoperability agreement, the RPS should analyse all the risks related to the RPE selected to achieve interoperability.

2.2 The RPS should measure, monitor, and manage the additional risks (including legal, financial, and operational) arising from the use of the RPE.

2.3 The RPS should ensure that the RPE does not unduly restrict usage of the link by any participant.

46. An RPS could use an RPE to achieve interoperability. This could be, for example, a switch platform or a PSP such as a financial intermediary or a network operator. The RPS should measure, monitor, and manage the risks related to the RPE on an ongoing basis and provide evidence to the oversight authority that adequate measures have been implemented to limit and monitor these risks.

47. The management of risks should be commensurate to the number of parties involved in the interoperability agreement. In particular, if the RPE is a provider of clearing and/or settlement services and intervenes in the processing of the transactions, the number of entities through which the payment is routed increases and raises the risks involved. As a result, the risks should be assessed, monitored, and mitigated taking into consideration the higher number of entities involved in the agreement. The RPS should provide participants with the information necessary to conduct an assessment of the risks associated with the RPE.

48. The RPE should not unduly restrict any participant’s usage of interoperability. Therefore, the RPS should examine the rules and procedures set by the RPE, and undertake any necessary action in the event of any restriction or discrimination.

LEGAL RISK

Principle 3: Interoperability agreements should have a well-founded, clear, and transparent legal basis that is enforceable in all relevant jurisdictions and provide adequate protection to the participating RPEs.

Key issues:

3.1 The legal framework (laws, regulations, rules and procedures) underpinning an interoperability agreement should provide a high degree of certainty for every aspect relating to interoperability.

3.2 The rules, procedures, and contracts governing the agreement should be clear, understandable, and consistent with relevant laws and regulations. They should be readily available as appropriate for all parties with a legitimate interest.

3.3 The rules, procedures, and contracts governing the agreement should be complete, valid, and enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken under such rules and procedures will not be stayed, voided, or reversed.

3.4 The agreement should be consistent with the applicable regulatory frameworks.

3.5 In cross-border interoperable systems, risks arising from any potential conflicts of laws across jurisdictions should be identified and mitigated.

49. Payments processed via interoperable systems may be subject to higher legal risks, compared with those processed in a single system. Conflicts may arise if it is not clear which are the specific laws, regulations, rules, or procedures applicable to payments processed via interoperable systems. In exceptional circumstances (e.g., the default of a participant in one of the systems), uncertainties or conflicts could arise if the rules governing interoperability do not clearly specify the procedures to be followed.

50. Conflicts may also arise when the legal basis, in particular the contracts, do not clearly define the rights and obligations of the RPEs participating in an interoperability agreement. Conflicts can stem from differences in laws and regulations defining rights and obligations, finality, and irrevocability, and settlement finality. In order to safeguard the protection of customers’ assets, RPEs should determine appropriate liability regimes to minimize the potential loss for their customers. Legal risks should also be mitigated in case interoperability involves a settlement agent that temporarily holds the funds transferred between one RPE and another in a transitional account.

OPERATIONAL RISK

Principle 4: RPEs participating in an interoperability agreement should carefully assess the operational risks related to the interoperability.

Key issues:

4.1 The scope of information security policy of RPEs that participate in interoperable systems should cover all aspects relating to interoperability.

4.2 Operational arrangements for interoperability should be agreed to by the RPEs and communicated to all relevant parties.

4.3 RPEs should ensure that their risk management capacity is sufficiently scalable and reliable in order for them to comply with the operational requirements of interoperability both at the current and projected peak volumes of activity and to achieve the agreed service level objectives.

4.4 Interoperability should be appropriately tested and monitored, and incidents should be logged and followed up. RPEs participating in interoperable systems and all parties involved should agree on business continuity plans that preserve interoperability under even extreme adverse circumstances.

51. RPEs participating in an interoperability agreement should assess the operational risks arising from interoperability. They should identify the possible effects of interoperability on their own ability to process payments in the normal course of business, and to manage risks that stem from other participating RPEs experiencing an external operational failure. RPEs should be committed to providing reliable services, not only for the benefit of their customers, but for all entities that would be affected by their inability to effect payments.

52. Participating RPEs should agree on specific service levels. These levels should be defined in a service level agreement and include operational reliability requirements for interoperability. RPE availability should be specified as part of the agreement rules, including the strategies for dealing with RPE non-availability in a way that still provides satisfaction to customers.

53. An interoperability agreement should impose on participating RPEs, general obligations to follow and comply with. The agreements should include an obligation for RPEs to have a compliance program to ensure service continuity. The impact on customers when a RPE is non-compliant is different in batch systems and real time payment systems. In a batch system, there may be time for a remitting RPE to correct and resubmit rejected payments without customers being aware, whereas in a real-time system payment rejections impact the customer immediately. Therefore, real time systems normally require higher levels of testing to ensure continuity of service both during implementation and also when RPEs and central processors make changes post live. Participating RPEs should agree bilaterally what testing regimes they need to apply to ensure that all actors remain compliant with all agreed technical rules and standards.

54. Connectivity and security policies of RPEs should be covered by an interoperability agreement. One solution could be for full alignment between systems and security provisions and for preferred technology solutions to be agreed and specified under the agreements. As an alternative, networks and security protocols could be agreed upon bilaterally by participating RPEs. In practice, there may be a general rule whereby the sending RPE uses the connectivity solutions and complies with the security of the receiving RPE.

55. RPEs participating in an interoperability agreement need to share information. RPEs should provide an appropriate level of information to share with each other in order for each of them to perform a robust and periodic assessment of the operational risks associated with interoperability and take measures to contain these risks. Systems and communication arrangements should be reliable and secure so that interoperability does not pose a significant operational risk to the participating RPEs. Any reliance on a critical service provider by a RPE should be disclosed as appropriate to the other RPEs. In addition, in the case of a cross-border interoperability arrangement, participating RPEs should consider operational risks resulting from complexities or inefficiencies associated with differences in time zones, particularly as these differences can affect staff availability.

56. Operational malfunctioning should require cooperation. In case of operational malfunctioning, an incident is likely to be resolved more efficiently if the measures are undertaken by the participating RPEs in cooperation with each other and in accordance with pre-established, clear, and immediately available procedures, stating the division of responsibilities and contact information. It must be considered that an incident in interoperable systems could impact the processing of payments not involving interoperability, and vice versa. Thus, rules and procedures related to business continuity should be coordinated and regularly tested; contact lists should be kept updated for both normal and abnormal circumstances.

FINANCIAL RISK

Principle 5: RPEs participating in an interoperability agreement should closely monitor and effectively measure and manage the financial risks arising from the agreement.

Key issues:

5.1 RPEs should have a clear understanding of the impact interoperability has on each of the financial risks they incur.

5.2 The assets used for settling payments via interoperable systems should carry little or no credit or liquidity risk.

5.3 Payments exchanged via interoperable systems should be settled promptly, preferably on an intraday basis.

5.4 The terms and conditions of an interoperability agreement should ensure adequate arrangements for managing and containing the risks associated with the inability of one of the participating retail payment entities to promptly fulfil its obligations.

57. RPEs participating in an interoperability agreement might be exposed to additional credit and liquidity risks. Interoperability causes an exposure of one RPE and its customers to another RPE and its customers. A risk can materialize if a participating RPE defaults, causing liquidity pressures on other RPEs. This risk may increase when a netting process takes place. Also, interoperability causes an additional exposure if a participating RPE temporarily holds the funds transferred between one retail payment entity and the other in a transitional account. Moreover, interoperability may create significant credit and liquidity interdependencies between systems. Problems may arise if, for example:

• One of the systems permits provisional transfers of funds that may be subject to an unwinding procedure.

• There are differences regarding the moment of finality.

• One of the systems experiences an operational problem that could expose participants in the arrangement to losses.

58. Interoperability agreements should specify rules on payment finality. Participating RPEs should state in their rulebooks that payments are final once they are confirmed as successful to the remitting RPE. In other words, when the remitting PSP receives a positive confirmation from the beneficiary RPE via the interbank system, payment finality has been achieved and the payment may not be recalled by the payer without the consent of the beneficiary. In addition, settlement should be guaranteed to ensure there is no settlement risk and that settlement is assured in the event of the insolvency and exclusion of a RPE, particularly where settlement is based on a deferred model. The system of guarantees used will require agreement with the relevant national central bank(s).

59. Where interoperability involves more than one RPS, interoperability agreements should include rules for settlement finality. Guaranteed finality should apply to each step in the chain, i.e., where a payment flows from one RPS to another, the payment will be guaranteed in the first system before being passed to the second system.

60. There are a variety of strategies for guaranteeing settlement in interoperable systems. All such strategies require the remitting RPE in some way guaranteeing payment to the beneficiary RPE in a way that would not be affected by insolvency or RPE failure. Some of the options are as follows:

• cash prefunding (either periodic deferred net settlement or settlement in real time),

• pledging non-cash collateral to the central bank,

• bilateral guarantees between banks,

• loss-sharing agreements,

• trust lines.

61. RPEs participating in an interoperable agreement should have access to all the information necessary to conduct an assessment of credit and liquidity risks associated with interoperability.

ACCESS CRITERIA

Principle 6: Criteria for access to interoperable systems should be clear, objective, non-discriminatory, and publicly disclosed.

Key issues:

6.1 Access criteria should be justified in terms of the safety and efficiency of the system, as well as the broader financial markets.

6.2 Price setting in interoperable systems should be non-discriminatory and transparent.

6.3 Exit rules and procedures from interoperability agreements should be clearly defined and disclosed.

62. Access criteria to interoperable systems should ensure a level playing field among RPEs. Access criteria should be justified in terms of the safety and efficiency of the system, as well as the broader financial markets. From a risk mitigation perspective, the access criteria should aim to minimize legal, financial, and operational risks. A RPS should assess whether participating RPEs have the requisite operational capacity, financial resources, legal foundation, and risk-management expertise so that risks are adequately mitigated and managed. From an efficiency viewpoint, the access criteria may be based on the business case. The access criteria should have the least restrictive impact on access that circumstances permit.

63. Access criteria should be commensurate with the risks generated by interoperability and those to which participating RPEs may be exposed.

64. If access to interoperable systems is refused by system owners or operators to an applicant RPE, the reasons should be explained to the applicant in writing on the basis of the access criteria adopted.

65. When access criteria constitute terms and conditions for maintaining an interoperability agreement, they should be continuously applied. RPEs should monitor compliance with participation requirements on an ongoing basis through the receipt of timely and accurate information. If conditions for maintaining interoperability are no longer met, rules and procedures should be legally set either for the termination of the non-complaint RPEs or for dismantling an interoperability agreement, depending on the extent of the problem.

66. The pricing policies adopted by interoperable systems should be transparent and non-discriminatory.

EFFICIENCY AND EFFECTIVENESS

Principle 7: Interoperability should meet the requirements of participating RPEs and the markets they serve.

Key issues:

7.1 A RPS should have clearly defined, achievable, and (where feasible) measurable goals concerning interoperability, e.g., in the areas of minimum service levels, risk management expectations, and business priorities. An RPS should have established mechanisms for the regular review of the efficiency and effectiveness of interoperability.

7.2 Interoperability should be designed to meet the current and future needs of its participants and the markets it serves.

7.3 The establishment of interoperability should not put the balance of RPEs at risk in terms of risk management and efficiency.

67. Interoperability should be consistent with the objective to improve payment system efficiency and effectiveness. Interoperability should facilitate the clearing of payments by ensuring a single gateway to multiple systems and jurisdictions (in case of cross-border arrangements). Furthermore, the establishment of interoperability agreements should support the relevant public policies, e.g., by facilitating the exchange of payments domestically or internationally and improving the reachability of the RPS participants and their customers. The ultimate objective of interoperability should be to improve efficiency when settling payments initiated by any customer in terms of shortening the settlement time and reducing the fees for processing payments.

68. To ensure efficiency for its users, an interoperability agreement should be designed with the users’ current and future needs in mind. These may include the size of their activity (number of payments), the efficiency of the channels currently used for clearing payments, and the jurisdictions within which they exchange payments. The decision on whether to establish interoperability should be based on a cost-benefit analysis.

69. Interoperability is effective when it allows for exchanging payments reliably and in a timely manner, and when it allows to achieve the public policy goals of safety and efficiency for participants and the markets it serves. In the context of oversight, interoperability effectiveness requires meeting service and security requirements. To facilitate assessments of effectiveness, an RPS should have clearly defined goals and objectives. For example, it should set minimum service level targets (such as the time it takes to exchange a payment).

70. The efficiency and effectiveness of interoperability should be measurable. A RPS should have established mechanisms for the regular review of interoperability efficiency and effectiveness, such as periodic measurement of its progress against its goals and objectives.

71. Interoperable systems should provide users with practical services. Rules and solutions to establish interoperability should consider market practices and technology and/or accommodate internationally accepted communication procedures and standards adhered to by participating RPEs.

GOVERNANCE

Principle 8: The governance of interoperable systems should be clear and transparent, promote the safety and efficiency of interoperability, and support the objectives of relevant stakeholders and relevant public interest considerations.

Key issues:

8.1 The governing bodies of RPSs should formulate a clear strategy on the establishment of an interoperability agreement, which should be disclosed to owners, relevant authorities, RPEs, other RPSs, and users.

8.2 The governing bodies of RPEs participating in an interoperability agreement should be responsible for ensuring the efficient and safe provision of interoperable services.

8.3 A RPS should have objectives that place a high priority on the safety and efficiency of interoperability and explicitly support the public interest.

8.4 Governance should ensure whether a decision to establish interoperability appropriately reflects the objectives and interests of the relevant stakeholders and, if so, how.

8.5 A RPS involved in an arrangement should set rules for the exchange of data, sharing relevant information with relevant stakeholders, and consulting them when needed.

72. Interoperability may represent a significant strategic objective of RPS development, as it increases reachability and allows RPSs to expand their service provision. The governing bodies (board of directors, management, and staff) of interoperable systems should define a clear strategy regarding the establishment of interoperability arrangements, which should be disclosed to owners, relevant authorities, RPEs, users, and other RPSs, and should be ultimately responsible for ensuring safe and efficient interoperable services. The governing bodies of the RPS should put in place a well-defined policy framework to govern interoperability.

73. Any decision pertaining to the establishment or dismantling of an interoperability agreement should be taken in the context of an open, transparent, and inclusive decision-making process. It should be ensured that the relevant stakeholders are consulted and that their interests are addressed as much as possible. This implies that the governance of the interoperability should, at the very least, include the relevant stakeholders. The relevant stakeholders should be consulted prior to the establishment of an interoperability agreement. Also, the relevant stakeholders should be notified of any change affecting it once the agreement is established.

74. Interoperability entails relationships between several parties. The division and sharing of responsibilities for the operation of interoperability must be determined. Some decisions regarding interoperability might need to be taken collectively. Therefore, all the parties involved should preferably implement formalized mechanisms for taking decisions on, for example: (i) the alignment of business strategies; (ii) problems encountered in ensuring interoperability; (iii) user needs and claims; and (iv) changes to business and operational procedures. The sharing and division of responsibilities should be strongly supported by an efficient exchange of information. The exchange of data should be rules-based. All entities involved should agree on a regular exchange of information and periodic meetings allowing for issues of common interest to be discussed.

75. Interoperability requires managing diverse stakeholder interests and opinions. As opinions and interests among parties involved in interoperability may differ, there should be clear processes for identifying and appropriately managing the diversity of stakeholder views and any conflicts of interest between stakeholders. Without prejudice to local requirements of confidentiality and disclosure, there should be processes to clearly and promptly inform stakeholders and the wider public of the outcome of major decisions concerning interoperability.

Annex I: Payment system risk glossary

Credit risk

The risk that a counterparty will not settle an obligation for full value, either when due, or at any time thereafter. In exchange-for-value systems, the risk is generally defined to include replacement cost risk and principal risk.

Finality risk

The risk that a provisional transfer of funds or securities will be rescinded.

Financial risk

Term covering a range of risks incurred in financial transactions – both liquidity and credit risks.

Foreign exchange settlement risk

The risk that one party to a foreign exchange transaction will pay the currency it sold but not receive the currency it bought.

Fraud

Risk of financial loss for one of the parties involved in a payment transaction arising from wrongful or criminal deception. The risk that a transaction cannot be properly completed because the payee does not have a legitimate claim on the payer.

Gridlock

A situation that can arise in a funds or securities transfer system in which the failure of some transfer instructions to be executed (because the necessary funds or securities balances are unavailable) prevents a substantial number of other instructions from other participants from being executed.

General business risk

Any potential impairment of the FMI’s financial position (as a business concern) because of a decline in its revenues or an increase in its expenses, such that expenses exceed revenues and result in a loss that must be charged against capital.

Legal risk

The risk of loss due to the unexpected application of a law or regulation, because a contract cannot be enforced, or because laws or regulations do not support the rules of the securities settlement system, the performance of related settlement arrangements, or the property rights and other interests held through the settlement system. Legal risk also arises if the application of laws and regulations is unclear.

Liquidity risk

The risk that a counterparty (or participant in a settlement system) will not settle an obligation for full value when due. Liquidity risk does not imply that a counterparty or participant is insolvent since it may be able to settle the required debit obligations at some unspecified time thereafter.

Market risk

The risk of losses in on- and off-balance sheet positions arising from movements in market prices.

Operational risk

The risk that deficiencies in information systems or internal controls could result in unexpected losses. These deficiencies could be caused by human error or a breakdown of some component of the hardware, software, or communications systems that are crucial to settlement.

Pre-settlement risk (or replacement cost risk)

The risk that a counterparty to an outstanding transaction for completion at a future date will fail to perform on the contract or agreement during the life of the transaction. The resulting exposure is the cost of replacing the original transaction at current market prices and is also known as replacement cost risk.

Principal risk

The risk that the seller of a security delivers a security but does not receive payment or that the buyer of a security makes payment but does not receive delivery. In this event, the full principal value of the securities or funds transferred is at risk. In the settlement process, this term is typically associated with exchange-for-value transactions when there is a lag between the final settlement of the various legs of a transaction (i.e., the absence of delivery versus payment).

Reputational risk

The risk of loss of confidence in the payment system due to lack of management control, capacity, security, business continuity plans, and/or contingency measures.

Settlement risk

General term used to designate the risk that settlement in a transfer system will not take place as expected. If a party defaults on one or more settlement obligations to its counterparties or to a settlement agent, this can generate both credit and liquidity risk.

Systemic disruption

Events whose impact has the potential to threaten the stability of the financial system, by transmission from one financial institution to another, including through the payment system.

Systemic risk

The risk that the failure of one participant in a transfer system, or in financial markets generally, to meet its required obligations will cause other participants or financial institutions to be unable to meet their obligations (including settlement obligations in a transfer system) when due. Such a failure may cause significant liquidity or credit problems and, as a result, might threaten the stability of financial markets.

[1] See Humphrey, D., M. Willesson, T. Lindblom, and G. Bergendahl, “What Does it Cost to Make a Payment?”, Review of Network Economics 2 (June), 2003: 159–174. In Europe, for example, the same authors show that the gradual move towards the use of electronic payments and substitution of ATMs for traditional banking offices has helped reduce bank operating costs by some US$32 billion, saving 0.38 per cent of 12 nations’ GDP over the period 1987–1999. Payment cost studies conducted in the Netherlands estimate the overall social cost of point-of-sales payments at 0.65 per cent of GDP, while the share of the cost of cash is 73 per cent of the total social cost or at 0.48 per cent of GDP. Comparatively, in Belgium, the social cost estimate was at 0.74 per cent of GDP, while the share of cost of cash is 75 per cent of the total social cost, or at 0.58 per cent of GDP. In Finland, estimates of the social cost of payments is at 0.3 per cent of GDP, where the share of the cost of cash is at 0.1 per cent of GDP. These studies further argue that the marginal social cost of cash is much higher than the use of non-cash payment methods, particularly debit cards and electronic purses, so with proper incentives, such cost-savings would lead to the adoption of more efficient payment methods.

[2] A transaction account is defined as an account (including an e-money account) held with a bank or other authorized and/or regulated PSP, which can be used to make and receive payments and to store value. All deposit accounts held with banks and other authorized deposit-taking financial institutions, referred to as “deposit transaction accounts”, that can be used for making and receiving payments qualify as transaction accounts. Prepaid instruments based on e-money, referred to as “e-money accounts”, can be offered by banks and other authorized deposit-taking financial institutions, as well as by non-deposit-taking PSPs such as mobile network operators. (See “Payment aspects of financial inclusion”, report by the Committee on Payments and Market Infrastructures and the World Bank Group, APRIL 2016.) The desirability of a single account is based on two considerations. First, while interoperability can be achieved even among payment service users who do not possess accounts with banks or other PSPs, such type of interoperability would not be as financially inclusive as one among payment service users who all hold accounts. The difference is between interoperability built around “off-network” transactions (as in the case, for example, of an individual sending money from her mobile account to another individual who doesn’t have an account) and “cross-network” transactions: the former requires recipients to cash out the payments received, whereas the latter makes it possible for recipients to store received funds, on-send them, or use them to make payments. The second reason in favor of achieving interoperability via a single transaction account is that this would allow every individual payment service users to make and receive payments from all other payment service users in the economy through only one entry point to the financial system, with maximum efficiency and user convenience.

[3] See ITU DFS Focus Group - Ecosystem Working Group Glossary - May 2016.

[4] See “Central bank oversight of payment and settlement systems”, Report of the Committee on Payment and Settlement Systems No. 71, Bank for International Settlements, Basel, May 2005.

[5] See “Policy issues for central banks in retail payments”, Report by the Committee on Payment and Settlement Systems, Bank for International Settlements, Basel, 2003.

[6] See “Principles for financial market infrastructures”, joint report by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions, Bank for International Settlements, Basel, April 2012.

[7] See “Responsibilities of central banks, market regulators, and other relevant authorities for financial market infrastructures”, under the “Principles for financial market infrastructures”, referred to in Footnote 6.

[8] Annex I reports a list with a brief description of the risks typically featured by payment systems.

[9] The case of India is illustrative, and it is interesting to examine how the payment system vision of the Reserve Bank of India (RBI) has progressed over the last decade. In its 2005-08 vision document, the RBI objective was “the establishment of safe, secure, sound and efficient payment and settlement systems for the country.” In the subsequent vision document (2009-12), the RBI – much more assertively – indicated that it wanted “to ensure that all the payment and settlement systems operating in the country are safe, secure, sound, efficient, accessible and authorized.” Finally, in its latest vision document (2012-2015), the goal has been broadened further “to proactively encourage electronic payment systems for ushering in a less-cash society in India and to ensure payment and settlement systems in the country are safe, efficient, interoperable, authorised, accessible, inclusive and compliant with international standards”.

[10] See Reference in Footnote 6.

[11] See the “Guidelines and Recommendations for establishing consistent, efficient and effective assessments of interoperability arrangements: final report”, 10 June, 2013, issued by the European Securities and Markets Authority (ESMA), under Article 54(4) of the European Market Infrastructures Regulation.

[12] See the “Oversight expectations for links between retail payment systems”, European Central Bank, Frankfurt, November 2012.

[13] In particular, the proposed principles build on the ECB’s oversight expectations for links between retail payment systems (see previous footnote) and on the EACHA Instant Payments Interoperability Guidelines V1.1, European Automated Clearing House Association, 19 November 2015.

[14] In light of the technical nature of interoperability and, more broadly, in consideration of the increasing role that information and telecommunication technology providers play in RPSs, cooperation between the central bank as payment system overseer and the telecommunication regulatory authorities is required and practiced in several jurisdictions worldwide.

III Payment System Interoperability and Oversight: The International Dimension

About this report

The author of this Technical Report is Biagio Bossone, International Financial Consultant. Contributions were received from the members of the FG DFS Interoperability Working Group. The Technical Report was reviewed by the ITU Focus Group Digital Financial Services (FG DFS). Thomas Lammer provided the overall guidance for this project.

If you would like to provide any additional information, please contact Vijay Mauree at tsbfgdfs@itu.int.

Executive Summary

Much as it is critical for the development and diffusion of modern (digital) retail payment services across all service users in a domestic economy, payment system interoperability is also essential in today’s globalizing world economy to enable the smooth and safe flow of cross-border transactions across users from different countries. This report approaches the issue of interoperability of payment systems and central bank oversight of payment systems from an international perspective. This report is a companion to the "Payment System Oversight and Interoperability" report by the ITU Focus Group Digital Financial Services – Interoperability Working Group (WG).

Today the interlinking of national Payment System Infrastructures (PSIs) and their interoperability represent important prerequisites for economic and financial development and constitute sources of potentially significant risks. Therefore, they require public authorities in the relevant jurisdictions to mutually cooperate in order to make them happen and to adopt suitable oversight provisions in order to render them sustainable. The purpose of this report is to discuss payment system interoperability and oversight policy in the context of international economic and financial integration.

Although international and national interoperability feature similar types of risk, the former raises specific challenges. Such challenges bear implications for central bank oversight policy. These challenges essentially stem from the scaling up to the cross-border level of the risks that are usually associated with national interoperability and from the international harmonization and standardization which national PSIs need to be subject to if they are to be part of an international interoperability agreement. While the principles elaborated in the companion report remain valid in the context of international interoperability, the challenges raised by the cross-border dimension of interoperability point to the need for adapting the scope of oversight of the linked or shared PSIs.

This report considers the implications of PSI interlinking and international interoperability for central bank oversight policy, and elaborates on a set of principles that complement those developed in the companion report. The principles cover some critical institutional aspects which underpin the establishment of international interoperability agreements, as well as the planning and implementation stages of the agreements, and their sustainability. National public authorities and private sector stakeholders should consider adopting these principles when establishing international interoperability agreements.

This report is not intended to be a regulatory document. The principles should be understood as providing methodological guidelines to public authorities and private sector stakeholders involved in establishing international interoperability agreements. This report’s main aim is to provide policy advice, recommendations and indications to country authorities, PSI operators and administrators, and service providers.

Purpose of this Report

1. This is a companion report to the "Payment System Oversight and Interoperability" report by the DFS Focus Group – Interoperability WG. The report examines the issue of interoperability of payment systems and central bank oversight of payment systems from an international perspective[1]. As much as it is critical for the development and diffusion of modern (digital) retail payment services across all service users in a domestic economy, payment system interoperability is essential in today’s globalizing world economy to enable the smooth and safe flow of cross-border transactions across users from different countries.

2. The cross-border integration of trade and financial markets has accelerated with the successive waves of trade and financial liberalization, which have taken place worldwide since the mid-to-late 1980s. The international linking of critical market infrastructures for payments, securities, and lately, derivatives, have widened and deepened as national economies across the world have experienced increasing cross-border trade and financial flows. Many international interlinking initiatives, especially at the regional level, have progressed through the collaborative efforts of the financial industry and the public sector.

3. Today, the interlinking of national PSIs and their interoperability represent important requisites for economic and financial development and constitute sources of potentially significant risks[2]. They require public authorities in the relevant jurisdictions to mutually cooperate to make them happen and to adopt suitable oversight provisions in order to render them sustainable. The purpose of this report is to discuss payment system interoperability and oversight policy in the context of international economic and financial integration. This is in line with the objective of ultimately enabling payment service users worldwide to make/receive electronic payment transactions to/from any other users located elsewhere, in a convenient, affordable, fast, seamless, and secure way, possibly using a single transaction account[3]. This report is not intended to be a regulatory document, and its main aim is to provide policy advice, recommendations, and indications to country authorities, payment system operators, and Payment Service Providers (PSPs).

4. The report is structured as follows: Section II discusses the factors that typically lead to public or private sector decisions in order to link PSIs internationally. It analyzes stylized modalities to achieve international PSI interlinking and describes major real-world examples of linked PSIs. Section III focuses on PSI interlinking and interoperability, illustrating the various types of solutions adopted to achieve interoperability at the national and international (regional and global) level, and points to the challenges and risks associated with international payment system interoperability. Finally, Section IV considers the implications of international interoperability for central bank oversight policy of payment systems, and elaborates on a set of oversight principles aimed to ensure the establishment of safe and efficient international interoperability agreements.

International Interlinking of Payment System Infrastructures[4]

A. Drivers of international payment system infrastructures (PSIs) interlinking

5. Several factors may prompt the international interlinking of PSIs. In most cases, linking national PSIs to achieve international interoperability of certain payment services comes from a country’s decisions to exploit the benefits of international economic and financial integration (i.e., greater international trade and investment activities, attraction of foreign investment capital, risk diversification, and deepening and broadening domestic financial and capital markets), since integration requires economic units to have convenient access to cross-border payment service facilities. A powerful driver to regional PSI interlinking is constituted by the political agreements among countries in a region on a broad, long-term economic and financial development cooperative program. Usually, in this case, the efforts to link payment system (as well as other financial market) infrastructures are supported actively by a core group of countries in organized regional development policy and planning forums[5]. In some cases, interlinking may result from decisions by national financial authorities to address the demand from market participants (and/or their customers, including asset managers, other securities servicers, and other types of businesses) for cross-border access to international markets at lower end-to-end transaction costs[6].

6. Market incentives can also be effective drivers of international PSI interlinking. Expanding operations across borders may strongly incentivize private-owned payment systems to extend and improve existing access channels and means by using or sharing international platforms that allow for greater speed of service or lower costs and risks. Such "supply-side-led" initiatives are most likely based on competitive, commercial, operational, risk management, and legal considerations. Another driver of international PSI interlinking is the growth-orientation of existing financial market infrastructures and their imperative to expand into new market areas within or across regions.

B. Modalities of international PSI interlinking

Interlinking solutions

7. International PSI interlinking can take different forms and feature various levels of depth and sophistication. Interlinking solutions range from simple agreements among national payment systems aimed to facilitate direct or indirect cross-participation of the participants in each of the systems, to full harmonization of operating systems and integration of technical platforms into a common infrastructure for the execution of cross-border transactions. In simple interlinking agreements, the relevant systems usually sign contracts that allow the participants of each national system to participate directly or indirectly in the other national systems[7]. The alternative – which may take the form of a regional or global payment system with a common (unified) scheme and operating infrastructure – represents the deepest form of interlinking possible and amounts to full-fledged payment system integration.

Technical modalities of international PSI interlinking

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

Figure 1 – Decentralized payments system

9. More advanced solutions for PSI interlinking are characterized by the adoption of a unified scheme and a common technical-operational facility to process the transactions defined under the scheme. The common (regional or global) technical-operational facility follows one of two basic architectures: the decentralized model, or the single or fully centralized model. Arrangements adopting a decentralized model for regional, cross-regional and/or global payments link existing national settlement systems (Figure 1). These normally feature different degrees of sophistication and complexity. Most decentralized regional payment systems are designed in a "hub-spoke" structure, in which there is a central administrative and technical-operational facility referred to as the "hub entity", which links the participating systems[9]. The interlinking mechanism is usually a standardized messaging and connectivity technology, which links account management and the various national operating systems together, while participants access the hub entity through the national settlement infrastructure of their jurisdiction[10].

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

Figure 2 – Centralized payments system

C. Examples of international PSI interlinking

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

12. Other cases exemplify the decentralized and centralized models of international payment system integration. Schemes with a decentralized settlement system involving multiple parties have been developed in regions where there is a regional currency, as well as for settling cross-border payments denominated in a single foreign currency. The most well-known example of a unified scheme with a decentralized settlement system for a regional currency was the original TARGET in Europe, which linked the Euro RTGS systems of EU national central banks. Another example is the Sistema de Interconexión de Pagos in Central America and the Dominican Republic, which uses a decentralized architecture for settling cross-border payments in U.S. dollars[11]. With regard to the centralized model of PSI interlinking (or integration), relevant examples are TARGET2 and EURO1 supporting euro denominated payments in the European Union[12], the STAR-UEMOA for the West African CFA Franc throughout the West African Economic and Monetary Union, and the RTGS system of the Eastern Caribbean Central Bank (ECCB) for the EC dollar in the Eastern Caribbean Currency Union. Over the past decade, centralized payment system infrastructures have also been developed regionally, where no regional currency existed, to facilitate settlement of domestic, regional, and cross-regional payments in more than one settlement currency (e.g., RAPID in the United Arab Emirates, and CHATS in Hong Kong). Finally, an example of a unified global system for settlements denominated in multiple currencies is CLS Bank International, which links the national RTGS systems of the participating jurisdictions/currencies, with a strong reliance on the legal agreement of the rulebook and the technical standards[13].

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

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

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

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

Box 1. Architecture of Regional Clearing Infrastructures

STEP2: Centralized Regional ACH

STEP2 is a centralized regional Pan European ACH for bulk payments in euros. Established in 2003 to clear cross-border euro credit transfer payments for its participating member-banks, it has expanded its services to include clearing of domestic euro payments for participating banks – primarily in Finland, Ireland, Italy, and Luxembourg, at present – and to include direct debit payments. STEP2 also developed clearing services for SEPA credit transfer and direct debit transfer schemes in 2008-09. STEP2 is a tiered connectivity system involving both direct and indirect participants with a processing platform that provides direct routing to beneficiary banks with straight-through processing and automated connectivity, for settlement, to TARGET2 for its SEPA services.

SICA-UMEOA: Hub-Spoke Regional Clearing Infrastructure

SICA-UMEOA, which was inaugurated in 2008, is also a regional retail payment clearing infrastructure but is comprised of 9 centers – a central regional clearing facility, a national clearing facility in each of the 8 member countries of the West African Monetary and Economic Union, and Clearance Access points in each country connected to the national facility. SICA-UMEOA clears domestic and cross-border intra-regional payments denominated in CFA francs. SICA-UMEOA clears batch files of various payment instruments, including digitized paper items such as cheques, for all participating banks within the region. It involves a single regional scheme on an integrated technical platform for all regional and national operating centers. Payment obligations are netted multilaterally with settlement on the regional RTGS system STAR-UMEOA, which is also operated by the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO).

EACHA: A Distributed Infrastructure

The European Automated Clearing House Association (EACHA) network is a distributed bilateral network arrangement for ACH-to-ACH connectivity. The EACHA provides technical interoperability standards for the straight through processing of cross-border payments among its 27 member ACHs from 23 participating countries in a distributed bilateral network (although not all EACHA member ACHs are actually linked to each other). The EACHA scheme illustrates the case of interoperable national ACHs whereby the payment obligations resulting from the clearing of cross-border payment transactions in euros are settled in TARGET2. The scheme involves an interoperability framework between national ACHs rather than full technical integration between them. In February 2015, the EACHA published the "Study on Interoperability of Immediate Payment Systems", followed in November 2015 by the "EACHA Instant Payments Interoperability." Upon invitation by the ECB, the EACHA began leading a taskforce consisting of ACHs (including members of EACHA, EBA Clearing and representatives of TARGET2), national central banks, the ECB, and ad hoc other stakeholders, for the purpose of delivering to the Eurosystem a set of business requirements for ensuring risk management, clearing and settlement, and interoperability of instant payment services in euros.

Equens: A Payment Processor

Equens SE is a European full-service card and payment processor headquartered in Utrecht, Netherlands, with offices in Frankfurt, Stuttgart, Milan, Rome, Helsinki, and London. With an annual processing volume of 9.7 billion payments and the switching of 5 billion POS and ATM transactions, Equens is one the largest payment processors in Europe, leading the market for future-proof payment and card solutions. Equens provides payment and card processing solutions for POS and ATM transactions. More specifically, it delivers vendor-independent card services (including payment terminal solutions); acquiring services, such as POS and ATM acquiring hosting, POS terminal solutions, and merchant services; issuing services, including issuing transaction processing, payment clearing, and issuance and management services; risk and fraud, affiliate, co-branded, and managed services; mobile NFC and contactless payments; and clearing and settlement services. The company also provides automated clearing house and business process outsourcing services for payments; SEPA services, including domestic payment processing, SEPA credit transfer, and SEPA direct debit services; and corporate payment services for banks, companies, service agencies, and software developers. In addition, it provides digital services, including digital routing, e-Mandate routing, and mobile payment services.

17. Bilateral international PSI interlinking is an example of the partnership between MTN Côte d’Ivoire and Airtel Burkina Faso. In April 2014, MTN and Airtel launched a landmark collaboration to allow MTN Mobile Money customers in Côte d’Ivoire to transfer money to Airtel Money customers in Burkina Faso. It was the first time two operators from different groups interconnected their mobile money services internationally to offer cross-border remittances. Given their limited experience with international money transfers, MTN and Airtel were keen to work with an intermediary that would act as a hub between their two services. In June 2013, they engaged with HomeSend, which was the most established remittance hub at the time. HomeSend provided two main services to MTN and Airtel: a real-time money transfer messaging platform and interface, and the management of anti-money laundering activities. To keep all transactions in the local currency (CFA franc), MTN, Airtel, and HomeSend decided it would be easier for the two operators to settle funds directly between themselves. Technical integration was completed within four months. As a next step, MTN, Airtel, and HomeSend agreed on a commercial model that would be transparent for customers[18]. Whereas the operators see cross-border mobile money remittances as a substantial strategic opportunity, their initial objective was not to maximize revenues, but rather to create a demonstration case for deciding whether or not to pursue new remittance corridors. MTN and Airtel then began working with their partner banks (Société Générale and Ecobank, respectively) to secure approval from the BCEAO to send and receive remittances using mobile money, which they obtained a few months later[19].

PSI interlinking and interoperability

18. PSI interlinking is essential to allow cross-system interoperability and to deliver convenient cross-border payment and settlement services. This section discusses the different geographical layers of interoperability, from national interoperability, that is, between PSIs within national borders, to international interoperability, that is, between national PSIs that are linked regionally or globally.

A. National Interoperability

19. As the vast majority of payment transactions are effected within national borders, most of the progress on interoperability so far has been achieved at the national level[20]. In fact, national interoperability has mainly been limited to the same types of accounts, e.g., between deposit accounts issued by different banks or between e-money transaction accounts offered by several mobile network operators (MNOs). Considering two baseline scenarios, one with a multitude of non-interoperable PSIs, and one with a single service provider, an interoperable payment ecosystem at the national level can typically be achieved via two migration modalities (Figure 3). The first, and most obvious, is the establishment of bilateral links between PSPs or PSIs, the second consists of a centrally interoperable solution. The former modality, which is largely followed by the mobile telecom and banking industries, requires setting up bilateral interoperability agreements between participating entities[21]. This process may encompass PSPs or PSIs establishing bilateral links with other PSPs or PSIs. Very often, in practice, a subset of PSPs might take the lead and establish bilateral interoperability agreements first, while others would follow through at some later stage either in response to their own ambition or as they are prompted to do so by the authorities’ moral suasion or by regulatory measures aimed to achieve interoperability countrywide.

20. Bilateral interoperability agreements feature some advantages as well as considerable disadvantages. They are relatively easy to deploy and make use of existing account management processes; yet they require each PSP or PSI to link to all others which are participating, with obvious duplication of efforts and much more complex maintenance of bilateral agreements. In general, the complexity of bilateral interoperability agreements increases with the number of linked entities. While this may not be a major issue, say, for MNOs linking to each other, due to their limited number per country, it may become complicated when MNOs and banks aim to establish interoperable services.

Figure 3 – Interoperability scenarios at the national level

21. Central interoperability solutions usually rest on a hub and spoke model. Here, individual PSPs or PSIs are linked to a central switch for the execution of transactions between them, following a common scheme of multilaterally agreed rules. The adoption of a central switch is not a strict necessity, however, since individual PSPs or PSIs can still use their own processing platforms as long as they are technically interoperable. The real improvement of the central hub solution over the bilateral agreement approach derives from the adoption of a common scheme of multilateral rules. Bilateral interoperability is often considered to be an interim step before migrating to centralized solutions (arrows 1, 2 and 3, or arrows 1 and 4). In fact, bilateral interoperability might be skipped altogether and a country may leapfrog from the non-interoperable scenario to centralized solutions, either by moving to a hub and spoke solution (arrow 5), and eventually from here to a central platform (arrow 3), or by moving directly to the latter (arrow 6).

B. International interoperability: At the regional level

22. With increasing regional economic integration and/or regional migration, cross-border payments (including international remittances) have gained importance. Again, the baseline scenario is a situation with non-interoperable solutions, this time offered in different countries within a region. In fact, these solutions might or might not be interoperable at the national level, and regional interoperability might be pursued even in the absence of national interoperability. Furthermore, the type of interoperability achieved at the national level may affect the degree of complexity of regional interoperability, with the centrally interoperable or single provider scenario on the national level being a less complex starting point than the bilaterally interoperable scenario. The other possible baseline scenario features one single PSI operating in several countries in the region or an international service provider that is present in various countries of the region. In such a scenario, payment service users are likely to benefit from being able to send and receive payments from the transaction account held with a service provider participating in the single PSI.

23. Several paths to regional interoperability are possible in a digital payments ecosystem, starting from the baseline scenario and featuring a number of non-interoperable PSIs operating in different countries (Figure 4). This is similar to national interoperability discussed above. A handful of PSIs might take the lead and establish bilateral interoperability agreements, while other PSIs would follow through at a later stage either in pursuance of their own business strategic objectives. First movers might also be individual PSPs that are active in different countries of the region seeking to establish interoperability. More direct paths to regional interoperability could be envisioned as a result of international agreements between governments in a region, whereby centralized interoperability solutions would be achieved more directly as part of economic or financial regional integration programs.

Figure 4 – Interoperability scenarios at the regional level

International interoperability: At the global level

24. Interoperability at the global level raises more complex issues. While national and/or regional interoperability can form the nucleus for global interoperability, (Figure 5) and can in principle be taken as basic models to be replicated on a larger scale to reflect global relations, in practice the coordination challenges to do so are much more critical than at the national or regional level. Various sources of complexity emerge, such as the coordination of a much more assorted set of stakeholders (including market participants and various national authorities), inconsistencies among several and possibly very different legal and regulatory regimes, and the identification of commercially viable business models and technological solutions that can match the preferences of very diverse stakeholders, to mention just a few.

C. Challenges and risks of international interoperability

Although international and national interoperability feature similar types of risk, the former raises specific challenges. Such challenges bear implications for central bank oversight policy. These challenges essentially stem from: i) the scaling up to the cross-border level of the types of risk that are usually associated with national interoperability, and ii) the international harmonization and standardization which national PSIs need to be subject to if they are to be part of an international interoperability agreement.

Figure 5 – Interoperability scenarios at the global level

"Scaling up" of risks

25. Payment system risks take on new dimensions in the context of international interoperability. The scaling up of such risks does not imply only a shift in magnitude, but a qualitative change as well, since every cross-border link triggers complexities that relate to the interaction of the different national jurisdictions involved in the interoperability agreement and raises important issues of legal, technical, administrative, business, and operational consistency. The related challenges vary with the specificities of each of the linked systems and the legal, technical regulatory, administrative, business, and operational environments characterizing each of the underlying national jurisdictions involved in the agreement, and grow with their differences or incompatibilities.

26. International interoperability raises greater legal and regulatory challenges than national interoperability. Whereas a national interoperability agreement falls under a single legal regime, and is therefore governed under one consistent set of rules administered by the relevant national authorities, international interoperability agreements expose the linked PSIs to cross-border and cross-PSI events and call into question a multitude of legal and regulatory regimes that may differ substantially across national jurisdictions and are handled by authorities from different countries. Internationally interoperable payment services are processed in different national PSIs (and via different national intermediaries), which are subject to different national applicable sets of rules and regulations. Cooperation and coordination failures among overseers and regulators can also represent important impediments to international interoperability, as owners and participants of linked PSIs may need to deal frequently with various different national authorities, each with their own specific mandates, regulations, procedures and practices, which in some critical aspects may be duplicative or even inconsistent.

27. Conflicts of laws and regulations may arise in the context of international interoperability agreements. These conflicts arise when there is no clarity as to which specific laws, regulations and procedures apply to the transactions processed via the scheme or system links, and if there is no certainty as to how the various national oversight authorities involved handle emerging legal and regulatory issues and controversies. In extreme circumstances (e.g., the default of a participant in one of the systems), uncertainties or conflicts may arise if the rules governing the scheme or system links do not clearly specify the procedures to be followed in such circumstances.

Conflicts may also arise when the underlying legal basis, and in particular the contracts between the participating entities, do not clearly define the rights and obligations of the linked PSIs (as well as the intermediaries, in case of indirect participation), and their participants. Finally, conflicts may stem from differences in laws and regulations applicable to the linked PSIs (and any intermediary to the transactions processed) and their participants, in particular, including issues such as access to, and direct participation of, foreign institutions in domestic PSIs; choice of relevant laws; enforceability of collateral agreements and transfer of collateral ownership in the event of default; enforceability of netting for the purpose of final settlement; irrevocability and finality of settlement, and applicable resolution and bankruptcy laws and wind-up procedures for financial institutions. Incompatibilities between the legal frameworks underlying schemes and systems of different national jurisdictions might erect significant barriers to the achievement of international interoperability.

28. Some regional PSI interlinking arrangements address the above problems by adopting common agreements or directives. These agreements (e.g., TARGET2 guidelines) or directives (e.g., EU settlement finality directive) are ratified and incorporated into the legal and regulatory frameworks of the sovereign countries participating in the regional arrangement. In other cases, where common agreements or directives are not feasible, expert legal opinions might be necessary to ensure that the interoperability agreements have legal support and standing under the existing legal framework of each of the sovereign participating countries, and do not violate the legal and regulatory provisions governing the operations of the regional arrangement. This latter approach presumes that the existing legal and regulatory regimes of each of the sovereign participating countries are sufficiently compatible to permit a reasonably common legal standard for participation in the regionally integrated payment systems. This approach also presumes that there are no legal or regulatory barriers in the sovereign jurisdictions of the participating countries that will unfairly distort competition in favor of national systems and participating entities vis-à-vis foreign ones. This legal risk can ultimately generate network and business risks.

29. Two specific types of risk may be associated with the interlinking of national PSIs and international interoperability: sovereign risk and participation risk. Sovereign risk originates from the circumstance that the operations of internationally integrated PSIs are subject to the political, legal, and regulatory regimes of the participating countries. While there may be interoperability agreements among PSIs, and even cooperative agreements among national regulatory agencies of the national jurisdictions involved, national laws and regulations may change over time in ways that might violate the intent and even the letter of existing interoperability agreements. Generally, there is no effective recourse in these cases other than renegotiation for enforcing the agreements, short of expulsion of noncompliant PSIs. Regarding the second type of risk mentioned above, participation, it should be noted that the legal and regulatory requirements that govern participation of financial entities in national PSIs vary across the jurisdictions of the internationally linked or shared PSIs. There is the possibility that some of the jurisdictions involved may impose substantially less rigorous licensing, reporting, and prudential requirements on participating entities than the others. Similarly, oversight monitoring and regulatory enforcement practices may differ across jurisdictions, with some jurisdictions applying weaker standards or practices than others. As a result of these asymmetries, participants in an international interoperability agreement might be exposed to risks originating in any participating PSI which are being transmitted internationally across the interlinking mechanisms.

Harmonization and standardization

30. Challenges and risks may be associated with the harmonization and standardization of national PSIs. Harmonization of operating rules, procedures and standards, as well as standardization of critical technical processes and system modules for information exchange and transmission, communication, data processing, and payment clearing and settlement are typically required to interlink PSIs and achieve international interoperability (Box 2). They help ensure that differences, inconsistencies, and incompatibilities between PSIs do not prejudge their interlinking and they are necessary to deliver efficiencies. Very often, in fact, the degree of homogeneity and compatibility of existing PSIs limits the choice of interlinking architecture. Challenges may originate from the intrinsic difficulties of achieving harmonization and standardization in an international environment with a multiplicity of industry interests, where resistance to changing current rules and procedures may be strong, and where agreeing on common standards may be problematic: many times, scheme or system owners will want to keep their specific processes, as they fear that harmonization and standardization might compromise their own way of doing business.

Box 2. Relevant standards for regional financial infrastructure integration

A prime example of global policy standards that promote and facilitate the strengthening of the clearing and settlement mechanisms of regional financial infrastructure are the CPSS-IOSCO.

Principles for financial market infrastructures[1]

Regarding the legal/regulatory standards covering the bilateral or multilateral relations of participants in regional financial infrastructures, all trading, clearing, and settlement platforms use a rulebook, owned by a scheme management organization or by the platform involved. Examples of rulebooks for payments are the SEPA Credit Transfer Rulebook, the SEPA Direct Debit Rulebook, NACHA Rulebook, IPF Rulebook, EACHA Framework and CLS Rulebook, and for securities and their clearing arrangements, the LCHClearnet Rulebooks. In addition to rulebooks, master agreements are also available, like the ISDA Master Agreement for derivatives transactions. In most regional integration projects, it is possible to re-use available rulebooks or master agreements.

The choice of technical standards is important to ensure such things as efficient processing between the infrastructure and its participants, the effective delivery of services to customers (in the case of end-to-end processing), or uniform reporting to the public authorities. Many vendors already have technology solutions available based on global standards. For example, product and service solutions are often coordinated around core standards such as ISO 20022, ISO15022, International Bank Account Numbers - IBAN (ISO 13636), and International Securities Identification Numbers – ISIN (ISO 6166). Also, mapping interfaces are available that allow for straight-through-processing between infrastructures using different messaging solutions. Similar benefits are provided by the interfaces that map proprietary messaging systems into standardized international formats.

[1] See "Principles for financial market infrastructures", joint report of the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions, Bank for International Settlements, April 2012.

31. Risks may derive precisely from inadequate harmonization and standardization. Lack of adequate harmonization and standardization may limit the overall benefits of scheme or system interoperability, for example, by raising the cost for PSPs to operate across schemes or systems. This lack of harmonization and standardization may also make the linked schemes or systems more prone to contagion. This would be the case, for instance, if oversight requirements were not sufficiently harmonized across the linked PSIs and if each PSI were to apply different standards than the others (say, on access criteria or for risk management): the PSIs that were subject to more stringent requirements would become exposed to those operating under weaker requirements. In this regard, risks may arise from the decision of PSI owners to follow a minimum-resistance path to interoperability agreements, deliberately lowering the degree of required harmonization and standardization accordingly.

Implications for Oversight Policy

A. The cross-border dimension of payment system oversight

32. The role of central bank oversight of payment systems in the context of interoperability has been discussed in the companion report on "Payment System Oversight and Interoperability". The focus of this section is on the implications for oversight policy of the cross-border dimension introduced by international interoperability, and the specific challenges and risks relating to it. In particular, although the principles elaborated in the companion report remain valid in the context of international interoperability, the preceding discussion suggests that the interlinking of national PSIs raises additional oversight issues and elevates the overall complexity of the oversight function. These additional issues and higher complexity change in relation to the technical nature of the interlinking solutions adopted. Decentralized models raise different issues than centralized ones: whereas decentralized models require focusing attention on the links connecting the different PSIs (Box 3) and on how different PSIs interoperate, centralized models require focusing attention on the shared infrastructures. Solutions under the two types of models not only differ technically, they demand different governance instruments since links generally fall under the primary responsibility of the national oversight authorities of the linked PSIs, whereas regional or global infrastructures fall within the purview of a lead oversight authority, which will coordinate its action with the relevant national authorities involved. All solutions involve a high degree of cooperation among authorities and between authorities and stakeholders.

Box 3. Links

A link between PSIs is a set of legal and operational arrangements aimed at facilitating the transfer of funds and fulfillment of payment obligations between entities participating in different PSIs. While general reference is made in this report to PSIs for the sake of convenience, links can also be between PSPs, and between PSPs and PSIs.

Links can be established both between PSIs located in the same jurisdiction or between PSIs in different jurisdictions (i.e., cross-border links). Links can work unilaterally or bilaterally. A link between two PSIs is unilateral when it is used only for the transfer of funds from one system to another, and not vice versa. A bilateral link between two PSIs means that a single agreement regulates the transfer of funds to and from both systems.

Links may take different forms, but the basic types are "direct", "indirect" and "relayed" links. A direct link is established directly between two PSIs without intermediation by a third entity. An indirect link is established between two PSIs, whereby a third entity (generally a commercial bank or a central bank) intermediates between them. In an indirect link, there will be legal and operational arrangements involving the linked PSIs and an intermediary. Finally, a relayed link involves three (or more) PSIs, in which at least one PSI intermediates between two other PSIs. A relayed link can be seen as a chain of two or more direct links.

Links between PSIs provide organized channels for the transfer, clearing, and settlement of payments. They are essential for the achievement of (national and international) interoperability, given that linked infrastructures enable payments to be exchanged across systems and jurisdictions, and facilitate the reachability of participants of different PSIs and their customers. Interoperability, in fact, requires advanced forms of relationships whereby PSPs agree to work together to establish solutions for improving their customer services.

Establishing a link allows PSI participants to transfer funds involving multiple instruments, channels, schemes, systems, and jurisdictions, through a single gateway and can thus reduce costs when compared with the costs of participating in a multitude of systems, schemes, and jurisdictions and when using several instruments and channels. Links can reduce the number of parties involved in the cross-system clearing and settlement of retail payments, which is conducive to mitigating legal and ITU-T Focus Group Digital Financial Services: Payment System Interoperability and Oversight: The International Dimension operational risk. However, inefficiently managed links may also increase risks. The design and potential risks of a link should therefore be carefully analyzed before its establishment. The type and degree of risk varies according to the design and complexity of the PSIs involved and the nature of the relationship between them.

33. The cross-border dimension of international interoperability requires adapting the scope of oversight of the linked or shared PSIs. In the case of solutions based on the decentralized model, as noted, particular attention should be devoted to links, and the national overseers should be responsible for assessing the links of the PSIs under their jurisdiction against internationally recognized standards. In overseeing links, the oversight authorities should agree to adopt a set of harmonized expectations for the linked PSIs. To this extent, they should adopt the international standards relevant for interoperability discussed in the companion report on "Payment System Oversight and Interoperability", as well as the principles specifically elaborated within. The overall goal should be to ensure that risks associated with international interoperability are properly managed. On the other hand, for solutions based on centralized models, the lead overseer – in cooperation with other relevant national authorities (see below) – should be responsible for safeguarding the integrity of the internationally shared infrastructures. In doing so, the lead overseer should monitor and intervene, as circumstances may require, on specific PSPs through the support of the oversight authorities of the concerned participating countries.

34. It is advisable to complement the standards and principles discussed in the companion report with a set of oversight principles specifically designed to address the challenges and risks raised by the international dimension of payment system interoperability. The proposed principles are intended to complement those elaborated in the companion report and are aimed to ensure the establishment of safe and efficient international interoperability agreements.

B. Oversight principles for international payment system interoperability

35. The principles covered in this section should be understood as providing methodological guidelines to public authorities and private sector stakeholders involved in establishing international interoperability agreements. The principles are intended to address the challenges and risks associated with international payment system interoperability, and complement those developed for national interoperability. The principles draw on the World Bank’s "Guidelines for the Successful Regional Integration of Financial Infrastructures", cited earlier, and have been written with the idea that initiatives to establish international interoperability agreements between national PSIs may originate from decisions made by public authorities or may be the result of private sector undertakings.

36. The principles are intended for a broad audience. The principles are meant to provide policy indications on international interoperability to payment system oversight authorities and to supervisory and regulatory institutions that cooperate with oversight authorities. The principles are also addressed to PSPs, as well as to system operators and scheme administrators of linked or shared PSIs. It must be noted that while it would be the responsibility of the oversight authorities to adopt the principles and include them as part of internationally recognized standards for interoperable PSIs, it would be the responsibility of system operators and payment scheme administrators to i) design PSI rules that are consistent with the principles, ii) administer these rules, and iii) ensure participant compliance with rules. The oversight authorities would assess the PSIs against the principles and hold system operators and scheme administrators accountable for the implementation of the principles. The engagement of PSI operators and scheme administrators in the implementation of the principles would help central banks better achieve their oversight objectives while reducing their involvement in day-to-day system administration[22].

37. An important qualification of the proposed principles is in order. The principles for national interoperability developed in the companion report were written assuming that national payment systems are under central bank oversight. As payment system overseers, central banks play an active role in the establishment, deployment, and operation of interoperability agreements between national PSIs – including their planning, implementation, and sustainability – even when the agreements are private sector-led initiatives. In view of such recognition, those principles were mainly intended to provide policy indications for retail payment system operators and PSPs to appropriately manage the risks associated with national interoperability agreements. On the other hand, the principles for international interoperability submitted below have been conceived by giving specific consideration to the need for both public and private sector stakeholder cooperation across all stages of international interoperability agreements, in particular, their planning, implementation, and sustainability: all areas where cross-border oversight responsibilities are typically not well identified or clearly defined. In fact, even when international payment system interoperability initiatives are led by the private sector, the close involvement of all relevant public authorities is essential to bring a clear systemic risk perspective into the management of the related international interoperability agreements, and to ensure that internationally interoperable PSIs take the necessary measures in order to make them as mutually compatible as needed, especially where critical differences in their risk management standards and practices might raise risks of shock transmission across PSIs (with cross-border implications).

38. The oversight principles for international payment system interoperability are the following:

Institutional basis

Principle 1: The public authorities and private sector stakeholders who consider establishing an international interoperability agreement should define a clear strategic vision articulating the purpose, scope, and form of the agreement, as well as its risks and oversight implications.

Key issues

1.1 The strategic vision for an international interoperability agreement should be incorporated within the national payment system policies of the countries where participating PSIs are located, with an emphasis on crystallizing their support to and participation in the agreement.

1.2 The public authorities and private sector stakeholders should also make a preliminary assessment of the risks associated with the agreement and the related oversight implications and requirements, and should open discussions on the appropriate oversight arrangements.

39. Establishing an international interoperability agreement among national PSIs requires a clear vision and a robust rationale. The public authorities and private sector stakeholders should prepare a general proposal expressing the vision of the initiative. The proposed vision should provide a high-level overview of comparable existing and projected national and international interoperability agreements, and include a preliminary and high-level (qualitative) benefit-cost analysis of the initiative for the international community, the participating countries, and the stakeholder groups involved. The general proposal supporting the agreement should serve essentially as a "request for information" for participating countries and key stakeholders and should not be intended to be an elaborated project plan or project development document. Instead, once finalized, it should provide a high-level framework for the subsequent planning and development stages.

40. An international interoperability agreement would benefit from government support of the participating countries. While an international interoperability agreement could be established at the initiative of private sector stakeholders and might in principle require no government involvement, the governments of the participating countries should, at a minimum, offer their support and facilitate the steps to the agreement, its deployment, and operation. If the agreement were a component of a broader international economic integration program, there should also be government support and facilitation. In such event, all national public authorities with relevant responsibilities over the agreement should be empowered, have the resources, and commit to address its related legal, oversight, and regulatory aspects. Also, they should be prepared to mutually cooperate for the success of the initiative and to ensure effective oversight of the linked or shared PSIs once the agreement is deployed and becomes operational (see below).

Principle 2: The public authorities and private sector stakeholders involved in an international interoperability agreement should establish the leadership that will secure adequate financial and human resource support to the agreement, ensure its implementation, and exercise effective oversight of the linked or shared PFIs.

Key issues

2.1 The public authorities and private sector stakeholders should devise appropriate organizational arrangements, including establishing a steering committee to lead the initiative and creating and empowering an effective implementation management team to carry out the planning and implementation stages of the agreement.

2.2 The public authorities and private sector stakeholders should devise appropriate oversight arrangements, including identifying a lead overseer institution and by defining the oversight responsibilities of the national authorities involved, to ensure the safe and efficient application of the agreement.

41. The purpose of establishing leadership is to enable the agreement proposal to move from a preliminary vision to a safe and effective implementation. While all public and private sector stakeholder groups involved in the agreement would have ownership in it, each group should establish a leadership team for the various development and operational aspects of the agreement. Each team should have a specific leader who is committed to the success of the initiative and have sufficient influence within the general stakeholder group to take formal commitments, including securing the required financial and human resources, and ensuring compliance of the agreement with oversight requirements. Group leaders should be members of a steering committee, which should have the highest-level decision-making authority in the agreement. The steering committee should include decision makers from the public and private sectors, such as senior representatives of the oversight authorities and participating PSIs, market players, and users.

Principle 3: The public authorities and private sector stakeholders involved in an international interoperability agreement should set up a forum to facilitate the necessary communication, cooperation, and coordination between the public authorities and stakeholders, as well as among and within stakeholder groups.

42. Endorsing and implementing a cooperative approach toward planning, designing, developing, and operating an international interoperability agreement are crucial steps. Adopting such an approach should involve the creation of representative key stakeholder groups with well-defined and organized consultative and cooperative mechanisms and processes. A critical objective of these structures should be to promote and facilitate effective communication throughout the various stages of the project. Both the public and private sectors need to be adequately represented at the senior level.

43. The steering committee should rely on public authorities and private stakeholder groups to inform the policy discussion, shape the decisions, and design the international architecture of the agreement. In addition, a controlling function which reports directly to the steering committee on key factors as the initiative evolves would contribute to the effective progress of the initiative, especially during the implementation and rollout stages (see below).

PLANNING

Principle 4: The public authorities and private sector stakeholders who consider establishing an international interoperability agreement should undertake comprehensive diagnostics of the participating PSIs, including an analysis of their strengths and weaknesses, in particular in the context of their prospective interoperability.

Key issues

4.1 A review of comparable agreements in place elsewhere should be conducted before, or as part of, the exercise in order to understand what worked in those cases and what did not, and why, and to form a view of what might be appropriate in the new context.

4.2 The public authorities and private sector stakeholders should identify gaps and key divergences in participating PSIs, and assess existing strengths, weaknesses, opportunities, and risks to be addressed in order to make their interoperability safe and efficient. In particular, they should pay close attention to the legal, financial, operational, and other relevant public policy characteristics of the participating PSIs and assess their compatibility as well as their alignment with international standards and best practices.

4.3 The public authorities and private sector stakeholders should set a clear plan to address all pending gaps in a reasonable timeframe in order to minimize barriers to interoperability, and should propose mechanisms and realistic schedules for any required changes by participating PSIs. The rollout strategy, however, should be flexible enough to allow sufficient time for some entities intending to join to meet the participation requirements.

44. The planning framework for the initiative should underpin the cooperative and consultative arrangements established for the preliminary and exploratory discussions. It is important that all relevant stakeholder groups remain involved as needed throughout the initiative life cycle.

45. The diagnostic exercise should provide a comprehensive picture of the relevant environment. The diagnostic exercise is the basic exercise from which most of the preliminary analysis of the agreement’s implication and requirements would draw. The diagnostic exercise should be broad in terms of scope and sufficiently detailed. It should cover national interoperability agreements, the key payment and financial instruments used, the types of financial institutions and other participating institutions and service providers, the relevant financial sector legislation and regulations, and the relevant private sector industry associations and public sector regulatory and oversight bodies. Also, it should have a strong focus on the organization, operations, and technical capabilities of the participating national PSIs, the organization, market structure, and market practices and conventions in key financial markets that will benefit from the international interoperability agreement; and the fundamental legal and regulatory environment in which they operate. It should also cover in detail the lessons and best practices from comparable national and international interoperability agreements elsewhere.

46. The diagnostic exercise should be followed by a substantial gap analysis. In the gap analysis, the major differences in the key aspects of the national PSIs should be identified, and their strengths, weaknesses, opportunities, challenges, and risks for successful interoperability would need to be assessed. Comparators or benchmarks for the gap analysis should be developed, taking also into account the relevant oversight standards and principles discussed in the companion report on Payment System Oversight and Interoperability, the applicable technical standards and best practices derived from comparable national and international interoperability agreements. The detailed understanding of the critical gaps should highlight the necessary changes that participating national PSIs will need to undertake in order to ensure safe and efficient interoperability services. The steering committee and project management team (see below) should develop a plan for all such gaps to be addressed effectively, and ensure that this plan be supported and adopted by the various stakeholder groups.

Principle 5: Public authorities and private sector stakeholders who consider establishing an international interoperability agreement should develop a strong business case that evaluates not only the information from the diagnostic exercise and subsequent analyses, but also the benefits, costs, and risks of alternative PSI interlinking arrangements.

Key issues

5.1 The public authorities and private sector stakeholders should devise a feasible, risk-robust interlinking model for PSI interoperability, based on consultations and discussions among all stakeholders around the diagnostic and business case analyses.

5.2 The public authorities and private sector stakeholders should outline the selected interoperability solution as comprehensively as possible with due regard to the results of the studies and analyses performed during the planning stage.

5.3 The public authorities and private sector stakeholders should specify the business framework for the new agreement, including its organization, management and governance, business management functions, operational scope and core business functions, business practices and controls, rules and procedures, and technical conditions and standards, among the main features.

47. The planning stage should conclude with the development of a detailed business case evaluation to assess the viability of the agreement at the most realistic level possible. The business case analysis should be a construction of scenarios of expected quantified future use, cost-savings and net benefit allocation over one or more future intervals (e.g., 1, 3 and 5 years). The diagnostic exercise and the gap analysis should provide many of the key inputs for this purpose, like the model(s) deemed most feasible for PSI interlinking. Through completion of the business case evaluation, the project’s planning and governance framework should be able to visualize more definitively the type of PSI interlinking model that might best suit the initiative.

48. The selection of the PSI interlinking solution for the agreement should be based on well-defined and transparent criteria. The criteria should draw on the overall vision underpinning the international interoperability agreement, the diagnostic exercise, the gap analysis, and the business case evaluation, as well as project development constraints and timelines. Moreover, since it is possible that more than one of the feasible interlinking solutions meet in some form the stated requirements and standards, there should also be an agreed-upon priority ranking on the selection criteria that are perceived as most closely aligned with maximizing the net benefits and mitigating the risks associated with the agreement.

IMPLEMENTATION

Principle 6: The public authorities and private sector stakeholders implementing an international interoperability agreement should set proper implementation management procedures and processes under the supervision of a designated implementation management team, and adopt a clear communication strategy with the stakeholders and the public in general.

Key issues

6.1 The implementation management team, to be supported by sufficient and scalable human and financial resources, would oversee the progress of the agreement being implemented and exercise an effective and strictly enforced implementation control function, in close interaction with the steering committee.

6.2 The implementation control function should not only ensure effective implementation, it should alert the public authorities involved of any risks and challenges that may be emerging during implementation.

6.3 The public authorities and private sector stakeholders should set up an effective communication system to properly inform all relevant stakeholders as well as the general public throughout the implementation process of the project.

6.4 The agreement and its related business practices, organization, and operations should be comprehensively documented and made public to create awareness of the new arrangement and its benefits as well as to build support for using it.

49. A robust management team for the day-to-day implementation of the agreement should be created at an early stage. The team should ensure strong coordination and professional support to the various stakeholder groups from the very beginning. The team should also ensure that all potential risks faced during the implementation stage be adequately managed and mitigated. Risks include managing changes to the PSI interlinking solution originally accepted, delays, budget overruns, and faltering commitment of some individual participants. Other potential risks are "development fatigue" and "project creep". The implementation management team should be directly responsible for the development, construction, implementation, and final rollout of the initiative. It should also be responsible for enforcing implementation time-schedules and budgets approved by the steering committee, and for carrying out consultation activities with key stakeholders on the PSI interlinking solution. In order to be able to perform all these duties effectively, the team should have sufficient expertise and overall project management experience, adequate empowerment, enough financial and human resources, and open and effective communication with project governance and the oversight authorities.

50. Transparency throughout the deployment of the agreement should help to ensure continuing buy-in and commitment from all relevant stakeholders. Transparency might also lead to improvements throughout implementation if a proper feedback mechanism is developed for this purpose. Progress reports should have a broad scope, though still with a certain level of detail. More detailed technical annexes may be produced and attached to the main reports. Progress reports should also be made available to broader audiences, though probably in a simplified format. This will serve the purpose of creating awareness about the initiative and its anticipated benefits. Building demand and participation from the early stages of the initiative would be a key part of its development and implementation process. Adequate financial and human resources should be allocated for this type of marketing effort.

SUSTAINABILITY

Principle 7: The public authorities and private sector stakeholders involved in an international interoperability agreement should regularize the public consultative arrangements to ensure that the evolution of the agreement in terms of new business functions, services, and operating procedures is broadly responsive to, beneficial for, and accepted by stakeholders.

Key issues

7.1 The consultative arrangements that were created for the planning and implementation stages of the agreement should not be intended to disappear once the agreement is rolled out.

51. Maintaining consultative arrangements is crucial for achieving the continuous buy-in and commitment that will accelerate the initial migration of transactions and promote future volume growth. Likewise, public sector authorities’ ́cooperative oversight arrangements that were devised and established in the planning phase should be meant to operate on an ongoing basis once the international interoperability agreement becomes operational. To ensure the effectiveness and transparency of the oversight arrangement, the regulatory standards and the detailed oversight policies and procedures that will be applied to the agreement should be developed and published. A communication program for broader audiences should be maintained after implementation. The program should inform those audiences not only on achievements and milestones, but also on future plans and developments intended to better meet the needs of participants and other market players and users.

Principle 8: The public authorities involved in an international interoperability agreement should establish effective cooperative public governance, regulatory, and oversight mechanisms to allow for the effective oversight of the linked or shared PSIs.

Key issue

8.1 A cooperative oversight body for the international interoperability agreement should be established with senior representatives from the participating national PSI supervisory and/or regulatory authorities that are relevant to the type of agreement.

8.2 The cooperative oversight body should be developed in a manner that is consistent with Responsibility E of the CPSS-IOSCO Principles for financial market infrastructures[23].

52. The cooperative oversight body should be given a mandate to monitor and assess the linked or shared PSIs against the recognized standards and, if necessary, to propose or even undertake regulatory action. In any case, national oversight authorities should stand ready to cooperate with the body and should be able to exert control over aspects of the agreement that affect their jurisdictions. Therefore, as part of the framework outlining its overall mandate, powers and functions, the cooperative oversight body should identify the division of responsibilities and the forms of interaction with national oversight and authorities.

Principle 9: The public authorities involved in an international interoperability agreement should put in place all necessary regulatory and oversight arrangements to ensure ongoing compliance of the participating PSIs with the legal and regulatory requirements and any other relevant policy standards that apply to the agreement.

Key issues

9.1 The public authorities and private sector stakeholders should maintain sound and committed organizational, governance and senior managerial leadership of the agreement and ensure that the staffs dedicated to the agreement are well informed and trained in the goals, functions and operations of the agreement.

9.2 The public authorities and private sector stakeholders should institute a regular evaluation program of the agreement.

53. Oversight should aim at ensuring that the agreement remains effective and relevant for its participants and the cross-border markets it serves. For this purpose, the governance of the agreement should be robust and be continuously strengthened. The steering committee should evolve into a board or similar arrangement reflecting the nature of the agreement as a going concern. Under its direction, management should continuously ensure that the agreement activities are consistent with its objectives, strategy, and risk tolerance. In this last regard, the board (or similar) should ensure that the organization provides the right incentives to attract qualified senior and mid-level professionals that will act diligently and in the best interests of the agreement. The board and management should also ensure that all of the staff members are adequately trained and understand the goals, functions, and operations of the agreement and can apply that knowledge in practice in a variety of circumstances.

54. The cooperative oversight body should institute a program of periodic assessments of the agreement. The assessments will assist the relevant oversight authorities in ensuring that the agreement is managed effectively. The assessment reports should be made available and accessible to all interested parties.

Annex 1: Oversight of payment systems in the SADC

In Southern Africa, the Committee of Central Bank Governors (CCBG) has undertaken to facilitate cross-border payments. To this end, the SADC Payments System Project Team (the project team), as the CCBG group responsible for payment systems, has initiated a process to develop a framework for an integrated regional payment environment. The CCBG has appointed the SADC Payment System Oversight Committee (SADC PSOC), an oversight committee that is vested with the necessary powers to ensure the proper functioning of the various payment schemes adopted in the regional SADC Payment Systems. The SADC PSOC sets out policies regarding access criteria for participation in the payment schemes, handles dispute matters referred to it, and ensures that any Financial Market Infrastructures (FMIs) that are appointed by the market to provide clearing and settlement services adhere to international standards and best practices.

Payment Systems in the Southern African Development Community[24]

Payment system oversight in SADC is established under the principles for international cooperative oversight contained in the CPSS (now: CPMI) report "Central Bank Oversight of Payment and Settlement Systems",[25] and adopts the CPSS-IOSCO Principles for financial market infrastructures (PFMI) as minimum standards against which the PSIs are assessed by the participating central banks.

Individual participating central banks consult with each other, and, when necessary, before implementing policies or taking any action that could materially affect the PSIs. This consultation is done in order to avoid inconsistencies in the oversight relationship.

The South African Reserve Bank (SARB) is the Lead Overseer and accepts primary responsibility for the oversight of the PSIs. It coordinates the cooperation between the participating central banks, and facilitates the work of the SADC PSOC. The SARB provides for the Chairperson and Secretariat of the PSOC. Each participating central bank designates a Country Leader to serve as the principal member of the Committee and to ensure ongoing senior-level engagement and accountability on oversight matters.

The SADC PSOC periodically assesses the design and operation of the PSIs against the PFMI. It may accomplish this either by reviewing and commenting upon analyses and assessments prepared by the PSI operators, or by preparing independent analyses and assessments. PSI operators are required to submit a self-assessment against the PFMI at least every two years or when there is a material change (e.g., the addition of new initiatives, major new services, and changes to the PSI operations and risk management procedures.)

Individual participating central banks reserve the right to prepare their own independent analyses and assessments of the PSIs against the PFMI, when they deem it necessary to do so. They share their assessments with the SADC PSOC, and seek to reach consensus on their assessment of PSI compliance with the PFMI. The participating central banks aim to take compatible actions with regard to PSI oversight, with the intention of achieving common understanding and consensus in the SADC PSOC. Differences that cannot be resolved by the SADC PSOC may be referred by the Country Leaders to their respective Governors for further guidance.

The Payment System Management Body (PSMB) administers the scheme rulebooks and ensures that participating members and PSIs comply with their obligations in terms of the rulebooks. The PSMB deals with any deviations from the rules and refers any dispute that it is not able to handle to the SADC PSOC for further consideration.

A SADC payment scheme consists of the rules, operating agreements, and processes adopted by its members and PSIs, which are administered by the PSMB under the oversight of the SADC PSOC.

The involvement of the PSMB allows the participating central banks to focus on their oversight responsibilities, leaving to the PSMB in its capacity as PSI scheme administrator the task to design rules that are consistent with the oversight principles and the role of first line actor in the event of rules non-compliance from PSIs, with an emphasis on reducing the needs for central bank involvement in PSI administrative aspects.

[1] As in the companion report, the term "interoperability" is generally understood here as the property of products or systems which work with other products or systems without friction. When referred to retail payment systems, interoperability enables users to make digital payment transactions with any other user in a convenient, affordable, fast, seamless, and secure way, possibly via a single transaction account (see below). Interoperable payment systems allow two or more proprietary platforms to interact seamlessly, enabling the exchange of payment transactions between and among payment service providers and, consequently, users.

[2] The term payment system infrastructure (PSI) is used here to generally refer to a payment system or any of its components (e.g., a platform, structure, or module) which combine with others to allow the system to perform its function of transferring funds between or among participants.

[3] A transaction account is defined as an account (including an e-money account) held with a bank or other authorized and/or regulated PSP, which can be used to make and receive payments and to store value. All deposit accounts held with banks and other authorized deposit-taking financial institutions, referred to as "deposit transaction accounts", which can be used for making and receiving payments qualify as transaction accounts. Prepaid instruments based on e-money, referred to as "e-money accounts", can be offered by banks and other authorized deposit-taking financial institutions, as well as by non-deposit-taking PSPs such as mobile network operators (See the "Payment aspects of financial inclusion", report by the Committee on Payments and Market Infrastructures and the World Bank Group, April 2016.) The desirability of a single account is based on two considerations: First, while interoperability can be achieved even among payment service users who do not possess accounts with banks or other PSPs, this type of interoperability would not be as financially inclusive as one among payment service users who all hold accounts. The difference is between interoperability built around "off-network" transactions (for example, as in the case of an individual sending money from her mobile account to another individual who doesn’t have an account) and "cross-network" transactions: the former requires recipients to cash out the payments received, whereas the latter makes it possible for recipients to store received funds, send them on or use them to make payments. The second reason in favor of achieving interoperability via a single transaction account is that this would allow every individual payment service user to make and receive payments from all other payment service users in the economy through only one entry point to the financial system, with maximum efficiency and user convenience.

[4] This section draws on the World Bank’s "Guidelines for the Successful Regional Integration of Financial Infrastructures", January 2014.

[5] The integration projects of the Association of Southeast Asian Nations (ASEAN), Central America and the Dominican Republic, the European Union (EU), and the Southern African Development Community (SADC), among others, are prime examples of this driver. These projects are discussed in further detail below.

[6] Transaction cost reduction is associated with the cost reductions related to straight-through processing of cross-border transactions, clearing, and settlement achievable through harmonization and standardization of regional payment systems, and to scale economies from commonly shared schemes and systems. Regional payment system integration may deliver liquidity-cost savings. These are greater where there is a single regional currency used to settle all domestic and cross-border regional payments, since the markets for the regional currency and assets denominated in it are potentially broader and deeper, making the settlement asset more available at a lower transaction cost than otherwise. Where there is no single regional currency, liquidity-cost savings depends on the use of a settlement currency that is highly available throughout the region and has relatively deep and active markets accessible to the regional financial institutions participating in the regional settlement network.

[7] Indirect participation occurs either through the system to which the participant belongs or through an intermediary.

[8] A link is a set of contractual and operational arrangements between two or more payment system infrastructures, which connects them directly or through an intermediary. While technical interfaces generally are developed to allow some degree of automation to support certain information and data exchanges, links generally also require some degree of harmonization of operating rules and other scheme features as a pre- requisite. More elaborate and sophisticated links allow for partial or even full interoperability and straight-through-processing at a transactional level of the underlying technical operating platforms. On links, see also Box 3.

[9] The operator or "hub entity" can be one of the participating payment system infrastructures, an entity that is independent of the infrastructures linked through, or an operating unit of a participating infrastructure.

[10] Messaging formats between participating members and their national payment system are often standardized with those required for cross-border messaging, or are readily translatable through mapping interfaces to allow straight-through message processing between connected systems.

[11] Where there is no single regional currency, regional settlement schemes involve either a currency index composed of a (weighted) basket of local currencies, a global reserve currency such as the U.S. dollar, or the euro as a reference currency, for exchange conversion to and from local currencies on each side of the cross-border payments. In some schemes, the global reserve currency, or a dominant regional currency, is used as the settlement currency.

[12] TARGET2, which was launched by the Eurosystem in 2008 and replaced TARGET, is a centralized platform that settles payments directly between participants – rather than through the infrastructure of the national central banks.

[13] The CLS solution has been introduced to reduce principal risk in foreign exchange settlements. CLS, in fact, virtually eliminates principal risk by settling all payments on a payment-versus-payment basis.

[14] The IPF was established in 2009, and is developed and managed by an association of banks and clearing systems from Europe, Africa, North America, and central and South America. Although less ambitious and prescriptive than the SEPA Framework for clearing and settlement (see in the text below), it provides a framework for cross-border clearing and settlement for multiple and single regional currency payments. Like the SEPA framework, the IPF is designed around accepted international operating and technical standards to permit efficient and secure regional and cross-regional interoperability among participating clearing infrastructures.

[15] As of June 2015, six central bank and sixty-five commercial bank participants from nine SADC Member States (Lesotho, Namibia, Malawi, Mauritius, South Africa, Swaziland, Tanzania, Zimbabwe, and Zambia) participate in the SIRESS platform.

[16] TIPANET was organized twenty years ago before the emergence of global banks that operate in multiple national payment infrastructures and focus on correspondent banking services as a core business line.

[17] Notable features among these global schemes are: the interoperability between schemes at point-of-sale devices, at least in some countries and regions; the integration between transaction systems; and globally centralized clearing and settlement systems for each of the card schemes. They involve proprietary messaging and processing systems for inter-member-bank clearing and settlement with decentralized authorization and processing at the member-bank level for cardholders and merchants. However, the actual cross-border funds transfer involves central counterparty/correspondent banking linkages to the national large-value payment systems of the countries in which they participate. Cross-border/cross-currency payments involve banking relations between member-banks in one country and a correspondent bank in the other country. Thus, even some highly integrated schemes and systems, such as those for global card payments, must link through local banks to national and regional inter-bank payment settlement infrastructures in order to settle cross-border/cross-currency inter-member payments.

[18] Based on the commercial agreement, the sender on MTN’s side would pay a service-specific transfer fee, but Airtel’s receiving customers would not pay to receive a cross-border transfer. The standard cash-out fee would apply to the receiver if customers were to withdraw cash from their mobile money account.

[19] In both countries, MTN and Airtel had a ‘360 degree marketing’ strategy that combined a strong above-the-line (ATL) campaign on TV and radio with below-the-line (BTL) actions on the ground. Focusing promotion on the sending market is key to the success of any remittance product, however, and MTN effectively carried most of the communication efforts. In the case of MTN, the customer experience was designed to be very similar to sending money domestically, and marketing materials closely mirrored those used to promote domestic transfers. Marketing materials were simple and focused on just one use case – ‘Send money home’ – and one competitive advantage: affordability. Focus groups targeting Burkinabé migrant workers in Côte d’Ivoire who send money back home have responded very positively to this marketing campaign. Following the launch campaign, MTN has continued to promote the service as part of its regular BTL activities, particularly in the western part of the country, where many Burkinabé migrants work as cocoa harvesters. (See Scharwatt C. and C. Williamson, "Mobile Money Crosses Borders: New Remittance Models in West Africa", GSMA. March 2005.)

[20] The World Bank included a dedicated questionnaire to capture developments in the area of interoperability as an annex to the 2010 edition of the biennial Global Payment Systems Survey. The questionnaire was designed to capture innovations resulting in new products as well as innovations in processing (hereinafter referred to as the survey). A total of 101 central banks completed the survey and reported 173 innovative retail payment products/product groups. The majority of the innovative products/mechanisms have very limited interoperability. Less than 20 per cent of the products were reported to be fully or partially interoperable. Around 25 per cent of the products/mechanisms supported some mechanism to exchange funds with traditional payment products. The traditional clearing and settlement infrastructure is not generally used. More than 50 per cent of the innovative products reported in the survey were settled in the books of the issuer, with only around 24 per cent settling in central bank money. Less than 40 per cent of the products settled in T+0. There is little evidence to assume that the situation has substantially changed since then. Interoperability of e-money accounts accessed via the mobile phone (mobile money accounts) has only been implemented (or is planned to be implemented) in very few countries. According to the GSMA "The Mobile Economy 2015" report, there were 255 mobile money solutions offered in 89 countries as of December 2014. In November 2014, the GSMA reported that, based on slightly lower figures, 60% of all mobile money services worldwide are led by MNOs. There were 57 markets with two or more live mobile money services (33 of which had 3 or more services). However, the GSMA report only lists four countries, where certain MNOs established interoperability between their mobile money solutions, namely Indonesia (2013), Pakistan, Sri Lanka, and Tanzania (all in 2014). Based on these figures, (partial) interoperability has only been introduced in 7 per cent of those countries with two or more mobile money deployments. In 2014, the GSMA introduced a Mobile Money Interoperability program with the support of Axiata, Bharti Airtel, Etisalat, Millicom, MTN, Ooredoo, Orange, Telenor, Turk Telekom, Vodafone, and Zain, aiming at accelerating interoperability of mobile money services by identifying and sharing best practices, guidelines, and processes, and by providing regulatory support in a number of leading markets.

[21] An "interoperability agreement" is here defined as an arrangement among systems and participating entities to facilitate the delivery of interoperable payment services to participants and users, consisting of a combination of: 1) technical, legal, commercial, and contractual agreements among participating institutions, 2) shared telecommunication links and common standards for the exchange of transaction data between access and acceptance devices of participants and users, and 3) a central coordinating structure to manage the clearing and settlement of transactions as well as related business aspects such as rules, procedures, fees, sanctions, etc. This report will refer to "international" interoperability agreements, to be understood as interoperability arrangements involving two or more national PSIs.

[22] The regional payment system oversight arrangement adopted in the Southern African Development Community (SADC) provides an illustrative example in this regard. See Annex 1.

[23] This responsibility calls for central banks, market regulators, and other relevant authorities to cooperate with each other, both domestically and internationally, as appropriate, in promoting the safety and efficiency of financial market infrastructures. As the CPSS-IOSCO report explains, central banks, market regulators, and other relevant authorities should cooperate with each other, domestically and internationally (that is, on a cross-border basis), in order to support each other in fulfilling their respective regulatory, supervisory, or oversight mandates with respect to financial market infrastructures (FMIs). Relevant authorities should explore, and where appropriate, develop cooperative arrangements that take into consideration i) their statutory responsibilities, ii) the systemic importance of the FMI to their respective jurisdictions, iii) the FMI’s comprehensive risk profile (including consideration of risks that may arise from interdependent entities), and iv) the FMI participants. The objective of such arrangements is to facilitate comprehensive regulation, supervision, and oversight and provide mechanisms whereby the responsibilities of the authorities can be fulfilled efficiently and effectively. Authorities are encouraged to mutually cooperate to reduce the likelihood of gaps in regulation, supervision, and oversight, which could arise if they did not coordinate, and to minimize the potential duplication of effort and the burden on the FMIs or the cooperating authorities. Relevant authorities should cooperate with resolution authorities and the supervisors of direct participants, as appropriate and necessary, to enable each to fulfill their respective responsibilities. Cooperative arrangements should foster efficient and effective communication and consultation among relevant authorities. Such arrangements should be effective in normal circumstances and should be adequately flexible to facilitate effective communication, consultation, or coordination, as appropriate, especially during periods of market stress, crisis situations, and the potential recovery, wind-down, or resolution of an FMI. Inadequate cooperation, especially during times of market stress and crisis situations, may significantly impede the work of relevant authorities.

[24] SIRESS stands for SADC Integrated Regional Electronic Settlement System.

[25] See "Central bank oversight of payment and settlement systems", Committee on Payment and Settlement Systems, May 2005.

IV Access to Payment Infrastructures

About this report

The author of this Technical Report is Jose Antonio Garcia. Contributions were received from the members of the FG DFS Interoperability Working Group and in particular from Ghassan N. Abu Shihab, Niyi Ajao, Lara Gidvani and Thomas Lammer. The Technical Report was reviewed by the Focus Group Digital Financial Services. Thomas Lammer provided the overall guidance for this project.

If you would like to provide any additional information, please contact Vijay Mauree at tsbfgdfs@itu.int.

List of acronyms

ACH Automated Clearing House

AML Anti-money Laundering

ATM Automated Teller Machine

CFT Combating the Financing of Terrorism

CPMI Committee on Payments and Market Infrastructures

DFS Digital Financial Services

IOSCO International Organization of Securities Commissions

ITU International Telecommunication Union

MNO Mobile Network Operator

NBFI Non-bank Financial Institution

NPS National Payments System

PFMIs Principles for Financial Market Infrastructures

PIN Personal Identification Number

POS Point of Sale

PSO Payment System Operator

PSP Payment Service Provider

RSP Remittance Service Provider

RTGS Real Time Gross Settlement

Executive Summary

Non-banks are having an increasing role in payments, including the provision of payments services directly to end-users. Despite this increasing role, many of them are still not accepted as direct participants of key payment infrastructures, which often leads to limited or null interoperability in the services/products they offer. Moreover, being able to use key payment infrastructures at a reasonable cost and with appropriate service levels is an important element underlying a competitive payments market.

The operators of these payment infrastructures should adhere to international standards and best practice and establish risk-based and objective access criteria, and ensure that any PSP that wishes to gain direct access and meets such criteria is able to join as a direct participant.

Still, for many non-bank PSPs gaining direct access may not be feasible due to the investments they would need to make in order to fulfill the infrastructure’s access criteria. In such cases indirect access mechanisms may be capable of providing these PSPs with suitable payment services. However, in certain cases indirect access may not be as effective, for example if charges applied by the principal (an entity that is a direct participant in the infrastructure) are excessive relative to the costs it itself incurs for using the system, or if the criteria set by the principal for opening accounts and providing payment services to customer PSPs are disproportionate.

Payment system regulators, in particular the central bank as the payment system overseer, should ensure that all PSPs are able to gain fair access to payment services, including those for which direct access is not financially feasible and need to access the services through a principal.

Effective access to payment infrastructures may also be hampered if there are barriers to accessing the telecommunications networks serving those infrastructures. Telecomm regulators may also have a role to play in markets where it has been observed that MNOs that are involved in the payments business restrict in some form the access to other PSPs to the mobile telecommunications network that these MNOs operate.

Introduction and Background

Until relatively recently, non-cash payment services were essentially – and in some countries, exclusively – provided by commercial banks. The role of banks as retail payment service providers was historically linked to another of their key functions, which is deposit-taking. This is: banks provide their depositors a gateway for making payments to other depositors in the same bank or in another bank. For this purpose, banks (including the central bank) developed payment systems, and traditionally were the sole direct participants in most of these.

However, the payments landscape has changed significantly in line with evolving payment needs, product, process and technical innovations, as well as other structural developments. In many countries, financial inclusion has been a major driver of change in the retail payments arena.

Development of digital financial services (and in general the shift from cash and paper-based instruments to electronic) and the expansion of the networks of service delivery/customer service points to bring financial services closer to where people live and transact are regarded as critical tools for achieving financial inclusion objectives, as well as overall payments efficiency objectives. Interoperability of the various payment services offered is another key tool to enhance the proximity of financial services and to increase overall convenience to end-users.

In this context, non-banks are having an increasing role in payments in general, and in retail payments in particular, including for the continued development of digital financial services.

Despite this increasing role, many non-banks that provide payment services are still not accepted as direct participants[1] in many payment infrastructures, either of a retail nature or a large-value nature. This often results in fragmentation of payment services and/or of payment service providers, which leads to their limited or null interoperability.

In addition, being able to make effective use of key payment infrastructures is an important element underlying a competitive payments market. Payment systems generally benefit largely from economies of scale and network effects, and for this reason in any particular market there is a very small number of payment systems. Hence, not being able to participate in a key payments infrastructure may significantly affect the competitive balance among market participants.

From a financial inclusion perspective, in their 2016 report "Payment Aspects of Financial Inclusion" the Committee on Payments and Market Infrastructures (CPMI) and the World Bank Group have described the issue at stake as follows:

"Restricted access to financial and ICT infrastructures, especially of new or non-traditional service providers, tends to constrain the supply of payment services to users. Often incumbents with a dominant position in one infrastructure have the incentive to create barriers for access to new entrants. However, there are some more fundamental challenges to accessing the messaging, clearing and settlement service infrastructures, including those associated with technical, legal/regulatory and/or financial viability issues (i.e., direct access might be too expensive)."

The main purpose of this report is therefore to discuss access-to-payment-infrastructures issues around the world, and how these can affect the development of safe, efficient, interoperable and financially inclusive payment services.

This document builds on the collective experience of the members of the Interoperability Working Group and the broader Focus Group on Digital Financial Services, convened by the International Telecommunication Union (ITU).

The document is organized as follows: the first section provides a general description of the historical role of banks in the payments business, and highlights the increasing role of non-banks in this area in recent years; the second section describes the core interbank payment infrastructures that are observed in most markets around the world, namely real-time gross settlement systems, automated clearinghouses and payment card switches, emphasizing the important role that these infrastructures play in making PSPs interoperable at different levels; section IV discusses legal and regulatory aspects related to access to payment infrastructures, in particular the various types of access criteria that are typically included in the rules or regulations of those systems; Section V then presents and analyzes global data on access-to-payment infrastructures issues. The main body of the report ends with a section that discussed key insights and conclusions. A number of specific case studies are then presented in Annex I.

1 Involvement of banks and non-banks in the payments business

Banks have been the "traditional" retail payment service providers, largely because through one of their core functions which is deposit-taking, they provide their depositors a gateway for making payments to other depositors in the same bank or in another bank. Nevertheless, banks also provide certain payment services to individuals and businesses that do not hold deposits with them. Examples of the latter include bill and other service payments made in cash, or acceptance of payments made with payments cards issued by another entity.

In recent years, non-banks have made a significant incursion into the retail payments market. Some of the elements that favored this development include the range of technical and other innovations in payment methods, the emergence of new payment needs/changing payment habits and customer preferences, and several other market-driven factors. In addition, in some countries the regulatory environment has facilitated and promoted the incursion of non-banks in this field, while in others it has become a hurdle or even an impediment.

For the purposes of this report, it is deemed useful to have a working definition of "non-banks" as regards their role in payments. In many jurisdictions, there is no specific legal definition of non-banks, or various definitions may apply depending on the functions that a non-bank performs. For reasons like these, it is proposed to adopt the functional definition of non-banks stated in the CPMI 2014 report "Role of non-banks in retail payments":

"a non-bank is defined as: any entity involved in the provision of retail payment services whose main business is not related to taking deposits from the public and using these deposits to make loans".

Moreover, in the payments field non-banks (as well as banks) are involved in a number of activities, not all of which are directly affected by the regulatory environment surrounding the access to payment infrastructures (e.g., access policies, conditions, restrictions, etc.). For this reason, it is also useful to specify the payments-related activities that are covered in this report.

Hence, following also CPMI (2014), non-banks involved in retail payments can be categorized as follows according to the stages of the payments chain in which they engage, the type of payment service provided and also their relationship with banks:

• Front-end providers that provide services directly to end-users such as consumers and businesses/corporates

• Back-end providers that typically provide services to banks

• Operators of retail payment infrastructures; and,

• End-to-end providers that combine front-end services to end users with clearing and settlement services.

This report will focus mainly on the first category, although it will also analyze access to central bank-operated settlement systems for operators of retail payment infrastructures.[2]

Lastly, for the purpose of this report, banks and non-banks that provide services directly to end-users are referred to as "payment service providers" or "PSPs".

2 Payment infrastructures[3]

An individual that holds a transaction account with a bank or non-bank PSP can normally make payments using that transaction account to other individuals, businesses and government entities that also hold a transaction account with the same PSP (i.e., so-called "on us" payments), or in some cases also to parties that hold a transaction account with a different PSP (i.e., "off us" payments).

For "on us" payments, the PSP only needs to debit and credit, in its own books, the account of the payer and the account of the beneficiary, respectively. While this can be done manually, modern PSPs have deployed an automated and centralized account management infrastructure within their so-called "core banking system" (or equivalent).

The main payment infrastructures that support "off us" payments are large-value settlement systems (e.g., a real-time gross settlement (RTGS) system), automated clearinghouses (ACH) for retail electronic funds transfers and/or for cheques, and payment card processing platforms (i.e., so-called payment card switches).[4]

RTGS systems are the backbone of a country’s payment and settlement infrastructure and are owned and operated by central banks.[5] Retail payment services are typically not processed at a large scale directly through RTGS systems, although there are exceptions (e.g., SPEI in Mexico). Nevertheless, RTGS systems are a critical foundation for retail payments because many retail payment infrastructures rely on an RTGS system to settle their participants’ final balances from each clearing cycle.

ACHs are designed to centrally handle and process mass payments of an "off us" nature. Some ACHs focus on cheque processing, others on fully electronic retail instruments like direct credit transfers and direct debit transfers, and some others process all these instruments.[6]

In practice, one of the effects of an ACH is that it enables the interoperability of its members for the payment instruments it clears, and by this means it "increases" the network size of service points for individual customers. This is because any branch (or in some cases also ATMs and other service point types) of a PSP that is a member of that ACH can be used to initiate a funds transfer to a customer of any other PSP that is also a member. This supports nationwide reachability of PSPs, even if some of them do not have a large network of service points.

ACHs have traditionally operated on the basis of a daily clearing and settlement cycle, although more recently many have incorporated two or more daily settlement cycles. During each cycle, ACH participants exchange payment instructions, which are then cleared and settled on net basis at the end of the cycle (i.e., so-called "deferred net settlement"). Final beneficiaries are often credited later on (e.g., one or two days), although in some cases they may get credited even before the settlement cycle has been completed. In fact, some ACH operators around the world have launched so-called "instant payments", by means of which the final beneficiary of a payment processed through the ACH is credited immediately after the payment instruction is approved, while the settlement between PSPs that participate in the ACH occurs at a later stage.

A payment card processing platform or switch is a mechanism that connects various payment card issuers and the payment card acceptance infrastructure deployed by card acquirers. Through the switch, payments initiated at a merchant via a point-of-sale terminal (POS terminal), at an ATM or other card acceptance device or channel (e.g., Internet, mobile phones) are routed to the issuer of the underlying payment card for approval.[7] Approved transactions are then exchanged, cleared and settled between PSPs, normally on a daily basis. Payees (typically merchants) are normally credited later on, from one day to a few days.

Similar to ACHs, card switches also increase the effective size of the network of service points/channel. This is because the switch enables processing transactions with cards issued by any member of that switch and that were made at any merchant affiliated to, or at an ATM belonging to, any acquirer that is also a member of the switch. In other words, card switches enable the interoperability of its members for the payment services it processes on their behalf. Higher levels of interconnectedness increase the positive network externalities to the benefit of customers, i.e. with the same payment card they are able to use the funds (or credit) in their account at numerous service points and channels

Moreover, in many cases a switch may be able to process transactions with payment cards from card issuers that are not members of the switch, and/or that were made at merchants affiliated to acquirers that are not members of that switch.[8] Typically, this is possible if these payment cards have been issued under - and the switch is enabled to process transactions made with - one or more of the payment card brands/schemes with nationwide or international acceptance (e.g., Visa and MasterCard, among others).

3 Types of access to payment infrastructures

A. Access for PSPs

To provide "off us" payment services to end-users, a PSP will need to be able to make use of the domestic payment infrastructures. This is necessary for the PSP to be able to exchange customer payment orders with other PSPs, and on this basis proceed with the clearing and settlement of such payment orders.

Access to payment infrastructures is generally considered as being of either a "direct" or an "indirect" nature. Nevertheless, there is also the possibility that direct access be obtained for some specific processes or sub-processes only, while others will need to be carried out through indirect access (i.e., through another direct participant). For example, some non-banks that are direct participants of an RTGS system may not be able to access some of the features of that system, like central bank intraday and/or overnight liquidity. Other possibilities (e.g., access for transaction switching only) are discussed in sub-section III.b below.

In principle, both direct access and indirect access could be capable of providing PSPs with suitable payment services for the purposes they pursue. As will be discussed in the following paragraphs, advantages and disadvantages of direct access versus indirect access vary according to specific circumstances.

In essence, direct access means that a PSP is itself a direct participant in the system, submits its payment instructions directly to the system, and is responsible vis-à-vis the system and other direct participants for the settlement of its (debit) positions.

Criteria for having direct access to a payments infrastructure includes technical and financial requirements, and in some cases other types of requirements. The latter often refer to aspects such as the need to have a specific legal or regulatory standing (e.g., having a specific license, such as a banking license, or being regulated by the central bank or financial supervisor). Technical, financial and other access criteria are explained in further detail in section IV of this document.

Complying with such criteria, especially when it comes to the national clearing and settlement backbone (i.e., the RTGS system that is operated by the central bank), will normally entail substantial internal investments from the applicant.[9] This is because the RTGS system is almost always considered systemically important.[10] Hence, for some PSPs, direct access to an infrastructure like the RTGS system might be overly expensive and/or complex.

From the technical and financial standpoints, the criteria for gaining direct access to payment systems like an ACH or a payment card switch are generally not as demanding as they are for the RTGS system operated by the central bank. However, ACHs and/or payment card switches still may have access criteria that can be difficult to meet, especially for smaller PSPs.

Indirect access occurs when a PSP is not itself a direct participant in the system but instead uses another PSP, which is a direct participant, to act on its behalf—i.e., the first PSP is a customer of the second PSP. For some PSPs, indirect access may be a better option for using a given payments infrastructure, for example due to cost reasons and technological limitations.

It should be noted that PSPs as customers of other PSPs are operationally reliant on their chosen intermediary to make payments on their behalf, and incur credit risk where receipts of funds are held with the intermediary. In turn, intermediary PSPs incur risks on their customer PSPs where they provide them with any form of credit as part of the payment (and/or other) services provided.

B. Other variants of access to payment infrastructures for PSPs

In some cases – notably in the area of payment cards - some PSPs may opt out of the inter-PSP clearing and settlement process. These would normally be PSPs that are card issuers but that do not acquire transactions made with other cards, or that do not act as acquirers at all. Nevertheless, for their cards to be attractive to their customers those cards must still be usable throughout the network of ATMs and/or POS terminals (or other merchant types), for which purpose the PSP card issuer will need access to the payments infrastructure for transaction switching. In this case, transactions are not exchanged among card issuers and acquirers; instead, the switch simply routes the transactions associated to the relevant PSP card issuer to him and excludes those transactions from the general clearing and settlement process. This PSP will then make payments directly to the merchants that accepted its card.

This type of access for switching purposes only is likely to become popular also for inter-PSP mobile money payments.

Yet in other cases, some PSPs that are direct participants are able to exchange payment transactions through the payments infrastructure but need to be "sponsored" into clearing and settlement by another direct participant (i.e., the former PSPs cannot clear and settle with others on its own behalf, but need to do this through others).[11]

In summary, as noted earlier in sub-section III.a, access to payment infrastructures can be either direct or indirect. However, in cases like the ones described above access may be a mix of the two: i.e., there may be "direct access" when it comes to transaction switching/exchanges, but inter-PSP transaction clearing and settlement may occur under indirect access.

C. Access for operators of other payment systems

Payment infrastructures like ACHs, payment card switches and others increasingly settle their final balances in an RTGS system operated by the central bank.[12] When this is the case, the operators of those infrastructures will need to have some form of access to the RTGS system.

It should be noted that participation by a PSP and by an operator of another payment system are different in nature, and this is very often reflected in different access criteria for each of them and in the conditions under which they are allowed to operate in the RTGS system (e.g., the various system functionalities and services they will have access to).

For example, different from a PSP that settles vis-à-vis other PSPs, an operator of another payments system generally only settles in the RTGS system the final balances of their participants. Hence, on one hand an operator may only need discrete access to the RTGS system (e.g., to settle the balances of each settlement cycle, which may be one or few per day).[13]

In another example, an operator of a retail payments infrastructure will not normally undertake credit risks vis-à-vis its participants, and will only settle the outcome of a settlement cycle once it has received all the necessary funds from participants with a debit position at the end of that cycle, in order to credit those funds to participants with a credit position at the end of the cycle. For this reason, an operator will only rarely need to use features of the RTGS system such as payment instruction queuing, or using intraday credit from the central bank.

Worldwide trends on the issues described in this Section of the report are explored in Section V. Likewise, these aspects are further illustrated with specific country cases in Annex I.

4 Legal & regulatory, ownership and governance aspects

Access to payment infrastructures is regulated in some form in the vast majority of countries. Access issues may be provided for in laws, general regulations and/or rules that are specific to the relevant payments infrastructure.

The law(s) and/or regulation(s) that refers to access to a given payments infrastructure may state that access to that infrastructure is confined to banks only, or to banks and a limited set of licensed and regulated non-bank financial institutions (NBFIs). In some cases the applicable law(s) or regulation(s) will not limit access directly as such, but may require for a PSP that wishes to become a direct participant of a payments infrastructure to hold a settlement account at the national central bank. Access to a settlement account at the central bank may in turn be limited to banks only and to selected NBFIs. In other cases, central banks that operate a RTGS system may be forbidden by local laws to act as liquidity providers for unregulated financial entities.[14]

The requirement to have a settlement account at the central bank is most common in the case of RTGS systems. All around the world, these systems settle in the accounts that system participants hold at the central bank (i.e., also referred as "central bank money") as this is widely recognized as a safe practice for systemically important payment systems.

Other payment infrastructures including ACHs and payment cards switches very often settle the final participant balances of each of their settlement cycles in central bank money as well. Hence, a PSP that does not have a settlement account at a central bank but that is a direct participant of the ACH or the card switch will most likely end up being sponsored into clearing and settlement. In other cases, direct participation in the ACH or switch of a PSP lacking such an account will simply not be allowed.

A. System access rules

Payment infrastructures generally have rules that state the specific criteria to be met by any PSP that wishes to become a direct participant. Access criteria typically include technical, financial and other requirements.

Technical requirements normally entail having a robust internal technological infrastructure to connect with the payments infrastructure, ensuring operational reliability and business continuity, adequate handling of anti-money laundering (AML) and combating the financing of terrorism (CFT) policies and procedures, availability of sufficient and capable staff that handle the interconnection with the infrastructure, etc.

Financial requirements generally refer to a PSP having appropriate indicators of creditworthiness (e.g., fulfilling a minimum capital requirement), and having sufficient financial resources for contributing to any pre-funded default arrangements (which are common in deferred net settlement systems such as ACHs and payment card switches).

Other requirements typically include being able to provide evidence on the good standing of the owners and managers of the PSP, on the qualifications of managers and staff (e.g., on risk management issues), etc. In addition, as earlier discussed, non-technical requirements may also include having a specific license type (e.g., a banking license) in order to become a direct participant, and/or that the applicant has a settlement account at the central bank.

B. International standards and other guidance

Access rules to payment infrastructures vary across countries and across the various infrastructures in each country, and keep evolving based on experience, market developments and other needs. Standards and other internationally recognized guidance for payments and other settlement systems provide general references or instructions on the features that a system’s rules ought to include with regard to access aspects.

The CPMI-IOSCO "Principles for Financial Market Infrastructures" (PFMIs) issued in 2012 are the most widely-recognized international standards for payment systems and other financial market infrastructures (FMIs).[15] Although the PFMIs were designed for being applicable to systemically important payment systems (and other FMIs), many central banks also apply the PFMIs, or a subset thereof, to the main retail payment systems in their jurisdiction.

The PFMIs contain a specific principle on the issue of access to the infrastructure. Principle 18 on "Access and participation requirements" states that:

An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.

According to this principle, a payments system (and other FMIs) should allow for fair and open access to its services, based on reasonable risk-related participation requirements. In other words, a payments system should allow for fair and open access to its services, but at the same time it must control the risks to which it is exposed by its participants by setting the necessary risk-related requirements for participation in its services. The latter should have the least-restrictive impact on access and competition that circumstances permit.

Moreover, the operator of a payments infrastructure must set robust risk management controls for day-to-day operations. The effectiveness of these controls may also mitigate the need for the operator to impose onerous participation requirements that limit access.

More recently, in their 2016 "Payment Aspects of Financial Inclusion" report the CPMI and the World Bank Group further recognize the importance for financial inclusion of appropriate access to infrastructures and their interoperability. For example, two of the key actions that relate to Guiding Principle 3[16] in that report state the following:

• Payment infrastructures, including those operated by central banks, have objective, risk-based participation requirements that permit fair and open access to their services.

• Increased interoperability of and access to infrastructures supporting the switching, processing, clearing and settlement of payment instruments of the same kind are promoted, where this could lead to material reductions in cost and to broader availability consistent with the local regulatory regime, in order to leverage the positive network externalities of transaction accounts.

C. Ownership and governance of payments infrastructures

As mentioned in section III, RTGS systems are owned by central banks which are very often bounded by their respective organic laws on the types of entities that can become direct participants of this and other payment systems they operate. Many central banks in their role as monetary and financial stability authorities also limit participation on the basis of concerns of potential negative implications of NBFIs and other entities becoming direct participants in the RTGS system[17].

Hence, direct participation in RTGS systems is often restricted to commercial banks and to some operators of other payment and settlement systems (e.g., retail payment systems, securities settlement systems, central counterparties, etc.). In some cases, other non-bank financial institutions that have been licensed and are supervised can also become direct participants.

ACHs can be owned by the central bank, by the private sector or have mixed ownership. For central bank-owned ACHs, it is common for direct participation to be restricted in the same way as for the RTGS system, often because in both cases participation is largely dependent on being able to have an account at the central bank.

For privately operated ACHs two common scenarios are: 1) the ACH is owned by a consortium of banks and is operated as a cost center rather than with a profit-maximizing objective; and, 2) the ACH is privately owned, with ownership being partly or largely independent from participation, and is a profit-maximizing venture. In the first scenario, direct participation tends to be limited to the banks that are also shareholders, or in some cases also to other banks as this allows the ACH to reach the whole banking sector. In the second case, direct participation tends to be open also to at least some types of non-bank PSPs as the ACH owner(s) will have an incentive to process the largest possible volume of transactions in order to help it maximize total revenue and profits.

Similar considerations apply to payment card switches, which only rarely are owned by central banks. In these infrastructures, however, participation for the sole purpose of transaction routing/switching (see section III.b) is likely to be more open to non-banks PSPs that operate payment cards or other payment instruments that can be processed through the same switch.

The governance structure of a payments infrastructure also has a significant influence on its access policies. Infrastructures owned by bank consortia and whose governance structures are based solely or essentially on ownership (e.g., based on the percentage of company shares owned) will tend to preserve the status quo, i.e. limiting participation to owners and possibly a few other entities. Or, even if other non-bank PSPs may access the infrastructure directly, the underlying terms and conditions might be disadvantageous relative to those that are applied to traditional participants in aspects like the initial subscription fee, monthly fee, per transaction fees, etc.

In some cases the central bank participates in the governance structure of these infrastructures, or is able to influence it through regulation and/or moral suasion so that all existing or potential participants are given fair access conditions.

5 International evidence and trends

The purpose of this Section is to show global data on access-to-payment infrastructures issues. A number of specific cases studies are then presented in Annex I.

The data shown in this Section have been obtained from the World Bank Group’s Global Payment Systems Survey (GPSS). Most recent data was publicly released in 2014 and shows information as of end-2012, and is therefore referred to below as the "GPSS 2012".

A. Access to RTGS systems

Table 1 – Access of non-bank institutions to the RTGS system

Supervised NBFIs

Unsupervised NBFIs

Non-financial institutions (other than Ministry of Finance or equivalent)

Direct access to settlement account and credit

Direct access to settlement account, NO credit

Direct access to settlement account and credit

Direct access to settlement account, NO credit

Direct access to settlement account and credit

Direct access to settlement account, NO credit

Total countries worldwide (117)

18

18

1

5

1

9

By Region

East Asia and the Pacific (9)

1

3

0

2

0

1

Europe and Central Asia (13)

1

2

0

1

1

3

Latin America and the Caribbean (24)

3

8

0

1

0

3

Middle East and North Africa (10)

2

0

0

0

0

0

South Asia (3)

0

0

0

0

0

0

Sub-Saharan Africa (19)

0

1

0

0

0

1

Euro area (15)

3

2

0

1

0

0

Other European Union members (11)

2

1

0

0

0

1

Other developed countries (13)

6

1

1

0

0

0

Notes:

1. Source: World Bank Group, Global Payment Systems Survey 2012 (adaptation of Table IX.1).

2. The "Total worldwide" figure of 117 represents the number of central banks that answered this section of the GPSS 2012. Some central banks represent more than one country (e.g., BCEAO, ECB, ECCB).

3. Numbers in the table represent the number of central banks that answered positively each question.

4. "Other developed countries" refers to developed countries outside the European Union.

From Table 1 it may be observed that direct participation of entities other than commercial banks was relatively uncommon in RTGS systems worldwide at the time of the GPSS 2012. The non-bank type with the least restrictive figures were supervised NBFIs. Even for the latter, however, at the global level only 36 countries (about 30% of the total that answered the GPSS 2012) informed that supervised NBFIs were direct participants in their RTGS system. In only half of those cases an NBFI can access payment system-related central bank credit.

On the other hand, direct participation of unsupervised NBFIs and of non-financial institutions other than the Ministry of Finance (e.g., mobile network operators or "MNOs") was practically inexistent. Only about 5% of countries informed that unsupervised NBFIs can become direct participants in their RTGS system. This number raises slightly to 9% for the case of non-financial institutions.

From a regional perspective, direct access to the RTGS system by supervised NBFIs is more common in Latin America and the Caribbean and in developed countries outside the European Union. About 50% of the central banks in these two regions informed that they give NBFIs direct access to their RTGS system. In contrast, such access is zero or close to zero in South Asia and Sub-Saharan Africa.

Table 2 – Access of payment system operators to the RTGS system

ACH Operators

Payment Card Switch Operators

Direct access to account and credit

Direct access to account, no credit

Direct access to account and credit

Direct access to account, no credit

Total countries worldwide (117)

15

44

6

22

Source: World Bank Group, Global Payment Systems Survey 2012 (adaptation of Table IX.1).

Table 2 shows that direct participation of payment system operators in RTGS system is much more common, albeit still far from universal. Operators of ACHs have direct access to the RTGS system in 51% of the respondent countries. The corresponding figure for payment card switch operators is significantly lower, at 24%. Only a small fraction of ACH and payment card switch operators also have access to central bank credit.

Additional relevant data from the GPSS 2012 shows that access criteria in RTGS systems was still largely institution-based: 107 respondents (91% of the total) mentioned that direct access is based on the type of license/authorization of the applicant or potential participant.

B. Access to ACHs

Table 3 – Direct access of non-bank institutions to ACHs

Credit Unions

MTOs

Supervised Cooperatives

Unsupervised Cooperatives

Other MFIs

Postal network

Exchange bureaus

Other

Total countries worldwide (96)

17

7

14

2

11

14

3

9

By Region

East Asia and the Pacific (8)

1

0

0

0

0

0

0

0

Europe and Central Asia (8)

0

0

0

0

1

2

0

0

Latin America and the Caribbean (22)

7

2

5

1

2

1

1

1

Middle East and North Africa (6)

0

0

0

0

0

2

0

0

South Asia (4)

0

0

1

0

1

1

0

0

Sub-Saharan Africa (19)

1

0

2

0

0

1

0

4

Euro area (10)

3

2

3

0

4

2

1

0

Other European Union members (10)

1

1

1

0

2

1

0

1

Other developed countries (9)

4

2

2

1

1

4

1

3

Notes:

1. Source: World Bank Group, Global Payment Systems Survey 2012 (adaptation of Table IX.3).

2. The "Total worldwide" figure of 96 represents the number of central banks that answered this section of the GPSS 2012. Some central banks represent more than one country (e.g., BCEAO, ECB, ECCB).

3. Numbers in the table represent the number of central banks that answered positively each question.

4. "Other developed countries" refers to developed countries outside the European Union.

With regard to direct access of non-banks to ACHs, the numbers are not very different from those discussed in the previous sub-section on access to RTGS systems.

Credit unions, supervised cooperatives and postal networks are the non-bank types with better direct access to ACHs. However, in none of these cases the share of countries where these entities enjoy direct access to ACHs exceeds 20%. Exchange bureaus and, unsurprisingly, unsupervised cooperatives show lower access figures than other non-banks.

Direct access to ACHs is more common in Latin America and the Caribbean region, Euro area-countries and developed countries outside the EU. Direct access of credit unions is stronger in these regions than in others.

Direct access of postal networks is especially strong in developed countries outside the EU (44% of the cases). Interestingly, the Middle East and North Africa region postal networks are the only non-banks with direct access to ACHs, in 2 out of 6 countries (33% of the cases) that responded the GPSS 2012.

6 Insights and conclusions

A. Implications for operators, banks and non-banks

Being able to make use of key payment infrastructures at a reasonable cost and with appropriate service levels is an important element underlying a competitive payments market. In addition, by further enabling interoperability of PSPs, fair and open access to payment infrastructures promotes efficient and low-cost payment services.

As mentioned in sub-section III.A, both direct access and indirect access mechanisms to payment infrastructures could, in principle, be capable of providing PSPs with suitable payment services. However, in certain cases indirect access may not be as effective for many customer PSPs. This could occur because customer PSPs are often direct competitors of the PSP(s) that provides them access to the payments infrastructure (i.e., the PSP acting as principal).

For example, charges applied by the latter PSP may be significantly higher than the ones it itself faces as a direct participant of the relevant payments infrastructure, even after due consideration of the amortization of the investments needed to gain such direct access. Naturally, this would place customer PSPs at a disadvantage if they are serving the same market segment as their principals.

In other cases, the principal may set disproportionate criteria for opening accounts and providing payment services to customer PSPs – or may even decide not to provide such services at all. This is currently being observed in several markets worldwide.[18]

On the other hand, it must be recognized that for a (probably large) share of non-bank PSPs, gaining direct access to a payments infrastructure may not be cost effective. This could be the case for many smaller and newer non-bank PSPs that process a relatively small volume of transactions. For them, the costs of joining a payments infrastructure as direct participants (e.g., initial and monthly membership fees, internal IT and other investments to meet the essential system access criteria, etc.) could be greater than if they were operating as customer PSPs through another direct participant PSP.

Best practice for payment system operators would therefore be adhering strictly to the spirit of international standards and other relevant international guidance. As per the discussion in sub-section IV.b, this would entail establishing risk-based and objective access criteria and ensuring that any PSP that wishes to gain direct access and meets such criteria is able to join the system as a direct participant. Operators must nevertheless also ensure that the risk-based criteria they set also consider the potential risks that a participant may bring into the payments infrastructure through its direct participation, and that such criteria are clear and are publicly available.

Lastly, in a related though at the same time different matter, in some markets it has been observed that certain MNOs that are also involved in the payments business as PSPs for mobile payments have restricted access to the mobile telecommunications network that they themselves operate to other PSPs. Although different from restricting access to clearing and settlement infrastructures, restricting access to the mobile telecommunications network is likely to have similar overall effects in terms of limiting interoperability and competition in the market place.

B. Implications for central banks and other authorities

Several institutions around the world have called upon payment system regulators, in particular the central bank in its role as payment system overseer, to ensure that all PSPs are able to gain fair access to payment services.

As regards direct participation, as already mentioned international standards require central banks to ensure that a payment system’s participation requirements allow for fair and open access. This applies both to infrastructures operated by the central bank as well as to those operated by other parties.

However, emphasis has also been placed on ensuring effective access to payment services for PSPs for which direct access is not a possibility based on overall cost-benefit considerations.

In this last regard, for example, the CPMI-World Bank "General Principles for International Remittance Services" state, as part of the possible actions to implement the principles, in particular General Principle 4, that:

"The relevant authorities may want to check that RSPs without direct access to core payment systems can obtain fair indirect access. Institutions with direct access should be encouraged to provide relevant payment services, including foreign exchange services, on an equitable basis to RSPs." [19]

Other entities have specifically stressed the risk that certain requirements, like those associated to AML/CFT, be used inappropriately by PSPs acting as principals (i.e., they have direct access to payment infrastructures) to discriminate against other PSPs when providing payment services to them.

Annex I: Case studies

Egypt

The introduction of the Automated Clearing House (ACH-EG) in 2010 enabled interoperability across banks by allowing the exchange and clearing of transactions among participating financial institutions. Mobile payments entered the ecosystem in 2013. It is expected that mobile payment interoperability will also be achieved by layering it on the ACH-EG via a mobile payments gateway solution, i.e. a mobile payments switch.

As of now, only one MNO e-wallet service is equipped with a function that allows funds transfers to other e-wallets. This is due to close integration of the MNO that operates this e-wallet service with the banking infrastructure (due to mobile money regulations in Egypt, MNOs are required to contract with a bank). Once the mobile payments switch in ACH-EG is released for production, which is expected for late 2016, mobile payments would flow seamlessly between e-wallets of different issuers, and between e-wallets and any bank account.

Among other responsibilities, ACH EG will be responsible for clearing, and settlement will be done at the RTGS system operated by the Central Bank of Egypt. As only banks are allowed as direct participants in this RTGS system, non-banks participating in the switch will have to be sponsored into settlement, most likely through the same bank that they will have contracted for providing the e-wallet service.

Jordan

The National Mobile Payment Switch (JoMoPay) was developed and built following an initiative of the Central Bank of Jordan (CBJ) for the purposes of exchanging "on us" and "off us" payments among PSPs, including banks and MNOs that operate e-wallets.

MNOs need to open account at a commercial bank in order to be able to settle transactions in the country’s RTGS system (the "RTGS-JO", operated by the CBJ). In other words, MNOs are direct participants in JoMoPay which allows them to exchange payment transactions directly, but need to be sponsored into settlement in the RTGS-JO by a direct participant of the latter (i.e., a commercial bank).

In parallel, the CBJ issued the Mobile Payment Instructions and Operational Framework that set the technical, financial and other requirements for MNOs to connect to JoMoPay, which is compulsory in order to ensure all levels of interoperability among all PSPs and PSOs involved in mobile payments throughout the Kingdom. For example, in terms of the technical requirements, MNOs cannot connect to JoMoPay unless they have the certification and approval from CBJ. As for financial requirements, a minimum capital of JOD 1.5 Million has been established. The Mobile Payment Instructions and Operational Framework also empowers the CBJ to oversee MNOs with regard to their role as PSPs.

The CBJ has made available access to JoMoPay without collecting the testing fees and annual infrastructure fees from PSPs for the first two years in order to facilitate that mobile payments customers receive the lowest price possible and increase financial inclusion levels in the country.

Mexico

Banco de México regulates mobile payment services in order to achieve mobile payments adoption, foster competition among mobile payments PSPs, and to reduce the associated costs. The mobile payments regulation has focused on achieving interoperability among PSPs. The regulation establishes that transactions across ecosystems must be settled through the RTGS system operated by Banco de México (i.e., SPEI) for "off us" mobile payments, either directly by the paying and payee mobile payments PSPs, or through a connected clearinghouse (see below).

Mobile payments are bank-led, in association with MNOs. It is compulsory to provide mobile payment services "on us" and "off us" in similar conditions regarding hours of service, times of processing and costs. In the case of "off us" transactions, banks can additionally charge SPEI costs.

In 2014, Banco de México issued rules for the creation and operation of mobile payments clearinghouses. Such entities need Banco de Mexico’s authorization to operate and are allowed to become direct participants in SPEI.

As a result of the measures taken so far, the processing costs and processing time of "off us" mobile payments have been reduced.

Nigeria

Twenty-one MNOs (known locally as "Mobile Money Operators" or "MMOs") have been licensed by the Central Bank of Nigeria (CBN), and they are all required to connect to the Nigeria Central Switch operated by the Nigeria Inter-Bank Settlement System Plc (NIBSS) to achieve interoperability among MMOs, and between MMOs and the bankers’ clearing system. Some of the MMO licensees are banks, while others are fintech companies.

Every fintech-owned MMO is required to enter into an agreement with a commercial bank of its choice for the latter to act as its settlement agent. MMOs’ access to the RTGS system operated by the CBN is made possible by this settlement arrangement. There is a back-to-back clearing collateral mechanism in place to protect the entire system against settlement risks. As part of this mechanism banks pledge collateral to the CBN, while individual MMOs pledge collateral to their settlement bank.

Recently, the CBN began to issue "Payments Solution Service Provider" licenses to fintechs who want to specialize in the provision of payment services. These specialized PSPs have access to the bankers’ clearing system through settlement banks, like the MMOs, and they also connect to the Nigeria Central Switch. Through this means, they are able to reach the bank accounts of their respective subscribers.

In parallel, the CBN, working with payment system industry players, commenced the process of benchmarking the Nigerian payments system against the PFMIs in 2015. The gaps that exist have been documented and there are ongoing initiatives to bridge the gaps.

Pakistan

In Pakistan, interoperability of mobile money services/e-wallets has been live since 2014 and is enabled through "1LINK", a commercial interbank switch. Interoperability allows for funds transfers from e-wallet to e-wallet, e-wallet to bank account and bank account to e-wallet.

It is important to note that interoperability between mobile money services was not mandated by the central bank (i.e., the State Bank of Pakistan, "SPB") or other regulators. The decision to interoperate was reached purely on market situation. In this regard, Pakistan’s mobile money model is bank-led (run jointly by a MNO and a bank), so PSPs providing mobile payment services were in general already familiar with an interbank switch: banks were already connected to 1LINK, so they only had to also integrate their mobile money platforms to the switch.

Recently, the SBP and the telecom regulator Pakistan Telecommunication Authority (PTA) issued joint regulations on the technical implementation and interoperability of mobile/branchless banking. Under these regulations, PTA licenses Third Party Service Providers (TPSPs) under class value added services, while the SBP provides authorization for what concerns payment services and operations. The TPSP model is expected to offer maximum outreach and connectivity, whereby all banks and all MNOs will be able to entertain each other‘s customers.

Peru

Peru´s shared mobile payments platform/switch became operational in February 2016. Known as "BiM" (which stands for "billetera móvil" or "mobile wallet"), it is the result of a partnership formed by the country’s financial institutions, government, telecommunications companies, and large payers and payees.

The ultimate goal of this effort is to achieve interoperability in mobile payments between banks and other approved entities, across telecommunications networks, while making use of existing financial infrastructure (i.e., banks, branches, agents, ATMs, online channels) so that a payment can be accepted by anyone.

Circular No. 013-2016 of the Central Bank of Peru (BCRP) regulates e-money payment agreements (known as "APDE"). BiM is regarded as an APDE. Pagos Digitales Peruanos, which is the administrator of BiM, clears payment transactions and calculates inter-participant positions on the basis of multilateral netting at the end of each day. BiM participants that have direct access to the BCRP’s RTGS system settle their positions directly in this system, while other BiM participants must be sponsored into settlement by a direct participant of the RTGS system.

Bibliography

[1] CPSS (2003), "The role of central bank money in payment systems", Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d55.pdf

[2] CPSS and the World Bank (2007), "General principles for international remittance services", Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d76.pdf

[3] CPMI-IOSCO (2012), "Principles for financial market infrastructures", Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d101a.pdf

[4] CPMI (2014), "The role of non-banks in retail payments", Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d118.pdf

[5] CPMI (2016), "Correspondent banking", Bank for International Settlements, http://www.bis.org/cpmi/publ/d147.pdf

[6] CPMI and the World Bank Group (2016), "Payment aspects of financial inclusion", Bank for International Settlements, Basel. http://www.bis.org/cpmi/publ/d144.htm

[7] The World Bank (2011), "Payment Systems Worldwide: A Snapshot. Outcomes of the Global Payment Systems Survey 2010", Financial Infrastructure Series, Payment Systems Policy and Research, Washington DC. http://documents.worldbank.org/curated/en/2011/01/16422496/payment-systems-worldwide-snapshot-outcomes-global-payment-systems-survey-2010

[8] The World Bank (2014), Tables of the Global Payment Systems Survey 2012, available at http://www.worldbank.org/en/topic/paymentsystemsremittances/brief/gpss, consulted on July 19, 2016.

[9] The World Bank (2015), "Withdrawal from Correspondent Banking: Where, why and what to do about it", Washington DC. http://documents.worldbank.org/curated/en/2015/11/25481335/withdraw-correspondent-banking

[1] "Direct participation" and other relevant terms in the context of access to payment infrastructures are described in detail in section III of this document.

[2] Non-banks in the fourth category also provide clearing and settlement services, even if only for a limited number of participants. For determining access to the core payment and settlement infrastructures in their respective jurisdiction, the non-banks in this category would also be regarded as operators of retail payment infrastructures.

[3] This section draws largely on CPMI and the World Bank Group (2016), section 3.1.3.1.

[4] As noted by CPMI and the World Bank Group (2016), "absence of any of these infrastructure components hinders the national payment system in exploiting the potential benefits of modern payment instruments, and therefore adversely affects financial inclusion".

[5] The World Bank’s Global Payment System Survey 2012 shows that RTGS systems are operating in 127 countries. There are only two cases in which the operator is not the central bank: Canada and Switzerland.

[6] Due to the focus of this report being on digital financial services, only ACHs that handle electronic payment instruments are discussed.

[7] Only transactions with cards issued by a member of the switch and that were made at merchants affiliated to (or ATMs belonging to) an acquirer that is also a member can be exchanged, cleared and settled through the platform.

[8] This is relevant, for example, when payment card switch only have regional rather than national coverage, or for payment card transactions made in a foreign country.

[9] These investments are in addition to the initial, per transaction and maintenance fees usually required by the operator of the payments system.

[10] ACHs and payment card switches are only rarely considered systemically important. Nevertheless, in an increasing number of countries these infrastructures are being considered as "system wide important payment systems" (or similar term), based on their importance for the real economy and the confidence in the domestic currency.

[11] This normally occurs when having an account at the central bank is a condition for becoming part of the clearing and settlement mechanism. This requirement is discussed in detail in section IV of this document.

[12] Some ACHs and/or switches settle in the accounts of a bank which is one of its participants. As will be discussed in section IV, RTGS systems settles in the accounts held at the relevant central bank. This practice is generally considered safer than settling through the books of a commercial bank.

[13] In some systems, however, the operator may need more continuous access to the RTGS system to, for example, manage collateral in cash posted by its participants and which is deposited at their account with the central bank.

[14] Depending on the specific system and its design, this may make the participation of such entities impossible from a practical perspective

[15] Other FMIs include central securities depositories, securities settlement systems, central counterparties and trade repositories.

[16] Guiding principle 3 on Financial and ICT infrastructures: "Robust, safe, efficient and widely reachable financial and ICT infrastructures are effective for the provision of transaction accounts services, and also support the provision of broader financial services".

[17] For example, there may be concerns that such other entities, once they join the system, may be seen as being under the general regulatory purview of the central bank and being covered by "safety net" mechanisms.

[18] As part of the so-called “de-risking" trend, many banks that are cancelling or denying these services to PSPs such as non-bank remittance service providers (RSPs), especially at the cross-border level. Some large global banks are even denying these services to foreign banks which depend on the former for all sorts of cross-border transactions. For more information see CPMI (2016) and The World Bank (2015).

[19] Moreover, with regard to direct access CPMI and the World Bank (2007) state “Payment system operators and their overseers may want to check whether their direct access requirements are consistent with international principles to ensure payment system safety and soundness. Access criteria should be clear, well defined and fair; and access should be granted to all entities, including RSPs, which comply with such requirements".

V The Regulator's Perspective on the Right Timing for Inducing Interoperability

About this report

This report was written by Daniel Gersten Reiss and Ricardo Teixeira Leite Mourão[1] from the Interoperability working group of the ITU Focus Group Digital Financial Services.

The authors acknowledge the contributions received from the Interoperability working group participants and from Marcelo Araujo da Costa. Thomas Lammer provided the overall guidance for this project.

If you would like to provide any additional information, please contact Vijay Mauree at tsbfgdfs@itu.int

Executive summary

Interoperability has been understood as a relevant aspect in fostering the financial inclusion efforts made through the availability of digital financial services (DFS). Despite the fact that some consensus has been achieved and the regulator can now have an important role in inducing interoperability, the right timing for and scope of the regulator’s actions is still an open discussion.

The present work provides insights shared by five regulators who participated in the DFS Focus Group WG on Interoperability. Although it is impossible to generalize conclusions from the survey, some similarities across the surveyed countries can be observed.

First, before addressing DFS interoperability, the financial and telco regulators need to define their roles and responsibilities among each other. Second, although regulators generally seem to consider interoperability an important element in the DFS ecosystem, the current state of interoperability in different countries varies substantially. Third, positive outcomes are reported—or at least expected—across countries, suggesting that current policies might persist for the time being. Fourth, authorities seem to be conscious of the fact that any intervention needs to be considered carefully and take place only when no market-driven solution is leading to interoperable services.

1 Introduction

Interoperability is deemed to be one of the crucial characteristics of financial and information and communications technology (ICT) infrastructures, and for the widespread availability of DFS, effectively supporting financial inclusion[2]. Whereas the widespread availability of digital solutions for savings, credit, and payments provides people with access to financial services, payments interoperability enables these targeted people to transfer their money to any other individual, without needing to have multiple transaction accounts.

While everyone should have the option to have more than one account, if she/he decides to do so, nobody should be required to open accounts due to a lack of interoperability, since this might involve costs coming from the existence of idle balances or from a higher incidence of fees to cope with their management. Since costs are often quoted as one of the most important reasons not to have an account, products that effectively meet a broad range of transaction needs of the targeted population (e.g. via interoperability) at little or no cost have a higher potential to increase access to and usage of transaction accounts[3].

Recent literature points out interoperability issues as a major obstacle to the implementation of DFS[4]. However, interoperability is not always considered as a desirable objective by service providers, especially not if they are dominant market players. This setting makes room for the rise of the willingness of governments seeking inclusion to induce interoperability.

Despite the fact that some consensus has been achieved and the regulator can now have an important role in inducing interoperability[5], the right timing for and scope of the regulator’s actions is still an open discussion. On one hand, early intervention may adversely affect market development by raising entry barriers and removing first mover incentives. For example, innovative solutions may be unsuccessful with early interoperability induction because of the reduction of the potential revenue they would obtain in the case where they were provided as stand-alone solutions[6]. On the other hand, intervening too late might make it difficult – if not impossible – to establish a competitive, interoperable market. As a result, undesired outcomes, such as oligopolistic or even monopolistic structures, and market power concentration can arise. Changing these market structures once they are established is challenging and will likely draw opposition from incumbents, who fear the competition from potential new entrants and want to defend their current market position.

Thus, the question becomes: What is the right time for the regulator to intervene and induce interoperability in a country’s DFS market? There is already extensive theoretical economic literature (which balances the benefits and costs of the government’s intervention in the market[7]) that may provide insights for answering this question. When it comes to interoperability, although there is some anecdotal evidence, typically we find a lack of ex ante/ex post data. Thus, analyses is limited, and any conclusion about whether regulatory intervention has improved interoperability must be carefully considered.

The present work contributes to the topic providing insights shared by five regulators who participated in the DFS Focus Group WG on Interoperability.

2 Methodology

A questionnaire was distributed among representatives from authorities of 18 countries attending the DFS Focus Group WG on Interoperability, eight from Asia, seven from Africa, and three from South America. Whenever possible, both the telecommunication and the financial regulators received the questionnaire.

Four regulators and one payment infrastructure answered the survey and their answers are reported on the next section. The questions are available in the Annex and addressed the areas summarized below:

• Mandate of the regulator

DFS, especially mobile financial services, rely on the telecom infrastructure, as well as the financial infrastructure. In some jurisdictions, it might not be clear what the powers and responsibilities of the telecommunication regulator and financial regulators are when it comes to DFS, resulting in the question of: Which regulator would be responsible for addressing DFS interoperability? The possible overlap and conflict of regulations and jurisdictions is an additional potential risk to the effectiveness of the regulations, which Benson and Loftesness (2012) cite as crucial for the success or failure of the flourishing of a sustainable interoperable market. It is important to take the country-specific legal and regulatory framework into consideration when trying to understand the rationale for local decisions.

• Relevant market

While the focus is on DFS, and specifically digital payments, the same electronic payment instrument (e.g. payment cards or mobile money) can be used for very different payment use cases. It is important to note that even within certain use cases, e.g. a person-to-person transfer, the challenges might be very different. For example, achieving interoperability in international remittances is typically considered to be even more complicated than interoperability for domestic remittances. Unique environmental conditions make it difficult to draw policy conclusions based on the experience of other markets. However, considering other markets’ experiences is still considered important, even if it is not possible to draw generalized policy conclusions from them. It is important to consider the country-specific market environment if regulators consider taking action on interoperability.

• State of interoperability

The regulator’s perception about the current state of interoperability within the relevant state is key to understanding any decision made regarding this aspect. How important is interoperability considered for the country’s financial system? How has the current level of interoperability of existing systems been achieved? Why does the regulator consider the current state of interoperability insufficient? It is important that the regulator is transparent on these aspects, so that its actions are predictable.

• Desirable outcome

Regulators’ actions to facilitate interoperability will obviously be taken with specific intentions, but the outcome may not always be the one expected. While authorities are typically cautious when it comes to admitting and/or discussing setbacks, a lot can be learnt from these lessons, and potential mistakes could ideally be avoided. Outcomes of regulatory interventions should be evaluated.

In the next section, the approach chosen by the five respondents for these areas is presented.

3 Reported answers

Country: Brazil

Respondent: Central Bank of Brazil[8]

Mandate

Concerning DFS, the Brazilian Central Bank (BCB) has the mandate to regulate DFS in general. The telecom regulator can regulate access to the mobile telecommunication infrastructure, which is clearly out of scope/mandate of the BCB. The BCB is also responsible for DFS interoperability.

BCB’s mandate was established in 2013, when Law 12,865 was enacted.

State of the market before authority’s involvement

Even before BCB’s mandate for DFS was established, banks and several non-bank payment service providers provided various DFS to the Brazilian market.

Examples are: PayPal, Mercado Pago, PagSeguro (payment facilitators), Cielo, Rede (acquirers), Oi Paggo, MFS (mobile payments), Alelo, Ticket, and Sodexo (food stamp providers), among others. Banks also provided DFS, mainly through Internet banking and mobile banking solutions.

Relevance assigned to interoperability

Interoperability is a major principle in the law that regulates the payment services provision in Brazil, as it is seen to be necessary for innovation and increasing competition.

Reason to address interoperability

The Brazilian payment cards market was characterized by a high level of market concentration. The two largest payment schemes had a combined share of approximately 90 per cent of the payment cards market (both in transaction volume and value). The acquiring market was also dominated by two acquirers (namely Cielo and Rede). It was pointed out in the Report on the Brazilian Payments Card Industry (2010) that the verticalization of many services by the acquirers were a major barrier to the entry of other acquirers. Additionally, the highly concentrated financial market led to a concentration at the issuing side as well. Furthermore, the involvement of the main financial institutions in all sectors of the payments service provision chain (from scheme owners to payment facilitators) increased the challenges entrants must face.

Authority’s approach

This is an ongoing process. In 2016, BCB decided to establish a working group with market participants to discuss and promote interoperability in the Brazilian market. In its first task on the operational side, the group discussed adjustments in the current interbank credit transfers standards to cope with non-bank payment service providers; besides that, all payment system providers guaranteed no technical obstacles for payment institutions to become participants, so that all authorized market participants should have access to this set of transfers as the adjustments are implemented.

Outcome

An internal report on the first phase achievements of the interoperability working group is to be finished by November 2016.

Country: Liberia

Respondent: Central Bank of Liberia[9]

Mandate

There has been no special agreement regarding the mandate on mobile payments between the Central Bank of Liberia (CBL) and the Liberia Telecommunication Authority. However, the Central Bank of Liberia mandated in its Mobile Money Regulation of May 14, 2014 that all authorized institutions licensed under its regulations should provide systems that are interoperable with systems of other authorized institutions.

State of the market before authority’s involvement

Prior to having a functional regulatory approach for DFS provision, the CBL followed a bank-led model. As a result, mobile money was offered by two banks in cooperation with one mobile network operator (MNO). The unsatisfactory uptake of mobile money led to an amendment of the new regulatory framework of 2014. The new regulatory framework follows a functional approach and no longer requires companies licensed by the Central Bank of Liberia for the provision of mobile money services to do this in cooperation with banks. So far, two subsidiaries from the MNOs have been licensed as mobile money providers: Lonestar Cell MTN Mobile Money Inc. which is currently market leader; and Cellcom Technologies Inc., which recently received its license.

Relevance assigned to interoperability

Interoperability has been considered important, as proven by the explicit requirement in the mobile money regulation.

Reason to address interoperability

Customers show a keen interest to transact across providers so interoperability is important. So far, however, the major challenge has been the deployment of the national switch at the CBL, to enable interoperability on infrastructure level.

Outcome

The two licensed mobile money providers still need to establish interoperability, as required by the mobile money regulation.

Country: Nigeria

Respondent: Nigeria Inter-Bank Settlement System[10]

Mandate

The Central Bank of Nigeria has the legal mandate for DFS in Nigeria, including enforcement of interoperability, through the Central Bank Act of 2007.

The role of telecommunication operators is the provision of telecommunication services, enabling the delivery of DFS over USSD, STK, mobile app, and the web via various GSM data plans.

State of the market before authority’s’ involvement

The authority’s focus on DFS prior to 2007 was limited. Financial institutions were the sole DFS providers before the legal mandate was enacted. Interoperability was mandated in 2008 among the two card payment processors (one with about 90 per cent and the other 10 per cent market share). Both were previously interested in interoperation, but they could not agree on business and commercial terms prior to 2008.

Relevance assigned to interoperability

Interoperability has been considered important.

Authority’s approach

Since moral suasion did not lead to the desired interoperability outcome, it was enforced by the Central Bank. The Central Bank initiated the development of the Nigeria Central Switch and mandated the existing (private) switches to interconnect to it for interoperability purposes. Inducing interoperability and establishing a central switch might have facilitated the growth of DFS in Nigeria, as DFS providers were able to interoperate with all banks right from the commencement of operations.

Outcome (aimed)

More efficient resource utilization (there were silo implementations which were expensive to operate and none were able to achieve critical mass) and lowering the barrier to entry were the major aimed outcomes.

Outcome (actual)

The aimed outcomes were achieved. A high level of technical interoperability exists in Nigeria today, and many DFS devices and schemes are able to interoperate seamlessly. Entry barrier has also been lowered substantially. While technical interoperability has been achieved and service providers comply with technical interoperability as required by regulation, they do not promote interoperability services (i.e. from a business/commercial perspective, there is little interest in interoperability). Interoperability has mainly been achieved among and between banks and non-banks, but not among non-banks, e.g. mobile money operators and microfinance banks.

Country: Philippines

Respondent: Bangko Sentral ng Pilipinas[11]

Mandate

DFS is within the mandate of the Bangko Sentral ng Pilipinas (central bank), specifically for products and services that would meet established regulatory criteria. Telecommunication operations, on the other hand, remains with the telecom regulator.

State of the market before authority’s involvement

Even without interoperability being mandated, the industry players were able to interoperate among themselves (with some encouragement from the central bank) in the following instances:

1. In 2005, the three ATM networks in the country interconnected, allowing an ATM cardholder to transact at any ATM in the country;

2. In 2010, the same ATM networks opened up their POS services to allow any ATM cardholder to transact at any POS device in the country;

3. In the first quarter of 2016, two of the largest e-money issuers launched a pilot to interoperate their e-money products. It is set to be launched to the public in late 2016.

Relevance assigned to interoperability

The relevant authorities have considered interoperability an important issue.

Reason to address interoperability

The decision to promote interoperability across DFS was aligned with the objective of encouraging and promoting electronic payments. Despite the increase in the number of institutions offering DFS and the increased use of DFS, a diagnostic study conducted in 2013 revealed only one per cent of the 2.5 billion payment transactions in an average month are effected electronically. The development of the national retail payments system (NRPS) hopes to address some barriers to entry in the existing set-up, including concerns on efficiency and affordability.

Authority’s approach

In the Philippines, interoperability is being strengthened with the NRPS initiative. NRPS is a policy and regulatory framework, which aims to establish a safe, efficient, reliable, and affordable retail payment system in the Philippines. Discussions across various groups are facilitated by the central bank to gather inputs and establish buy-in from the participants. It is an on-going process with planned policy and regulatory issuances.

Outcome

The process is still on-going but positive results are expected, based on the results of preliminary discussions.

Country: Uganda

Respondent: Bank of Uganda[12]

Mandate

Currently, the Central Bank is responsible for the approval and regulation of mobile money services, which are the predominant form of DFS in Uganda. An informal cooperative arrangement between the Central Bank and the telecom regulator exists, which will likely soon be formalized by means of a Memorandum of Understanding (MOU). The Central Bank issued mobile money guidelines with one of the requirements stating that systems need to be interoperable. Also, there is a requirement that mobile money service providers should not have exclusive contracts with Agents. The Guidelines were passed in 2013.

State of the market before authority’s involvement

Before the guidelines were passed, six mobile money providers were operating in the market, with two of them having a combined market share of over 80 per cent. Mobile money services are offered in partnership between financial institutions and telecom companies, and between financial institutions and third-party service providers.

Relevance assigned to interoperability

The relevant authorities consider interoperability an important policy issue.

Reason to address interoperability

Six participants on the market, with two of them having a combined market share of over 80 per cent. However, there was no evidence of collusion and no noticeable barrier to entry.

Authority’s approach

In regard to the non-exclusivity of Agents, all services providers were required to remove exclusivity clauses from their contracts with Agents following the issuance of the mobile money guidelines in 2013.

Outcome (aimed)

Agents are able to serve customers of the various service providers.

Outcome (actual)

Currently agents service customers of different service providers and this has increased the uptake of mobile money services.

4 Final remarks

Although it is impossible to generalize conclusions from the survey, some similarities across the surveyed countries can be observed. These aspects may be considered when discussing the timing for intervening for interoperability.

DFS, like other financial services, are typically the responsibility of financial regulators, often the Central Bank. The provision of financial services through mobile networks and/or the provision of DFS by mobile network companies (or their subsidiaries), might make it difficult for MNOs to determine their relevant regulator for their different service offerings. Financial regulators traditionally seek financial stability through safeguarding public confidence (Khiaonarong 2014). Telecom regulators focus on access to, and competition in the telecommunication services (Blackman e Srivastava 2011). Without a clear definition and understanding among regulators, there might be a regulatory overlap or gap. Thus, the financial and telco regulators need to define their roles and responsibilities among each other before addressing DFS interoperability.

Typically, the financial regulator takes care of the service financial aspect, while the telco regulator is concerned with the telecommunication infrastructure aspects of the service provision. The establishment of different legal entities has been a way to deal with this topic ‒ within the same business group, one entity provides the financial service and is under the financial regulation, whereas the other entity ‒ the MNO ‒ provides the data transfer service under the telecommunication authority’s regulation.

Regulators generally seem to consider interoperability as an important element in the DFS ecosystem, though the current state of interoperability in the different countries varies substantially. Even though these results were expected, this survey contributes to stress and reveals this policy perception.

While the Philippines reports some market-driven interoperable solutions, the reports from Nigeria reveal that, even with early attention to the topic, moral suasion was not enough to drive the market players to interoperate. As expected, regulators tend to act when the market is not developing towards a scenario that is considered to provide the best welfare results. Yet, the related strategies include not only normative rulings, but also moral suasion and general policies disclosures. Authorities should be transparent on their interoperability strategy to give market participants planning security.

Positive outcomes are reported ‒ or expected ‒ across countries. This condition suggests that the current policies are going to persist for the time being in those countries. Unfortunately, publically available data is limited and these positive outcomes are mainly confirmed by the increase of interoperable systems over time. Without appropriate counterfactuals, no further inference can be made.

Authorities seem to be conscious that any intervention needs to be carefully considered and take place exclusively when no market-driven solution is leading to interoperable services. However, they should not fail to consider inducing market participant behaviors in order to guarantee the system’s soundness and efficiency[13].

References

[1] Aghion, Philippe, Dewatripont, Mathias, Legros, Patrick, & Zingales, Luigi (eds.). 2016. The Impact of Incomplete Contracts on Economics. Oxford University Press.

[2] Albuquerque, João Porto de, Eduardo Henrique Diniz, and Adrian Kemmer Cernev. 2014. “Mobile Payments: A Scoping Study of the Literature and Issues for Future Research”. Information Development, 1–27. doi:10.1177/0266666914557338.

[3] Bankable Frontier Associates. 2012. “Interoperability and the pathways towards inclusive retail payments in Pakistan”. CGAP.

[4] Benson, Carol Coye, and Scott Loftesness. 2012. “Interoperability in Electronic Payments: Lessons and Opportunities”. CGAP.

[5] CPMI, World Bank. 2016. Payment aspects of financial inclusion. http://documents.worldbank.org/curated/en/806481470154477031/pdf/107382-WP-REPLLACEMENT-PUBLIC-PAFI-Report-final-in-A4.pdf

[6] Blackman, Colin, and Lara Srivastava, orgs. 2011. Telecommunications Regulation Handbook. Washington, DC: The International Bank for Reconstruction and Development / The World Bank, InfoDev, and The International Telecommunication Union.

[7] Bossone, Biagio. 2016. “Payment System Oversight and Interoperability”. 09/2016. ITU-T Focus Group Digital Financial Services. Geneva: International Telecommunication Union.

[8] Central Bank of Brazil, and Brazil. 2010. “Report on the Brazilian payment card industry”. Brasilia: Central Bank of Brazil; Ministry of Finance; Ministry of Justice. https://www.bcb.gov.br/Pom/Spb/Ing/Payment_Cards_Report.pdf.

[9] Dahlberg, Tomi, Jie Guo, and Jan Ondrus. 2015. “A critical review of mobile payment research”. Electronic Commerce Research and Applications, Contemporary Research on Payments and Cards in the Global Fintech Revolution, 14 (5): 265–84. doi:10.1016/j.elerap.2015.07.006.

[10] David-West, Olayinka. 2016. “The path to digital financial inclusion in Nigeria: Experiences of Firstmonie”. Journal of Payments Strategy & Systems 9 (4): 256–73.

[11] Khiaonarong, Tanai. 2014. “Oversight Issues in Mobile Payments”. 14/123. IMF Working Paper. Washington, D.C.: International Monetary Fund.

[12] Laffont, Jean-Jacques and Tirole, Jean. 1993. A Theory of Incentives in Procurement and Regulation, MIT Press.

[13] Laffont, Jean-Jacques and Tirole, Jean. 1999. Competition in Telecommunications, MIT Press.

Annex: Questionnaire

1 How is the mandate over digital financial services (DFS) split between the Central Bank and the telecom regulator? Who (if any) has a legal mandate to induce interoperability? Please describe the legal mandate and when it was ruled out.

2 Can you describe if there were DFS available prior to when your legal mandate was enacted? If so, describe the market conditions of the most relevant DFS available (number of players, market share, and economic sector – i.e. financial institution, telecom company or other categories of DFS providers).

3 Considering the most relevant DFS, have the relevant authorities considered interoperability an important issue in terms of policy?

a. If so, what were the market conditions that raised the issue and when did it happen? (How many participants were in the market? Which market share did they have? Was there any evidence of collusion among the participants? Any kind of barriers to entry, either horizontal or vertical?)

b. If not, why was interoperability not an important issue in that market?

4 For those cases in which interoperability was considered an issue in the previous question:

a. Have you acted in any way to induce interoperability? For these cases, how was the induction implemented? (Moral suasion, enhance industry code, non-regulatory policy issuance, regulation, etc.)

b. If you have not acted, why did you choose this strategy? Do you expect to take any action in the future (on what conditions)?

5 Regarding the outcomes:

a. Which were the aimed outcomes when the inducement was implemented?

b. Which were the actual outcomes observed from the inducement? Could you describe the new market conditions? Were the unplanned outcomes positive or negative?

6 In cases where the regulator’s inducement was implemented before, would you expect the outcome to be different (better/worse)? And, if it were implemented later, what would you expect? Please elaborate.

[1] The views expressed herein are those of the authors and do not necessarily represent the ones from the Central Bank of Brazil nor the International Telecommunication Union.

[2] According to the ITU Digital Financial Services Focus Group’s glossary, interoperability is “the ability to exchange payments transactions between and among providers. This can be done by providers participating in a SCHEME or by a variety of bilateral or multilateral arrangements”. “When payment systems are interoperable, they allow two or more proprietary platforms or even different products to interact seamlessly”.

[3] See the Payment Aspects for Financial Inclusion report (CPMI and World Bank, 2016).

[4] See Albuquerque et al. (2014).

[5] For recent accordingly claims, see, e.g., David-West (2016); Bankable Frontier Associates (2012).

[6] There is a lack of quantitative assessment of these assumptions. According to Dahlberg et al. (2015), limited progress seems to have been made even if a large number of articles and notes have been published about digital payments.

[7] Indeed, the literature on market power and regulation and on contract theory and incentives is especially applicable to this topic. See, for example, Laffont and Tirole (1993), Laffont and Tirole (1999) and Aghion et al. (2016).

[8] Central Bank of Brazil was represented by Mr. Ricardo Teixeira Leite Mourão.

[9] Bank of Liberia was represented by Ms. Erica R. Williams.

[10] Nigeria Inter-Bank Settlement System was represented by Mr. Niyi Ajao.

[11] Bangko Sentral ng Pilipinas was represented by Mr. German S. Constantino Jr.

[12] Bank of Uganda was represented by Mr. Ivan Ssettimba.

[13] See Bossone (2016) for a discussion on interoperability and the oversight of payment systems.