Page 89 - ITU-T Focus Group Digital Financial Services – Interoperability

ITU-T Focus Group Digital Financial Services
Interoperability

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. Retail payment services are typically not processed at a large scale directly through
5
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

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.

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