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Payment Instruments and Payment Systems: A Global and National
Perspective
Payment Systems Department
2016
Latvijas Banka
Latvijas Banka:• contributes to determining and
implementing of monetary policy;
• manages reserve assets, including gold reserves;
• facilitates smooth functioning of payment systems;
• ensures interbank settlements;
• ensures smooth circulation of cash in Latvia;
• collects, aggregates and publishes financial (statistical) data;
• represents the interests of Latvia in international financial institutions.
These functions are performed by:• economists and econometrists;
• accountants and bookkeepers;
• financial market analysts;
• statisticians;
• payment systems experts;
• financial investment portfolio managers;
• cash-desk transactions methodology experts;
• payment and financial market analysts.
Content
1. Payment environment
2. How does it look in Latvia?
3. Payment instruments
4. Development trends
Payment system
Payment system — funds transfer system with formal andstandardised arrangements and common rules for theprocessing, clearing and/or settlement of payment transactions.
As defined in Law on Payment Services and Electronic Money
Payment environment
Large value interbank
payment system
Retail payment systems
Banking services for customers
Person to person payments
Payment environment
Large value interbank
payment system
Retail payment systems
Banking services for customers
Person to person payments
PAYMENTSYSTEMS
What is the importance of payment systems in payment environment?
• Smooth functioning of payment systems – participants’confidence in those systems and, ultimately, public confidence inthe currency;
• Stability of financial institutions and market, promoting systemicstability;
• Implementation of monetary policy;
• The functioning of financial markets and the economy as a wholethat favour the welfare of society;
• Mitigation of systemic risk – settlement in central bank money;
• Promoting of domestic and cross-border payments’ efficiency.
Payment environment
Large value interbank
payment system
Retail payment systems
Banking services for customers
Person to person payments
PAYMENTSYSTEMS
Types of payment systems
• RTGS - Real Time Gross Settlement systems. Large value, express payments. (also so-called LVPS – Large Value PaymentSystems)
• RPS - Retail Payment systems – large volumes. Usually netsettlement systems for retail payments.
What types of payment systems there are?
Payments are processed in payment systems of two types:
• gross settlement systems process payments on one by one basis and settle each payment individually without bundling;
• net settlement systems aggregate many payments and settle them in batches in specified time periods during a day.
GROSS SETTLEMENT
1. payment
2. payment
3. payment
4. payment
settlement
settlement
settlement
settlement
NET SETTLEMENT
1. payment
2. payment
3. payment
4. payment
settlement
RTGS
• Settlement transactions between payment systems’participants (banks);
• Settlement of monetary policy transactions;
• Cash leg settlement of financial and capital markettransactions;
• Final settlement of ancillary systems;
• Funds flows from all levels of payment environment –concentrated in significant fund flows and risks;
Payment system
Source: ECB
14
CHAPS - UK
HVPS - China
Fedwire and CHIPS - USASTEP2 - EU
TARGET2 – EU
BEPS - China
BOJ-NET - JapanEURO1 - EU
CORE – France
TARGET2-Latvija
EKS
PAYMENT SYSTEMS IN THE WORLD
Zengin - Japan
SWIFT – critical component of payment infrastructure
• SWIFT is an international communication network for safeexchange of standardized financial messages;
• Daily more than 10,000 financial institutions and corporationsin 215 countries send over 20 millions of financial messagesusing SWIFT network;
• Head office of SWIFT located in Belgium and operated underBelgian law.
PAYMENT ENVIRONMENT IN LATVIA
Payment environment in Latvia
Large value interbank
payment system
Retail payment systems
Banking services for customers
Person to person payments
EKS, FDL
TARGET2-Latvija
Banks
E-money institutions
Payment institutions
Latvian Post
State Treasury
What does Latvijas Banka do in the area of payment systems?
One of the principal tasks of the Latvijas Banka – participate inpromoting the smooth operation of payment systems incompliance with the provisions of the Treaty on the Functioningof the European Union and Protocol (No 4) "The Statute of theEuropean System of Central Banks and of the European CentralBank”.
Since the introduction of the euro as a currency, Latvijas Bankaperforms this task in cooperation with other central banks of theEurosystem.
Article 9, Law “On the Bank of Latvia”
How does Latvijas Banka perform this function?
3 main roles of Latvijas Banka in payment systems’ area:
• operator of payment systems;
• overseer of payment systems;
• catalyst in payment environment.
How does Latvijas Banka perform this function?
3 main roles of Latvijas Banka in payment systems’ area:
• operator of payment systems;
• overseer of payment systems;
• catalyst in payment environment.
EKS andTARGET2-Latvija
TARGET2-Latvija
The euro payment system TARGET2 is a real time payment system usedby EU banks for financial market settlements as well as large value andurgent customer payments.
Legally and operationally the decentralisation principle is retained withrespect to each Member State joining the TARGET2 system. TARGET2-Latvija is one of 25 TARGET2 component systems.
22 banks, Latvijas Banka and State Treasury, as well as 3 ancillarysystems (EKS, LCD system un FDL payment cards processing system)participate in TARGET2-Latvija.
On average TARGET2-Latvija processes 1.4 thousand payments in a valueof 1.0 billion euro daily (2015).
Electronic Clearing System
The EKS is the only clearing (net settlement) system in Latvia thatensures the settlement of a large volume customer credit transfers ineuro.
The EKS positions are settled in TARGET2-Latvija seven times per day.
The EKS is SEPA compliant system, which ensures its participants'capability to send and receive euro payments within SEPA area.
18 direct participants, incl. Latvijas Banka and State Treasury, 13indirect participants and addressable BIC holders participate in the EKS.
On average the EKS processes 147.4 thousand payments in a value of0.2 billion euro daily (2015).
What is SEPA and why it is necessary?
SEPA (Single Euro Payments Area):
• a project for single market of retail payments in euro;
• three main products – payment cards, credit transfers anddirect debits;
• single payment area and unified standards.
What are the benefits of SEPAfor credit transfer?
Equal standards for domestic and cross-border SEPA credit transfers
One price – cheaper cross-border SEPA credit transfers
Main condition – BIC and IBAN
Fee of a transfer initiated through internet-banking in Latvia
Before 01.01.2014. After 01.01.2014
for domestic transfer on average 0.25 lats (0.36euro)
on average 0.36 euro
for SEPA credit transferin euro
on average 5 lats (7.11 euro) on average 0.36 euro
26
EKS
The route of customer interbank payment
If both banks are EKS participants
27
EKS
EBA Clearing
The route of customer interbank payment
If only one of the banks is EKS participant
Development of the EKS
EuroSettlement
2008
STEP2 directconnectionWorking onholidays2014
Instant payments
2017
Night cycle
2015
Launch
1998
SEPA
2010
How does Latvijas Banka perform this function?
3 main roles of Latvijas Banka in payment systems’ area:
• operator of payment systems;
• overseer of payment systems;
• catalyst in payment environment.
Oversight and catalyst functions
• assessment of payment systems against internationaloversight standards, which also includes providingrecommendations aiming to mitigate the risks related to theprocessing of the payment system;
• payment data analysis;
• cooperation with market participants and infrastructureproviders in different projects of payments and securities area;
• expression of the opinion or expertise regarding the differentpayment systems development issues;
• performing risk analysis on the national payment system ingeneral, aiming to minimise negative affects as far as possible.
The role of other institutions in Latvia’s payment environment
The Financial and Capital Market Commission (FCMC) – is anautonomous public institution, which carries out the supervisionof Latvian banks, payment institutions, electronic moneyinstitutions, and other financial and capital market participants.
Consumer rights protection centre (PTAC) – looks through theapplications received from consumers, including users offinancial services, on violations of rights protection laws andregulations, including those on unfair contract conditions.
The role of other institutions in Latvia’s payment environment
Ombudsman of the Association of Latvian Commercial Banks -handles the complaints of credit institution customers on theactions of credit institutions registered in Latvia and which arelinked with non-cash credit transfers or transactions withelectronic means of payment.
Payment environment in Latvia
Large value interbank
payment system
Retail payment systems
Banking services for customers
Person to person payments
EKS, FDL
TARGET2-Latvija
Banks
E-money institutions
Payment institutions
Latvian Post
State Treasury
Payment service providers
• 25 registered banks and foreign banks’ branches in Latvia;
• 15 electronic money institutions (licenced 3)
• 34 payment institutions (licenced 3)
• Latvian Post (Latvijas Pasts) and State Treasury (Valsts kase
Payment service providers
• ensure the cashless money in return for cash to customers;
• provide payment services to customers (individuals and legalentities) and infrastructure (means of payment, etc.) to carry outday-to-day settlements;
• provide innovations in payment area (e.g., mobile paymentcard reader, withdrawal of cash in shops).
Number of bankcustomers’ accounts inthe second half of 2015
3.4 million (increasecompared to previous
half a year - 1.9 %)
0
9,00
18,00
27,00
36,00
45,00
54,00
I II I II I II
2013 2014 2015
Number of bank customers' accounts (thousand)
number of EUR accounts number of LVL accounts
PAYMENT INSTRUMENTS
Cashless vs cash settlements
How many payments did you do by cash or payment card in thecourse of last week?
Bāze: visi respondenti: n=1007
5.7
NON-CASH CASH
6.3AVERAGE NUMBER OF PURCHASES:
AVERAGE NUMBER OF PURCHASES:
EUR 54.6AVERAGE TOTAL PURCHASE AMOUNT:
AVERAGE TOTAL PURCHASE AMOUNT: EUR 40.8
Survey by TNS, 2015
Payment instrument and means of payment
Payment instrument — any personalised device(s) and/or set of proceduresagreed between the payment service user and the payment service providerand used by the payment service user in order to initiate a payment(payment card, i-bank application).
Payment — an act, initiated by the payer or by the payee, of placing,transferring or withdrawing funds, irrespective of any underlying obligationsbetween the payer and the payee.
As defined in Law on Payment Services and Electronic Money and Credit Institutions Law
What is the most rapidly growing payment instrument?
0
2,00,00
4,00,00
6,00,00
8,00,00
10,00,00
I II I II I II I II
2012 2013 2014 2015
Credit transfers
Card payments
Direct debit
E-money payments
Cheques
Development of most often used means of payment
Card payments rose by 9.0% according to volume (amounting to 112.2million) and 10.3% according to value (amounting to 2.2 billion euro).
• There were 2.4 million payment cards issued in total (increased by1%).
• Available 31.0 thousand points of sale (POS) (increase by 3.3%)
Customer credit transfers – increased by 5.9% according to volume(amounting to 65.7 million) and 6.9% according to value (amounting to175.7 billion euro).
Changes are given for the 2nd half of 2015 compared to the 1st half of 2015
Development trends
• instant payments
• “virtual currencies”
• e-money
DEVELOPMENT TRENDS
Instant payments
Main features:
• convenient user interface, that ensures “person-present” and“person-not-present” transactions (mobile and direct channel);
• clearing takes place in seconds from the moment of paymentinitiation;
• interbank settlement occurs in real-time or on the basis of so called“deferred settlement”;
• up to now these payment services are offered mostly by privatesector.
How do instant payments operate?
Beneficiary Bank
Solis 6
Saņēmēja banka apstiprina saņemšanu
un kreditē kontu
Solis 5
Saņēmēja banka autorizē maksājumu
Instant Payment service
Solis 7
Saņem paziņojumu, ka maksājums ir veiksmīgs
Solis 4
Maksājums apstiprināts
Sender Bank
Solis 8
Maksājuma apstiprinājums
Solis 3
Autorizācija
Customer
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 8
Maksājuma apstiprinājums
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 4
Maksājums apstiprināts
Solis 8
Maksājuma apstiprinājums
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 8
Maksājuma apstiprinājums
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 7
Saņem paziņojumu, ka maksājums ir veiksmīgs
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 8
Maksājuma apstiprinājums
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 6
Saņēmēja banka apstiprina saņemšanu
un kreditē kontu
Solis 7
Saņem paziņojumu, ka maksājums ir veiksmīgs
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 8
Maksājuma apstiprinājums
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 3
Autorizācija
Solis 2
Maksājums tiek iniciēts
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 3
Autorizācija
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 3
Autorizācija
Solis 8
Maksājuma apstiprinājums
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 3
Autorizācija
Solis 7
Saņem paziņojumu, ka maksājums ir veiksmīgs
Solis 8
Maksājuma apstiprinājums
Solis 1
Klients sazinās ar banku
Solis 2
Maksājums tiek iniciēts
Solis 5
Saņēmēja banka autorizē maksājumu
Solis 4
Maksājums apstiprināts
Solis 3
Autorizācija
Step 6
Beneficiary bank confirms receipt and
credits account
Step 7
Receives notification that payment was
successful
Step 8
Confirmation on payment
Step 1
Customer contacts bank
Step 2
Payment instruction initiated
Step 5
Beneficiary bank authorises payment
Step 4
Payment validated
Step 3
Authorisation
51
INSTANT PAYMENTS IN THE WORLD
Mexico – SPEI (2004)
Chile – TEF (2008)South Africa – RTC (2006)
Nigeria – NIP (2011)
China – IBPS (2010)
Taiwan – CIFS (2010)
India – IMPS (2010)
Singapore – FAST (2014)
South Korea – KFTC (2014)
UK – FPS (2008)
Poland – Elixir Express (2012)
Sweden – BiR (2012)
Denmark – Nets (2014)
Italy – SIA (2014)
Australia – (2016)
USA – (2018)
NETHERLANDS
SPAIN
Development of the EKS system
Eurosettlement2008
STEP2 directconnectionWorking on holidays2014
Instant Payments2017
Night cycle2015
Launch1998
SEPA2010
• Continue ensuring safe, effective and contemporaryinterbank payments infrastructure
• Facilitate integration of the Latvian payments market intothe Euro area (reachability)
• Facilitate the development of innovative paymentinstruments in Latvia
Motives of Latvijas Banka to launch InstantPayments service
54
Principles of Instant Payment
immediately receives funds on the account
Beneficiary
instant interbank
Clearing
receives confirmation within seconds after initiation
Originator
SEPA Credit Transfer
Instrument
24/7/365
Availability
What is e-money?
Money which is circulating concurrently with cash and cashless money inthe form of bank deposits:• mean of payment, which arises by paying in (depositing) any cash
amount in the account opened with an e-money institution;• e-money institution makes customer’s funds available to the
equivalent extent in the form of digital money;• the value of e-money is kept in smart card or computer memory;• use of e-money for payment of different goods and services, but only
there, where is particularly indicated, that e-money has been acceptedas means of payment.
E-money institutions are commercial entities licensed or registered in e-money institutions’ register of the FCMC, and their activities aresupervised. Examples: Mobilly, “Dāvanu karte” Ltd. (Galactico).
What is “virtual currency”?
That is not a currency (money).“Virtual currency” is the form of non-regulated digital money, which is notissued and not guaranteed by the central bank and which is possible to use asa means of payment.It is possible to buy “virtual currency” in currency exchange platforms, bypaying with an ordinary (normal) currency.While buying, safekeeping and vending “virtual currency”, e.g. Bitcoin, several
risks should be taken into account:- money could be lost in currency exchange platform;- money could be stolen from digital purse;- consumers are not protected if they use “virtual currency” as means of
payment;- value of “virtual currency” might rapidly change and even drop down to
zero;- it is possible to misuse transactions with “virtual currency” for the
purpose of criminal activities including money laundering.
Conclusions
• Payment systems are cornerstone of country’s paymentenvironment – that is the environment where funds flows areconcentrated from all levels of the payment environment.
• Payment systems are interlinked with each other thereforerisks in one payment system may impact other.
• Banking system has essential role in the development ofmeans of payment and infrastructure since they offer servicesto customers.
• Development of means of payment in Latvia shows positivetrend – society uses cashless means of payment, which aremore safe and convenient compared to cash more frequently.
THANK YOU FOR YOUR ATTENTION!
Discussions
Questionnaire
DENISS FILIPOVS
Head of Payment Systems Policy Division
Payment Systems Department
Latvijas Banka