payments and transaction processing systems - global and indian overview
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PAYMENTS & TRANSACTION
PROCESSING SYSTEMSGlobal and Indian
Overview
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
INTRODUCTION
Payment Systems: A configuration of institutions supported by a technology infrastructure and driven by processes to facilitate financial transfers between payer and beneficiary
Bank BBank A
Securities Clearing & Settlement
Large Value Clearing & Settlement
Retail Clearing & Settlement
Messaging and Routing Platform
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
BIS-CPSS – STANDARDS SET BY PSDG VIA WORLD BANK
Source: World Bank
GLOBAL REGULATORY FRAMEWORK
Payment, Remittances & Securities settlement systems represent a basic infrastructure for the functioning of market economies
• Sound PRSS are Essential for Financial System Stability & Development• Large value payments in a year - more than 50 times global GDP• Growth in total amounts settled by RTGS - 86% between 2002 and 2006
and 82% of the value of total payments
• Safe PRSS Mitigate Risks in Financial Markets• Financial market crises reflect first in payment systems• Interbank money market relies heavily on ability to transmit funds
• Efficient PRSS Lead Countries to Huge Savings• Progressive shift from paper-based to electronic payments can produce a
potential saving to the country of 0.7% of the GDP per year
• PRSS are Key in Developing More Inclusive Financial Systems• Enhances access to financial services• Retail payments services first entry point of underserved into financial
sector
Source: World Bank
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
REGULATORY FRAMEWORK IN INDIA
Regulatory Acts & Provisions:
•The Payment and Settlement Systems Act, 2007 – (PSS)
• Board for Regulation and Supervision of Payments and Settlement Systems Regulations, 2008
•Payment and Settlement Systems Regulations, 2008
The PSS Act stipulates that no person other than the Reserve Bank of India shall commence or operate a payment system, except under and in accordance with an authorisation issued by the Reserve Bank of India as per the provisions of the PSS Act
RBI is empowered to prescribe:
• Format of payment instructions• Size and shape of instructions• Timings to be maintained by payment systems• Manner of funds transfer• Criteria for membership
Source: Reserve Bank of India
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
HOW BANKS TRANSACT AND SETTLE WITH EACH OTHER?
Interbank funds transfer systems are arrangements through which funds transfers are made between banks for their own account or on behalf of their customers Different systems for different purposes:
• Fund transfer systems for Large Value transactions• Fund transfer systems for Large Volume of low value payments
Key elements of fund transfers:• Transfer of messages (information) between the banks• Settlement – Actual transfer of funds between the payer’s bank and
payee’s bank
• Net Settlement System
• Batch programs run at definite points on a business day
• Transactions are bunched and sent over to the other banks
• Typically low value and high volume transactions
• Amounts less than Rs.1,00,000 in India are to be routed via NEFT and above by RTGS
• Gross Settlement System
• Processing and final settlement can take place continuously
• Real time settlement transactions are final once they take place
• Ability to limit system risks. Reduces the duration of credit and liquidity exposures
• Intra-day Liquidity requirements: Central banks of each country need to define how intra-day liquidity for banks will be covered. Most central banks have a policy to cover short-term credit requirements for the banks in case of insufficient funds
RTGS / NEFT
SWIFT – SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION
• SWIFT operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions
• The majority of international interbank messages use the SWIFT network. As of September 2010, SWIFT linked more than 9,000 financial institutions in 209 countries and territories, who were exchanging an average of over 15 million messages per day
• SWIFT established common standards for financial transactions and a shared data processing system and worldwide communications network
Source: SWIFT
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
HOW CUSTOMERS TRANSACT?
Electronic Mode• Assuming a customer does ticket booking
online using his card• The Buyer has A/C with Bank A & Seller with
Bank B• In the above scenario be a payment gateway
will be hosted by an intermediary • This intermediary acts as the gateway between
the Seller / Buyer & Bank A / Bank B
Conventional Mode• Involves the Buyer & Seller to have a
Bank A/C and transact via it • In cash payment a buyer withdraws from
his/her account, transfer of cash to the seller, and the seller deposits the payment to his/her account
POPULAR MODES OF TRANSACTION
• Cheque, Draft, Cash
Branch Transactions
• Credit Card, Debit Card, Smart Card
Card Based Transactions (EDC/ATM)
• Using Bank’s Online Gateway to do Banking Transactions, Bill Payments, Fund Transfer
Online Banking
• Mobile Banking• What the iPod® did for music, The mobile phone
will do for money• Specialized Payment Gateways
Alternate Methods
FUTURE PAYMENT OPTIONS – UID + MOBILE BANKING
SMS Led Transactions• Sequence of SMS
enable the transaction
WAP & Application • Interfacing mobile
applications with the Bank
Mobile Money• Go Mobile with
your Money
UID with Mobile Banking• Banking to the
unbanked with Mobile Banking
The current pool of financially excluded population has a huge potential to become viable banking customers with the proper business model and governmental support
Barely 34% of the Indian Population is formally banked
India has second highest number of unbanked households in the world About 135 Million households
40% of Indians who have a savings account use it less than once a month
The Balance population sits above the poorest of the poor and just below the customers targeted by most banks
34%
40%
CURRENT ENVIRONMENT FOR MBANKING
• With 550M active mobile subscribers, far more than banked population. There is a huge market which can be tapped through mobile banking • Under the UID initiative of Government of India, it can be possible to provide mobile banking to the people with access to Mobile phones
MBANKING - BUSINESS MODELS
•Focus on Banking
•Focus on Transactions
• Goods purchase through mobile phone. The payments are either debited from their pre paid cards or charged to the customer in their post paid bills.
• Usage of talk time as currency
• Currently mobile banking is very popular in Japan, South Korea, Philippines and Kenya.
• All these countries have one thing in common, the largest operator (>60 per cent market share) has in some form tied up with a large national bank to offer mobile banking services. This kind of a relationship provides sufficient leverage in creation, distribution and maintenance of services.
Bank led models Operator led models Hybrid models
Person 2 Person
Domestic remittanc
e
Merchant Pay Bill Pay PrePaid
Top Up
Micro Lending / Insurance
Mobile Check out
Services offeredSource: Obopay
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
Visa Inc.
Type Public
Traded as NYSE: V
Industry Financial services
Founded 1970 in Delaware
Headquarters595 Market StreetSan Francisco, California, U.S.
Key peopleJoseph Saunders (Chairman and CEO)John Partridge (President)
Products Payment systems
Revenue US$8.065 billion (2010)
Operating income US$4.638 billion (2010)
MasterCard Worldwide
Type Public
Traded as NYSE: MA
Industry Financial services
Founded 1966
Headquarters
MasterCard International Global HeadquartersPurchase, New York, United States[1]
Key peopleRichard N. Haythornthwaite(Chairman)Ajay Banga (CEO)
ProductsPayment systemsCredit cards
Revenue US$ 5.539 billion (2010)
Operating income US$ 2.757 billion (2010)
COMPANIES IN THE INDUSTRY
Source: Wikipedia
COMPANIES IN THE INDUSTRY
PayPal Inc.
Type Subsidiary of eBay Inc.
FoundedPalo Alto, California USA (1998)
Founder
Ken HoweryMax LevchinElon MuskLuke NosekPeter Thiel
Headquarters San Jose, California USA
Area served Worldwide
Key peopleScott Thompson, PresidentPatrick Dupuis, CFO
Revenue US$2.23 billion (2009)
Owner eBay Inc.
Website PayPal.com
NCR Corporation
Type Public (NYSE: NCR)
Industry Technology
Founded(1884)incorporation 1900
HeadquartersDuluth, Georgia, U.S. (relocated from Dayton, Ohio)[2]
Key peopleWilliam Nuti, Chairman and CEORobert Fishman, CFO
Products
Self-service kiosks, Point of sale, Automated Teller Machines, Data warehouses, Retail store automation
Revenue US$ $4.819 billion (2010)
Website www.ncr.com
Source: Wikipedia
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
MARKET SHARE OF CUSTOMER PAYMENT MODES
E-Commerce Payment Systems Percentage Rank
Credit Card 35 1
Debit Card (Smart Card) 26.5 2
Cash on Delivery 23.5 3
Bank Transfer 9 4
Money Transfer 5 5
Postal Transfer 1 6
Prepaid Card 0 0
Payment Through Convenience Store 0 0
Total 100 0
Source: Reserve Bank of India
MARKET SHARE OF EACH PAYMENT MODE – MACRO ECONOMIC LEVEL - INDIA
Payment System Indicators - Annual TurnoverItem Volume (000s) Value (Rupees crore)
2005-06 2006-07 2007-08 2008-09 2005-06 2006-07 2007-08 2008-091 2 3 4 5 6 7 8 9
Systemically Important Payment Systems (SIPS)
1. High Value clearing 15,924 18,730 21,919 21,848 49,81,428 50,34,007 55,00,018 45,50,6672. RTGS 1,767 3,876 5,840 13,366 1,15,40,836 1,84,81,155 2,73,18,330 3,22,79,881
Total SIPS (1+2) 17,691 22,606 27,759 35,214 1,65,22,264 2,35,15,162 3,28,18,348 3,68,30,548 (4.6) (5.7) (6.9) (6.9)Financial Markets Clearing
3. Government Securities Clearing
151 167 216 270 25,59,260 35,78,037 56,02,602 62,54,519
4. Forex Clearing 490 606 757 838 52,39,674 80,23,078 1,27,26,832 1,69,37,489Total Financial Markets Clearing (3+4)
641 773 973 1108 77,98,934 1,16,01,115 1,83,29,434 2,31,92,008
(2.2) (2.8) (3.9) (4.4)Others
5. MICR Clearing 10,15,912 11,25,373 12,01,045 11,40,492 44,92,943 54,01,429 60,28,672 58,49,6426. Non-MICR Clearing 2,54,922 2,23,177 2,37,600 2,33,566 18,54,763 16,06,990 18,67,376 20,60,8937. Retail Electronic Clearing 83,241 1,48,997 2,18,800 2,80,610 1,06,598 1,86,160 9,71,485 4,16,4198. Cards 2,01,772 2,29,713 3,16,509 3,87,215 39,783 49,533 70,506 83,903
Total Others (5 to 8) 15,55,847 17,27,260 19,73,954 20,41,883 64,94,087 72,44,112 89,38,039 84,10,857 (1.8) (1.8) (1.9) (1.6)
Grand Total (1-8) 15,74,179 17,50,639 20,02,686 20,78,205 3,08,15,285 4,23,60,389 6,00,85,821 6,84,33,413 (8.6) (10.3) (12.7) (12.9)
Note: 1. High value clearing refers to cheques of Rs. 1 lakh / 10 lakh and above 2.Cards include credit cards and debit cards
3.Figures in parentheses are ratios to GDP at current market prices
Source: Reserve Bank of India
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
CRITICAL SUCCESS FACTORS OF PAYMENT SYSTEMS
Integrity
• Transaction data transmitted and received unchanged
Non-Repudiation
• Transactions have the quality of non-deniable proof or receipts
Authentication
• Identities of Parties engaged in commerce are established at tolerable level of risk
Confidentiality
• Transactions can be viewed only based on authority
Reliability
• Probability of failure in the transaction-send, receive, acknowledge-is low
AGENDA
1. INTRODUCTION
2. GLOBAL REGULATORY FRAMEWORK
3. REGULATORY FRAMEWORK IN INDIA
4. HOW BANKS TRANSACT?
5. HOW CUSTOMERS TRANSACT?
6. SPECIALIZED COMPANIES OPERATING IN EACH
AREA
7. MARKET SHARE
8. CRITICAL SUCCESS FACTORS
9. RISKS
RISKS IN PAYMENT SYSTEMS
Systemic Risk:
Default by one participant leading to other participants failing to meet their obligations
Liquidity Risk:
Risk of counterparty not meeting an obligation when due but some time thereafter
Credit Risk:
Risk of counterparty not meeting an obligation when due or thereafter
Operational Risk:
Risk of downtime of systems or software malfunction leading to financial losses
Legal Risk:
Unexpected interpretation of the law or legal uncertainty
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