Payments and transaction processing systems - Global and Indian Overview

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

Akshay Kaul Nitesh ChadhaPradeep Ravichandran