The Level One Project Boot Camp. FinTechStage Inclusion Forum March 2017, Jakarta

Transcription

1 The Level One Project Boot Camp FinTechStage Inclusion Forum March 2017, Jakarta

2 What is the Level One Project? A vision for a new digital payments platform that supports inclusive, interoperable digital economies, and the design principles to achieve this A blueprint for how such a system could be configured within a country A set of tools and resources to enable the implementation of a Level One system 2

3 The Level One Payments System A new digital platform to reach previously unbanked consumers Customers Customers Digital Financial Services Providers Level One Scheme Level One Hub Services Digital Financial Services Providers Customers Customers 3

4 The Level One Payments System Customers Customers Digital Financial Services Providers Level One Scheme Level One Hub Services Digital Financial Services Providers Customers Customers Exists Within the Larger Payments Ecosystem of the Country Card Networks Customers Customers Banks ACH, Checking Banks Customers Customers RTGS 4 Central Bank

5 Core Level One Concept: Low Costs Multiple Use Cases High volumes Low unit costs Digital liquidity Multiple DFS Providers Many kinds of providers Financial regulation Increased competition Low Cost Payments System 5

6 Core Level One Concept: Collaboration Rules Rails Accounts Apps Collaboration Space Competition Space 6

7 Level One Project Design Principles 1 Open Loop System 5 Same Day Settlement 2 Real Time Transactions 6 Governance by Participants 3 Push Payments 7 Cost Recovery Model 4 Irrevocable Transactions 8 Shared Fraud Service 7

8 A Recipe for Financial Inclusion Broadly held transaction accounts that are affordable, accessible, usable, and secure Transaction Account Transaction Account Transaction Account A Level One Digital Payments Platform Transaction Account Transaction Account A digital payments platform that connects all transaction accounts Transaction Account Transaction Account Transaction Account 8

9 Regulatory Considerations Transaction Accounts Tiered/Shared/eKYC Permissions for new classes of providers to offer transaction accounts; regulatory capacity to supervise - emoney or Mobile Money institutions - Payments Banks or other limited purpose institutions Accessibility - to agents, branches and ATMs to support cash-in and cash-out Digital Payments Platform Ownership, governance and participation Interoperability approach Security and service standards; network availability Real time risk management capabilities Quick settlement and liquidity management Addressing infrastructure Consumer protection policies 9

10 Building the Level One Vision and Blueprint Research Best Practices New Payments Systems Research Best Practices Legacy Payments Systems Research Supporting Technologies The Level One Project 10

11 Payments Basics: Open Loop Payments Systems

12 Payments Basics: Open-Loop Systems Interoperability is accomplished through use of the system Customers access the payment network through a relationship with a bank Checking, RTGS, ACH (direct debit and credit transfer), debit cards and most credit card systems follow this model Customer Bank Payment System Bank Customer Banks belong to the payment system and are bound by its rules Payments Basics Glenbrook Partners LLC

13 Payments Basics: Push and Pull Any payment on a bank transfer system is a push or pull Pull payments - initiated by payment receiver s bank PULL Paying Party Paying Party Bank Payment System Receiver Party Bank Receiver Party PUSH Push payments: - initiated by payer Payments Basics Glenbrook Partners LLC

14 Payments Basics: What The System Does RULES Law, private regulations PROCESSING Switching and settlement BRAND Common terms for payer and payee Payments Basics Glenbrook Partners LLC

15 Payments Basics: Schemes and Rules Together, these provide the rules which govern the system Law and Regulation Scheme Operating Rules Service Provider Operating Guidelines Payments Basics Glenbrook Partners LLC

16 Payments Basics: Switching Schemes most typically run or hire a switch Payments Scheme Switch Rules Bank 1 Bank 3 P Bank 2 Bank 4 P A switch routes a transaction from one bank to another Banks use the switch and follow its operational guidelines Banks may use processors or aggregators to access the switch Some switches are physically distributed Payments Basics Glenbrook Partners LLC

17 Payments Basics: Settlement All retail schemes use some form of net settlement Payments System Scheme Bank 1 Payments System Switch Bank 2 Net Settlement Ledger Settlement Bank Bank 1 Account Bank 2 Account Payments Basics Glenbrook Partners LLC

18 Payments Basics: Risk Management Banks are responsible for risk management, including fraud and AML Typically banks are only responsible for knowing their own customer, although there are exceptions Paying Party Paying Party Bank Payment System Receiver Party Bank Receiver Party Pull payments have significantly more risk than push payments There is often duplicate investment at each bank Payments Basics Glenbrook Partners LLC

19 Payments Basics Who Owns the System? Payments Scheme Rules Many systems are owned by participant banks; some are private companies Bank 1 Bank 3 Switch P Bank 2 Bank 4 P Typically the scheme ownership body is run on a not-for-profit basis A hired switch may be commercial Payments Basics Glenbrook Partners LLC

20 Payments Basics: Governance An industry association governance body is common Bank 1 Bank 2 Payments System Scheme Bank 3 Bank 4 The scheme is an industry association Participating banks sit on board and vote on rules Participation drives sense of fairness which is essential for collaboration Voting rights are balanced between needs of large and small players Payments Basics Glenbrook Partners LLC

21 Payments Basics: Thick and Thin Systems How much resource is in the middle? RULES Law, private regulations BRAND Common terms for payer and payee PROCESSING Switching and settlement Thick networks have lots of resource in the center: can afford complex rules and value-added functions. These are generally supported by strong revenue-generating business models for participating banks Thin model networks provide minimal functionality at the center. These typically support cost-reduction efforts for participating banks Payments Basics Glenbrook Partners LLC

22 Payments Basics: Three Kinds of Fees 1 Customer Fees 2 Scheme Service Fees 1 Customer 1 Bank 1 Payment Scheme Bank 2 Customer 2 Switch 3 OPTIONAL: Interchange Fees Payments Basics Glenbrook Partners LLC

23 Lessons Learned

24 Lessons Learned from Legacy Payments Systems A closed-loop system limits reach Direct participation in governance creates a feeling of fairness among participants Many legacy systems use tiered access models, with smaller financial institutions accessing systems through larger institutions Standards matter; proprietary connections lead to vendor lock-in 24

25 Lessons Learned from New Payments Systems Real-time push payments work well Many countries built new systems, rather than enhancing existing ones, to do this Same-day settlement is practical; there are best practices for reducing liquidity risk Licensed non-banks can provide transaction accounts and efficiently reach more people Tiered KYC can enable financial inclusion Consumers make mistakes; but revocability reduces trust in the system 25

26 Lessons Learned from Legacy Payments Systems Fraud detection and management is better with pooled data - Shared (pooled) data makes fraud detection easier - Bad actor data but also good actor - Can be done by (or with) a switch which has access to all transactions ( on-us and off-us ); or by reporting data - A pooled approach to the investment in detection algorithms also makes good business sense 26

27 Lessons Learned from Legacy Payments Systems Push payments are less risky and less costly than pull Thick model networks have significantly higher costs than Thin model networks Systems operating on cost recovery models have the lowest costs The use of interchange fees can solve some problems but can also be problematic 27

28 Lessons Learned from Payments Systems Consumers are reluctant to pay for payment unless the cost of using cash is too high Merchants will pay to pay, but only if it drives increased sales; small merchants often won t accept electronic payments if they carry a fee Percent of value pricing only makes sense if the party receiving the revenue is taking transaction risk 28

29 USE CASES

30 Core Requirements of Users These core user requirements hold across all segments of consumers, businesses, governments, and other participants in the ecosystem SECURE AFFORDABLE CONVENIENT OPEN ROBUST 30

31 Payments System Basics: Use Cases All major payments systems support multiple use cases Person to Person (P2P) Point of Sale (C2B) Remote Commerce (C2B) Bill Payment (C2B, C2G) Business to Business (B2B, B2G) Income (G2P, B2P) Payments Basics Glenbrook

32 Delivering on Use Case Requirements Takes Both Core Systems and Enabling Programs Core systems support multiple use cases Enabling programs may be specific to use cases Level One Payments System DFS Provider Wallet Platform DFS Provider (Bank) Core Processing Enrollment Data Collection Data Delivery Devices and Security Connectivity Pricing Rules 32

33 Enabling Programs May Be Shared In some markets, some aspects of enabling programs for specific use cases may be shared and provided as a value-added service by the scheme and switch. Rules Rails Accounts Apps Payments Scheme Switch Rul es Bank 1 Bank 3 Collaboration Space Competition Space Bank 2 Bank 4 Merchant Services 33

34 The Level One Blueprint

35 Level One System Core Components Customers Customers Digital Financial Services Providers Level One Scheme Level One Hub Services Digital Financial Services Providers Customers Customers Wallet or Core Processing Platform IST Directory Wallet or Core Processing Platform Settlement Fraud Mgmt 35

36 Level One Basics Level One applies the traditional concepts to a broader set of providers End User 1 DFS Level One DFS Provider 1 System Provider 2 End User 2 DFS Provider is any licensed provider of transaction accounts in a country - Includes both banks AND licensed non-banks who provide transaction accounts to end users End user is a consumer, merchant, enterprise or government Key concepts: account based, open-loop and interoperable 36

37 Level One: An Open-Loop System Reaches scale through a broader set of DFS Providers C C C C DFS Provider (Bank) DFS Provider (MMO) C C C C C DFS Provider (MMO) Level One System DFS Provider (MMO) C C C C C DFS Provider (Bank) DFS Provider (Bank) C C C C 37

38 Level One Push Payments Level One payments are push DFS Provider 1 sends the transaction to the hub, after authenticating their customer and validating available funds End User 1 DFS Level One DFS Provider 1 System Provider 2 End User 2 PUSH A Level One push payment is also real time A Level One push payment may happen after a request to pay message 38

39 The Level One Payments System Scheme DFS Providers form and own the scheme The scheme is operated on a cost-recovery basis: a thin model scheme End Users DFS Providers Level One Scheme DFS Providers End Users The DFS Providers determine the governance of the system and write the Operating Rules 39

40 Scheme Hub Services The Scheme selects the Hub Operator, who provides Hub Services, including a switch The Hub Operator may be a commercial entity; the switching may be distributed End Users DFS Providers Level One Scheme DFS Providers End Users Hub Operator Hub Services 40

41 The Switch and Other Hub Services DFS Providers may connect to the Hub through a processor wallet platform to access the IST (Switch) and other Hub Services End Users DFS Providers W Hub Services IST (Switch) Settlement Fraud Mgmt Directory Other Services P DFS Providers End Users 41

42 The Addressing Directory A key hub service is the Addressing Directory, which allows one end-user to address a payment to another end user The mobile phone number is an obvious and useful address; but the system will enable other addresses as well This may be integrated with a national ID system End Users DFS Providers W Hub Services Addressing Directory P DFS Providers End Users 42

43 Message Confirmation A payment transaction, before being finalized, is confirmed by the sender: do you want to send $X to [Name]? This message comes from the receiving DFS provider This confirmation allows the transaction to be irrevocable Paying End User Paying DFS Provider W Hub Services IST (Switch) P Receiving DFS Provider Receiving End User 43

44 Request to Pay The system supports a request to pay transaction from a merchant or biller A consumer responds to this by initiating a push transaction This creates the benefits of a pull system without the risks Paying End User Paying DFS Provider W Hub Services IST (Switch) P Receiving DFS Provider Receiving Merchant or Biller 44

45 Risk and Fraud Management DFS Providers maintain primary responsibility for risk management, including fraud management and AML/CFT compliance The Fraud Management Hub Service provides a shared pool of data and shared analytics End Users DFS Providers DFS Providers choose how they use this: - At account opening - At transaction execution W Hub Services Fraud Management P DFS Providers End Users 45

46 Settlement The same net settlement as legacy systems, but faster and less risky DFS Provider 1 Level One Scheme Hub Services Net Settlement Ledger DFS Provider 2 Settlement Bank DFSP 1 Account DFSP 2 Account Banks and licensed nonbanks belong directly to same settlement scheme and have an account at a common settlement bank Settlement done at a minimum on a same-day basis; ideally more often Systemic controls over liquidity risk through prefunding or other techniques 46

47 Level One: Economic Model The goal is zero-to-low prices to consumers and poor merchants A collaborativecompetitive model Rules Rails Accounts Apps Level One Scheme Level One HUB Services The scheme itself operates on a cost-recovery at scale (not for profit) model for the rules and the rails Fees are preferably on a fixed, not percent of value basis The scheme runs or hires the hub services, and is responsible for keeping costs low. The hub can be a for-profit entity Interchange is treated carefully, if used at all 47

48 Level One Scheme Brand Goal: establish a system-wide common term for end users EXAMPLE: The L1P scheme establishes FastPay as a scheme brand End User 1 DFS Provider 1 XYZ Level One Payment Scheme DFS Provider 2 ABC End User 2 Use FastPay with your XYZ SuperWallet Use FastPay with your ABC OmniWallet 48

49 Payments Basics: Cross-Border Transfers In the U.S.: End User 1 initiates a transfer with DFS Provider 1 In Estonia: End User 2 receives a transfer from DFS Provider 2 End User 1 (Mother living in U.S.) DFS Provider 1 (U.S.) DFS Provider 2 (Estonia) End User 2 (Daughter living in Estonia) Correspondent relationship End User 1 Account at DFS Provider 1 DFS Provider 2 Account at DFS Provider 1 DFS Provider 1 Account at DFS Provider 2 Ender User 2 Account at DFS Provider 2 Book Book -$100 Transfer +$ This example assumes a 1:1 dollar to euro conversion rate Payments Basics Glenbrook Partners LLC 2017 Transfer 49

50 Level One Basics: Cross-Border Payments Goal: Minimize friction to end users through scheme efficiencies. End User 1 DFS Provider 1 XYZ Level One Payment Scheme DFS Provider 2 ABC End User 2 The Level One Payment Scheme can develop correspondent relationships in key corridors to minimize friction and cost for DFS Providers Large payments volumes help keep fees and foreign exchange costs low Note that cross-border payments require additional compliance by DFS Providers 50

51 Level One Basics: Regulatory Support Interoperability -Closed loop wallets interconnect -Non exclusive agents OR agent accounts on the system Tiered KYC Consumer protection Persistent identity with biometrics if possible 51

52 Level One Basics: Government Support Government use of Level One system -G2P -Supplier payments -Tax payments Consumer and merchant education programs Reasonable taxation policies 52

53 Level One Basics: A Secure Environment Necessary to look at the system as a whole Bank grade system security Device and software certification A challenging and ever-evolving environment Mobile network availability and quality 53

54 World Tour

55 World Tour: Questions to Ask What has the country done to ensure easy access to transaction accounts by the unbanked? Is there a real-time retail push payments switch? Is it open loop (enabling interoperability)? For all DFS providers? Just for mobile money providers? Does it support multiple use cases? Is it governed by DFS participants? Are consumer fees zero to low?

56 United Kingdom: Faster Payments Faster Payments system introduced in 2008 demanded by regulators Open loop, real-time, push payments Irrevocable No interchange Hugely popular, used for P2P, B2B, bill pay Faster Payments Scheme (owned by banks) hired VocaLink to run switch Expanding into new use cases 56

57 Mexico: SPEI RTGS system of Mexico opened up for retail use Open loop, real-time, push payments Operated by the Central Bank; aggressive rule setting to ensure banks made service broadly available Any financial entity regulated by any of the Mexican financial authorities is eligible to participate SPEI handles both large and small value payments as well as cross border payments between Mexico and USA 57

58 Jordan JoMoPay Real time, push payment system Connects banks and non-bank DFS providers Multiple use cases; aggressive pursuit of multiple merchant payments types Started by central bank; governance turned over to Jo- PACC (Jordan Payments and Clearing Company) after launch 58

59 Kenya: M-PESA Closed-loop system; real-time push payments 20 million active users: 80% of people with mobile phones use the service 43% of Kenya s GDP flows through M-Pesa Mainly used for instant money transfer, and to withdraw money ( cash-out ) Multiple bilateral M-Pesa to bank connections Astonishing success of core P2P model! 59

60 India: NPCI Strong government push and control over establishment of a national payments infrastructure Includes payments banks and multiple system and rules components within NPCI bank and central banked controlled entity IMPS real-time push system works with UPI system to enable easy access by banks Aggressive use of Aadhaar biometric identity system to facilitate account opening, payments addressing and cash-out services - NPCI has an Identity Mapper 60

61 The India Stack CONSENT LAYER Provides a modern data and privacy sharing framework Open Personal Data Store CASHLESS LAYER PAPERLESS LAYER PRESENSE-LESS LAYER Game changing electronic payment systems and transition to cashless economy Rapidly growing base of paperless systems with billions of artifacts Unique digital biometric identify with open access of nearly a Billion users IMPS, AEPS, APB, and UPI e-kyc, E-sign, Digital Locker Authentication 61

62 Pakistan: 1Link Strong government focus on financial inclusion Regulation enabling emoney issuance through special purpose banks; several owned by MNO s 1Link is owned by the major commercial banks Real-time, push payments Extensive use of OTC (over the counter) transactions 62

63 Peru: Bim Driven by national financial inclusion law emoney issuers (banks and non-banks) founded Pagos Digitales Peruanos (PDP) PDP designed & manages Bim PDP hired Ericsson to for switch and wallet services Single platform; common brand; shared agent network Real-time, push payments: instant credit Standardized paperwork (e-contracts, forms, etc.); common menu (USSD) display Cross-border transfers on product roadmap 63

64 Video: Bim, Peru

65 Egypt: Interbank Mobile Payment Switch Egypt allows emoney issuance by both banks and nonbanks Interbank Mobile Payments Switch (IMPS) is a real-time, push system connecting emoney issuers Egyptian Banking Company (EBC), the key payments infrastructure player, contracted MasterCard to provide the IMPS; participation is mandatory for emoney Issuers Supports P2P money transfers, CICO at agents. Also supports bulk payments and P2M payments which is at a nascent stage. 65

66 Tanzania: Agreements Among 4 MMPs Four Mobile Money Providers (MMP) agreed to connect bilaterally to enable real-time P2P transfers among the participants First provider-led initiative in Africa All licensed emoney Issuers are eligible to join the scheme However, the new player must have established a commercial agreement with at least 3/4th of the existing scheme participants Currently supports P2P transfers only but may expand into new use cases. 66

67 Nigeria: NIBSS NIBSS (owned by the Central Bank of Nigeria (CBN) and all licensed Deposit Money Banks in Nigeria) is the main payments infrastructure provider NIBSS launched Nigeria Central Switch (NCS) to interconnect various players in the financial system Real-time, push payments: instant value to the beneficiary Supports P2P transfers (interbank and inter mobile wallet), CICO at agents, bulk payments, bill payments and merchant payments. 67

68 Single Euro Payment Area (SEPA) Harmonized instruments and rules for Euro payments - 34 countries - Credits and debits - Instant payments (in development) Global standards: ISO 20022, IBAN European Union mandates SEPA and European Payments Council is the scheme manager Replaced national payment instruments, not infrastructures Cross-border, not cross-currency 68

69 SADC M2M Regional, cross-border payments collaboration among Southern African Development Community (SADC) - Government driven; SEPA inspired; 15 countries Shared rules, standards and settlement for Rand - Credit transfers - Mobile2Mobile (in development) Multiple currencies and regulatory environments present some challenges Cross-border, cross currency 69

70 ARPS Arab Regional Payment System - Provide alternative to current high-cost and lengthy correspondent banking relationships to facilitate trade and other economic activities among all Arab countries and beyond, through a simple, low-cost and risk-controlled payment clearing and settlement system Shared platform Cross-border and cross currency Bank participation 70

71 Wrap Up

72 Questions for Discussion What are the biggest barriers to financial inclusion? What should primary regulatory focus be? Is digital liquidity a reasonable objective? Should countries enhance existing payments systems, or develop new ones? 72

73 Level One Contacts Kosta Peric Miller Abel Carol Coye Benson Elizabeth McQuerry

74 Level One Project Support Resources Provided by the Website White Paper Case Studies Reference Rules Reference Implementations Requirements documents Level One Project Boot Camps 74