‘switching, interoperability and interconnectivity’ bridget morris november 2009

‘Switching, Interoperability and Interconnectivity’

Bridget Morris

November 2009

Programme

• Introductions

• The Problem(s)

• Overview & key concepts

• Some Answers?

• Suggested way forward

Introduction – TPS & Liquid

• TPS started in Zimbabwe, early 90’s

• Bought by Econet Wireless in late 90’s

• Liquid Telecomms grew out of Econet

• TPS moved into Liquid sphere 2008

• Re-positiioned in payments and

wholesale telecoms market

Introduction – Bridget Morris

• Payments Industry - 2 decades experience

in/around ‘payments’ and payment systems

• 12 years self-employed independent payments

consultant, payments workshops

• Joined the new TPS earlier this year

• Payments initiatives all over Africa, Europe,

Caribbean, Central Asia

• Nigeria – was involved at begining of InterSwitch

and also some work for DfID on remittances

The Problem, the confusions..

• Currently 3 bigger ‘switches’ (and various

smaller ones)

• InterSwitch

• Valuecard

• eTranzact

• NIBBS Central switch

But are they all really EFT ‘switches’?

Is a central switch needed?

The Problem, the resentments?.

• Scepticism?

• Compulsory connection to central switch?

• Adding another layer of cost?

• Eroding market share?

• Is a central switch needed? Yes a central switch

is desirable… reasons to become clear in the

following….

Why a central switch?

• Regulator DOES NEED to

• see all the payment flows

• to balance

• real time and netted payment streams

• demand for intra-day liquidity

• Regulator does NOT NEED

• to make a profit out of switching

• to own the central switch

Why a central switch? contd.

• Received wisdom, best practice

• Important in Africa to comply with ‘best practice’

• Standard, internationally accepted payment

systems are very important w.r.t.

• Ratings

• Bretton Woods institutions

• Readiness for international trade

• Credibility generally

Some pertinent questions….

These are rhetorical questions for the moment..

• Is a given payments initiative, an infrastructure

company? Or a commercial scheme?

• What is its position in the National Payments

System environment

• Who are the owners? Who are the customers?

Overview – key concepts

• Technology is the easy part

• Understand your position in the National

Payments system infrastructure

trade payment

Issuing bankPayment systemAcquiring bank

CustomerPSP / Scheme

Merchant

The 2 ‘legs’ of commerce

PPaayymmeenntt IInnffrraassttrruuccttuurree

SSeeccuurriittiieess DDeeppoossiittoorryy

CCeennttrraall BBaannkk

EElleeccttrroonniicc CCoommmmeerrccee

CCoommmmeerrcciiaall BBaannkkss

AAuuttoommaatteedd CClleeaarriinngg

EElleeccttrroonniicc FFuunnddss TTrraannssffeerr

Physical picture very different…

A more realistic picture…..

CB enpowered by NPS Act

NIBSSPaper clearing house

EFT Switches + VISA/Mcard

Bank

Bank Bank

Bank

System Operatorsm-commerce

EBPPATM/POS Acquirers

E-commerce

Card Issuers

Etc., ad infini

Overview – key concepts 1

• Technology is the easy part

• Understand your position in national

Payments system infrastructure

• Only banks can guarantee payment

• High value – low volume or high volume –

low value?

• Retail payments are business of retail banks

• Real time stream or DNS (netting systems)

• Risk vs Efficiency

Risk and Efficiency

• Real time streams are the most ‘efficient’ involving cash or hi-value transfers

• Batch streams which contain lots of low-risk, low-value payments can be less efficient i.e. slower, provided they settle same day

• Risk assessment for each type of payment will dictate the payment stream, real time or batch

• Neither are ‘absolutes’ so always compromises and tensions

Overview – key concepts 2

• Management of Settlement risk in a deferred

net settlement environment is vital

• Create a robust system, probably branded,

that consumers can trust absolutely 24 x 7

• Majority ownership likely to be with the

banks, even if initially driven by the Central

Bank

• Central Bank as ‘overseer’ of whole

payments system, should provide policy

guidelines, to preserve level playing field

Overview – key concepts 3

• Is the Central Bank just being difficult? No, needs

to

• ‘see’ the flows, volumes, patterns

• Adjust the high-value threshold, ‘lubricate’

• Monitor settlement risks, assist

collateralisation

• All the above makes for credible,

internationally recognised payment system

• But Central Bank may be slow, innovation always

precedes regulation…

Overview – key concepts 4

• Understand difference between an infrastructure

company (not for profit) and a scheme (for profit)

• Who are owners, who are customers

• Core Principle compliance at micro and macro

level

ATM, POS, the realtime stream

• EFT switching of ATM and POS (and possibly

airtime) really belong in the real time

authorisation stream with deferred net

settlement

• 90/10 ratio - high volume / low volume streams

• ATM is relatively easy, POS is where the fun

begins, usually…

• POS switching is good area for Central Bank to

provide guidelines and prevent the expensive

disasters seen many times, in many countries

6 POS policy guidelines

• All EFT terminals must accept ALL cards

• Cardholder must pay marked price of goods at POS

• All local transactions switched and settled locally

• Universal principle of interchange at approx. 1%

• No multi-acquiring at POS

• Cash back, authorised by PIN, at all POS terminals -

(no offline transactions anywhere)

Infrastructure, Scheme initiatives

Infrastructure companies• No profits• Owners and customers the same• Fees and charges set by treaty• Usage often licensed

Schemes are the ‘free-market’ entities• Differentiated by product, service,• “Co-opetition” on standards, protocols, rules• Should be profitable

National switch? Yes or no?

PRO’s

• All can see all streams• No profit in infrastructure• Push ownership onto

banks• Push risk management

onto banks• Internationally accepted

best practice

CON’s

• Duplication of existing structures?

• Competing with PSPs?• Additional layers of fees.

Charges?• CB should maintain a

good regulatory, oversight independence

Some points arising….

Keeping an eye on ‘best practice’ one could …• Look at APACS and PASA web sites• Create a regulatory framework for payment system

operators

Various interest groups should set up ‘schemes’ or associations to

• Provide some self-regulation, rules, codes of conduct • Ensure, aggregate viable transaction volumes• Rationalise common transactions, formats, protocols

etc., so as to ensure interoperability where needed

Trust and Confidence

• As with all things in banking and finance, TRUST and CONFIDENCE are paramount

• Absolute clarity needed as to when ‘value’ will be given for any payment – ‘certainty’

• All participants in a payment system need to work toward such robustness and reliability.

Conclusion – key points

1. TWO equal legs of e-commerce

2. Only banks can provide ‘certainty’

3. Technical/physical interactions with payment infrastructure are completely different from business, risk, legal interactions

4. TRUST, CONFIDENCE, FINALITY, CLARITY

Thank YouBridget MorrisMobile +263 912 222 569 / +260 966 306 982Office +260 211 257 147 BridgetM@tpspay.comwww.tpspay.com