fundamentals of the payments...

Information Classification: Public

FUNDAMENTALS OF THE

PAYMENTS ENVIRONMENT

Cheryl Gurz

Managing Director, Bank Market Segment Manager

Treasury Services

May 28, 2014

2 Information Classification: Public

1. U.S. Payments Environment

2. U.S. Payment Systems

3. Key Trends and Issues in Payment Systems

Contents


1. U.S. Payment Environment


0

5

10

15

20

25

30

35

40

45

50

2000 2003 2006 2009 2012

Bill

ion

s

Debit, credit and pre-paid card

trends include general purpose

and private-label payments

U.S. Payment Market is Large and Evolving

Source: The 2013 Federal Reserve Payment Study. Summary Report and Initial Data Release December 2013

Trends in Non-Cash Payments by Number and Type of Transaction

Debit Credit Checks (paid) EBT/ Pre-paid


2013 Fed Payments Study Highlights – By the Numbers

Source: The 2013 Federal Reserve Payment Study. Summary Report and Initial Data Release December 2013

122.8 billion Total number of non-cash payments

in 2012, excluding wires

4.4% Annual growth rate for all non-cash

payments from 2009 to 2012

$79 trillion Total value of non-cash payments in 2012

7.6% Annual growth rate of credit card


5.1% Annual growth rate for Automated Clearing House (ACH) payments

slowed from 2009 to 2012

7.7% Annual growth rate of debit card


18.3 billion Number of checks paid in 2012

17% Checks being deposited as images


U.S. Payments Drive the Global Payments Marketplace

111 113 117 124 130

73 75 79 82

83

22 26

30 35

41

19 24

26

29 34

11

14 17

21

27

12

14

17

20

25

247 266

285

312 339

0

70

140

210

280

350

2008 2009 2010 2011 2012E

Bill

ion

s

Europe 4.3% 1.3%

(including Eurozone)

Mature 16.5% 16.9%

Asia-Pacific

Latin America 15.8% 14.3%

Rest of Asia 19.7% 24.4%

CEMEA 26.3% 25.5%

Ma

ture

D

eve

lop

ing

Global 8.1% 8.8%

North America 3.7% 4.8%

CAGR

(‘08-’11)

20.6%

5.4%

Source: Capgemini Analysis, 2012; ECB Statistical Data Warehouse, 2010 figures released November 2011; Bank for International Settlements Red Book, 2010 figures released December 2011; Central Bank Annual Reports, 2010

Number of Worldwide Non-Cash Transactions, by Region, 2008-2012E CAGR

(‘11-’12E)

GROWTH

(’11-’12E)


Global Volume Growth in Non-Cash Transactions1

• Volumes grew by 8.8%, reaching 307 billion transactions in 2011

• Central Europe, Middle East, Africa (CEMEA) and Emerging Asia regions grew by more than 20%

• Latin America grew on average by 14%

• Mature markets such as North America and Europe saw single digit growth but remain the largest non-cash payments

markets, accounting for two-thirds of global volumes

• Projected growth of 8.6% in 2012 to 333 billion transactions

• The growth in electronic, mobile and other forms of payments

1 Figures from Capgemini and RBS World Payments Report 2013


What’s Driving These Growth Dynamics?

Regulation

• Real-time view of liquidity and

intraday exposures

• Tracking of all payment flows and

fee transparency

• Comprehensive risk management

Client

• Transparency on FX rates and

conversion practices

• Management Information System

data and fee transparency

• Value-added reporting on liquidity

• Increased efficiency in treasury and

cash management operations

Industry

• Strong multi-channel client service

• Efficient cash management across

branches and entities

• Financial stability reduction in third

party risk


2. U.S. Payment Systems


Payment Systems in the U.S.

The United States’ four main interbank payment clearing systems are Fedwire, CHIPS, ACH and check clearing. The

Clearing House and The Fed clear all these instruments for banks in the U.S.

SVPCO

Check Image

Exchange (TCH)

The Federal Reserve Bank

System

EPN

Electronic Payments

Network (TCH)

Check and ACH

Settlement

The Clearing House


Wire Transfer Facts

• The Fedwire Funds Service is a real-time gross settlement system owned and operated by the Federal Reserve Banks in

which participants initiate payment orders that are individually processed and settled in central bank money in real time

upon receipt. Once settled, Fedwire funds transfers are final and irrevocable.

• The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments system,

formed in 1970.

• CHIPS is a customer, as well as a competitor, of Fedwire. The vast majority of CHIPS members are also Fedwire

participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.

• Historically, CHIPS specialized in settling the dollar portion of foreign exchange transactions, and CHIPS estimates that it

handles 95 percent of all U.S. dollar payments moving between countries. However, the CHIPS’ focus has shifted to

domestic business since CHIPS introduced intraday settlement in January 2001.

• Terms to know: Beneficiary, Beneficiary Bank, Intermediary Bank, Swift Code, IBAN Number, Lifting Fees, Correspondent

Bank

Source: The Clearing House; The Federal Reserve


ACH Facts

• The Automated Clearing House, or ACH, is a network of over 12,000 banks and financial institutions that comply with the

national ACH (NACHA) standard format of transferring funds electronically

• The ACH network was formed in the 1970s and is governed by the National Automated Clearing House Association

(NACHA) and the Federal Reserve Bank

• Transactions received by the financial institution during the day are stored and processed later in a batch mode. Rather

than sending each payment separately, ACH transactions are accumulated and sorted by destination for transmission

during a predetermined period

• Terms to know: Originator, Originating Depository Financial Institution (ODFI), Receiver, Receiving Depository Financial

Institution (RDFI), ACH Operator, Third Party Provider

Source: National Automated Clearing House Association (NACHA)


Name of System Fedwire

Settlement type Real-time gross settlement

Settlement cycle Same-day basis with immediate finality

Payments processed Domestic high-value and urgent electronic payments

Currency of payments USD

Value and other processing limits There are no value thresholds

Operating hours 21:00 prior night – 18:30 ET

Cut-off times USD transfers to a foreign central bank or international bank

with an account at the FED of NY = 17:00 ET

Domestic payment orders = 18:00 ET

Interbank settlements = 18:30 ET

Participants Approx. 8,000 financial institutions linked to the 12 Federal

Reserve Banks

Fedwire

Source: The Federal Reserve Bank


Name of System CHIPS

Settlement type Real-time net settlement

Settlement cycle Same-day basis with immediate or end of day finality

Payments processed Domestic high-value and urgent electronic payments, both

domestic and cross border



Operating hours 21:00 prior night – 17:00 ET

Cut-off times 17:00 ET

Participants 59 direct participants

Non-direct participants may send transfers through CHIPS

via a direct member

Clearing House Interbank Payment System (CHIPS)

Source: The Clearing House


Name of System Automatic Clearing House (ACH)

Settlement type Multilateral net settlement

Settlement cycle Debits settle on a next day basis at 11:00 ET

Credits settle on a two-day basis at 8:30 ET

Payments processed Low-value and non-urgent electronic payments



Operating hours 3:00 to 17:00 ET

Cut-off times Dependent on operator

Participants Approx. 20,000 institutions

Automated Clearing House (ACH)

Source: NACHA; The Clearing House


Paper Checks

Source: The Federal Reserve

Name of System Paper Checks

Settlement type Multilateral net settlement

Settlement cycle Depends on presentment – direct exchange, correspondent

bank or Federal Reserve

Payments processed Paper checks via images



Operating hours Depends upon bank

Cut-off times Dependent upon banks

Participants Multiple ABAs


Payment Method Comparisons

Aspect Description Possible Mitigation Strategies

Fraud Payments executed without the consent or authorization of the

payer due to deliberate criminal actions such as counterfeiting,

alteration of instruments or deception

KYC

Fraud review

AML

BSA

SARs

Operations Systems or operations failure due to natural or man-made causes,

preventing the timely, accurate execution of payments

Business continuity

Disaster recovery

Resilient IT design

Regular testing of plans

Credit / Settlement Failure of a counterparty to a payment transaction or participant in

a payment scheme to fulfill gross or net settlement obligations

Underwriting

Exposure limits

Exposure monitoring

Netting

Collateralization

Linked settlement

Compliance Civil, criminal and market sanctions resulting from failure to comply

with laws, rules, regulations or codes of conduct

AML

OFAC

Capital/liquidity requirements

Consumer protection


REGULATION / NAME PAYMENT INSTRUMENTS IMPACTED

• Reg B Consumer Credit Protection Act

• Reg E Electronic Fund Transfer Act

• Reg J Collection of Checks and Other Items by Federal Reserve Banks and Fund

Transfer Through Fedwire (commonly known as ‘Check 21’)

• Reg P Privacy of Consumer Financial Information

• Reg Z Truth in Lending Act

• Reg AA Unfair or Deceptive Acts or Practices (improved credit card disclosures

outlined in Reg Z)

• Reg CC Expedited Funds Availability Act, Check Clearing for 21st Century Act

• Reg DD Truth in Savings Act

• Reg FF Obtaining and using medical information in connection with credit

• Reg GG Prohibition on Funding of Unlawful Internet Gambling

• UCC Uniform Commercial Code

• Cards

• ACH

• Checks/Wire Transfers

• Check, ACH, Wire, Cards

• Cards

• Cards

• Checks

• Check, ACH, Wire

• Cards

• Check, ACH, Wire, Cards

• Check, ACH, Wire

The ABCs of Regulation


3. Key Trends and Issues in

Payment Systems


Corporate Priorities for Payments

1. Same-day ACH

2. Industry standard for account opening/maintenance documentation

3. Account owner verification for ACH

4. Remittance standards harmonization

5. Small business (trading partners) electronification

6. Cross-border ACH

7. Wire transfer ERI and notification

Payments Initiatives in Priority Order – AFP Survey (May 2011)

Source: Association for Financial Professionals (AFP)


Payment Method Comparisons

Service Benefits Challenges

ACH ACH is cost effective when compared to other electronic payments

Without lifting fees, beneficiaries will receive the full value of the payment

Increased control over value date of the payment

Lack of standardization, with each country employing its

own set of standards and rules

Regulations affecting local clearing systems are constantly

evolving

Lack of common standards in terms of format and

communication methods

Limitation on payment value varies country to country

Transfer Standard global payment format

Can generally be repaired up front

Same Day/Next Day delivery for time critical payments

Remittance information can travel with the payment

No limitation on payment value

Higher cost for issuers and beneficiaries:

– Transaction cost for issuer

– Lifting fees

Varied degrees of self-servicing capabilities

Checks Complete beneficiary bank details not required

Lower possibility for returns

No limitation on payment value

Access to float

Higher cost for issuers, including check printing costs

Delivery time varies dramatically between countries and

takes longer

Increased exposure to fraud risk

Stop and Payment Recall rules vary and can be

cumbersome country to country

Cards Eliminates paper

Ability to develop robust analytics around spend

Improve working capital management

Rebate opportunity

Higher cost for vendors/suppliers as a result of interchange

fees

Acceptance as a payment method may vary country to

country

Increased exposure to fraud risk

Potentially less control over spend

22

Questions


For More Information

Cheryl Gurz

Managing Director, Bank Market Segment Manager

BNY Mellon Treasury Services

301 Bellevue Parkway

Wilmington, DE 19809

302 791 4383

[email protected]

This presentation is for private circulation and for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment,

financial or other professional advice on any matter. Not all products and services are offered at all locations, and all are subject to final contractual agreements. BNY

Mellon does not undertake to update or amend this information and expressly disclaims any liability for any loss arising from this information or data.

Proprietary content of The Bank of New York Mellon Corporation.

©2014 The Bank of New York Mellon Corporation. All rights reserved.

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