Please enable JavaScript.
Coggle requires JavaScript to display documents.
ISFS614: Digital Banking — Session 3 readings - Coggle Diagram
ISFS614: Digital Banking — Session 3 readings
Significance of Payments
Customers’ basic needs
Convenience
: meet transactional needs
Immediacy
: ease and speed of transactions
Network
: breadth of network
Compatibility
: currency capability
Informedness
: pre- / post-transaction information
Some stats
The global non-cash transaction volume is growing year to year (
CAGR: 10.9%, 2015 - 2020
)
Initiatives to promote
cashless societies, technological innovation and financial inclusion
emerge as the key drivers of the significant growth rates of non-cash transactions in the emerging markets
In mature markets, a combination of NFC / contactless technology and mobile payments may lead to the development of new payments use cases
Debit cards and credit transfers were the leading digital instruments in 2015
, while cheque usage continues to decline globally
Despite the increased adoption of digital payments,
cash continues to be in the
mainstream
, especially for low-value transactions
How Banks Make Money from Payments
FX spreads
Credit card commissions
Trade payments
Free float due to temporary hold of deposits (e.g., cheques)
ATM transactions
Types of payments
Retail / Wholesale
Retail
(small value):
Card networks, electronic transfer networks, cheques
Handle low-value, high-volume transactions (e.g., bill payment)
Wholesale
(large value):
Payments between banks through accounts held at central bank
Used for large interbank and B2B payments
Online / Offline
(see
here
)
Types of electronic money
Essential elements of payments
A set of mechanisms for the transfer of money between two entities, requiring:
Instrument (e.g., cheque, credit / debit card)
Transfer mechanism: message instructions and communication channels
Member institutions (i.e., counterparties)
Central clearing facilities (e.g., central banks, central clearing facilities)
Rules & procedures (e.g., legal framework to guarantee finality)
Operational elements of a payment
Payment transactions
Payment transactions in a single bank
International payment through a bank
Nostro / Vostro accounts
A
nostro
account is held in foreign country by a domestic bank, in the currency of that country.
Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions.
A
vostro
account is held by a domestic bank in its home country for foreign banks
SWIFT Network & Messaging Standards
SWIFT: Society for Worldwide Interbank Financial Telecommunication
SWIFT does
not
facilitate funds transfer. Rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other.
SWIFT Payment Through a Bank
Clearing & Settlement
(
overview
):
Clearing — A set of procedures to determine net effect of multiple payment orders
Settlement — Actual payment in fiduciary (real) money, often involving a central bank
Singapore practices
5 day clearing week
, no
Saturday / Sunday clearing
Local SGD cheque clear by 2PM the following business day
Uses
Check Truncation System
(CTS) for image scans of SGD and USD cheques
Unpaid checks returned with
Image Return Document
(IRDs) — physical checks are removed from the process
Types of large value transfer systems
Designated-time net
settlement (DNS)
Real-time gross settlement (RTGS):
Settlement of real-time, very high volumes of large-value e-payment transfers
Reduction of credit risk
Credit cards & EFTPOS Systems
EMV (Europay, MasterCard and Visa) standard for credit cards:
Standard for interoperation of integrated circuit (IC) cards, IC capable point-of-sale (POS) terminals, and ATMs for authenticating credit and debit card payments
Benefits
Fraud reduction
Manage offline card transactions
Ensure interoperability
Debit and credit card transaction flow
Electronic Money (Smart Card):
Card contains a counter representing money value
Card is loaded through a loading terminal—can be through debit of customer’s bank account
Payment at POS—amount deducted from card, added to merchant’s terminal
Deposit—merchant uploads transactions at the end of day
Multi-purpose stored value facilities (SVF)
General cash card model