FUNDAMENTALS OF THE PAYMENTS...
Transcript of 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
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1. U.S. Payment Environment
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2000 2003 2006 2009 2012
Bill
ion
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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
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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
payments from 2009 to 2012
5.1% Annual growth rate for Automated Clearing House (ACH) payments
slowed from 2009 to 2012
7.7% Annual growth rate of debit card
payments from 2009 to 2012
18.3 billion Number of checks paid in 2012
17% Checks being deposited as images
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U.S. Payments Drive the Global Payments Marketplace
111 113 117 124 130
73 75 79 82
83
22 26
30 35
41
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29 34
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14 17
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247 266
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312 339
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2008 2009 2010 2011 2012E
Bill
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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
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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)
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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
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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
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2. U.S. Payment Systems
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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
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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
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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)
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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
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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
Currency of payments USD
Value and other processing limits There are no value thresholds
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
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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
Currency of payments USD
Value and other processing limits There are no value thresholds
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
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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
Currency of payments USD
Value and other processing limits There are no value thresholds
Operating hours Depends upon bank
Cut-off times Dependent upon banks
Participants Multiple ABAs
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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
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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
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3. Key Trends and Issues in
Payment Systems
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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)
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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
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Questions
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For More Information
Cheryl Gurz
Managing Director, Bank Market Segment Manager
BNY Mellon Treasury Services
301 Bellevue Parkway
Wilmington, DE 19809
302 791 4383
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