‘Switching, Interoperability and Interconnectivity’

Bridget Morris

November 2009

Programme

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Introductions

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The Problem(s)

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Overview & key concepts

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Some Answers?

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Suggested way forward

Introduction – TPS & Liquid

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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

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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..

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Currently 3 bigger ‘switches’ (and various smaller ones)

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InterSwitch Valuecard

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eTranzact NIBBS Central switch But are they all really EFT ‘switches’?

Is a central switch needed?

The Problem, the resentments?.

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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?

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Regulator DOES NEED to

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see all the payment flows

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to balance

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real time and netted payment streams

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demand for intra-day liquidity

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Regulator does NOT NEED

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to make a profit out of switching

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to own the central switch

Why a central switch?

contd.

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Received wisdom, best practice Important in Africa to comply with ‘best practice’ Standard, internationally accepted payment systems are very important w.r.t.

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Ratings Bretton Woods institutions

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Readiness for international trade Credibility generally

Some pertinent questions….

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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

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Technology is the easy part Understand your position in the National Payments system infrastructure

The 2 ‘legs’ of commerce

trade payment

Customer PSP / Scheme Merchant Issuing bank Payment system Acquiring bank

Physical picture very different…

C e n t r a l B a n k S e c u r i t i e s D e p o s i t o r y A u t o m a t e d C l e a r i n g

P a y m e n t I I n f r a s t r u c t u r e

E l e c t r o n i c F u n d s T r a n s f e r C o m m e r c i a l B a n k s E l e c t r o n i c C o m m e r c e

A more realistic picture…..

CB enpowered by NPS Act Bank Bank NIBSS Paper clearing house EFT Switches + VISA/Mcard Bank Bank m-commerce EBPP System Operators E-commerce ATM/POS Acquirers Card Issuers Etc., ad infini

Overview – key concepts 1

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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

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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

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

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‘see’ the flows, volumes, patterns Adjust the high collateralisation value threshold, ‘lubricate’ Monitor settlement risks, assist

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All the above makes for credible, internationally recognised payment system

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But Central Bank may be slow, innovation always precedes regulation…

Overview – key concepts 4

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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

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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

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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 You

Bridget Morris Mobile +263 912 222 569 / +260 966 306 982 Office +260 211 257 147 [email protected]

www.tpspay.com