Retail payment systems in the EU (Definitions, functions, instruments)

1
Role of the Bundesbank in payment systems and
future prospects
Dr. Hans-Jürgen Friederich Head of department
Payments, Account keeping, Safe-custody Accounts
and Trade Settelement
DeutscheBundesbank
Payment Systems on the Threshold of EU Budapest,
28 November 2002
2
Agenda

• Bundesbank in cashless payments
• Role of the Bundesbank
• Effects of the euro
• The relationship with banks
• Large-value payments
• RTGSplus within TARGET
• Challenges for TARGET
• TARGET2 - Decision and future structure
• Common shared platform - Benefits, principles,
  governance
• Retail payments
• Interbank clearing in Germany
• RPS of the Bundesbank
• EU price regulation
• SEPA - View of the Bundesbank

3
Role of the BBk in cashless payments

• Providing interbank infrastructures for the
  banking industry
• Individual payments (RTGSplus)
• Retail payments (RPS)
• Account holding (4.400 accounts)
• Providing payment services for BBk customers
• Governmental agencies (2.200 accounts)
• Small-sized credit institutions (indirect access
  to interbank payment systems)
• Correspondent banking activity
• Commercial customers (until 2004)
• Oversight of payment systems
• Monitoring function concerning banks activities
  and own NCB systems
• Not only smooth functions of payment systems,
  but also efficiency
• Participation in payment system bodies design
  of payment operation agree- ments
  (technical/organisational/legal basis of the
  German payment system)
• Strategy Co-operation instead of regulation
• Active implementation of standards (being more
  than a catalyst) Own payment services set
  benchmarks in efficiency

4
The effects of the euro... on the Bundesbank

• From a monopoly towards a competitive scenario
• Loss of the home market/DM advantage
• Appearance of new systems (eg EBA)
• Domestic markets are more and more influenced by
  the European dimension
• Massive re-engineering of all systems
• High demand on IT ressources
• Chance for far-reaching system improvements (eg
  RTGSplus)
• Making procedures more efficient
• Implementation of international standards
• New definition of the NCB role
• Monetary policy Loss of importance
• High degree of payment policy coordination
  restricts NCB independence
• Need for a higher transparency on Eurosystem
  level
• Operational cooperation between NCBs will
  increase
• Internal rationalisation (branches reduced by 50
  , staff by more than 10 )

5
The relationship with banks

• Complaints about alleged unfair NCB
  competition
• Increased degree of competition in the credit
  sector
• Increased regulatory pressure by the Eurosystem
• NCBs as public service provider
• Bigger banks increasingly try to integrate
  smaller banks ( bank of banks-functionality
  by private credit institutions)
• Solution for NCBs as operator of payment systems
• Maximum transparency
• Calculating prices on full-cost basis
• Neutral and cautious policy Security,
  Efficiency, Structural balance
• Support of banking industry initiatives
  co-operation with banks
• Open and fair access also for smaller banks
• Central banks service provider for, not
  competitor of banks

6
RTGSplus - within TARGET
32
DK
KRONOS
FR
186
BE
TBF
18
ELLIPS
ES
207
SLBE
UK
CHAPS euro
20
GR
43
HERMES
TARGET- Interlinking
DE
69 x
RTGSplus
IE
22
IRIS
NL
124
TOP
Total number ofparticipants 1.569
IT
681
BI-REL
PT
36
SPGT
ELS
FI
15
BOF
2.266 ./. x
AT
82
ARTIS
LU
30
ECB
LIPS
EPM
SE
ERIX
15
7
RTGSplus - within TARGET
Daily average of TARGET transactions (volume
01/02 - 10/02)
TARGET cross-border
TARGETdomestic
8
RTGSplus - and other systems
volume per day (average)
EBA Euro1
RTGSplus
EAF
TARGET cross-border
Start of EMU
Removal of national currencies
til 10/01 ELS
9
Challenges for TARGET What do banks expect?

• Optimising TARGET operations
• Single technical interface
• High level of cost effectiveness
• Robust infrastructure reliability, robustness,
  optimal back-up
• Optimising payment business
• Real-time information and interactive control
• Flexible infrastructure for accessing
  information
• Optimum connectivity to other infrastructures
  (CLS, Securities)
• Optimising liquidity management
• Efficient means for liquidity management
• Visibility on queues of incoming payments
• Built-in liquidity-saving elements to reduce
  liquidity needs
• Facilitated mobilisation of collateral
  inter-regionally

Source ZKA Zentraler Kreditausschuss
10
RTGSplus the design
Credit institution
Credit institution
Clear-stream Eurex
ESCB/TARGET
BBk asparticipant
SWIFTFIN Y-Copy
SWIFTNet
Online informationandinteractive control (ICS)
TARGETInterlinking
Payment processing
Liquidity bridge
Home account
RTGSplus accounts(booking, liquidity keeping)
11
RTGSplus - Liquidity saving features

• Liquidity is a value
• Entry disposition Consideration of bilateral
  offsetting payment flows
• Highly advanced resolution of queues
• Continous analysing of payments in queues
• Event-oriented dissolution of the express queue
• Continous dissolution of the limit queue
  (including pending express payments)
• Flexible use of algorithms through
  parametrisation
• Result Realisation of bilateral and
  multilateral liquidity savings
• Precise control of liquidity outflow via sender
  limits
• Built-in incentive for early submission

12
RTGSplus - Sender limits
Participant activity
Liquidity effect
13
RTGSplus - Information and control system

• Information and control system (ICS)
• Payment information (summary/details)
• Full queue transparency (inward/outward)
• Limits
• Queue management (payment type, order in
  queues, revocation, time tags)

VPN Browse
InterAct
Browse
S.W.I.F.T
HTML
XML
Automated Liquidity management
Euro1
Routing and liquidity control
New CHAPS
TotalEuroliquidity
Europayments
CLS
Treasury
14
RTGSplus - Prices
1,75 Euro
Fixed costs(per item)
1,75 0,80
1 Euro
Other domestic TARGET systems

• Non cost-covering
• TG loss (overall) 2000 app. 60 m euro
• Fixed fees not included

Euro1
0,50 Euro
Fixed costs(per item)
0,24 0,17
0,15 0,0425
prices in 7 RTGS systems (partly estimated)
EBA/Euro1-Transaction fees (valid as of 2003)
15
Challenges for TARGET

• Improvementsin other systems
• Settlement in central bank money
  (going hybrid)

• Competition with other infrastructures
• CLS
• Euro1

• Prices
• Cost-recovery
• Cost-pressure (esp. customer payments)

• Minimising operational risk
• 9/11
• Resiliance
• Efficient back- up procedures

Removing inefficiencies in the European liquidity
management

• High dynamic in payments
• improvements time-to-market
• Offering top features/quality

16
TARGET2 The dicision of the Governing Council

• TARGET2 Multiple platform system (MPS)
• Open approach no de-jure or de-facto limits for
  TARGET payments
• Introduction of a common shared platform
• Voluntary use for all EU countries
• Single shared component for three years
• TARGET2 Stronger harmonisation
• Single price structure (as of the start of
  TARGET2)
• Based on the system with the minimum per item
  cost (including a so-called public good factor)
• Broadly harmonised core service
• TARGET2 Obligation to achieve cost-recovery
• Full cost transparency across all TARGET-systems
• Outphasing of subsidies in all systems within
  four years

beginning with the start of TARGET2-operations
17
TARGET2 The future structure
ChallengeCost recovery
Which system(s) will survive?
Improved Interlinking
single sharable platform for 3 years
18
TARGET2 Benefits of a shared platform

• Lower cost
• Cost-covering price in Euro1 app. 21 cent
• Realising economies-of-scale
• Avoiding high investments esp. for smaller
  countries
• Better service quality
• All system features available for all
  participating NCBs/banks
• Maximum transparency for all participating
  NCBs/banks
• Offering top quality service levels
• Lower operational risk improved business
  contingency procedures
• Easy adaption to future requirements
• Pooling of scarce human and technical
  resources
• Cost-effective and fast implementation of new
  features/techniques
• High volume elasticity

19
TARGET2 Principles for a shared platform

• Neutrality
• Shared utility concept - Common ownership
• Co-operative governance
• Indepedence from other central bank acitivities
• Avoiding an over-loading of the common platfom
• High degree of standardisation necessary
• Local requirements Task of individual NCBs
  (Outside the common platform via home account)
• Central platform technical service provider
• Face to the customer Responsibility of the NCBs
• Shared platforms only works in the background
  only one system for all NCBs
• Highest level of confidentiality customised
  sharing by NCBs
• Only one TARGET interlinking component for all
  NCBs

20
An RTGS system as a shared utility
Credit institution(direct)
NCB1
Home accounts
Credit institution(indirect)
A
Correspondent banking module
Info and control
C
Payments
Monitoring/Admin.
Payments (indir. particip.)
Liquidity bridge
ESCB/TARGET
Info and control
Credit institution(direct)
NCB1
Monitoring
Payments
NCB2
B
Correspondent banking module
Monitoring/Admin.
Intraday accounts
Home accounts
Payments(indir. particip.)
Payment processing
TARGETInterlinking
Online information andcontrol (ICS)
NCB2
Liquidity bridge
standard modules may be developped later
21
Ancillary systems - in a shared utility
environment
Ancillary system 1
Internal cash accounts

Ancillary system 2
Option 1transfer of CBM
Option 2settlement via credit transfers/direct
debit
Ancillary system 3
Opiton 3 Settlement via home accounts/national
interface
Common platform

Home accounts

Intraday accounts
NCB1
Standardised
Individual
Smooth transition
outsourced central bank account or internal
account prefunded in CMB
22
Decentralised business functions

• Business relations will remain at the NCBs
• Customer contacts (different cultures/languages)
• Monitoring of intraday accounts and traffic of
  their customers
• Home accounts of their customers/non-standardis
  ed services
• Monetary policy operations with their customers
• Client-based monitoring system with maximum
  security
• NCB has only access to data of its customers
• NCB can only intervene if own customer is
  concerned
• IT just serves as a provider for certain
  technical functions
• Technical administration is centralised

23
GovernanceRelation between participanting NCBs

• One man one vote principle applicable,
  unless otherwise agreed
• But diverging interests
• Small NCBs want the same influence like larger
  NCBs
• Larger NCBs do not to be outvoted by smaller
  NCBs and their banks
• Solution
• Choice of common features user-driven (
  minority rights)
• Consensus decisions for fundamental questions
  among NCBs (eg selection of the system)
• Pay-as-you-use principle NCBs should only
  pay for features required by their banks
• Possibly double-key voting

24
Connection of accession countries
Logica model
AC bank
Stand-alone RTGS
Present model
AC bank
IN-RTGS
Common platform
AC bank
SECBmodel
Common corrspondent(bank)
AC bank
IN-NCB
Available as of 2005
Correspondent relation
Norwaymodel
Out-NCB
AC bank
25
Retail payments in Germany Interbank clearing
Giro network
Partner bank
Branch
Big bank
Credit co-op.
Bank
Central institutions of the co-op. banks
Bilateral clearing
Bundesbank
Credit co-op.
Settlement in central bank money
15
Bank
Giro network
Central institution of the savings banks
Savings bank or credit co-op.
possibly with parts of their business
Savings bank
Savings bank
Giro network
26
BBk-RPS Some figures

• Volume per day
• Average working day 8.5 mn transactions
• Peak load 23 mn transactions
• Share of payment instruments
• Credit transfers 1/3
• Collection items 2/3
• Submission of payments
• Via data media 50
• Via telecommunication 50
• Cheque truncation procedure
• Share of cheque payments in DE less than 5

27
RPS New developments

• Introduction of a new price model (07/2002)
• Very low transaction fees for standard service
  (0.015 euro for submissions via
  telecommunication)
• Additional fees for additional services (7.50
  euro for submissions/delivery of data media)
• Introduction of new technology (04/2002)
• Additional transfer protocols
• Implementation of IP technology (2003)
• Implementation of SWIFT formats (for STEP2,
  09/2003)
• Extension of opening hours (03/2003)
• Normal processing 08.00 20.00/21.00 (output
  settlement t1)
• Morning processing 20.00/21.00 06.00 h
  (output settlement t)

28
EU - price regulation (I)
Domestic fee
Cross border fee

• For euro payments within the EU

• Relation bank-customer, no application to
  interbank clearing systems

• Requirement for credit transfers IBAN
  BIC

Application to EU non-euro currencies possible
29
EU price regulation (II)

• Costs for cross-border transactions

Interbank 10
Internal cost 90
Average cost of a cross-border transaction 2001
(Source Association of German savings banks)
11.5
8.03
6.90
4.89
Paper-based(with reporting customer service)
Paper-based(without customer service)
Paper-based(with customer service)
Paperless
15
85
30
EU price regulation (III)
Leading to a level playing field?
Prices for domestic credit transfers
Range of prices for c.b.-credittransfersinEurop
e
Source Association of German savings banks
31
SEPA
Stage 2 As of 2005
Stage 3 Until 201X
Stage 1 As of 2002

• Implementation of the governing structure
• Implementation of STP standards
• Optimisation of processes
• Code of conduct for credit transfers
  (CREDEuro)

• European agreeement for credit transfers
• Definition of a European direct debit
  procedure
• IBAN in domestic payments full STP
  chain
• Harmonised data formats for credit
  transfers, direct debits and card payments
• Co-existence of new and old structures

• Removal of domestic payment systems

Source BdB German banking association
32
SEPAView of the Bundesbank New Standards

• Domestic formats will survive in the
  medium-term, but co-existence may be
  problematic
• IBAN implementation in the German DTA-format
  without severe modifications not possible
• Discussion about the implementation of SWIFT
  formats in German interbank clearing
• Reluctance of smaller credit institutions
  (costs)
• Waiting on the new SWIFT XML bulk payments
  standard A massiv increase of data volume?
• European or global standards The EDIFACT
  experience
• Usage of the SWIFTNet FileAct also for domestic
  retail transactions?
• Well proven domestic payment instruments vs.
  European harmonisation on a lower level?
• Will the German direct debit procedure survive
  in Europe?

33
SEPAView of the Bundesbank - Infrastructure
Bank (direct)
Branch
Bank
Partner- bank
Bank (direct)
Bank
Bundesbank
ACH
Public funds
Savings/Cooperative banks)
Border
34
SEPAView of the Bundesbank - Infrastructure

• Support the EBA STEP2 initiative
• No political acceptance for other solutions (eg
  a ACH linkage, retail-TARGET)
• Concentration on one initiative useful (to
  achieve a critical mass)
• BBk STEP2 settlement via TARGET (not Euro1)
• Equal treatment within STEP2 (no special NCB
  status)
• Policy issues
• No competition, only complementary function
• Operational involvement as basis for an active
  payment policy
• Offering an indirect STEP2 participation for
  banks without alternative access
• Direct participation may be to expansive (high
  investments)
• Usage of the domestic RPS procedure (Economies
  of scale)
• BBk as preferred agent for incoming payments
  (if receiver is not adressable in STEP2)
• Long-term effects
• Domestic traffic in STEP2 smaller
  countries/coutries with no ACH/ countries with
  antiquated ACHs
• STEP2 als central European clearing house?
• Will alternative clearing procedures continue to
  exist (eg club-solutions)