DFS and RTGS - Digital Financial Services & Real-Time Gross Settlement PDF

DFS AND RTGS UNIT_2 UNIT2 1. Developing Countries and Digital Financial Services (DFS): The Story of Mobile Money and Regulation of Mobile Money 2. RTGS Systems WHAT IS DIGITAL FINANCIAL SERVICES? A digital financial system refers to the use of digital technologies to provide financial servi...

DFS AND RTGS UNIT_2 UNIT2 1. Developing Countries and Digital Financial Services (DFS): The Story of Mobile Money and Regulation of Mobile Money 2. RTGS Systems WHAT IS DIGITAL FINANCIAL SERVICES? A digital financial system refers to the use of digital technologies to provide financial services and manage financial transactions. This system encompasses a wide range of services and products that are delivered through electronic platforms, enabling individuals, businesses, and governments to access and manage financial resources more efficiently and securely. DFS-  INTRODUCTION Access AND NEED to affordable financial FOR services DFS for poverty is critical reduction and economic growth.  Countries with deeper, more developed financial systems enjoy higher economic growth and larger reductions in poverty and income inequality.  Access to financial services also increases opportunities and resilience for the poor, particularly women.  Despite this, 65 percent of adults in the world’s poorest economies lack access to even the most basic transaction account that would allow them to send and receive payments more safely and efficiently. These accounts are also the gateway to broader financial services such as savings, insurance and credit. Only 20 percent of adults in developing economies save through a formal financial institution. The remaining savers rely on informal and costlier ………  In developing countries less than 1 person out of 5 has access to banks and even fewer use their accounts regularly.  Therefore rises the need to build a more stable, sustainable and inclusive future as more people need access to financial services and need to use them.  WHY?  Because having an account helps people pay what they need, send and borrow what they must and save what they can.  And the others are caught in the cash trap as they spend or borrow cash at considerable cost WHY DFS IS BECOMING POPULAR….  DFS bridges the gap between rich and poor.  Requires only a mobile phone- which everyone has access to.  DFS is more affordable,  DFS is more flexible.  More extensive coverage.  Bridge the usage gap  KEY COMPONENTS OF DFS  Digital Payments: Mobile Payments: Use of smartphones to make payments via apps like Google Pay, Apple Pay, or Paytm. Online Banking: Accessing bank accounts and conducting transactions through the internet. e-Wallets: Digital wallets that store payment information and allow quick transactions, e.g., PayPal, Venmo. QR Code Payments: Scanning a QR code to transfer money directly from a bank account or digital wallet.  Digital Currencies: Cryptocurrencies: Decentralized digital currencies like Bitcoin and Ethereum, which operate on blockchain technology. Central Bank Digital Currencies (CBDCs): Digital forms of a country’s fiat currency, issued and regulated by the central bank.  Digital Banking: Neobanks: Online-only banks that provide banking services without physical branches (e.g., Chime, Revolut). Traditional Banks: Offering digital services like mobile banking apps, online loan applications, and digital customer support.  FinTech (Financial Technology): Lending Platforms: Peer-to-peer lending, microloans, and online loan marketplaces. InsurTech: Digital insurance platforms that simplify buying and managing insurance policies. Robo-Advisors: Automated platforms that provide financial advice or manage investments with minimal human intervention. Digital Financial Inclusion: Mobile Money: Services like M-Pesa that allow unbanked populations to access financial services using mobile phones. Digital Identity: Biometric systems and digital IDs that enable secure access to financial services.  …… Blockchain and Distributed Ledger Technology (DLT): Smart Contracts: Self-executing contracts with the terms directly written into code, used for automating transactions. Decentralized Finance (DeFi): Financial services that operate without traditional intermediaries, using blockchain technology. Regulatory Technologies (RegTech): Compliance Tools: Digital tools that help financial institutions comply with regulations. KYC/AML: Digital Know Your Customer (KYC) and Anti-Money Laundering (AML) processes to verify identities and prevent fraud. Cybersecurity: Encryption: Protecting financial data through encryption to prevent unauthorized access. Fraud Detection: Advanced algorithms and AI to detect and prevent fraudulent activities in real- time. BENEFITS OF DIGITAL FINANCIAL SYSTEM Convenience: Access to financial services anytime, anywhere, via smartphones or computers. Efficiency: Faster and cheaper transactions compared to traditional methods. Financial Inclusion: Reaching underserved populations who may not have access to traditional banking services. Transparency: Easier tracking of transactions and better access to financial data. Innovation: Continuous development of new financial products and services. CHALLENGES OF DIGITAL FINANCIAL SYSTEM Security Risks: Threats from cyber-attacks, fraud, and data breaches. Regulatory Compliance: Ensuring that digital financial services comply with national and international regulations. Digital Divide: The gap between those who have access to digital technologies and those who do not. EXAMPLES- India’s UPI (Unified Payments Interface): A real-time payment system that enables instant money transfers between bank accounts via mobile devices. China’s Alipay and WeChat Pay: Platforms that dominate digital payments in China, integrating financial services with social media and e-commerce. Cryptocurrencies like Bitcoin: Allowing peer-to-peer transactions without the need for traditional banks. FUTURE TRENDS- AI and Machine Learning: Enhancing decision-making, fraud detection, and customer service in financial services. 5G and IoT Integration: Faster and more secure connections for financial transactions using the Internet of Things. Expansion of CBDCs: More countries exploring or launching their own digital currencies. SO HOW CAN WE ENCOURAGE THE FINANCIAL INCLUSION OF THESE PEOPLE?  We know that more than half the population in these countries already own a mobile phone and At very least most people have access to one through friends, relatives or local businesses.  So, financial services can be brought to where people need them digitally, fast and cheaply using the mobile networks. DFS is the system which address this need of today by building financial services ecosystems for the world notably the poor.  For DFS to work fully, the services have to become more relevant That means more available for people in rural areas. More affordable for people that think accounts and savings are only for the rich. More flexible for people who have money today and maybe not tomorrow.  Its not enough to bridge the physical distance using wireless. We have to bridge the usage gap by providing services that people need. GHANA KEY ENABLERS OF THIS SUCCESS?  The key enabling development was that Ghana allowed non-banks – specifically mobile network operators – to issue e-money.. In 2015, new guidelines were introduced that allowed mobile network operators to set up subsidiaries that would issue e-money. These subsidiaries would, in turn, be supervised directly by the Bank of Ghana. Mobile money could now be issued not only by traditional financial institutions, but also by regulated mobile network operators.  In addition to an enabling regulatory environment, Ghana invested in the necessary payment systems infrastructure.  In May 2018, the Bank of Ghana took DFS growth to the next level by requiring mobile money services to be interoperable amongst themselves and with bank accounts.  Almost 100 percent of all government-to-person (“G2P”) and government-to-government (“G2G”) payments are digital.  Almost 100 percent of all government-to-person (“G2P”) and government-to-government (“G2G”) payments are digital.  Regulation should balance the need to foster industry competition and incentivize private sector investment INDIA India’s major accomplishments in DFS are significant scale up in access to accounts and volume of transactions via digital channels, and significant scale up in digital G2P payments. In the last three years, over 300 million adults have gained access to bank accounts. In India, the share of adults with an account surged from 53 percent in 2014 to 80 percent in 2017, and the gender gap shrunk from 20 percent to six percent in the same period. On the back of the increased access, India’s UPI, the country’s real-time payment system which instantly transfers funds between two bank accounts using mobile apps of banks and other third-parties (e.g., Google Pay), has gone from processing 17.9 million digital transactions per month in 2016 to 1.3 billion per month in 2020.  With a comprehensive digital payments system in place, the government of India was able to leverage it to digitize G2P KEY ENABLERS OF INDIA’S DFS EXPANSION  In 2014, India embarked on one of the most ambitious digital financial inclusion initiatives seen in any country, which was made possible by investments in key enablers. Two critical enablers were the technological infrastructure and systems supporting innovation and well- calibrated regulations reflecting the government’s prioritization of financial inclusion.  (1) The Biometric ID Program gave the ability to cheaply, reliably and digitally verify and authenticate ID  (2) The India Stack connected different components of digital infrastructure.  (3) The electronic payment system is robust.  Sound legal and regulatory framework that enabled orderly and rapid development  Kenya KENYAhas the largest and most successful mobile money sector in Africa and has consistently led the continent both in scale and innovation. M-Pesa was first introduced in 2007 by MNO,  M-Pesa’s basic P2P payment solution was a foundational building block for the development of a wider and more diversified DFS ecosystem. M-Pesa’s initial advertising slogan “send money home” pointed to the core function it offered to the lower income population: facilitating internal remittances, mostly from urban to rural areas.  This was backed by an extensive agent network that enabled M-Pesa customers to convert their cash to e-money and back, as and when needed. Over time M-Pesa developed a variety of P2P and P2B payments, covering many use-cases from small informal sector payments and contributions to the informal savings groups, to utility bills as well as payments at gas stations, supermarkets and hospitals KEY ENABLERS OF KENYAS DFS EXPANSION  1) M-Pesa rose because of significant private investments, strong execution and a dominating share of the telecom market.  2) Regulatory flexibility The “test-and-learn” approach taken by the regulator was also instrumental to the success of M-Pesa. T  3) Simplified Customer Due Diligence The adoption of simplified CDD was critical for the development of mobile- based bank accounts. MOBILE MONEY- INTRODUCTION  In the past few decades, sending and receiving money around the world has become more convenient, more accessible, and more cost-effective for the millions of people sending global remittances every single day.  The growth of specialist money transfer providers offer an alternative to the expensive fees and unfair exchange rate margins often charged by traditional financial institutions, and have made managing money transfers possible with just a few swipes of a button on a mobile app. MOBILE MONEY- MEANING  As per the IMF’s Financial Access Survey,  mobile money is a pay-as-you-go digital medium of exchange and store of value using mobile money accounts,  facilitated by a network of mobile money agents.  It is a financial service offered to its clients by a mobile network operator or another entity that partners with mobile network operators, independent of the traditional banking network.  A bank account is not required to use mobile money services—the only pre-requisite is a basic mobile phone. WHAT IS MOBILE MONEY  Electronic wallet service which allows users to store, send and receive money using their mobile device under financial regulation is known as mobile money. A digital wallet is virtual wallet which stores all the contents in digitized format which allows easy payments and other money related transactions. A digital wallet is virtual wallet which stores all the contents in digitized format which allows easy payments and other money related transactions. It can hold not only money but also coupons, loyalty points, value and membership cards etc. It provides support for financial services such as payments, transferring money, paying for goods and services using mobile device. WHAT CAN THE RECIPIENT DO WITH THE MOBILE MONEY  Most mobile money services allow users to purchase items in shops or online, pay bills, school fees, and top-up mobile airtime. Cash withdrawals can also be carried out at authorized agents.  To pay a bill or send money to another person, the user selects the relevant service from their phone’s mobile money menu. Paying with mobile money is just like sending a text message – it’s simple and easy. WHO PROVIDES MOBILE SERVICE? Most mobile money services are offered by local mobile telecoms operators who have received a license to operate electronic payments services. Some mobile money services are offered by banks or other companies. ADVANTAGES OF MOBILE MONEY  ➨Using this solution, money can be transferred almost anywhere, even when there are no banks nearby. This increases accessibility in rural areas. ➨It enables cashless payments which reduces dependency on cash and allows tracking of transaction records. This increases financial security and reduces inherent risks of cash handling such as loss, theft or fraud. ➨Mobile money has lower transaction costs with improved security compare to credit card method. ➨Customers need not require middlemen for money transfers anymore. Hence it increases transparency. ……..  ➨It avoids long travel to send/receive money or to pay bills by standing in long queues. This provides great comfort to the customers. ➨Purchasing of online goods and services have become easier and provides more options based on pricing/features selection. ➨Mobile money system provides services to the people who are geographically inaccessible and/or having very low income. ➨Mobile money platforms are accessed through most basic mobile phones with low transaction costs. ➨They are distributed by vast network of agents which provides person to person contact and training to those who are unfamiliar with the mobile money technology.  …..  It has been used to provide aid in humanitarian disasters -In Nigeria, an estimated 187.9 million people are registered mobile users, while just 40 million of the country’s adult population have access to a basic bank account. Mobile Money bridges this gap, giving millions of people access to financial services that they would not otherwise be able to have.  Reduced corruption -In some countries, official payments such as taxes, permits, and licenses are synonymous with corruption and bribery. Mobile Money provides access to these services without users needing to deal with officials face-to-face, which can remove much of the corruption involved in these processes.  Instant transfers -Mobile Money transfers can often be processed instantly or within minutes by many transfer providers offering the service, so are a great method for getting funds to your recipient quickly.  Secure -Most mobile money accounts are still protected by local financial regulations, with money transfer providers verifying the identity of both sender and receiver before a transfer is approved. DISADVANTAGES OF MOBILE MONEY  ➨The customers are required to obtain compliance from the respected banks. ➨Lack of interoperability between networks restricts reach and makes transactions cumbersome. ➨Adoption of mobile money usually requires multi-party involvement (viz. agents, governments, corporations etc.). The trust is needed between these in order to have successful mobile money platform. ➨The ignorance and illiteracy from people need to be reduced in order to have wide acceptance of the system. ➨It requires app to be installed which is not available in all the mobile phones. Smart phones are needed for this purpose. ➨It is advisable not to provide passwords and other details to anyone. Failing to do so will lead to scam and theft. HOW DOES IT WORK?  Mobile wallets are linked to a mobile phone number, so you don’t need a smartphone or internet access to use Mobile Money – even a basic mobile phone will work provided you have a signal.  Mobile money can be used to send and receive money using a mobile phone, which can then be used to purchase items online, in shops, to pay bills, or just simply store money as savings within the account. For many, this means that Mobile Money is, in fact, a cheaper and more reliable way to make payments than a bank account which can be difficult or expensive to open. MOBILE MONEY PROVIDERS  Mobile Money services are usually owned by a Mobile Network Operator in each country. A few major mobile operators throughout the world supporting Mobile Money include: M-Pesa: Vodafone’s own mobile money transfer and payment service, M- Pesa first launched in Kenya in 2007, and now has over 50 million active users across Afira, Asia, Europe, and the Middle East. MTN Money: This operator supports Mobile Money in partnership with over 10 banks, and has over 22.2 million subscribers using the service in a number of African countries. GCash: Based in the Philippines, GCash enables users to turn their mobile into a mobile wallet to pay for items and send money as quickly as sending a text. EcoCash: EcoCash is Zimbabwe’s dominant Mobile Money group and had over 2.3 million registered users just 18 months after its initial launch in 2018. INTERNATIONAL TRANSFERS  Mobile Money makes it easier for people to send money to friends and family all over the world. Today, international Mobile Money transfers are possible in 51 of the 92 countries in which the service is offered.  Bottom line  Mobile Money has the potential to transform the lives of billions of people around the world. Although it’s most commonly used for domestic purposes at the moment, Mobile Money also has the capability to connect people all over the world and make sending and receiving money more accessible than ever.  In India, Real-Time Gross Settlement (RTGS) is a payment system that allows for instant and secure transfer of large sums of money from one bank to another in real time. It is operated by the Reserve Bank of India (RBI) and is primarily used for high-value, time-critical transactions. RTGS- MEANING  The term real-time gross settlement (RTGS) refers to a funds transfer system that allows for the instantaneous transfer of money and/or securities. RTGS is the continuous process of settling payments on an individual order basis without netting debits with credits across the books of a central bank. Once completed, real-time gross settlement payments are final and irrevocable. In most countries, the systems are managed and run by their central banks RTGS- Real-time gross settlement is the continuous process of settling interbank payments on an individual order basis across the books of a central bank. This system's process is opposed to netting debits with credits at the end of the day. Real-time gross settlement is generally employed for large-value interbank funds transfers. RTGS systems are increasingly used by central banks worldwide and can help minimize the risks related to high-value payment settlements among financial institutions. MEANING- RTGS  Real-Time Gross Settlement (RTGS) is a system used by central banks to transfer large sums of money or securities between banks in real-time. Here’s a basic example of how it works:  Scenario: Bank A needs to transfer $1 million to Bank B on behalf of one of its customers. 1. Step 1: Bank A sends the payment request to the central bank’s RTGS system. 2. Step 2: The central bank’s RTGS system checks if Bank A has enough funds in its account. 3. Step 3: If Bank A has sufficient funds, the RTGS system immediately transfers $1 million from Bank A’s account to Bank B’s account at the central bank. 4. Step 4: The transaction is settled instantly and irrevocably, meaning the money cannot be reversed once transferred.  This type of system is often used for high-value, urgent transactions and ensures that funds are transferred quickly and securely.  Real-Time: The transfer of funds happens immediately, as CHARACTERISTICS soon as the transaction is initiated. There is no waiting period or delay. Gross Settlement: Each transaction is processed individually, not bundled with other transactions. This means that payments are settled one by one, rather than netted against other payments. Immediate and Final: Once a transaction is processed through RTGS, it is considered final and irrevocable. The funds are transferred and cannot be reversed, making it highly secure. Used for Large-Value Transactions: RTGS is mainly used for transactions involving large amounts of money, such as RTGS- OTHER COUNTRIES  Many countries have their own RTGS systems. For example: Fedwire in the U.S. TARGET2 in the European Union RTGS in India  RTGS systems help maintain liquidity in the banking system by allowing banks to move money around easily and securely.  BENEFITS  RTGS systems, increasingly used by central banks worldwide, can help minimize the risk to high-value payment settlements among financial institutions.  Although companies and financial institutions that deal with sensitive financial data typically have high levels of security in place to protect information and funds, the range and nature of online threats are constantly evolving.  Real-time gross settlement can allow a smaller window of time for critical information to be vulnerable, thus helping mitigate threats.  Two common examples of cybersecurity threats to financial data are social engineering or phishing—tricking people into revealing their information—and data theft, whereby a hacker obtains and sells data to others. Speed: It ensures that money moves quickly, which is critical in situations where timing is key, such as settling large financial deals. Security: Since transactions are settled instantly and individually, there's less risk of defaults. Finality: Once the money is transferred, the transaction is done and cannot be undone. HOW RTGS WORKS?  the transaction settles in the receiving bank immediately after it is transferred from the sending bank. Gross settlement means transactions are handled and settled individually, so multiple transactions aren't bunched or grouped together. This is the basis of a real-time gross settlement system.  An RTGS system is generally used for large-value interbank funds transfers operated and organized by a country’s central bank. These transfers often require immediate and complete clearing. As mentioned above, once transactions are settled, they cannot be reversed.  RTGS does not require an actual physical exchange of funds. A central bank will often adjust the accounts of the sending and receiving bank in electronic form. For example, sender Bank A's  HOW RTGS WORK IN INDIA  1.Eligibility for RTGS: Minimum amount: ₹2 lakhs (there is no maximum limit). Participants: RTGS can be used by individuals, businesses, and institutions that need to transfer large amounts of money between banks.  2. Process: Initiation: The sender (individual or business) provides their bank with the details of the beneficiary, such as their bank account number, the name of their bank, branch, and IFSC (Indian Financial System Code). Bank’s Submission: The sending bank forwards the payment instruction to the RTGS system, managed by the RBI. Verification: The RTGS system checks if the sending bank has enough funds in its account with the RBI to cover the transfer. Transfer: Once verified, the RBI debits the sending bank’s account and credits the receiving bank’s account immediately. Notification: The receiving bank is informed, and the funds are credited to the beneficiary’s account. The transaction is settled instantly, and the process is irreversible.  3. Timings: Operating hours: RTGS in India is available 24x7, 365 days a year (including weekends and holidays) since December 2020. This provides flexibility for businesses and individuals to transfer funds at any time.  4. Features: Instant Settlement: As soon as the transfer request is processed, the money is transferred in real-time and becomes available to the beneficiary immediately. Gross Settlement: Each transaction is settled individually, not as a batch of payments, which makes it a highly secure and reliable payment method. Final and Irrevocable: Once the funds are transferred, the transaction cannot be reversed or canceled.  5. Fees: The Reserve Bank of India has waived charges for RTGS transactions between banks. However, individual banks may charge a fee for providing RTGS services to their customers. These fees generally vary from bank to bank.  …..  6. Use Cases: Large business payments Real estate transactions High-value interbank transfers Corporate financial settlements  7. Benefits: Speed: Payments are settled in real-time, so the recipient gets the funds immediately. Security: RTGS transactions are processed and settled by the RBI, providing a high level of trust and security. No Physical Exchange: All transfers happen electronically, making the process fast and efficient. RTGS VS NEFT (NATIONAL ELECTRONIC FUND TRANSFER) RTGS is used for high-value, urgent transactions (₹2 lakh minimum) and provides instant settlement, whereas NEFT is used for smaller, non-urgent transactions with no minimum value, but payments are settled in batches at regular intervals.  RTGS plays a crucial role in ensuring the smooth functioning of India’s financial system by allowing immediate movement of large amounts of money between banks, especially for critical transactions.