SC03 MFin Payment Systems PDF

Payment Systems 1. Introduction: What is a payment system? 2. Singapore Giro 3. ATMs 4. NETS 5. Payment cards 6. Instant payment systems 7. PayNow and PayNow Corporate (Singapore...

Payment Systems 1. Introduction: What is a payment system? 2. Singapore Giro 3. ATMs 4. NETS 5. Payment cards 6. Instant payment systems 7. PayNow and PayNow Corporate (Singapore) 8. Mobile-wallets and other mobile apps (Singapore) 9. FAST (Singapore) 10. Overseas fund transfers (SWIFT) © Associate Professor (DR.) Wee Yong, YEO  What is a payment system? There can be no commerce without a payment system The payment system is crucial to any economy and finance hinges on it An efficient payment system goes a long way in enabling economic growth The modern payment system goes beyond the transfer of funds from payers to the payees Payment methods have expanded beyond the traditional cash and paper transactions to electronic means Financial institution intermediate the transfers through the exchange of debits from and credits to the participants © Associate Professor (DR.) Wee Yong, YEO  What is a payment system? Understand the payment system is important Reasons: Many of the technological disruptions happen in the payment arena © Associate Professor (DR.) Wee Yong, YEO  What is a payment system? Examples VISA bought Tink, a Swedish payment platform for more than $1.8B in March 2022 Wise, a money-transfer firm: listed in London in July 2021 at more than $11 bn (Now $9.8 bn) Stripe (started as a online payment service): value at $95 bn as at March 2021 (Now about $65 bn) Paypal: valuation in July 2021 at $308 bn (now about $70 bn) Ant Financial, payment giant: private valuation in 2018 at $150 bn and in 2020 at $315 bn, before its ill-fated IPO (Now about $80bn) © Associate Professor (DR.) Wee Yong, YEO  What is a payment system? © Associate Professor (DR.) Wee Yong, YEO  What is a payment system? © Associate Professor (DR.) Wee Yong, YEO  What is a payment system? Understand the payment system is important Reasons: Many of the technological disruptions happen in the payment arena Understanding the payment process helps in the understanding of and the creation of disruptive solutions Comparing where we were before and where we are now helps to project where we can be in the future We will take Singapore as an example in some of our discussions © Associate Professor (DR.) Wee Yong, YEO  Singapore GIRO General Interbank Recurring Order An interbank payment system Transfer of funds can either be: Direct debits (pull) Between the payer and the billing organization (BO) to pay regular bills BO issues instructions to its bank to collect bills from its direct debit customers Examples: utility bills and insurance premiums © Associate Professor (DR.) Wee Yong, YEO  Singapore GIRO General Interbank Recurring Order An interbank payment system Transfer of funds can either be: Credit transfers (push) To make transfers of a specific amount on a specific date to a specified payee © Associate Professor (DR.) Wee Yong, YEO  Singapore GIRO Procedure Originator (the payer) sends payment instructions to the originating (payer’s) bank Originating bank sends the payment instructions to the ACH (Singapore Automatic clearing house or SACH) for clearing SACH determines the net settlement amount and clearing figures to the MEPS (MAS electronic payment system) Instructions forwarded to the (payee’s) receiving bank Net amount is settled in the MEPS © Associate Professor (DR.) Wee Yong, YEO  Singapore GIRO Technology In the past, magnetic tapes (!) were manually delivered between participating banks and the SACH In 2001, system was enhanced to a browser-based eGIRO system for electronic delivery Settlement takes place in new and enhanced MEPS+ © Associate Professor (DR.) Wee Yong, YEO  Automated Teller Machine (ATM) Introduced in Singapore in 1979 by Chartered Bank Initially only used for cash withdrawal Evolving electronic funds transfer (EFT) networks: Telecommunications and payment infrastructure Link consumers, ATMs, merchants, and banks Currently used for other basic bank transactions without having to visit a bank outlet Network can be regional or national © Associate Professor (DR.) Wee Yong, YEO  Automated Teller Machine (ATM) Networks Two most popular international networks: ? Visa’s Plus and MasterCard’s Cirrus National networks may serve as a bridge between regional and international networks Cross-network transactions may involve multiple layers of switching fees depending on the number of networks (and number of times) they cross © Associate Professor (DR.) Wee Yong, YEO  Automated Teller Machine (ATM) Technology Data terminal connects with a host processor Host processor communicates with an internet service provider (ISP) Host processor connects all ATMs Encryption is used to keep user information secure EMV chip technology is the currently the norm The basic structure of an ATM consists Input devices: card reader and keypad Output devices: speaker, screen, printer, cash dispenser © Associate Professor (DR.) Wee Yong, YEO  Automated Teller Machine (ATM) Technology Improved offerings Competition from other payment platforms Banks hanging on to old technology AMT are re-wired for ever more services Payment of utilities bills Subscriptions of IPO, rights issues, T-bills and T-bonds Purchase of insurance Investment in funds Etc © Associate Professor (DR.) Wee Yong, YEO  NETS (Singapore) Network for Electronic TransferS Privately held company founded in 1985 as Singapore’s national debit scheme Owned by DBS, OCBC, and UOB Started as an electronic funds transfer at point of sale (EFTPOS) system Allows cardholders to pay merchants at the point of sale through online bank fund transfers Before the introduction of debit cards in Singapore by using banks’ ATM cards © Associate Professor (DR.) Wee Yong, YEO  NETS (Singapore) NETS manages the clearing process of EFTPOS transactions DBS acts as the clearing bank NETS calculates the multilateral net settlement positions of the banks before sending the net amount to DBS for debiting and crediting of the bank accounts Obligations of participating members are settled through DBS Member banks then manages their respective accounts through MEPS+ © Associate Professor (DR.) Wee Yong, YEO  NETS (Singapore) Other cards: The POS NETS terminal also takes other cards, such as Maestro, Amex and Diners charge cards Maestro: MasterCard ATM 5 Network used by QFBs (special bank license in Singapore) © Associate Professor (DR.) Wee Yong, YEO  Depository Financial Institutions Commercial banks (Singapore) Qualifying Full Banks 10 Qualifying Full Banks (QFBs) 25 places of business (including 10 branches) Share ATMs among themselves The retail arm of 4 has been incorporated locally so far: Citibank, HSBC, Maybank and Standard Chartered © Associate Professor (DR.) Wee Yong, YEO  NETS (Singapore) NETSPay A mobile payment app in Singapore Users register NETS Bank Cards digitally Allow users to use their NETS card without carrying the NETS card Contactless payments by tapping a terminal or by QR code Smartphone sensors allows biometric authentication Near-Field Communication (NFC) technology enables Android phones to be used to make contactless payments through Radio Frequency Identification (RFID) technology © Associate Professor (DR.) Wee Yong, YEO  NETS (Singapore) Partnerships with other countries China: NETSPay can be used in some cities India: RuPay digital payments (of the National Payment Corporation of India (NPCI)) Bharat Interface for Money (BHIM) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Started 1950 Diners Club: when? AMEX : when? 1971 Still entrenched in western economies © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Relationships Merchant Customer Acquiring Issuing Bank Bank Payment Networks (Eg. VISA and MC) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Clearing and settlement: 3 stages Authorization The card terminal transmit the card and transaction data to the issuer Issuer checks for customer’s identity, credit limit, etc Issuer determines whether the transaction is approved or rejected © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Clearing and settlement: 3 stages Authorization Authorization technology Magnetic card technology: swipe through reader Chip card technology: verification at the payment terminal through PIN number or a signature Waved technology: verification via reader For online purchase, the account number, expiration date and card verification number is provided instead © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Relationships Merchant Customer Acquiring Issuing Bank Bank Payment Networks (Eg. VISA and MC) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Clearing and settlement: 3 stages Clearing Transaction data is transmitted from acquirer to issuer for settlement Settlement Issuer pays acquirer © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Relationships Merchant Customer Acquiring Issuing Bank Bank Payment Networks (Eg. VISA and MC) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Clearing and settlement: 3 stages Clearing Transaction data is transmitted from acquirer to issuer for settlement Settlement Issuer pays acquirer Customers will pay issuer on payment date If not paid in full, the balance becomes a loan from the issuer to customer © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Relationships Merchant Customer Acquiring Issuing Bank Bank Payment Networks (Eg. VISA and MC) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Fee structures Merchant discount rate (MDR) Fees charged to merchants by the acquiring banks © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Relationships Merchant Customer Acquiring Issuing Bank Bank Payment Networks (Eg. VISA and MC) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Fee structures Merchant discount rate (MDR) Fees charged to merchants by the acquiring banks In Singapore, merchant may pass the cost to customers For Visa and Mastercard, could be as high as 3% of the transaction amount © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Fee structures Merchant discount rate (MDR) The MDR is split many ways The acquiring bank keeps some Pays Card companies Interchange fee to Issuing Bank (biggest share) Issuing Bank keeps some and pays Card companies Use the rest for customers rewards © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Fee structures Merchant discount rate (MDR) The interchange fee paid to the issuing banks compensate them for handling costs, fraud, bad debt, etc © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Fee structures Is such fee system fair? Smaller retailer cannot negotiate However, card access may increase sales by more than 10% Retailer may charge for card usage Or increase prices: fair? Those who don’t use card subsided those who does Further more, users receive the rewards at the expense of non-users © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Cross-border transactions: Complex: involving communication, clearing and settlement between parties from different jurisdictions and different currencies The typical 1% cross-border fee they charge Together with the 1-3% levy on merchants, contribute around 50% of the companies’ net margins © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Cross-border transactions: Currencies Consumers bear the foreign exchange burden Conversion fee Imposed by card network (e.g. VISA and MC) Typically, 1% of the converted amount © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Cross-border transactions: Currencies: Foreign exchange rate Foreign exchange rate of the transaction is decided by the card network Usually, first converted to USD before being converted to home currencies What’s the effect of this? Twice the transaction costs, including the bid-ask spread © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Previously Previously: before computerization Complicated and inconvenient Manual checking of the customer’s balance Inefficient communication channels between the merchant, acquiring and issuing banks Source: Quora Plague with counterfeit card frauds and scams © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Previously Source: Quora © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Hologram Early credit cards could be easily forged The invention of the laser in 1960 allowed holograms to be incorporated in card design for mass production Holograms were added to all cards by MasterCard in 1983 to make cards more difficult to forge © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Hologram Source: Quora © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Magnetic stripe The magnetic stripe stores information about the cardholder account Card is swiped past a magnetic stripe reader to read the information © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Magnetic stripe Source: Mastercard © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Magnetic stripe Up to three tracks of data can be stored on a single stripe Track 1 and 2 are read-only and track 3 is a read/write magnetic track Personal information can be copied to create fraudulent cards Hence, the technology is phasing out © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection EMV Chip: EMV stands for? Europay, MasterCard and Visa developed a global standard for Integrated Circuit Cards Called Chip-and-PIN cards Tracks 1 and 2 data is stored in a microchip rather than in the magnetic stripe More difficult to steal the information © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection EMV Chip: Chip contained cryptogram counter for every transaction Duplicate or skipped counter values would be a potential indicator of credit card fraud PIN code is also offers added protection © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection EMV Chip: Source: Texan Citizen Bank © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Radio Frequency Identification (RFID) chip Source: Visa © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Credit Cards Technology: Improvement over the years Protection Radio Frequency Identification (RFID) chip Contactless: no physical contact with the payment terminal Near-Field Communication Payment (NFC) technology Payment terminal generate an radio frequency to power the RFID chip in the card Source: Texan Citizen Bank © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore Prepaid electronic cash card that can be used within the system of the issuer Single purpose: e.g. pre-paid phone card Multi-purpose: e.g. EZ-Link Card and the NETS CashCard © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore In the not so distance past … © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Bus fare systems: bus conductor Source: LTA Source: mrbrown © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Bus fare systems: OTS (Singapore) Flexible soft card Ticket dispenser Source: mrbrown © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore EZ-Link Card Integrated circuit (IC) chip technology Reader generates electromagnetic energy to power the IC chip Radio wave used for communication between reader and card Encryption techniques are used NFC technology is currently used to enabled top-up with mobile phone © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Bus fare systems: Ez-link Card Source:Ezlink Card © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore EZ-Link Card Upgrade: chip top-up system to account-based system No hassle of queuing for topping up Topping up via mobile app Track spending Block further transaction if lost or stolen Alternatively: mobile payment © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Bus fare systems: Mobile payment Source: The Strait Times © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore Management of technology: The SimplyGo saga SimplyGo allows passengers to use credit cards and compatible ez-link cards for payment in public transport To replace the current system which lifespan end in 2024 The SimplyGo is intended to integrate with other payment systems such as ERP SimplyGo: trial in 2017 and launched in 2019 Many were convinced to switch © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore Management of technology: The SimplyGo saga By December 2023: 64% switched One major shortcoming: could not see balance in the e-wallet Too slow to appreciate users concerns and react Result: The planned replacement was scrapped Invest S$40m to prolong the lifespan for current system Continue to find a solution for SimplyGo or search for a better alternative © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore NETS cashcard ERP Launched in 1997 Used in Singapore’s road toll payment system: Electronic Road Pricing (ERP) In the not so distance past … © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Stored Value Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Stored Value Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Stored Value Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Stored Value Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore NETS cashcard ERP Now … Singapore-registered vehicles are fitted with an In-vehicle Unit (IU) At ERP gantry, a short-range wireless system is used to communicate with the IU Gantries are also equipped with cameras that photograph vehicle license plates in the case if the cash card is not in the IU or has insufficient funds © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Stored Value Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Stored Value Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore NETS cashcard ERP What is the problem this tries to solve? Reduce congestion: Singapore is pioneer Car owners to pay for using congested road Extra road tax Is there a better way? GPS tracking: pay for using the road with dynamic pricing? © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore NETS cashcard Also used for other motoring payments such as the Electronic Parking System (EPS) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore NETS FlashPay Contactless multi-purpose card Make payments: E.g. for ERP, bus and MRT fare, retail transactions Relies on RFID technology NETS FlashPay Reader App allows top-apps using a debit or credit card © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore Management of technology: ERP 2.0 Satellite-based system Start with public transport vehicles (buses and taxis) Common complaints Position of the card reader Position of the dashboard touchscreen display © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) © Associate Professor (DR.) Wee Yong, YEO  Payment Cards: Stored Valued Facilities (SVFs) Singapore Management of technology: ERP 2.0 Satellite-based system Start with public transport vehicles (buses and taxis) Common complaints Position of the card reader Position of the dashboard touchscreen display Adjustments are being made © Associate Professor (DR.) Wee Yong, YEO  Instant Payment Systems Private: Started in ?2007 M-PESA: Launched by telecoms giant Safaricom Users give cash to designated agents to top up an account linked to their phone’s SIM card Payments are sent by sms Estimated to have reduced extreme poverty in Kenya by at least 2% Alipay and Google Pay (2011) WeChat, Apply, Samsung (2013, 2014, 2015 respectively) © Associate Professor (DR.) Wee Yong, YEO  Instant Payment Systems State Sponsored: Brazil: Pix China: UnionPay World’s largest card network by transaction volume Accepted by 65m merchants globally CIPS (challenging SWIFT) © Associate Professor (DR.) Wee Yong, YEO  Instant Payment Systems State Sponsored: India: UPI Open system Linked with Singapore’s fast payment system (remittances at 3% fee) © Associate Professor (DR.) Wee Yong, YEO  Instant Payment Systems State Sponsored: USA Lagging behind July 20, 2023 – FedNow Start with 35 banks and 16 payment providers Not all have jumped on: e.g. Bank of America, Citigroup and Goldman Sachs Old system is very profitable Will such instant payment system destabilized banking? Eg. easier for deposit runs? © Associate Professor (DR.) Wee Yong, YEO  PayNow and PayNow Corporate (Singapore) PayNow: Singapore’s smart nation initiatives Enhanced funds transfer system Interoperable payment system that is 24/7 and free Bank accounts are linked to the mobile phone or NRIC/FIN numbers Users do not need a mobile wallet Only the sender is required to have the app Payments to be made by scanning QR Code Ten participating banks and four participating non-bank FIs © Associate Professor (DR.) Wee Yong, YEO  PayNow and PayNow Corporate (Singapore) PayNow Corporate: Phasing out cheques Allowing business to receive payments from other businesses and customers Linking their bank accounts to their Unique Entry Numbers (UENs) Businesses are able to send payments without the recipient’s bank account number The payment mechanism supported by existing payment systems such as FAST and GIRO © Associate Professor (DR.) Wee Yong, YEO  PayNow and PayNow Corporate (Singapore) Efforts are being made to make payments using PayNow available overseas India Thailand © Associate Professor (DR.) Wee Yong, YEO  Mobile-wallets and other mobile apps (Singapore) Digital wallets require money to be deposited into a separate account to be used for transactions. DBS/POSB: DBS PayLah! Requires funds to be transferred into the wallet User does not need to have an account with DBS/POSB PayLah! requires both sender and recipient to have the mobile app DBS/POSB can pay/received directly into bank account Other users will need to transfer funds between their bank account and the PayLah!Wallet © Associate Professor (DR.) Wee Yong, YEO  Mobile-wallets and other mobile apps (Singapore) Digital wallets require money to be deposited into a separate account to be used for transactions. OCBC: PayAnyone Similarly to a NETS transaction Payment deducted automatically from bank account Requires users to have an OCBC account © Associate Professor (DR.) Wee Yong, YEO  Mobile-wallets and other mobile apps (Singapore) Digital wallets require money to be deposited into a separate account to be used for transactions. Android Pay, Apple Pay, Grab Pay, Samsung Pay Allow multiple credit/debit cards to be linked to users’ mobile phones instead of bank accounts Users can enjoy credit card benefits Android Pay and Apple Pay rely on near field communications (NFC) technology © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Fast And Secure Transfers Launched in 2014 Allows for 24/7 real-time inter-bank fund transfers of up to S$200,000 Accessed via internet banking, smartphones, tablets Immediate transfer vs GIRO which takes up to 3 days 20 participating banks © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Procedure (a simplified illustration) The originator sends payment instructions to the originating bank The amount is immediately debited from the bank account The bank sends the instructions to FAST for clearing FAST validates the transaction before forwarding the payment message to the receiving bank © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Procedure (a simplified illustration) The receiving bank checks for the validity of the account number before crediting the receiver’s bank account The net figures are transmitted to the Real-Time Gross Settlement System (RTGS) to be settled between the banks on a multilateral net basis Multiple individual transactions settled regularly (twice a day) Real-time technology to enhance traditional methods of batched processing © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Advantages Increased speed and service availability 24/7 real-time payment platform Receiver receive payment before the funds are even transferred between the banks Allows for time-sensitive payments to be completed faster © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Disadvantages Credit risk Funds are transferred to the receiver before actually transfer from payer Difficulties in retrieving the funds The S$200,000 maximum limit per transaction limits the credit risk (increased from $50,000 from Feb 5, 2018) © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Disadvantages Liquidity risk Originator’s bank need to ensure that there are sufficient funds to make (almost) immediate payer’s demand Nevertheless, the deferred payment to receiver bank helps mitigate the risk Banks only need to ensure sufficient liquidity at the end of a settlement cycle © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Disadvantages Legal risk Legal framework needs to clarify the responsibilities and liabilities of the parties involved Rules and procedures need to be clearly defined to resolve cases involving fraudulent or erroneous transactions © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Disadvantages Fraud risk Attractive target for fraud due to the speed and immediacy of funds available Attempts to reverse of recover the money lost would be difficult Strong anti-fraud measures and robust security are necessary Examples include post-payment measures such as sending SMS alerts © Associate Professor (DR.) Wee Yong, YEO  FAST (Singapore) Disadvantages Operation risk Any issue with the system will likely lead to an immediate disruption or delay Users get accustomed to last-minute payment Any late payment will become an operational issue Ensuring reliability of a 24/7 system outside business hours is also be difficult © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Society for Worldwide Interbank Financial Telecommunications Financial messaging system Provides secure global communication between financial institutions all around the world Each institution is assigned a unique code called Bank Identifier Code (BIC), SWIFT code, SWIFT ID or ISO 9362 code System to track, validate and direct messages Standard messaging: data can be understood by users of different languages and systems © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Sender bank sends a payment transfer SWIFT message to receiving bank through the SWIFT network Payments are generally received within a few days The importance of the system Used by more than 10,000 financial institutions Processes 25m messages a day Covering half of all big cross-border transfers © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Heists in February, 2016 Attempted to steal around $1 bn of Bangladesh central bank’s money kept at the Federal Reserve Bank of New York Managed to steal $81 m while the rest of the transfer was blocked in time The loot went to a bank in the Philippines, then on to casinos and Chinese operator of junkets for gamblers May not have been the first heist © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Heists in February, 2016 The problem may not be with SWIFT Hackers target countries and banks with weak securities They infiltrate these banks Use malware to connect to the bank’s SWIFT system Re-routed transactions to themselves or their mules Sometimes, insiders were used © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Heists in February, 2016 In the Bangladesh case, a malware was used to interfere with a machine whose printouts the bank relied on to check transactions How ill-prepared banks are? Median time it takes for victims to realize they have been hacked: 146 days! Targeted banks are also slow to share information and hence others are not warned SWIFT does not have regulatory power over the banks © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Recent improvements to the SWIFT system SWIFT Global Payments Innovation (gpi) Provide same-day transactions, along with transparent fees and end-to-end payment tracking Real-time tracking of transactions allows users to know the current status of payments Other possible solutions AI to recognize and detect anomalies Blockchain technologies © Associate Professor (DR.) Wee Yong, YEO  Overseas Fund Transfers SWIFT Geo-politics Western countries has long use the USD and SWIFT to achieve political objectives Other countries are developing alternatives to avoid the impact of sanction Example: Russia System for Transfer of Financial Messages (SPFS): alternative to SWIFT MIR cards: alternative to VISA and Mastercard © Associate Professor (DR.) Wee Yong, YEO