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Payments Complexity - Need for Bank of Central Banks

Payments Complexity - Need for Bank of Central Banks
Gaurav Misra - Lead Business Analyst (Senior Business Specialist) - Payments and Liquidity Domain | January 16, 2019
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Current Payments Infrastructure landscape:

You talk about India - we have NEFT, NACH, UPI, RTGS, Sri Lanka - SLIPS, CEFTS, SL RTGS, Australia - HVCS, BECS, Singapore – MEPS+, IBG, US - Fedwire, CHIPS, NACHA, UK- BACS, FPS, CHAPS, EURO zone - SEPA, STEP 2, TARGET2 etc.

Read about shared payments infrastructure and standards protocols across central banks in this blog. @hclfs

Country-wise the list is endless - with each country having a flavor of deferred payments, instant payments, real time gross settlement payments and so on.

To add to that, we have message based payments approach vs File based payments.

Software Requirements

High value Payments are typically in most cases are SWIFT based MT messages while Low value are typically - ISO based xml messages and then there are other formats as well eg: csv, fixed length , ~ separated formats etc.

In a nutshell, every payment/clearing scheme is different, has different hardware and software infrastructure requirements and runs independently controlled or operated by the Central Bank of the respective Countries.

The grey areas:

Every Central Bank is investing separately on infrastructure, although as mentioned above supporting similar types of Payment processing.

All the above boils down to one question which I would like to raise, is there a need to do so?

  • Can't we have region-wise implementations, if not a global level? Something like, shared infrastructure at Central Bank level - possible?
  • Across a geography use Standard payment messages when interacting with Central Bank like for eg: Instant Payments is message based irrespective whether its implemented in India or Sri Lanka? The point here is the technological implementation should be standard with possible functional variations as per country specific needs.
  • Why can't Central Banks in a region share standards? Say share SWIFT infrastructure - and split the costs etc.
  • One of the Central Bank acts as a service provider while others subscribe for services? isn't that more efficient, isn't that more easy to manage?
  • Bank-wise implementations would vary as there are several other internal application needs to cater to, but the interaction with Central Bank can be standardized - has that been thought of ever- I'm not sure about it?
  • Are Central Banks across the globe willing to come together, brainstorm and invest in the idea - are there any restrictions/regulations? Is there a vision to achieve efficiencies?
  • Is there a need for Bank of Central Banks? We have something similar as in case of TARGET2, can this be a regional/global idea? On similar lines, we also have the Common Monetary Area as an example which basically, is a monetary union including South Africa, Namibia, Lesotho and Swaziland to draw leverage on the benefits of shared interests and objectives.
  • Bank to CSM communication and vice versa can and should be standardized in terms of messaging formats, security protocols, settlement procedures etc. eg: ISO20022 is being looked at as the messaging standard for High Value Payments as well.

Innovation should be simple as well.

With the advent of new technologies like Block chain, almost everything looks doable, if stringently and consciously thought through, agreed, tested and implemented.

This trend of introduction of new clearings, new message formats, new ways of payment processing, new technology looks like a never ending process, which is good but will yield most productive results if these can be introduced globally/regionally and not just at local levels.

Central Banks of major economies like US, India, UK, France, Australia, Brazil etc. can think of forming something like a closed user group and do a proof of concept study. All this may sound unreal, time-consuming, may have initial cost implications but the longer term benefits can be limitless and sustainable.

How this needs to be done is still a grey area, who can lead the change is also a question-mark.

What we need to ascertain is:

  1. If this is feasible or not. If yes, what are the key challenges and if not, why not?

    Different currencies, different regulations, data secrecy etc. maybe some of the factors that may be an anticatalyst to the idea but probably the possibility is not fully explored still, I believe.

  2. Has this been thought ever i.e. the coming together of Central Banks for standardizing the Payment infrastructure across the globe?

    From the look of it, it appears to me it is very much possible - what it needs is brilliant minds (across the globe) and cross-border intent to come together and explore the possibilities to make the Payment Infrastructure space much cleaner internationally.

Benefits:

  1. Much simpler Payments Infrastructure at global/regional level
  2. Simplified implementation for participating banks as well
  3. Reduced Cost, if common messaging standards can be used leading to reduced development effort and complexity
  4. Reduced Training efforts/spends
  5. Technological upgrades become easier and uniform

From the look of it, it appears that it is very much possible - what it needs is brilliant minds (across the globe) and cross-border intent to come together and explore the possibilities to make the Payment Infrastructure space much cleaner internationally.

Is there a forum where this can be discussed, brainstormed, or has already been brainstormed? The basic question remains- can we simplify?

Your views, inputs and comments are welcome.

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