New Zealand's Move to Intra- Day Payments and Settlement Via

Case study

New Zealand’s move to intra- day payments and settlement via SWIFTNet

Payments NZ Ltd (PNZ) was “The new system enables banks to both interchange payment established in 2010 to lead the information and settle their obligations to transfer money governance of New Zealand’s throughout the same business day, reducing the settlement interbank payment clearing and risk between banks, speeding up payments, and improving settlement system’s rules and the financial stability of New Zealand’s payment systems.” standards and to promote safe Tim Duston, Chief Operating Officer, Payments NZ and efficient payment systems. PNZ has 8 registered bank shareholders and is governed by Background Below is a summary of the pain points of the old payment interchange, along with a board of 11 directors. New Zealand has a very modern payments the implementation areas and business culture, involving low cash & cheque usage benefits of the new SBI system. and one of the highest electronic funds transfer (EFT) rates per capita1. To support this, a robust EFT clearing and settlement Key challenges system was decided on to be deployed Prior to SBI, domestic retail transactions and the Settlement Before Interchange were processed in a next-day net deferred (SBI) platform was chosen as the best fit. settlement via the automated clearing SBI went live in February 2012 and was a house, Interchange and Settlement collaboration between the payments system Limited (ISL). operator and payments industry body Payments NZ, the New Zealand banking community and SWIFT. Key Challenges Solution Beneﬁts of SBI

1. Outdated clearing 1. Move from non-real 1. Reduction of system and technology time ACH switch to settlement risk 2. Settlement uncertainty intra-day bilateral 2. Increase in intra-day 3. Operational inefficiency clearing file traffic 4. Inflexible proprietary file 2. Workflow created to 3. Total Cost of formats send files of bulk Ownership (TCO) payments (SWIFTNet 5. No disaster recovery reduction by re-using FileAct) and copy existing infrastructure settlement data to for some participants RBNZ 4. Non-repudiation 3. ISO20022 standards for notifications and status reports

1 According to the Lipis and Lipis 2012 study, PaymentsNZ led global payments schemes with the highest number of credit transfers and direct debits per year at 125 per capita. Settlement before interchange (SBI) solution

(1) File of bulk payments (5) File released (not released if failed) to sent receiver after authorization

(6) Authorization or refusal Sender notiﬁcation sent Receiver

(2) Settlement data (4) RBNZ sends extracted from header authorization after and copied to RBNZ settlement occurs (3) Settlement queue (3) Settlement queue status sent status sent

RBNZ

There were several pain points with the SBI solution overview Transfer Protocol (FTP) and the open previous system: Internet. FA supports both interactive As a result of the above pain points, and store-and-forward modes, and is • Outdated clearing system reinvestment was clearly required, particularly suited for the exchange of providing two options – to upgrade the Old and rigid technology meant large volumes of data. any change or innovation was system or to rebuild it. The different A Payments Copy Service for providing complicated and risky to carry options were carefully assessed and a copy to RBNZ to trigger near real-time out, making it hard to improve the the New Zealand industry decided to settlement. Based on SWIFTNet FileAct domestic payment interchange partner with SWIFT to rebuild the system copy, only settlement-related information system. with SBI. SWIFT supported through all phases of the project: from initial concept from the File Header is duplicated • Settlement uncertainty discussion, system design, industry and delivered to RBNZ to trigger net The solution carried an unknown and preparation, testing and migration to live. settlement of the file. FileAct Copy is a value-added service of FileAct that uncapped net deferred settlement The graph below depicts the SBI payment enables the sender of a file to trigger a risk which introduced a systemic risk interchange flows over . SWIFTNet copy of the file header to a third party for associated with the possible failure of SWIFTNet is the advanced IP-based authorisation (Y-copy) or for information a given participant. messaging platform which communicates (T-copy). • Operational inefficiency financial information securely and reliably utilizing public key infrastructure (PKI) ISO20022 standards for system The “wind back” failure-to-settle for authentication. Bulk payment files notification messages and payment mechanism involved returning and are sent from the sender to the receiver status reports. The SBI solution supports reversing some transactions in case of and settlement-related information is existing proprietary payment formats bank failure. This was not perceived to copied to the central bank (Reserve within transactional batches as well as the be an ideal operational solution. Bank of New Zealand, RBNZ) for intra- international ISO20022 standards over • Inflexible proprietary file formats day settlement. This happens during five SWIFTNet InterAct. InterAct is SWIFT’s and standards settlement windows throughout the day. interactive request/response messaging service that supports both real-time Banks used different file formats Settlement at RBNZ occurs before files and store-and-forward modes and is (BACHO or QC), requiring some are interchanged between the banks. particularly suited for individual message transaction files to be converted The solution components include: transmission. by the ACH prior to interchange. A Closed User Group for participant Individual files sent to the ACH were membership where access control also not bank specific, requiring the and permissions are managed and ACH to sort the transactions for each administered by Payments NZ. destination bank. A Bulk Payments Service for payment • Weak business continuity planning participants to exchange intra-day files on There was limited disaster recovery a bilateral basis over the SWIFT network. redundancy in the ACH system should Based on SWIFTNet FileAct, this mitigates an issue be experienced. the risks associated with generic File Implementation process Benefits all counterparties, improving reliability and enabling participants to settle The process was highly iterative with SBI and SWIFT provides the community through multiple intra-day windows. consultation and feedback between the with a modern and robust solution which banks, Payments NZ and the RBNZ. constitutes an excellent base to layer up • Total cost of ownership (TCO) PNZ was established midway through innovation and changes over time. It offers reduction by re-using existing and brought about a better governance the following benefits: infrastructure for some existing structure and focus to the project. SWIFT participants. As all of the SBI • Reduction of settlement risk. Under users were already SWIFT members For the onboarding, bilateral testing was the new system, the banks clear and (including RBNZ), they were able to undertaken between SWIFT, participant settle the files during five interchange leverage more payments volumes banks and RBNZ in a dedicated test windows throughout each business through their SWIFT connections (and environment prior to each participant day. The beneficiary bank receives eliminate a costly proprietary system). going live. The eight participating banks an immediate settlement notification, The benefits of doing so include – ANZ New Zealand, ASB Bank, Bank of removing the settlement risk. increased straight-through processing New Zealand, Citibank, HSBC, Kiwibank, • Increase in file traffic. SBI file traffic opportunities. TSB Bank and Westpac New Zealand – has increased by 22.2% (vs April YTD participated in a staged migration to the • Non-repudiation. The FileAct service 2013/2012). In the old environment, new SBI system between November 2011 offers on demand non-repudiation banks sent mixed files to ISL, and and February 2012. of file transfers. Users benefit from ISL ‘sorted’ them for collection SWIFT as a trusted third party to by the receiving bank. Now, SBI provide evidence in the event of a allows participants to exchange bulk dispute. payment files on a bilateral basis with

Where is SBI now? YTD 2013 YTD Growth Before SBI, the average number of files Average settlement time 5-6 seconds – processed daily was less than a 100 and they were mixed destination files sent Average monthly transaction volume ~36 million 10% to the ACH (ISL). File traffic has now increased with SBI to more than 600 Average monthly settlement value $50-60 billion 5% files daily for a monthly average of about Average monthly file volume ~12,000 20% 12,000 files. There is an increase of more than 20% versus YTD 2012 which is net credit 75%/net Average settlement mix by volume – largely due to the bilateral, standardized debit 25% nature of SBI’s file transfer. net credit 85%/net Average settlement mix by file value – debit 15%

About SWIFT Next Steps • Further tighten the contingency arrangements and enhance the SWIFT is a member-owned cooperative The likely immediate next stage of documentation on technical and that provides the communications the project will review the strategic operational procedures (post- platform, products and services to options regarding both the payment implementation) to respond to any connect more than 10,000 banking instruction processing time in SBI and participant, SWIFT or ESAS outage organisations, securities institutions and the transaction value of the payments or issue. corporate customers in 212 countries pipeline. It also includes the following and territories. SWIFT enables its users considerations: • Explore the use of ISO20022 to exchange automated, standardised file format to replace the current financial information securely and • Decrease operational risk by BACHO format for transaction reliably, thereby lowering costs, settling transactions as early in the records and benefit from richer/ reducing operational risk and eliminating day as possible: currently majority additional information in the operational inefficiencies. SWIFT also of daily volume is settled between transaction record. brings the financial community together 21:00 to midnight. • Assess the need or desire to make to work collaboratively to shape market payments faster. practice, define standards and debate issues of mutual interest.