BUILDING FASTER BETTER A guide to inclusive instant payment systems Nov. 2019 January 2021 William Cook, Dylan Lennox, Souraya Sbeih ACKNOWLEDGMENTS The authors wish to thank the many experts and organizations without whose invaluable help this techni- cal guide would not have been possible. Partner organizations who provided comments and helped to workshop multiple iterations of the guide: Harish Natarajan, Holti Banka, Nilima Ramteke (World Bank); Kosta Peric, Miller Able, Matt Bohan, Dilwonberish Aberra (Bill and Melinda Gates Foundation); Ruan Swanepoel, Bart-Jan Pors, Anant Nautiyal (GSMA); Ghiyazuddin Mohammad, Ivan Ssettimba, Kennedy Komba (Alliance for Financial Inclusion); Ahmed Dermish, Amani Itatiro (UNCDF); Shakila Kerre (FSD Africa); Victor Malu, Juliet Mburu (FSD Kenya); Daniel Mhina (FSD Tanzania); Renita Nabisubi, Jean Bosco Iyacu (Access to Finance Rwanda); Rashmi Pillai, Juliet Tumuzoire, Joseph Lutwama, George Muga (FSD Uganda); Betty Wilkinson (FSD Zambia); and David Porteous (Digital Frontiers Institute). Subject matter experts who provided technical information: John Maynard, Dick Mabbott (UK Faster Payments); Mirjam Plooij (European Central Bank); Arthur Cousins (SADC Bankers Association); Ramachandran Sundaresan (National Payments Corporation of India); Katrina Stuart (New Payment Platform Australia); Miguel Arce, Fernando Barrios (Pagos Digitales Peruanos, Peru); Maha Bahou (Jo-PACC, Jordan); June Ruweza (Central Bank of Kenya); Seun Owoeye (Integrated Payment Services Limited, Kenya); Raymond Estioko, Bridget Romero (Bangko Sentral ng Pilipinas); Gisèle C. Keny Ndoye, Ndèye Fatou Dieng Gueye, Kuassi Ayikué Satchivi (Banque Centrale des Etats de l’Afrique de l’Ouest); Charles Niehaus; Martin Warioba; Ariadne Plaitakis; Paul Makin; Alaa Abbassi; and Anand Raman. Consultative Group to Assist the Poor 1818 H Street, NW, MSN F3K-306 Washington, DC 20433 Internet: www.cgap.org Email: [email protected] Telephone: +1 202 473 9594 Cover photo: Nicolas Réméné, for CGAP via Communication for Development Ltd. © CGAP/World Bank, 2021. RIGHTS AND PERMISSIONS This work is available under the Creative Commons Attribution 4.0 International Public License (https:// creativecommons.org/licenses/by/4.0/). Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes. See license for conditions. Attribution—Cite the work as follows: Cook, William, Dylan Lennox, and Souraya Sbeih. 2021. “Building Faster Better: A Guide to Inclusive Instant Payment Systems.” Technical Guide. Washington, D.C.: CGAP. All queries on rights and licenses should be addressed to CGAP Publications, 1818 H Street, NW, MSN F3K- 306, Washington, DC 20433 USA; e-mail: [email protected] Authors: William Cook, Dylan Lennox, Souraya Sbeih CONTENTS 1 3 Executive Summary Introduction 15 21 45 51 OVERSIGHT The instant The instant of the instant payment payment SETTLEMENT payment system SCHEME SWITCH of instant payments 57 65 73 Instant payment Bringing the systems across instant payment CASE STUDIES national borders system to life in instant payments Photo: Nicolas Réméné, for CGAP via Communication for Development Ltd. EXECUTIVE SUMMARY ODAY, DIGITAL TECHNOLOGIES PROVIDE THE ON-RAMP FOR MANY PEOPLE in emerging markets to access and use financial services. Digital payments provide Tsafe and efficient ways to send money home, receive or repay a loan on time, or buy goods from a merchant. M-PESA in Kenya, bKash in Bangladesh, and Movii in Colombia are just a few examples of the bank and non-bank products offering digital payments in emerging markets. However, many of the payment services available to low-income customers have evolved as closed-loop systems, meaning they are not interoperable with the services of other pro- viders. Systems that are interoperable improve customer value by allowing users to transact beyond their own network. They allow customers to send money to a friend using a dif- ferent service, pay at a merchant acquired by another provider, or withdraw funds from an agent on a different network. In the absence of interoperability, customers often develop inconvenient and costly workarounds to make their transactions. Interoperability also encourages competition by removing barriers to market entry for smaller providers. It may create economies of scale by reducing the need for individual providers to replicate distribution networks where financial access points already exist. Instant payment systems—also known as fast, immediate, or rapid payment systems— facil- itate the types of small-dollar, mobile payments most frequently used by low-income custom- ers. Instant payment systems offer continuous, real-time availability, allowing for transactions between providers to be completed within seconds at any time of the day or night. Successful instant payment systems are characterized by clear oversight, effective scheme management, reliable switch operation, and timely settlement. Where these activities are well managed, they help to balance incentives and drive transactions at scale. While a central bank almost always performs payment system oversight, a variety of institutions can fill the other roles. Roles and actors for the instant payment system Roles Duties Possible actors Overseer Promotes safe and efficient payments by monitoring and assessing Central bank payment systems and,where necessary, inducing change. Scheme manager Manages scheme, including overall governance,rule writing, and Private entity, Association/ setting strategic direction. nonprofit, Central bank Switch operator Transmits payment instructions, calculates settlement positions, Private entity, Association/ and does related operational activities. nonprofit, Central Bank Settlement agent Moves final funds between licensed financial institutions. Financial institution, Central bank 1 Bringing an instant payment system to life involves three phases: 1. Plan. A champion identifies a problem or market failure in the existing payments eco- system. A shared vision for improved interoperability is developed, including adequate buy-in from the right stakeholders in both the public and private sectors. 2. Design. The interoperability solution is designed in a collaborative process with stake- holders. Key questions surrounding oversight, governance, economic incentives, and the operational model are answered. 3. Go to market. The system goes live and becomes available to customers. An ongoing process is initiated to drive volumes and innovate. This guide offers insights for policy makers, financial service providers, and other actors involved in driving interoperability in digital payments. It defines foundational concepts, delineates the four key roles in an instant payment system, and offers actionable insights on planning, designing, launching, and scaling an effective system. BUILDING FASTER BETTER—A GUIDE TO INCLUSIVE INSTANT PAYMENT SYSTEMS 2 SECTION 1 INTRODUCTION HIS GUIDE IS INTENDED TO BE A PRACTICAL TOOL for those pursuing interoperability in digital financial services. It focuses on instant payments— T payments where the transmission of the payment message and the availability of final funds to the payee occur in near real time with continuous availability (24/7/365) (CPMI 2020). Instant payments often enable digital, mobile services that help poor people enter the world of formal financial services. As opposed to traditional batch systems, card systems, and large-value systems, instant payment systems typically involve a direct credit transfer, also referred to as a push payment, and use mobile as a channel. However, today’s instant payment systems continue to push the boundaries of this definition; specific exceptions are discussed throughout the Guide. The first part of this Guide explores instant payment oversight and the key components of an instant payment system: scheme, switch, and settlement system.1 It is important for readers to understand how these components are defined for the purposes of this Guide. 1. Many of the definitions referenced in this Guide are based on the Bank of International Settlements’ “Glossary,” updated 17 October 2016, https://www.bis.org/cpmi/publ/d00b.htm. 3 The four key components In their oversight role, central banks promote safe and efficient payments by monitoring and assessing payment systems and, where OVERSIGHT necessary, inducing change (BIS 2020). Payment legislation and regulation set the legal basis for oversight and provide the guardrails within which decisions about the instant payment system will be made. A scheme is a set of procedures, rules, and technical standards that govern the execution of payments (BIS 2020). Effective schemes are supported by clear ownership and governance, which ensure balanced SCHEME economic incentives and define safe and reliable operational models. The governance, economic, and operational decisions made by scheme managers play a large role in determining whether the instant pay- ment system is sustainable and drives transaction growth. A switch is a technology that enables safe and efficient transactions. Switch operators transmit, reconcile, confirm, and net transactions between participants (collectively, these functions make up the clearing SWITCH function); submit instructions for real-time or deferred transfer of final funds (settlement initiation); and perform other operational functions, including managing disputes and monitoring for fraud. A settlement system is used to facilitate