Payment and Settlement Systems in modern world

Presentation about payment system, its infrastructure. Comparative explanation modern and traditional ways of money transfer.

1. Payment and Settlement Systems 1

2. Payment and Settlement Systems According to the ‘Law on the Central Bank of the Republic of Azerbaijan’ (then the National Bank) adopted in 1992, one of the main functions of the Central Bank is to create necessary environment to safeguard payment systems stability and conduct financial settlements . 2 Mission of the CB “To ensure that all the payment and settlement systems operating in the country are Safe , Secure , Sound , Efficient , Accessible and Authorized ".

3. Payment System 3 A payment system Is any system used to settle financial transactions through the transfer of monetary value, and includes the institutions, instruments, people, rules, procedures, standards, and technologies that make such an exchange possible . Payment order Is a directive to a bank from a bank account holder instructing the bank to make a payment or series of payments to a third party. Clearing It denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment into the actual movement of money from one account to another. Payment systems in Azerbaijan AZİPS - Real Time Gross Settlement System LVPCSS - Low Value Payments Clearing and Settlement System CISMS - Centralized Information System on Mass Payments 

4. 4 S.W.I.F.T Society for Worldwide Interbank Financial Telecommunications (SWIFT) is member-owned cooperative that provides safe and secure financial transactions for its members

5. Simple mechanism of money transfer 5 Central Bank Issuer’s bank Beneficiary bank Sender Receiver

6. The structure of National Payment System AZİPS (2001) LVPCSS (2002 ) Card processing centers Payment Systems 1500 Branches and divisions Banks 30 bank s , more than 600 branches Money Transferring Financial Institutions Domestic Payment Systems Domestic Payment Systems Foreign Bank 6 CISMS - > GPP (200 8 )

7. Retail banking infrastructure 7

8. 8 The Government Payments Portal (GPP)  – was created to electronically collect payments for electronic services supplied by public institutions, simplify and directly handle payments to the budget, and collect payments for utilities, communication, insurance and others over a unified platform. Also , one of the main goals of the GPP is to more effectively use the National Payment System, whose key components are the AZIPS and the LVPCSS, and expand access to electronic services across all regions of the country . Available 24/7/365 ( www.gpp.az ) Government Payment Portal ( GPP )

9. E xpand cashless settlements between the population and economic agents in the economy The  Government Payment Portal  was launched in 2012 in frame of “E-government” to effectively use the infrastructure capacity of the CISMS Easing of collection of taxes, duties, rent fees and other budget payments B oost access to financial services across the country. . To boost payments for domestic utilities communication and other mass services in a centralized manner. Government Payment Portal ( GPP ) 9 Currently, the infrastructure integrates 13 central public authorities, 97 judicial authorities over the ‘E-court’ portal, 10 municipalities selected as a pilot, 9 legal entities whose equity stakes are owned by the government, 6 state high education institutions, 13 insurance companies through the Compulsory Insurance Bureau and 3 mobile operators. Today , over 523 types of payments, including over 400 payments for public services (tax, duties, rent fees, administrative fines and penalties etc.) on the said public institutions integrated to the GPP are made in cash at about 2000 payment points and payment terminals of the Azerpost LLC, the Nakhchivanpost LLC and 30 banks and in a cashless form via payment cards and bank accounts using GPP’s Internet resources and banks’ e-banking services.

10. Government Payment Portal ( GPP ) Government Payment Portal ATM Cash-in machines Bank s Azer Post Card Prossesing Centers Judicial authorities Participant’s Internet Resources Government Authorities Utility companies Phone operators İnsurance companies «ASAN payment » Public Agencies Government Treasury Agency

11. HÖP-ün mövcud iştirakçıları 11

12. Non-Cash and Electronic Payment System 12

13. Non-cash payment system Non-cash payment (payment order, direct debit, e-cash ,e check , e-wallet,) which is – Simpler, Safer, Faster, Cost Effective, Enhanced Reach, Eco-friendly 1. Non-cash payment system is a financial exchange that takes place between buyers and sellers without using cash money 2. There are financial intermediaries (banks, card institutions, etc.) conducting this process and facilitating transaction or simply money transfer. 3. E-payment system is realized online between buyer and seller.

14. February 9, 2011 DPSS, RBI 14 Evolution of payment Cash / Paper Electronic Physical Movement of cash / paper instruments Electronic Message movement Fraud prone as paper moves outside the banking system Message moves inside the banking system hence less prone to frauds Geographical restrictions No such restrictions. Payment anywhere in India possible Time required to move paper makes the system slow Electronic movement of messages makes the system real time Operational cost of running the system very high Operational cost is very low As volume increases, logistics to be increased No such requirement

15. BENEFITS TO BUYER

16. BENEFITS TO SELLERS

17. SECURITY ISSUES 1. Confidential 2. Integrity 3. Availability 5. Encryption 4. Authenticity 6. Audit ability 7. Non – Rejection

18. 20 Visa offers a comprehensive set of payment products and services. Visa-branded credit, debit, commercial, prepaid, mobile, and money transfer products are a leading choice of cardholders and financial institutions in 200 countries and territories. VisaNet also makes it possible for us to deliver the latest innovations for an increasingly mobile society, providing consumers with mobile financial services, such as mobile payments, money transfer and top-up services . MasterCard operates the world’s fastest payment processing network, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. Every day, everywhere, we use our technology and expertise to make payments safe, simple and smart PAYMENT INFRASTRUCTURE

19. Some glossary 21 Acquiring Acquiring is the process of obtaining funds from a cardholder using the Card Schemes Card p ro c essin g A payment processor is a company (often a third party) appointed by a merchant to handle transactions from various channels such as credit cards and debit cards for merchant acquiring banks.  Issuer/Issuing Bank Financial institution which issues payment cards (credit, debit) as a member bank of the card organizations, serves it’s card users, provides authorization to customers, and ensures payment transactions to acquiring bank . Acquirer Bank An a cquirer is the financial institution that maintains the merchant’s bank account. The contract with the acquirer enables merchants to process credit and debit card transactions, passes the merchant’s transactions to receive payment, or provide cash from card account.

20. PAYER - A Payer is a person who makes the payment. PAYEE - A Payee is a person who receives payment. The financial institution participates in payment protocols in two roles - as an issuer and as an acquirer. The issuer holds payer s’ account and acquirer holds payee’s account and assets. The payee deposits the payment received during a transaction with the acquirer. Some glossary

21. Direct debits It is like an automatic payment - an instruction to your bank to make a regular payment from your account to someone else, either for a fixed period of time or indefinitely. When you arrange a direct debit, you are essentially giving someone else permission to take funds directly from your bank account. A direct debit authority acts as your instruction to your bank or other banking service provider to accept debits from your account by another person or business (known as the direct debit initiator). For example , you might arrange a direct debit with your power or telecommunications company so that your monthly bill can be taken automatically from your account without having to arrange separate payment each time.

22. Payment with cards 24 CREDIT CARDS DEBIT CARDS PREPAID CARDS PIN – Personal Identification Number

23. Payment Cards Credit cards issued by banks who provide credit lines to customers. Bank charges cardholder for used amount Debit card requires a bank account with customers deposited money. No interest charges related to this card.

24. Card payment transaction

25. 27 STEP 1 The consumer pays with card for goods or services to the merchant STEP 2 There are a variety of ways to transmit the information to the acquiring bank. Most useful is Payment Processing Gateway: The sales authorization request is submitted through an automated internet website which communicates with the acquiring bank. STEP 3 The acquiring bank routes the transaction to a processor and then to the associations – either Visa, MasterCard or Discover. STEP 4 The association system then routes the transaction to the issuing bank and requests an approval. STEP 5 The issuing bank sends back the response. If the cardholder is approved the issuing bank assigns and transmits the authorization code back to the association. STEP 6 The authorization code is sent from the card association to the acquiring bank. STEP 7 The acquiring bank routes the approval code or response to the merchant terminal. Depending on the merchant or transaction type, the merchant terminal may print a receipt for the cardholder to sign, which obligates the cardholder to pay the amount approved. STEP 8 The issuing bank bills the consumer . STEP 9 The consumer pays the bill to Issuing bank (according to account) Card payment transaction

26. PEER-2-PEER PAYMENTS Online financial transfer through e-mail address. Reduces risk of fraud & overdrawn a/c. Example PayPal services. It enables the merchants or individuals to withdraw cash from their PayPal accounts. Allows customers to send their transaction money quickly & safe to anyone. To use it one should must get registered themselves .

27. ELECTRONIC CASH In case of e-cash, both customer and merchant have to sign up with the bank or company issuing e-cash. Online payments via debit cards, credit cards or smart card are the examples of e-money transactions . E Cash is transferred directly from customer’s desktop to the merchant’s site.

28. HOW TYPICAL E-CASH SYSTEM WORKS ?

29. E-CHEQUE WORKING SCHEME E-Cheque is the result of co-operation between several banks, government entities, technology companies and e-commerce organizations.

30. ELECTRONIC FUND TRANSFER It is the groundwork of groundless and cheque-less culture, it is used to transfer money without any paper money changing hands. Benefits of EFT: Simplified accounting Improved efficiency Reduced administrative costs Improved security

31. 33 Other E-Banking Services

32. E-Banking or Internet banking Electronic banking has been on the rise over the last decade and helps keep an organized financial life. People can easily check their account balance online, pay bills or move money from one bank account to another electronically . Internet banking also bolstered e-trade and consequently boosted economic growth. With benefits internet banking also emerge some risks.

33. Benefits of E-Banking Convenience:  You can get 24/7/365 services as long as you have internet connections. Compared to normal banks which are open during business hours, e-banking services are available anytime everywhere. Real-time data:  You can get real-time account balance with just a touch of few buttons. This makes them a faster, easier and efficient means to organize your transactions . Better rates:  There are no unnecessary service fees and overhead costs thus allowing e-banks charge better interest rates on loans and low mortgage charges. Ease of use:  It is easy to open an online account, fill forms and carry out any transactions. They have a user-friendly interface which makes it easy for consumers to interact with the online platform. Extra Services:  E-banking offer more services not provided in the traditional banking sector like investment analysis tools, forecasting tools, loan calculators among other services.

34. Benefits of E-Banking Mobile capability:  Many banking institutions are offering mobile-friendly websites which allow you to access your online account transaction through your smartphone. Bank from anywhere:  You don’t have to waste time queuing in long lines at the bank since all the transactions can be carried at the comfort of your home or anywhere across the world Electronic funds transfer:  Funds are transferred from your account to another electronically upon your approval. Payroll deposits and automatic bill payments can be transferred at no or little cost. Easily manage finances:  You can schedule your recurring bills to be paid automatically at once per month making it easy to manage your finances. Added security:  There is some security layers, like PIN number, or 3D security code. SMS information service also keeps you up to date about your payments and balance.

35. Drawbacks of E-Banking Transaction issues:  There is some complex banking transaction which can only be done through face to face transactions thus you have to go personally to the bank to carry out the transactions. Security issues:  We are in the age of computer hackers and identity theft. Despite the efforts of the banking institution to keep customers information safe, hackers can gain access to the system and steal customers sensitive information. Limited services:  Some E-banks may not offer services like insurance and brokerage accounts offered by the traditional banks. You may not get special services offered to loyal customers like free investment advice . Tight credit scores:  Frequent use of online banks limits you from being picked for credit scores which can benefit you in the future. I nternet accessibility:  Internet accessibility is still expensive and inaccessible making it difficult to access your online account.

36. New trends in mobile banking 38