MFT

Solution

The Message Type Identifier (MTI) is a crucial component in the ISO 8583 standard, which is used for
financial transactions. In the RuPay implementation of this standard, each MTI has a specific
significance. Let's break down the provided information:

1. Authorization Messages (01xx): These are messages used for authorizing a transaction. It's the
process where a cardholder's account is checked for available funds.

2. Financial Transaction Messages (02xx): These messages are related to actual financial transactions,
like purchases or withdrawals.
3. File Update Messages (04xx): These messages involve updates to files, which could be related to
the issuer's records or other necessary updates.

4. Network Management Messages (08xx): These are messages used for network management tasks,
like network status inquiries.

Within each category, there are further distinctions based on the second and third digits of the MTI:

- Request (Xx00): Indicates that the message is a request. For example, a request for authorization or
a request for a financial transaction.

- Request Response (xx10): This signifies a response to a request. It acknowledges the completion or
status of a requested action.

- Advice (xx20): This category is used for advisory messages. These messages provide additional
information or advice about a transaction.

- Advice Response (xx30): This is the response to an advice message. It acknowledges the receipt and
processing of the advice.

Now, let's go over the scenarios you provided:

a. Authorization Advice Response: This falls under the "Advice Response" category for Authorization
messages. So, the MTI for this would be 01x3.

b. Financial Advice Request: This is an advice message for a financial transaction. It's categorized as
an "Advice". Therefore, the MTI for this would be 02x2.

c. Financial Advice Response: Although not explicitly mentioned in the table, following the pattern,
this would correspond to an MTI of 02x3, as it is the response to a financial advice message.

d. Issuer File Update Request: This is a file update message, which is categorized under "File update
messages". So, the MTI for this would be 04x0.

e. Issuer File Update Response: Similar to the previous case, this is the response to a file update
message. Following the pattern, the MTI would be 04x2.

These MTIs are essential in the processing of financial transactions, as they convey the type and
purpose of the message being sent.

a. Authorization advice response:

 The MTI for Authorization advice response is in the category of "Authorization messages"
(01xx) and falls under "Advice response" (xx30).

 Therefore, the valid MTI for Authorization advice response is 0130.

b. Financial advice request:

 The MTI for Financial advice request is in the category of "Financial transaction messages"
(02xx) and falls under "Advice" (xx20).

 Therefore, the valid MTI for Financial advice request is 0220.

c. Financial advice response:

  The MTI for Financial advice response is in the category of "Financial transaction messages"
(02xx) and also falls under "Advice response" (xx30).

 Therefore, the valid MTI for Financial advice response is 0230.

d. Issuer file update request:

 The MTI for Issuer file update request is in the category of "File update messages" (04xx) and
is a request (Xx00).

 Therefore, the valid MTI for Issuer file update request is 0400.

e. Issuer file update response:

 The MTI for Issuer file update response is in the category of "File update messages" (04xx)
and is a response (Xx20).

 Therefore, the valid MTI for Issuer file update response is 0420.

In summary:

a. Authorization advice response: 0130

b. Financial advice request: 0220

c. Financial advice response: 0230

d. Issuer file update request: 0400

e. Issuer file update response: 0420

1. ISO8583 (International Organization for Standardization 8583):

 Description: ISO8583 is an international standard for financial transaction messaging.

It defines a format for data exchange between systems involved in financial
transactions, like point-of-sale (POS) systems, ATMs, and financial institutions.

 Significance: It ensures that different systems can communicate and process

transactions reliably and consistently, which is crucial in the functioning of payment
systems.

2. Java:

 Description: Java is a versatile, class-based, object-oriented programming language.

It is widely used in software development for a range of applications, including web,
mobile, desktop, and enterprise systems.

 Significance: In fintech and payment systems, Java is commonly used for its platform
independence, allowing applications to run on various devices. It provides a robust
foundation for building secure, scalable, and reliable financial applications.

3. JSON (JavaScript Object Notation):

 Description: JSON is a lightweight data-interchange format. It is easy for humans to

read and write and easy for machines to parse and generate. JSON is often used in
API communication between different software systems.
  Significance: In fintech, JSON is crucial for enabling seamless communication
between different services and platforms. It allows for the exchange of structured
data, facilitating the integration of various financial services.

4. Magnetic Stripe:

 Description: A magnetic stripe is a band of magnetic material used in credit cards,

debit cards, and identification cards. It contains encoded information, including
account details and other relevant data.

 Significance: Magnetic stripes are fundamental in payment systems. When swiped

through a card reader, the encoded information is read and used to authorize
transactions.

5. PKI (Public Key Infrastructure):

 Description: PKI is a framework that provides secure communication over an

insecure network. It uses asymmetric cryptography to secure the transfer of data.

 Significance: In fintech, PKI is vital for establishing secure channels for online
transactions. It ensures that sensitive information, such as cardholder data, is
encrypted and can only be decrypted by authorized parties.

6. REST (Representational State Transfer):

 Description: REST is an architectural style for designing networked applications. It

uses a stateless, client-server communication protocol, often over HTTP, and
emphasizes simplicity and scalability.

 Significance: RESTful APIs are widely used in fintech for building web services that
enable communication between different systems. This allows for the seamless
integration of various financial services and applications.

7. NFC (Near Field Communication):

 Description: NFC is a short-range wireless communication technology that allows

data exchange between devices when they are within close proximity.

 Significance: In fintech, NFC enables contactless payments. This technology is used in

services like mobile wallets and contactless cards, providing a convenient and secure
way to conduct transactions.

8. XML (eXtensible Markup Language):

 Description: XML is a markup language that defines a set of rules for encoding
documents in a format that is both human-readable and machine-readable.

 Significance: In fintech, XML is used in financial data interchange. It's often used in
messaging protocols for payments and financial transactions.

9. Proof-of-Work:

 Description: Proof-of-Work is a consensus algorithm used in blockchain networks. It

involves solving complex mathematical problems to validate and secure transactions
on the network.
  Significance: In fintech, especially in cryptocurrencies like Bitcoin, Proof-of-Work
ensures the integrity and security of transactions. It's a crucial component of
blockchain technology.

10. Merkle Trees:

 Description: A Merkle Tree is a cryptographic data structure used in blockchain

technology. It's a way of efficiently verifying the contents of a large dataset.

 Significance: In fintech, Merkle Trees are used to ensure data integrity and efficiency
in transaction verification. They play a crucial role in the security and efficiency of
blockchain-based financial systems.
Interchange fees play a crucial role in the operation of card payment systems. Given the provided
interchange fee structure for a specific card payment system, we will analyze transactions conducted
by Santosh using his State Bank of India card at two different merchants. Additionally, we will
examine the income earned by the involved banks and the card network.

1. Hanuman General Stores Transaction:

 Merchant Category: Merchants with turnover less than 20 lakh in prior FY

 Transaction Value: ₹2000

 POS Interchange Fee: 0.20% (interchange cap of ₹75 per transaction)

Calculations:

 Interchange Fee = 0.20% of ₹2000 = ₹4

 Hanuman General Stores Retained Amount = Transaction Value - Interchange Cap =

₹2000 - ₹75 = ₹1925

2. Marriott Hotels Transaction:

 Merchant Category: Merchants with turnover more than 20 lakh in prior FY

 Transaction Value: ₹15,000

 POS Interchange Fee for Transaction Value > ₹2000: 0.75% (interchange cap of ₹800
per transaction)

Calculations:

 Interchange Fee = 0.75% of ₹15,000 = ₹112.50

 Marriott Hotels Retained Amount = Transaction Value - Interchange Cap = ₹15,000 -

₹800 = ₹14,200

3. Income of Banks:

 Federal Bank (Hanuman General Stores Transaction)

 Network Charges from Acquirer = ₹20.60

 Income = Interchange Fee + Network Charges = ₹4 + ₹20.60 = ₹24.60

 HDFC Bank (Marriott Hotels Transaction)

 Network Charges from Issuer = ₹2040

 Income = Interchange Fee + Network Charges = ₹112.50 + ₹2040 = ₹2152.50

4. Card Network Earnings from Santosh's Activities:

 Total Earnings = Network Charges from Acquirer + Network Charges from Issuer =
₹20.60 + ₹2040 = ₹2060.60

Hence, for the day, the card network earns ₹2060.60 in total from Santosh's financial activity.
Table 4 presents the core principles of payment systems established by the Bank for International
Settlements (BIS). We will assess whether the Unified Payments Interface (UPI) adheres to these
principles and also provide an additional set of five core principles specific to Systemically Important
Payment Systems (SIPS) as per BIS.

Assessment of UPI against BIS Core Principles:

1. Assets used for settlement should preferably be a claim on the Central Bank; where other
assets are used, they should carry little or no credit risk.

 Answer for UPI: Yes

2. The system should have a high degree of security and operational reliability and should have
the contingency arrangements for timely completion of daily processing.

 Answer for UPI: Yes

3. The system should provide a means of making payments which is practical for its users and
efficient for the economy.

 Answer for UPI: Yes

4. The system should have objective and publicly disclosed criteria for participation, which
permit fair and open access.

 Answer for UPI: Yes

5. The system's governance arrangements should be effective, accountable and transparent.

  Answer for UPI: Yes

Additional Five Core Principles of Systemically Important Payment Systems (SIPS) by BIS:

6. The system should provide a means for participants to have a clear understanding of the
payment system's impact on each of the financial risks they incur through participation in it.

7. The system should ensure a high degree of safety and efficiency.

8. The system should be subject to oversight by an appropriate regulatory authority.

9. The system should have effective risk-management procedures and standards.

10. The system should be subject to relevant laws that are clear and predictable, and
participants should have a means to seek redress.

Clear Understanding of Risks:

Description: This principle emphasizes that participants in the payment system should have a
comprehensive understanding of the risks associated with their involvement. This includes credit
risk, liquidity risk, operational risk, and other relevant financial risks.

Significance: It ensures that all participants are well-informed about the potential risks they may
face, promoting transparency and informed decision-making.

Safety and Efficiency:

Description: This principle underscores the importance of achieving a balance between safety and
efficiency in payment systems. It implies that while efficiency is vital for timely processing, safety
measures should not be compromised.

Significance: Striking the right balance between safety and efficiency ensures that payments are
processed promptly without compromising the security and integrity of the system.

Regulatory Oversight:

Description: This principle states that a relevant regulatory authority should have oversight over the
SIPS. This authority ensures that the system operates in compliance with regulatory standards and
addresses any issues or concerns.

Significance: Regulatory oversight helps maintain the stability, integrity, and compliance of the
payment system with established rules and regulations.

Effective Risk Management:

Description: This principle highlights the necessity for the payment system to have robust risk
management procedures and standards in place. This includes measures to identify, monitor, and
manage various types of risks.

Significance: Effective risk management safeguards the system against potential threats, such as
fraud, operational disruptions, and financial instability, ensuring smooth operations.
Legal Clarity and Redress Mechanism:

Description: This principle emphasizes that the payment system should be subject to relevant laws
that are clear and predictable. Additionally, participants should have a means to seek redress in case
of disputes or issues.

Significance: Legal clarity provides a solid foundation for the operation of the payment system,
ensuring that all parties involved understand their rights and responsibilities. The availability of a
redress mechanism adds an extra layer of security and fairness.

a. Authorization request: Authorization requests fall under the category of "Authorization messages"
with the MTI prefix of 01xx. Since it's a request, it should also have a request-response indicator of
xx00. Therefore, the valid MTI for an Authorization request is 0100.

b. Authorization response: The corresponding response for an Authorization request falls under
"Authorization messages" with the MTI prefix of 01xx. As a response, it should have a request
response indicator of xx10. Therefore, the valid MTI for an Authorization response is 0110.

c. Financial transaction request: Financial transaction requests are categorized under "Financial
transaction messages" with the MTI prefix of 02xx. Since it's a request, it should also have a request
response indicator of xx00. Therefore, the valid MTI for a Financial transaction request is 0200.

d. Financial transaction response: The corresponding response for a Financial transaction request
falls under "Financial transaction messages" with the MTI prefix of 02xx. As a response, it should
have a request response indicator of xx10. Therefore, the valid MTI for a Financial transaction
response is 0210.

e. Authorization advice request: Authorization advice requests are categorized under "Authorization
messages" with the MTI prefix of 01xx. Since it's a request, it should also have a request response
indicator of xx20 (since it's an advice). Therefore, the valid MTI for an Authorization advice request is
0120.

In summary:

a. Authorization request: 0100

b. Authorization response: 0110

c. Financial transaction request: 0200

d. Financial transaction response: 0210

e. Authorization advice request: 0120

1. APIs (Application Programming Interfaces):

 Description: APIs are sets of protocols, routines, and tools for building software
applications. They define how different software components should interact,
allowing them to communicate with each other.
  Significance: In fintech, APIs enable seamless integration between different financial
services and applications. They facilitate the exchange of data and functionality,
enabling the development of innovative and interconnected financial solutions.

2. Blockchain:

 Description: Blockchain is a decentralized, distributed ledger technology that records

transactions across multiple computers. It ensures security, transparency, and
immutability of data.

 Significance: In fintech, blockchain is the foundation of cryptocurrencies like Bitcoin.

It's also used for various financial applications such as smart contracts, cross-border
payments, and supply chain finance, providing secure and transparent transaction
records.

3. Cryptographic Hash Functions:

 Description: Cryptographic hash functions are mathematical algorithms that convert

input data into a fixed-size string of characters, which is typically a hash code.
They're designed to be fast to compute and infeasible to reverse.

 Significance: In fintech, cryptographic hash functions are used to ensure data

integrity and security. They're employed in digital signatures, verification of data
authenticity, and protecting against tampering of sensitive information.

4. ISO20022:

 Description: ISO 20022 is a global standard for the messaging of financial

transactions. It defines a universal language for financial messages, enabling
seamless communication between different financial systems and institutions.

 Significance: ISO 20022 is crucial for interoperability in the financial industry. It

allows for standardized, structured, and consistent data exchange, which is essential
for efficient and secure financial transactions.

5. HTML (Hypertext Markup Language):

 Description: HTML is the standard markup language used for creating web pages. It
consists of a series of elements that define the structure and content of a web page.

 Significance: While not specific to fintech, HTML is used in the development of web
interfaces for fintech applications. It enables the creation of user-friendly and
interactive web-based financial services.

6. HTTPS (Hypertext Transfer Protocol Secure):

 Description: HTTPS is a secure version of HTTP, the protocol used for communication
between a user's web browser and a website. It encrypts data transmitted between
the browser and the website, ensuring privacy and security.

 Significance: In fintech, HTTPS is essential for secure online transactions. It protects

sensitive information, such as credit card details and personal data, from
unauthorized access and interception.

7. Digital Signature:
  Description: A digital signature is a cryptographic technique used to verify the
authenticity and integrity of a digital message or document. It provides a way to
prove that a message was created by a specific sender.

 Significance: In fintech, digital signatures are used to authenticate the origin of

messages in electronic transactions. They provide a secure way to confirm the
identity of parties involved in a transaction.

8. EMV Chips:

 Description: EMV (Europay, Mastercard, Visa) chips are microprocessors embedded

in payment cards. They generate dynamic data for each transaction, enhancing
security compared to traditional magnetic stripe cards.

 Significance: EMV technology significantly reduces the risk of card fraud by making it
much harder to clone cards. It's widely adopted in payment systems globally.

9. Decentralization:

 Description: Decentralization refers to the distribution of authority, control, and

decision-making across a network, rather than being concentrated in a single central
entity.

 Significance: In fintech, decentralization is a key feature of blockchain technology. It

removes the need for a central authority in financial transactions, which can lead to
increased security, transparency, and efficiency.

10. Distributed Networks:

 Description: Distributed networks are systems in which multiple computers (nodes)

work together to achieve a common goal. Each node has its own processing power
and can function independently.

 Significance: In fintech, distributed networks, often associated with blockchain,

ensure the integrity and security of financial transactions. They prevent a single
point of failure and make it more difficult for malicious actors to compromise the
system.
Transaction at Hanuman General Stores:

1. Transaction Details:

 Transaction Value: ₹2001

 Merchant Category: Merchants with turnover less than 20 lakh in prior FY

2. Interchange Fee Calculation:

 Since the transaction value is greater than 2000, the applicable interchange fee is
0.75%.

 Interchange Fee = 0.75% of ₹2001 = ₹15.01

3. Interchange Cap:

 The interchange cap is ₹800 per transaction.

 Therefore, Hanuman General Stores will retain ₹2001 - ₹800 = ₹1201.

Transaction at Marriott Hotels:

1. Transaction Details:

 Transaction Value: ₹10,000

 Merchant Category: Merchants with turnover more than 20 lakh in prior FY

2. Interchange Fee Calculation:

 Since the transaction value is greater than 2000, the applicable interchange fee is
0.75%.

 Interchange Fee = 0.75% of ₹10,000 = ₹75.00

3. Interchange Cap:

 The interchange cap is ₹800 per transaction.

 Therefore, Marriott Hotels will retain ₹10,000 - ₹800 = ₹9200.

Income of Banks:

Federal Bank (Transaction at Hanuman General Stores):

 Network Charges from Acquirer = ₹0.90

 Interchange Fee Income = ₹15.01

 Total Income = ₹0.90 + ₹15.01 = ₹15.91

HDFC Bank (Transaction at Marriott Hotels):

 Network Charges from Issuer = ₹0.50

 Interchange Fee Income = ₹75.00

 Total Income = ₹0.50 + ₹75.00 = ₹75.50

Card Network Earnings from Santosh's Financial Activity for the Day:

 Network Charges from Acquirer (Hanuman General Stores) = ₹0.90

 Network Charges from Issuer (Marriott Hotels) = ₹0.50

 Total Earnings = ₹0.90 + ₹0.50 = ₹1.40

Therefore, for the day, the card network earns ₹1.40 from Santosh's financial activity.

Core Principles of Payment Systems:

1. The system should have a well-founded legal basis under all relevant jurisdictions.

 Evaluation for UPI: Yes

2. The system's rules and procedures should enable all participants to have a clear
understanding of the system's impact on each of the financial risks they incur through
participation in it.

 Evaluation for UPI: Yes

3. The system should have clearly defined procedures for the management of credit risks and
liquidity risks, which specify the respective responsibilities of the system operator and the
participants, and which provide appropriate incentives to manage and contain those risks.

 Evaluation for UPI: Yes

 4. The system should provide prompt final settlement on the day of value, preferably during
the day and at minimum as the end of the day.

 Evaluation for UPI: Yes

5. A system in which multilateral netting takes place should at the minimum, be capable of
ensuring that timely completion of daily settlements in the event of an inability by the
participant with the largest single settlement exposure.

 Evaluation for UPI: Yes

Additional Five Core Principles of Systemically Important Payment Systems (SIPS) by BIS:

6. Oversight by Regulatory Authority:

 Description: This principle emphasizes the importance of having an appropriate

regulatory authority oversee the operation of the payment system. This authority
ensures that the system complies with regulatory standards, operates efficiently, and
manages risks effectively.

 Significance: Regulatory oversight provides an external layer of governance and

ensures that the payment system operates in a manner that is consistent with
established rules and regulations.

7. Effective Risk-Management Procedures and Standards:

 Description: This principle highlights the necessity for the payment system to
implement robust risk-management procedures and standards. These procedures
should cover various types of risks, including credit risk, liquidity risk, operational
risk, and other relevant financial risks.

 Significance: Effective risk management is essential to safeguard the stability and

integrity of the payment system. It helps in identifying, monitoring, and mitigating
potential risks that could disrupt the system's operations.

8. High Degree of Safety and Efficiency:

 Description: This principle emphasizes the importance of balancing safety and

efficiency in the payment system. It means that the system should process
transactions efficiently without compromising security measures.

 Significance: Striking the right balance between safety and efficiency ensures that
payments are processed promptly while maintaining the security and integrity of the
system.

9. Clear Understanding of Risks by Participants:

 Description: This principle asserts that participants in the payment system should
have a comprehensive understanding of the risks associated with their involvement.
This includes credit risk, liquidity risk, operational risk, and other relevant financial
risks.
  Significance: Ensuring that participants are well-informed about the potential risks
they may face promotes transparency and informed decision-making. It helps in
building trust and confidence in the payment system.

10. Adherence to Relevant Laws and Redress Mechanism:

 Description: This principle underscores the importance of the payment system being
subject to relevant laws that are clear and predictable. Additionally, participants
should have a means to seek redress in case of disputes or issues.

 Significance: Legal clarity provides a solid foundation for the operation of the
payment system, ensuring that all parties involved understand their rights and
responsibilities. The availability of a redress mechanism adds an extra layer of
security and fairness.