Payment system

What, How and How Much

 Payment system definition
World banking system
Clearance and Settlement
Outline SWIFT
International payment
E-payment
Payment systems in Vietnam
 Payment system facilitates transactions
Hệ thống thanh toán
 Công cụ thanh toán

Payment  Tiền mặt, séc, chuyển khoản điện tử, thẻ tín dụng, thẻ ghi nợ…

 Hệ thống quy tắc về thủ tục, hoạt động và tiêu chuẩn

system được thỏa thuận giữa các nhà cung cấp dịch vụ thanh
toán
 Cơ chế chuyển khoản
 Khung pháp lý đảm bảo cho tính không thể thay đổi về sự
giải ngân của nghĩa vụ giữa người phải trả (debtor) và
người nhận tiền (creditor)
World
Banking
System
 CENTRAL BANK – INTER-BANK – INTRA-BANK
VALUE TRANSFERRED FROM CENTRAL BANK
BANK TO BANK ON BOOKS
OF CENTRAL BANK
FINAL SETTLEMENT

Payment INTERBANK SYSTEMS

System Securities Risk/Credit
Transportation/Exchanges
Financial markets Management
CLEARING

Layers Head Office BANK A Head Office BANK B

BANKS
3 2 2 3
Branch A1 Branch A2 Branch B1 Branch B2
SETTLEMENT BETWEEN
BRANCHES AND
3 2 1 CUSTOMERS’ ACCOUNTS

Client A Client A1 Client A2 Client B Client B1 Client B2

SOURCE: WORLD BANK

 FUNCTIONAL ARCHITECTURE
CENTRAL BANK layer Real Time Gross Settlement
Large Value, Liquidity

Payment INTER-BANK layer

CARDS NET
System
RISK/CREDIT
CLEARING
SECURITIES LOW VALUE MANAGEMENT

Layers INTRA-BANK layer

Commercial Banks’ Head Offices
Bank branch Bank branch Bank branch Bank branch

Delivery channels ATM, POS, PHONE, INTERNET, E-COMMERCE

Clients Clients Clients Clients

SOURCE: WORLD BANK

  NGÂN HÀNG TRUNG ƯƠNG
 Phát hành tiền PHÁP ĐỊNH & điều tiết lưu thông tiền tệ
 Ngân hàng của hệ thống Ngân hàng thương mại

 NGÂN HÀNG THƯƠNG MẠI

 Phát hành tiền lưu ký dưới dạng ghi chú (tài khoản ngân hàng)

Banking system  Chuyển tiền ghi chú

 Nhận tiền gửi
 Cho vay tiền

 CÁC TỔ CHỨC TÍN DỤNG

 Ex: Công ty tài chính, Công ty cho thuê tài chính

 CÁC NHÀ CUNG CẤP DỊCH VỤ THANH TOÁN

© 2004 MICHAEL I. SHAMOS

  Messaging
 Transmission of payment orders (Ex: SWIFT)
Clearance vs.  Clearance
 Determining the net effect of multiple payment orders
Settlement  How much does each party owe or is owed?
 Settlement
 Actual payment, often involving a central bank
 Foreign exchange requires two settlements
 Exchange HKD (HK dollars) to JPY (Japanese ¥) requires settlement in both
HKD and JPY

C© 2004 MICHAEL I. SHAMOS

Clearance vs.
Settlement
 Gross settlement system:
 Every transaction is processed separately (usually immediately)
Example: cash purchase, large-value bank transfers
 Problem: transaction overhead, network load
Gross v. Net  Wire transfers/ RTGS: Real-time Gross Settement

Settlement Net settlement system:

Systems  Transactions are batched.
 Example: credit cards
 Merchant is paid once per day, not for each sale
 Customer is billed once per month
 Problem: delay. Time is the enemy of money.

© 2004 MICHAEL I. SHAMOS

Net Settlement
  Net settlement requires “clearing”
 Determining the net amounts owed or owing

Net v. Gross  Need a separate clearing house

 Introduces delay (for clearing)
Settlement  Reduces counterparty risk
 Used for large numbers of small payments, e.g. cheques, credit cards

 Gross settlement can be instantaneous (< 1 minute)

 Gross settlement involves a large number of payments; used for large
transactions, e.g. interbank transfers

© 2004 MICHAEL I. SHAMOS

 CHECK
DATE NUMBER
MAKER (DRAWER)

PAYEE

Payment Orders AMOUNT

(Checks)
CURRENCY

DRAWEE
BANK

DRAWEE BANK
ACCOUNT NUMBER AUTHORIZED
NUMBER
SIGNATURE OF
MAKER’S AGENT
THIS CHECK IS AN ORDER TO MELLON BANK TO
PAY $100 TO PAYEE OR HIS TRANSFEREE FROM
THE CARNEGIE MELLON UNIVERSITY ACCOUNT

© 2004 MICHAEL I. SHAMOS

Checking
system
U.S. Cheque
Clearing
 The paper check is just
MAKER (DRAWER) DATE CHECK a carrier of information.
NUMBER
PAYEE
AMOUNT Electronic transmission is
better.
DRAWEE CURRENCY

Electronic Clearing
BANK
We dematerialize the check
DRAWEE BANK AUTHORIZED (remove the paper).
NUMBER DRAWER SIGNATURE OF
ACCOUNT MAKER’S AGENT
NUMBER

06130018184310143700000000010000USD065200356425020010130
DRAWEE DRAWER CHECK AMOUNT CURRENCY PAYEE PAYEE DATE
BANK ACCOUNT NUMBER BANK ACCOUNT
NUMBER NUMBER NUMBER NUMBER

Only the information is sent to the clearing house

© 2004 MICHAEL I. SHAMOS

Automated
Clearing House
(ACH)

© 2004 MICHAEL I. SHAMOS

  Nationwide wholesale electronic payments system
 Transactions not processed individually
Automated  Banks send transactions to ACH operators

Clearing House  Batch processing store-and-forward

 Sorted and retransmitted within hours
(ACH)  Banks
 Originating Depository Financial Institutions (ODFIs)
 Receiving Depository Financial Institutions (RDFIs)
 Daily settlement by RTGS
 Posted to receiver’s account within 1-2 business days
 Typical cost: $0.02 per transaction; fee higher

© 2004 MICHAEL I. SHAMOS

  High-volume, small value payment orders between financial institutions
 largely recurring payments: payroll, mortgage, car loan, Social Security
 U.S. Treasury Financial Management Service: cost to send gov’t check: $0.42. Cost
Automated of epayment: $0.02.
 Processes dematerialized checks (digital data only)
Clearing House  Both debits and credits allowed
 ACH processors:
 American Clearing House Association (American)
 Federal Reserve System
 New York Automated Clearing House (NYACH)
 VISANet ACH

© 2004 MICHAEL I. SHAMOS

ACH Credit and Debit Transaction
 1. BUYER SENDS
AN ORDER TO
BUYER’S BANK TO BUYER
CREDIT $X TO SELLER
SELLER’S ACCOUNT

ACH Credit
6. SELLER’S BANK
IN SELLER’S BANK CREDITS SELLER’S
2. BUYER’S BANK ACCOUNT WITH $X
SENDS TRANSACTION

Transaction BUYER’S
BANK
TO AUTOMATED
CLEARINGHOUSE
SELLER’S
BANK
4. BUYER’S BANK
PAYS $Y TO
SETTLEMENT BANK

SETTLEMENT CLEARINGHOUSE
BANK
3. CLEARINGHOUSE DETERMINES THAT
5. SETTLEMENT BANK
BUYER’S BANK OWES SELLER’S BANK $Y
PAYS $YTO
(ALL TRANSACTIONS ARE NETTED)
SELLER’S BANK

© 2004 MICHAEL I. SHAMOS

 1. BUYER AUTHORIZES 2. SELLER ASKS HIS BANK
SELLER TO DRAW $X TO SEND TRANSACTION
FROM BUYER’S BUYER TO AUTOMATED
ACCOUNT IN BUYER’S SELLER CLEARINGHOUSE

ACH Debit
BANK
7. SELLER’S BANK
CREDITS SELLER’S
8. BUYER’S BANK ACCOUNT WITH $X

Transaction
ADVISES BUYER
OF PAYMENT
BUYER’S SELLER’S
BANK BANK

5. BUYER’S BANK 3. SELLER’S BANK

PAYS $X TO SENDS TRANSACTION
SETTLEMENT BANK TO AUTOMATED
CLEARINGHOUSE

SETTLEMENT CLEARINGHOUSE
BANK
4. CLEARINGHOUSE DETERMINES THAT
6. SETTLEMENT BANK
BUYER’S BANK OWES SELLER’S BANK $X
PAYS $X TO
(ALL TRANSACTIONS ARE NETTED)
SELLER’S BANK

© 2004 MICHAEL I. SHAMOS

Debit Card
Authorization

• A IS MERCHANT’S BANK; B IS CUSTOMER’S BANK

• A AND B BELONG TO DIFFERENT REGIONAL ATM
NETWORKS ON THE SAME NATIONAL NETWORK
• DEBIT IS IMMEDIATE WHEN BANK B AUTHORIZES

SOURCE: HAYASHI, WORLD BANK

© 2004 MICHAEL I. SHAMOS

 1. NATIONAL NETWORK CLEARS FOR ITS REGIONAL NETWORKS,
SETTLES REGIONAL NETWORK’S ACCOUNTS IN CENTRAL BANK
2-3. REGIONAL NETWORK CLEARS FOR ITS MEMBERS THROUGH
NETWORK’S CLEARING BANK
4-5. ACH OPERATOR FOR REGIONAL NETWORK INITIATES DEBITS
AND CREDITS TO REGIONAL BANKS THROUGH ACH

Debit Card
Settlement

© 2004 MICHAEL I. SHAMOS SOURCE: HAYASHI, WORLD BANK

  Society for Worldwide Interbank Financial Telecommunication
 Non-profit, headquarters in Brussels
 Financial messaging system, not a payment system
 Settlement must occur separately
S.W.I.F.T.  7500 institutions, 200 countries
 2 billion messages per year: $6 trillion per day
 Cost ~ $0.20 per message
 Private IP network
 swiftML
 interoperable with ebXML

SOURCE: SWIFT

© 2004 MICHAEL I. SHAMOS

 SWIFT Network (Jan. 2002)

7,500 financial institutions

200 countries
Peak day 9.7 million messages
2 billion messages / year 99.977 % availability

6 trillion USD/day

Connected
Not connected
SOURCE: SWIFT
 Buyer's bank Seller's bank

Payment

SWIFT E- SWIFTNet
Link
SWIFTNet
SWIFTNet
Link

payments
Payments Payments
application Payment application
Initiation Initiation
Initiation Confirmation
Plus System Response

e-paymentPlus
Payment Initiation Initiation
Initiation
Confirmation Confirmation
TrustAct Remittance
Remittance Remittance TrustAct
Link advice advice
TrustAct Server advice Link

Invoices
Buyer Seller
Internet

SOURCE: SWIFT
SWIFT Message
Types

SOURCE: SECURITIES OPERATIONS FORUM

 • Letter of Credit: Thư tín dụng – Phát hành bởi 1 tổ chức tài chính nhằm cam kết
thanh toán cho một giao dịch thương mại
• Bill of Lading: Vận đơn đường biển - Tài liệu xác nhận và ghi chép điều khoản
hợp đồng giữa người gửi hàng, công ty vận chuyển và các đại lý cung cấp và
nhận hàng hóa; hường đóng vai trò như một chứng từ quyền sở hữu hàng hóa,
một hợp đồng vận chuyển và một biên lai cho hàng hóa.

International
Payment BILL OF LADING (B/L)
TRANSACTION - LINK
PAYMENT TO
SHIPMENT
 B2B Payments
Buyer Supplier
Order
• Procurement • Order Mgmt
• Receipt Status Order Confirmation • Fulfillment
• Reconciliation • Credit and
and Payment Advance Shipping Notice Collections
• Financing/ • Financing/
Cash Mgmt Invoice
Cash Mgmt

Letter of Credit/ Payment Guarantee/

International Cash
Escrow/
Line of Credit/
Risk Management
Financial
Institution
Insurance/
Trade Finance/
Risk Management
Cash

Payment
Payment
Details
Logistics Providers Receipt
Proof of Delivery Packing List Details
• Order Mgmt
Shipping Invoice • Credit/ Collections Proof of Delivery Cash
• Financing/ Cash Mgmt Shipping Invoice Payment
Details
Payment Payment (Shipping
Cash Receipt Details
Authorization Authorization Charges)
Logistics (Shipping
Provider Charges)
Bank
Buyer Cash Account Cash Supplier
Bank Bank
Account Cash Account

Goods Move Faster Than Money SOURCE: TRADEC

  Currency = token fiduciary money of a central bank
 Every bank account is denominated in one currency
 Most banks allow accounts in only one currency

Foreign Exchange  All currencies have three-letter ISO currency codes:

 USD (U.S. dollar) JPY (Japan yen)
 GBP (Great Britain pound) CHF (Swiss franc)
 VND (Vietnam Dong) EUR (Euro)
 Usually, the first two letters indicate the country; third letter is the first letter of
the currency name
 Foreign exchange is a barter transaction
 To buy GBP for USD, buyer has to find someone with GBP who wants USD

© 2004 MICHAEL I. SHAMOS

  Every bank must have an account at the central bank (or with another
bank that has a central account)
 The account is (usually) denominated in that country’s currency and is
Foreign Exchange used to settle obligations in that currency
 A foreign exchange transaction requires two settlements, one in each
currency
 Therefore, two countries’ central banks (or settlement systems) are
involved (except in HK)

© 2004 MICHAEL I. SHAMOS

E-Payment
 Credit Card based Payment system
 Traditional Credit Card Systems
 Support of MOTO by Credit Cards
 SSL (TLS) – based solution
Modern  The SET protocol (Failed)
 3D Secure
E-Payment Smartcards
 Smartcards technologies: Smartcard, NFC, RFIDs
System  EMV (Europay – MasterCard – Visa) initiatives
 Other Smartcard-based Stored-Value Facilities (SVFs), e.g.
Octopus
P2P payment systems, e.g. Paypal
(c) Wing Lau
 Mobile Payment System and Digital Wallets
 Apple Pay, Samsung Pay, Google Pay (Wallet) and Union Pay
Modern  Alipay and Wechat Pay
Micro-Payment Protocols (F)
E-Payment Cryptocurrencies and related technologies
System  Bitcoin (Blockchain, PDL Tech)
 Ethereum (Smart Contracts, ICOs,..)
 Central Bank Digital Currencies (CBDC)

(c) Wing Lau

  To allow the payee to obtain money, fiduciary or its equivalent
 Usually in his bank account (convertible to fiduciary)
 Cash is rare except for low-value face-to-face payments

Objective of  How does the money get into the bank account?
 Payment in real money is called settlement

Payment  Most payments are not settled individually

 Example: bank checks, ATM withdrawals – too small for separate transfers of funds;
batched for efficiency
Systems  Batching to determine how much money must be paid is called clearance or
clearing
 Payment systems must provide for both clearance and settlement

(c) Wing Lau

  How does the payor know how much to pay?
(bill presentment, invoicing)
 What mechanism will be used to “pay” (payment)?
 When will payment be made (before, during, after)
Payment Issues  How will the payments be added up? (clearance)?
 How will the payee receive real money (settlement)?
 How will the payee credit the payor (reconciliation)?
 What records are available to the parties (audit)?
 Security for all the above
 authentication of parties
 prevention of forgery

(c) Wing Lau

  Prepaid Systems (Bank access before transaction)
 Cash
 Octopus, phone card
Payment Systems  Bank stored-value cards (GeldKarte)

by Timing  Instant-Paid Systems (Access during transaction)

 Debit card
 Post-Paid Systems (Access after transaction = credit)
 Credit card, EZPass, Speedpass
 Checks & electronic forms, eChecks
 Commercial invoice
 Huge differences in risk, authentication, cost

(c) Wing Lau

  Physical support (smart card, files, encrypted strings)
 Value representation (denominations, numbers)
 Location of value store (bank, electronic wallet)

System Issues  Discharging power (who accepts it?)

 Mode of use (remote, face-to-face)
 Methods of payment (credit transfer, jeton exchange)
 Genuineness (is it valid? stolen? double-spent?)
 Authentication (of user)
 Traceability (anonymity, privacy)
 Scalability, cost

(c) Wing Lau

Vietnam
Vietnam
  (i) Các hệ thống thanh toán do NHNN tổ chức, vận hành và quản lý
(Hệ thống thanh toán bù trừ điện tử/giấy; Hệ thống thanh toán điện
tử liên ngân hàng)

Vietnam  (ii) Các hệ thống chuyển mạch và thanh toán bù trừ thẻ;
 (iii) Các hệ thống thanh toán bù trừ và quyết toán chứng khoán;
Payment  (iv) Các hệ thống thanh toán nội bộ, thanh toán song phương do
một số TCTD tổ chức, vận hành và quản lý.
System  Dịch vụ chuyển tiền quốc tế qua hệ thống SWIFT và Dịch vụ
chuyển tiền Western Union (WU)
 Ngân hàng thanh toán bù trừ nội địa các giao dịch thẻ (VCB – Visa;
BIDV – Master Card)
  78 tổ chức cung ứng dịch vụ thanh toán qua internet
 45 tổ chức cung ứng dịch vụ thanh toán di động
Non Cash  9 hệ thống TTKDTM chính gồm:
Payment  Hệ thống thanh toán điện tử liên ngân hàng (IBPS);
 Hệ thống thanh toán bù trừ;

System in  Hệ thống thanh toán nội bộ của từng ngân hàng thương mại
(NHTM);
 Các hệ thống thanh toán song phương;
Vietnam  Hệ thống thanh toán ngoại tệ VCB – Money;
 Hệ thống thanh toán chứng khoán do BIDV quản lý, vận hành;
 Hệ thống thanh toán thẻ;
 Hệ thống thanh toán qua internet và điện thoại di động
 Hệ thống SWIFT.
 ALL RISK HAS COST
 Suffering loss has cost
 Protecting against loss has cost
System design must respond to risk posture (willingness
Payment to accept various kinds of risk)
risks (1) Transferable vs. non-transferable risk
 Insurance
 Hedging
Example tradeoff: open v. closed payment networks
 Operational (reliability and integrity)
 Security (unauthorized access)
 Employee fraud
 Counterfeiting (ecash)
 System design, implementation, maintenance
Payment  Customer misuse
risks (2)  Service provider risk
 System obsolescence
 Transaction repudiation by customer
Reputational
Systemic
 Legal
 Violation of law, ambiguity, legal sanctions
 Money laundering
 Inadequate disclosure
Payment  Violation of privacy
 Violation by linked site
risks (3)  Certificate authority risk
 Foreign law
 Banking
 Credit (non-payment, insolvency)
 Liquidity (demand for redemption of ecash)
 Interest rate (spread)
Payment  Market (inflation, foreign exchange)
 Cross- border (social, political, economic)
risks (4) Crime
 Fraud, forgery
 Theft
 Kiting (illegal use of float)