Report on. Payment Systems Oversight. in Palestine

Transcription

1 Report on Payment Systems Oversight in Palestine 2013 Report No. 1

2 Report on Payment Systems Oversight in Palestine 2013 Report No. 1 Prepared by the Payment Systems Oversight Unit May, 2014

3

4 A letter from the Governor I am pleased to introduce the first report on Payment Systems Oversight in Palestine. The report is part of the PMA s efforts to perform the tasks and responsibilities entrusted to it to achieve financial and monetary stability and to contribute to sustainable economic growth in Palestine. The clearing and settlement of payment systems are the fundamental channels through which funds are transferred to all economic sectors; the clearing process exerts a direct impact on the reliability and effectiveness of the financial sector, and on the economy in general. This is especially true in light of the rapid developments in information technology and communications in addition to the increased availability of modern electronic payment instruments. The establishment of fast, efficient and secure payment systems can limit the risks which may accompany these financial operations. The PMA has adopted the international recommendations and principles of effective oversight of payment and settlement systems issued by the International Committee on Payment and Settlement Systems CPSS/Bank of International Settlement. These recommendations define the enhancement of oversight and the development of payment and settlement systems and the oversight of the payment systems as one of a central bank s most important functions. The report is a first of its kind and constitutes an achievement in the steps undertaken by the PMA related to oversight of the payment systems. The report comprises five main sections related to the most important infrastructural developments in Palestinian payment and settlement systems during the period It highlights some of the concepts, literature and principles of payment systems oversight and underlines the most important work and activities conducted by the PMA during 2013, including the establishment of a Payment Systems Oversight Unit and the future work priorities of the oversight unit. Dr. Jihad Khalil Al-Wazir Governor of the Palestine Monetary Authority i

5

6 Contents 1. Payment System in Palestine Definition of the Payment System Strategic Transformation Plan Payment Systems Infrastructural Development Payment Services Background 3 2. Payment Systems Oversight Introduction Definition of Payment Systems Oversight Objectives of Payment Systems Oversight International Principles of Payment Systems Oversight Tasks and responsibilities Scope of work 7 3. Establishment of Payment Systems Oversight in the PMA Legal Framework Organizational Structure Governance Oversight Standards and Requirements 9 4. Activities of the Payment Systems Oversight Unit Establishing Regulations and Criteria for Payment Systems Oversight Follow Up and Evaluation Factors Impacting on the Use of Cash Payment Services Priorities for Future Work Annexes References 36

7 Copyright PMA, May, 2014 All Rights Reserved. Suggested Citation: Palestine Monetary Authority (PMA), Report on Payment Systems Oversight in Palestine Report No. 1 Ramallah Palestine All Correspondence should be directed to: Palestine Monetary Authority (PMA) P. O. Box 452, Ramallah, Palestine. Tel.: Fax: info@pma.ps

8 Executive Summary: The Palestine Monetary Authority (PMA) plays many key roles in the clearing and settlement systems; it is an owner and operator that owns the infrastructure of various payment systems that comply with the public s best interests. The PMA is also a user of these systems as it isan active member of the banking and financial system through its transactions within the banking sector. The PMA continuously seeks to keep abreast of new developments in payment systems to develop its role in payment systems oversight. This report is the first of its kind to cover the oversight of different payment systems and it addresses five main aspects: 1. A summary of the most important developments in the infrastructure of payment and settlement systems in Palestine during the period ; the launch of the Real-Time Gross Settlement System (BURAQ), the formation of the National Payments Council, the introduction of the Palestinian National Payments Law, a project linking the financial market with BURAQ; the International Bank Account Number (IBAN) project; and the National Switch project. 2. Highlights of the concepts, literature and principles relevant to payment systems oversight. As the report is the first to address the oversight of payment systems, the PMA included this section to give the reader a detailed or general idea of the concepts without having to refer to other resources. 3. The establishment of the Payment Systems Oversight Unit at the PMA and the definition of regulations, criteria, policies, strategies and instructions. 4. An overview of the activities implemented by the Oversight Unit since its formation, including an evaluation of the payment systems managed by the PMA, payment instruments, the payment systems pillars, and activities related to electronic payment service providers. 5. A review of the future work priorities for the Payment Systems Oversight Unit. v

9

10 1. Payment System in Palestine 1.1 Definition of the Payment System A payment system is defined as a set of instruments, procedures and rules for the transfer of funds between or among participants; the system includes participants and the entity operating the arrangement (banks and financial institutions). Payment systems are based on agreements between the participants in the system and the operator of the arrangement, and the transfer of funds is affected using an agreedupon operational infrastructure. 1.2 Strategic Transformation Plan Following the approval given to the PMA s Strategic Transformation Plan of 2006 to form a central bank with full authorities that included the establishment an effective and efficient payment system, the PMA has pursued the development and upgrading of banking systems in line with best international practices. Activities have included the creation of a comprehensive and sound banking infrastructure that reduces the potential risks faced by the banking and financial systems. In cooperation with the World Bank, the PMA adopted a plan to develop and improve the effectiveness and security of the Palestinian payment system on the basis of nine fundamental pillars as follows: 1. The legal framework 2. large value payments 3. retail payments 4. government payments 5. cooperation framework 6. money market 7. clearing and settlement arrangements for securities 8. international remittances 9. payment systems oversight. The main goal of the development and improvement of national payment systems is to ensure financial stability, which is a key role of the PMA and of considerable importance in supporting economic development. Legal Basis LVPS Retail Payments Payment System Pillars Government Payments Cooperative Framework Interbank Money Market CSD Clearing and Settlement Remittances Oversight 1

11 1.3 Payment Systems Infrastructural Development The PMA has made significant progress in developing payment systems in the banking system: Launch of the first phase of the Real-Time Gross Settlement System - BURAQ in 2010 as the backbone of the payment system. Launch of an advanced version of BURAQ in Formation of the National Payments Council. Introduction of the National Payments Law as an important and essential part of the legal framework governing payment systems and payment systems oversight. The PMA has also worked on many important development projects, including the following: The BURAQ system to settle financial market CSD transactions. This connection has reduced the working days required for the settlement process from five to only three working days during the first phase, later reducing it further to two working days in early This has had a positive impact on the international classification of the financial market. International Bank Account Number IBAN project to ensure compatibility with international standards relating to bank account numbers issued by the International Organization for Standardization (ISO) and the recommendations of the Secretariat of the Council of Governors of Arab Central Banks and Arab monetary institutions. This project is perceived as a first step towards the implementation of straight-through processing. Clearing system project, which is an essential part of retail payments. The National Switch project. Participation in various committees on payment systems and payment systems oversight e.g. special committees related to the Arab Monetary Fund (AMF), Organization of the Islamic Countries (OIC), and the World Bank. Amidst these activities to develop the operation of payment systems, the PMA also fulfill edits role to oversee payment and settlement systems. As a result, the Payment Systems Oversight Unit was established on 28 February 2013 to define legal and legislative frameworks, plan the policies and strategies of the PMA in managing risks in payment systems, expand payment services, provide a competitive environment for payment services, and coordinate with the banking system and payment providers. 2

12 1.4 Payment Services Background Although the Palestinian banking system was only introduced in 1994, the rapid growth and development of the payment system and the huge progress in methods of communication, along with the links between the Palestinian economy and those of other countries, directly contributed to the expansion of banking services and noncash payment methods, particularly traditional payment instruments such as checks and transfers. However, the absence of a legal framework for payment services has been detrimental to growth in advanced electronic payment services such as prepaid cards, mobile payments, E-money, etc. In recent times, electronic payment services were limited to the following: Banks: through credit and debit cards, in addition to Points of Sale (POS) deployed at various locations or simple payment services provided via the websites of some banks. Payment service providers: where services are based on bill payments to an organization and company such as water, electricity and phone bills, mobile topups, payment of insurance premiums and university tuition payments. 2. Payment Systems Oversight 2.1 Introduction Since this is the first report to address payment systems oversight, this section examines some of the concepts and literature on this topic. The various references consulted are listed in the final part of the report. 2.2 Definition of Payment Systems Oversight Payment systems oversight is one of the main functions of the central bank. It aims to ensure the safety and efficiency of settlement and payment systems through monitoring and evaluation of the functions of these systems and the introduction of amendments where necessary. 3

13 2.3 Objectives of Payment Systems Oversight 1. Reduce systemic risks: [1] since payment systems are one of the most crucial components in the financial system, they must be properly managed and controlled to prevent systemic risks or reduce the likelihood of threats to these systems. 2. Enhance smooth functioning: since payment systems are the only means to realize clearing and settlement processes, the failure or breakdown of these systems or one of their components will be detrimental to the financial sector and, thus, to the economy as a whole. 3. Enhance customer confidence: increasing the safety and efficiency of payment systems will increase customer confidence and lead to increased use of electronic payment instruments. 2.4 International Principles of Payment Systems Oversight [2] The Committee of Payment and Settlement Systems (CPSS)was formed by the Bank for International Settlements(BIS)and adopted some of the fundamental principles for effective oversight of payment and settlement systems. These principles were published in a report [3] issued by BIS and are divided into two groups: General principles for oversight. Principles for international cooperative oversight. [1] This type of risk arises when one member of the system faces a financial problem that leads to their inability to meet financial commitments. This affects other members and entails a series of consecutive financial problems (domino effect). [2] Principles of oversight of payment and settlement systems and the responsibilities of central banks. AMF. [3] 4

14 Transparency International standards General Principles Powers and authorities Consistency Cooperation with other oversight authorities Oversight of Payment Systems Notification Primary responsibility Principles of International Cooperation for Oversight Overall evaluation of the system Settlement arrangements Unsound systems 5

15 General principles for oversight are: I. Transparency Central banks should set out publicly their oversight policies, including the policy requirements or standards for systems and the criteria for determining which systems these apply to. II. International standards Central banks should adopt, where relevant, internationally recognised standards for payment and settlement systems. Effective powers and capacity Central banks should have the powers and capacity to carry out their oversight responsibilities effectively. III. Consistency Oversight standards should be applied consistently to comparable payment and settlement systems, including systems operated by the central bank. IV. Cooperation with other authorities Central banks, in promoting the safety and efficiency of payment and settlement systems, should cooperate with other relevant central banks and authorities. Principles for international cooperative oversight I. Notification Each central bank that has identified the actual or proposed operation of a cross-border or multicurrency payment or settlement system should inform other central banks that may have an interest in the prudent design and management of the system. II. Primary responsibility Cross-border and multicurrency payment and settlement systems should be subject to oversight by a central bank which accepts primary responsibility for such oversight, and there should be a presumption that the central bank where the system is located will have this primary responsibility. 6

16 Assessment of the system as a whole In its oversight of a system, the authority with primary responsibility should periodically assess the design and operation of the system as a whole. In doing so it should consult with other relevant authorities. III. Settlement arrangements The determination of the adequacy of a system s settlement and failure-to-settle procedures in a currency should be the joint responsibility of the central bank of issue and the authority with primary responsibility for oversight of the system. IV. Unsound systems In the absence of confidence in the soundness of the design or management of any cross border or multicurrency payment or settlement system, a central bank should, if necessary, discourage use of the system or the provision of services to the system, for example by identifying these activities as unsafe and unsound practices. 2.5 Tasks and responsibilities The main tasksofpayment systems oversight are assessment of payment and settlement systems, communication between the operator of the system and its users and the processes conducted through these systems, in addition to supervision of securities settlement systems due to their relationship with other payment systems. 2.6 Scope of work The central bank must clearly determine the scope and range of oversight of payment systems and the type of systems under its supervision. The oversight process may include: 1. Systemically important payment systems, whether managed by the central bank or other parties. 2. The clearing system and securities settlement. 3. Multiple non-cash payment instruments. 4. Correspondent banks and custodians. 5. Third party service providers. 7

17 3. Establishment of Payment Systems Oversight in PMA 3.1 Legal Framework In 2012, Decree law No. 17 was issued concerning the Palestine National Payments Law. One of the most important articles in this law relating to payment systems oversight is Article 1/5, which stipulates that the Palestine Monetary Authority is exclusively authorized to oversee the providers of payment services as well as the safety and efficiency of payment systems to promote financial stability. This provides the legal framework for the PMA to conduct oversight of payment systems. 3.2 Organizational Structure In compliance with the stipulations of the Payments Law, the Board of Directors decided to Establesh a Payment Systems Oversight Unit, attached temporarily to the office of the Governor but to become an independent body. This represents a significant step to comply with best international practices, principles and standards, particularly in relation to the separation of powers and conflicts of interest. Since this is part of the fundamental work of the PMA and contributes significantly to the promotion of financial stability, the PMA envisages that the Unit will be converted into an independent department within the Financial Stability Group in the organizational structure of the PMA. 3.3 Governance In collaboration with the banking system, the PMA established the National Payments Council, which exercises an advisory guiding role and submits its recommendations to the PMA for the latter to undertake appropriate measures. The Council is responsible for defining national strategies and policies for the purpose of developing payment systems and stimulating regular coordination and collaboration among actors in this sector to safeguard security and efficiency. Headed by the PMA Governor, the Council consists of representatives of the PMA, banks and the Association of Banks in Palestine. The PMA Board of Directors, Payment Systems Department and Oversight Unit play special roles which contribute to the promotion of the safety and efficiency of the payments system. 8

18 3.4 Oversight Standards and Requirements International standards and principles related to payment systems oversight have stressed the importance of reducing risks that may face payment systems originally designed for large value payments. The work of the Oversight Unit in the PMA extends to retail payments as well as multiple non-cash payment instruments since the security and efficiency of these systems contribute substantially to building consumer confidence. The Unit also assists in using and expanding payment systems and fostering the security and smooth running of these systems. 9

19 4. Activities of Payment Systems Oversight Unit 4.1 Establishing Regulations and Criteria for Payment Systems Oversight The general policy for payment systems oversight was drafted in cooperation with the Payment Systems Development Group of the World Bank. The policy comprises all the legal foundations for oversight, the required cooperation arrangements, and the strategic goals, range, instruments, activities and criteria of payment systems oversight. The following table shows Oversight framework : strategic goal objectives of payment systems oversight Scope Confirm that payment systems are efficient and safe. Maintain a sound policy to manage risks in payment systems. Enhance the existence of an efficient legal and organizational framework. Provide adequate protection for the participants and users of payment systems. Expand payment services. Ensure the existence of a competitive environment for payment services. Important payment systems/large Value. Retail payment systems. Remittances from abroad. Securities clearing and settlement. Any new payment services and systems in Palestine. Activities Follow up. Evaluation and analysis. Introducing amendments. Research and development. Instruments Friendly persuasion. Instructions, incentives and sanctions. Cooperation and dialogue. Collecting, addressing and analyzing data. Participating in the system. 10

20 The Payment Systems Oversight Unit prepared its strategic plan for the oversight of payment systems during on the basis of the Roadmap and reports prepared by the World Bank. This plan is based primarily on international principles and standards issued by the Bank for International Settlements and the World Bank, particularly those issued by the CPSS and the IOSCO. One of the important axes of this plan is for the Oversight Unit to become a department with full tasks and responsibilities in the coming two years. The plan specifies the requirements to ensure the realization of objectives and the fulfillment of responsibilities and is a major reference that includes the annual work plan for 2014, the anticipated budget, human resources and training requirements. The Oversight Unit defines the strategy on payment services adopted recently by the PMA Board of Directors to reflect the following PMA objectives: 1. Enhance financial stability by reducing risks related to the work of payment services. 2. Provide secure and efficient payment services with a high level of protection of information and data. 3. Reduce the dependence on cash and encourage the use of electronic payment instruments. 4. Fight money laundering and apply know your customer (KYC) procedures. 5. Provide an open infrastructure that ensures equal opportunities for everybody, encourages competition and limits monopoly in the provision of payment services. 6. Realize the principles of financial inclusion by facilitating access to financial services by all sectors of the community and at reasonable cost. 7. Empower local companies and institutions, especially medium and small ones, to realize the competitiveness and permeability of their products locally and internationally. 8. Contribute to providing new job opportunities and driving the economy forward. With these objectives in mind, regulations have been drafted to organize providers and payment services. These regulations cover the approval of licensing for payment services and providers, covering payment services by prepaid cards, payment services by mobile phone, and the presentment and payment of bill services and payments via the internet using electronic payment gateways. These regulations are currently under discussion prior to adoption and publication. 11

21 4.2 Follow Up and Evaluation Evaluation of the main pillars of payment system The Palestinian payment system is based on nine key pillars. The PMA has drafted a plan to meet the requirements of these pillars in two phases and it is anticipated that the PMA will finalize this plan by The Oversight Unit identified and evaluated the achievements realized in this field, as shown in the table below: Item Key Pillars of Payment System Notes First phase (finishes by the end of 2014) Pillar 1 Legal Framework The National Payments Law was endorsed. Issuance of regulations and procedures to organize payment services and providers is underway. Issuance of instructions to operate BURAQ is completed Review and updating of regulations for clearing houses is underway. Pillar 2 Large Value Payments Real-Time Gross Settlement System (BURAQ) was launched. Pillar 3 Retail Payments PMA has clearing system for checks. Launch of a new clearing system is underway. Implementation of the National Switch is currently underway. Retail payments via mobile phones not yet implemented. Enhancement of payment services by credit and other instruments requires a lot of work. Pillar 4 Government Payments Pillar 5 Cooperation Framework Arrangements need to be made between the PMA and the Palestinian government. Not yet implemented. An account for the Ministry of Finance was opened in the PMA. The National Payment Council was formed. Cooperation in all fields with Association of Banks is underway. Need to enhance coordination with other relevant parties. Achievements Realized Partially implemented. F u l l y implemented. Partially implemented. Not implemented. Partially implemented. 12

22 )Second phase (finishes by the end of 2016 Pillar 6 Money Market between Banks Pillar 7 Securities Clearing and Settlement Arrangements Pillar 8 Remittances from Abroad Pillar 9 Payment Systems Oversight The money market between banks is efficient and there are arrangements in this regard. Money market use needs further development. Central Depository for the financial market linked to the BURAQ system. The PMA and government are currently working on the issuance of government bonds by the Ministry of Finance, managed by the PMA on behalf of the government. Securities management system for the PMA was not implemented. PMA must record and calculate remittances from abroad (stock-taking) according to relevant international recommendations and standards. The Payment Systems Oversight Unit was established. Performance of the tasks and responsibilities relevant to oversight, in addition to regulations and legislation, is underway. Fully implemented Partially implemented. Not implemented. Partially implemented. As per the table above, of the nine key pillars that form the payment system, two pillars had been fully implemented, five pillars were partially implemented and two pillars have not yet been implemented Follow up and evaluation of the procedures of payment systems managed by PMA The Payment Systems Oversight Unit examined the regulations and procedures that govern the work of payment systems managed by the PMA. The results and recommendations were published in a special report to the PMA Governor that will be issued periodically as required, and the recommendations in the reports will be implemented. The most important points in the report can be summarized as follows: 13

23 1. Evaluate the principles of the financial markets infrastructure and the responsibilities of the authorities towards the implementation of these principles. In the report, the Unit studied and evaluated the principle of legal basis and governance and defined the recommendations required for payment systems to comply with these principles. The report briefly evaluates the PMA s responsibilities in the implementation of these principles. 2. A study of the default of one of the participants in the system: the report examined the consequences of the failure of one or more participants to settle the financial positions in the payment system on the financial system and the options in that scenario. 3. A review of PMA policy regarding high value check clearaning. 4. A study of the BURAQ system in contengency mode as a precautionary measure in case of a problem or cutout occurring in the SWIFT network. As many of the Payment Systems Department s regulations are being updated and developed, the Unit decided to review these regulations in detail and evaluate the commitment of payment system participants to them three months after the date on which they are issued and disseminated Evaluation of the current clearing system The current clearing system in the PMA was in-house developed. Its working mechanism is based on the checks provided from each bank to other banks in four active currencies (shekels, dollars, dinars and euros). Bank files are then merged to extract financial statements from the clearing system based on the multilateral net settlement System which show the financial impact of each bank after the clearing session (creditor and debtor) in order for the settlement process to be implemented through the BURAQ system. Many problems and risks were found in the current system, including: Files between banks and the PMA are sent via rather than via a closed and secured network, leading to the possibility of exposing the system to information security risks. Clearing results are transferred to the BURAQ system manually. This requires time 14

24 and effort, in addition to operational risks. The system only exists in the PMA and not in any other banks. Therefore, all reading files, the extraction of reports and statement processes and other processes are conducted in the PMA and demand greater effort and responsibility. Failure to validate the information sent by banks. The PMA is currently addressing the problems and risks of the existing clearing system and is working on a new and enhanced clearing system Evaluation and analysis of payment instruments Checks: Checks are the second most frequently used instrument after cash payment. The number of checks in circulation is increasing as a result of huge dependence on them in daily business dealings and their use as a form of postpaid credit, in addition to economic growth and expansion in general. Number of checks cleared in the National Clearing House in thousands Data from Payment Systems Department As there is no national currency, checks are circulated in the four active currencies (shekels, dollars, dinars and euros). However, the Israeli shekel has the largest share in terms of the number and value of checks, as shown below: 15

25 The contribution of currencies in the total volume of checks cleared in 2013 The contribution of currencies in the total value of checks cleared in 2013 One of the strategic goals of the PMA is to reduce the use of checks as a payment instrument and increase as much as possible the use of electronic payment instruments that are more sophisticated and secure and pose less risk and cost. The use of checks has increased remarkably during recent years. They are often used for future payments and installment purchases, in addition to acting as a credit facility rather than as a tool of redemption, as stipulated in existing legislation in Palestine, where prevailing banking norms require the date on the check to have matured before it can be cashed. Payment cards: The following graphs show that all indicators relevant to payment cards from Automatic Teller Machines (ATMs), POS, payment cards and transactions conducted continue to rise. Nevertheless, the use of payment cards remains low compared with cash payment processes or checks. Number of POS Number of ATMs )Data Source: Banking Supervision Department PMA ( 16

26 Number of ATM debit cards and debit cards Number of credit cards Thousands Thousands Thousands Number of withdrawals from ATM Number of purchases from POS Thousands The geographical distribution of ATMs in Palestine varies from one governorate to the other. For example, there are 4.3 ATMs per ten thousand residents in Ramallah, while Hebron has only 0.9ATMs per ten thousand residents. Number of ATMs per people

27 The analysis also applies to the distribution of POS. For example, there are 40.1 POS per ten thousand residents in Ramallah and 3.7 POS per ten thousand residents in Hebron. Number of POS per people We can conclude that certain factors influence the distribution of ATMs and POS: Tourism: tourists visit Ramallah, Jericho and Bethlehem governorates more frequently than other areas and the distribution of ATMs and POS in these governorates is therefore greater. Employees: the number of employees in Ramallah is higher than in other governorates and there is therefore a higher distribution of ATMs and POS in the city. Commercial and economic activity: the extent of commercial and economic activity does not appear to be an important factor in the distribution of POS. This can be concluded from the lower distribution in Hebron and Nablus governorates despite these two regions having the greatest commercial and economic activity. Cultural factors: awareness of the use of electronic payment instruments and cultural factors may be a reason for the increase in ATM and POS distribution. the Israeli authorities in distributing ATMs in the Gaza Strip. Credit Transfers: The BURAQ system used by the PMA is one of the main pillars of the payment process through which personal and bank transfers and payment settlements from other systems are processed, including deposit settlement processes in the financial market and the results of check clearance. 18

28 The use of the BURAQ system in internal transfer processes between banks has increased (source: Payment Systems Department), while personal credit transfers are made through clearing houses. Following the launch of the BURAQ system, all credit transfers exceeding ten thousand of any active currency are transferred for settlement through the BURAQ system. On July 7th2011 clearing house dealings with all credit transfers were halted and settlement was only possible thereafter through the BURAQ system. Number of banking transfers Number of personal transfers Total number of transfers Of the total number of transactions implemented through the BURAQ system in 2013, the Israeli shekel had the highest share, although a lower share in checks presented to national clearing houses, because the shekel is the main currency used in business transactions in markets. The reason for the large share of the Israeli shekel in different payment instruments is the absence of a national currency and the dependence of the Palestinian economy on that of Israel, in which most of the daily commercial and economic transactions are conducted in shekels, whether in cash or using other payment instruments. 19

29 The share of currencies in the total transactions processed through BURAQ system in % 46.8% 31.4% 18.3% 8% 17% 3.4% 2% ILS JOD USD EUR VOLUME VALUE 4.3 Factors Impacting on the Use of Cash Cash is one of the most common means of payment in the world and this also applies in Palestine. However, the use of cash (paper and coins) constitutes a major obstacle to the work of the electronic payment system. The factors that impact on the use of cash can be ascertained by applying criteria used in a study by a number of developed countries such as the US, Britain and France. The Payments Systems Oversight Unit analyzed and studied these factors and their impact in Palestine and identified the following aspects that influence the use of cash: Merchants and service providers Consumers PMA and Payment Networks Banks Economic Factors CASH Government 20

30 Economic factors Economic and political stability. Unemployment rates. Cash resources of Palestinian residents or those who work in the areas occupied in PMA and payment network Efforts to reduce the use of cash: the PMA is exerting efforts to encourage electronic payment services by providing the infrastructure and encouraging its use by individuals, banks and companies. Multiple currencies in the Palestinian market lead to avoidance of electronic operations due to the differences in exchange rates for payment services providers. Geographical distribution of payment cards and POS: their expansion and distribution contribute to making electronic payments more widespread. Payment via mobile phone: electronic payment services can be promoted by transactions via mobile phones thanks to the widespread use of smart phones. Traders and service providers The cost of approving the use of electronic payments is one of the obstacles for traders. Switching to electronic payments in a sector that depends significantly on cash and where the acceptance of electronic cards by POS does not represent a competitive advantage. The giving of cash-back by a trader when operating cash-back services as a result of POS operations might be an obstacle to the spread of electronic payments. Consumers The widespread use of smart phones enhances the opportunity to provide payment services via mobile phones. The use of banking services by individuals is increasing within the framework of efforts by the PMA and initiatives to promote financial inclusion. The social culture of cash payment: efforts are needed by the PMA and banks to promote awareness to consumers of the advantages and benefits of using payment 21

31 instruments, including the efficiency and security aspects of these instruments. The number of transactions using cards is increasing, but the rate of increase remains lower than in surrounding countries. Multiple currencies and differences in exchange rates, as referred to earlier. Banks The distribution and provision of ATMs: the data referred to earlier show that the distribution of ATMs varies by governorate. Payment transactions by mobile phone Imposing commission and restrictions on cash deposit and withdrawal operations: this is one of the ways that can be used to encourage individuals to use electronic payment instruments instead of cash deposit and withdrawal. However, it is premature to recommend this step because of its implications on consumer sand the need to provide alternatives before implementing such procedures, taking into account that banks can impose fees on large volume transactions in excess of 30 thousand dollars for cash withdrawal and 20 thousand dollars for cash deposits. Government The government can exploit many opportunities to enhance electronic payment transactions and eliminate cash transactions. A cooperation framework between the government and the PMA may be required. For example: Efforts by the government to reduce cash payments such as collecting government payments electronically. Paying social services to beneficiaries via electronic cards with a limited value. Legislation relevant to electronic payment transactions such as the Electronic Transactions Act. Recommendations Establish the infrastructure required for electronic payment instruments in systems, legislation and regulations. This task must be fulfilled by the PMA, banks, payment service providers, mobile phone companies and others. Encourage awareness of electronic payment: this is a responsibility to be shared 22

32 by the PMA, banks and payment service providers. Fees and commission for electronic payment services must be clear and fair; this is primarily the responsibility of the PMA, banks and payment service providers. Payment service providers should conduct campaigns and promotions to encourage customers to carry and use payment cards. Enhance POS and encourage traders to accept payment by electronic cards; this responsibility is shared by the PMA, banks and private payment service providers. The PMA must work with the government to provide electronic payment alternatives for the cash collection of fees and different governmental payments. The PMA must encourage and stimulate the private sector to invest in electronic payments. Encourage simple and creative solutions in payment services. 4.4 Payment Services The payment services sector has seen a significant upsurge in the establishment of service providers or the introduction of new services that enhance the spread of modern payment instruments. During the second half of 2013, three providers were given initial approval to operate as payment service providers for the Ministry of National Economy. It is anticipated that other applications will be received in the near future, particularly once the regulations for the licensing of payment service providers are published. Prior to issuing the decree on the national payment system, the PMA held many meetings with various payment service providers to discuss the nature and extent of their services and their future plans. 23

33 5. Priorities for Future Work The Payment Systems Oversight Unit undertakes many tasks to realize the objectives of the Unit as specified by the PMA s Board of Directors. In addition to routine work related to payment systems oversight, other crucial aspects form part of the strategic plan of the Oversight Unit. These aspects are as follows: 5.1 Remittances from Abroad The transfer of income from abroad (employees compensation and income investment) is one of the main financial sources for the BOP (balance of payment) current account balance. In Palestine employees compensations formed 90% of net transfers from abroad during 2012 and remittances contribute substantially to the balance of payments (Annual report 2012, PMA). Remittances from abroad form one of the nine main pillars of the national payments system. The process of recording and maintaining an inventory of these remittances is assigned to the PMA. The Payment Systems Oversight Unit may supervise the implementation of the tasks of the PMA in relation to the general principles of remittances (CPSS/WB General Principles for International Remittances Services). The process of calculating remittances is based on surveys conducted by the Palestinian Central Bureau of Statistics and not on accurate data taken from banks. Accurate statistics on remittances from bank records will enhance confidence in the validity of data on this crucial item in the Palestinian balance of payments. 5.2 Establishment of a Special Department for Payment Systems Oversight The vision of the PMA is to create the Payment Systems Oversight Unit as a department within the Financial Stability Group in the structure of the PMA. The Payment Systems Oversight Unit will draft the detailed structure, tasks and responsibilities of the department, as well as vacancies and job descriptions for all department employees, through coordination with the relevant PMA departments. 24

34 5.3 Evaluation of the Principles for Financial Market Infrastructures The most important task assigned to the Payment Systems Oversight Unit is to evaluate the compatibility of payment systems with international principles and criteria for financial market infrastructures. In the coming period, the Payment Systems Oversight Unit will analyze all the criteria in detail and in line with the international methodology defined by the Bank for International Settlements. 5.4 Improved Basic Cooperation Improvements to internal cooperation and coordination between the Payment Systems Oversight Unit and the work of other departments related to the PMA, plus the enhancement of external cooperation relationships with other authorities and bodies such as the Capital Market Authority, the banking system and payment service providers. 5.5 Follow Up and Evaluation of the Work and Procedures of Payment Systems The Payment Systems Oversight Unit monitors and evaluates the work and procedures of payment systems to reduce any risks that may occur and drafts reports on the two processes for the PMA. 5.6 Payment Services Future efforts will focus on various payment service centers as follows: 1. Draft and adopt regulations for the licensing of payment service providers. 2. Monitor and regulate the legal status of payment service providers working prior to the issuance of decree No. 17 on the National Payments Law. 3. Receive and study licensing applications submitted to the PMA from new payment service providers who wish to enter the market. 4. Study and evaluate modern payment instruments and methods. 25

35 6. Annexes Principles for Financial Market Infrastructures(FMIs) 1. General organisation Principle 1: Legal basis An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions. Principle 2: Governance An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders. Principle 3: Framework for the comprehensive management of risks An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks. 2. Credit and liquidity risk management Principle 4: Credit risk An FMI should effectively measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes. An FMI should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, a CCP that is involved in activities with a more-complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. All other CCPs should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the CCP in extreme but plausible market conditions. 26

36 Principle 5: Collateral An FMI that requires collateral to manage its or its participants credit exposure should accept collateral with low credit, liquidity, and market risks. An FMI should also set and enforce appropriately conservative haircuts and concentration limits. Principle 6: Margin A CCP should cover its credit exposures to its participants for all products through an effective margin system that is risk-based and regularly reviewed. Principle 7: Liquidity risk An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should maintain sufficient liquid resources in all relevant currencies to effect sameday and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the FMI in extreme but plausible market conditions. 3. Settlement Principle 8: Settlement finality An FMI should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time. Principle 9: Money settlements An FMI should conduct its money settlements in central bank money where practical and available. If central bank money is not used, an FMI should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money. Principle 10: Physical deliveries An FMI should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor, and manage the risks associated with such physical deliveries. 27

37 4. Central securities depositories and exchange-of-value settlement systems Principle 11: Central securities depositories A CSD should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. A CSD should maintain securities in an immobilised or dematerialised form for their transfer by book entry. Principle 12: Exchange-of-value settlement systems If an FMI settles transactions that involve the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other. 5. Default management Principle 13: Participant-default rules and procedures An FMI should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the FMI can take timely action to contain losses and liquidity pressures and continue to meet its obligations. Principle 14: Segregation and portability A CCP should have rules and procedures that enable the segregation and portability of positions of a participant s customers and the collateral provided to the CCP with respect to those positions. 28

38 6. General business and operational risk management Principle 15: General business risk An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services. Principle 16: Custody and investment risks An FMI should safeguard its own and its participants assets and minimise the risk of loss on and delay in access to these assets. An FMI s investments should be in instruments with minimal credit, market, and liquidity risks. Principle 17: Operational risk An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI s obligations, including in the event of a wide-scale or major disruption. 7. Access Principle 18: Access and participation requirements An FMI should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access. Principle 19: Tiered participation arrangements An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements. 29