Central Bank Nigeria launched the Payments System Vision 2020
Background to the Payments System Vision 2020 In March 2007, CBN launched the Payments System Vision 2020 (PSV2020). Through the implementation of the original PSV2020 and subsequent activities of CBN and the banking community, Nigeria has witnessed an impressive growth of electronic payments and a move from the dominance of cash as a means of payment. In 2013, CBN initiated a further formal assessment of the payments market, resulting in the PSV2020 Release 2.
Approach to the PSV2020 the original PSV2020 carried the overall objective to make the Nigeria payment systems ‘Internationally Recognized, Nationally Utilized’.
The existing infrastructure was assessed against the international best practice defined by the Bank for International Settlements, and to encourage usage of electronic payments, seven specific initiatives were identified to promote adoption.
The 2013 revision follows the same successful approach. The key recommendations result from key deficiencies when assessed against the current BIS IOSCO Principles for Financial Market Infrastructure (PFMI). It should be noted that the PSV2020 key recommendations result from a much higher target for compliance than was possible in 2007 due to the significant progress already achieved – we entered 2013 with a significantly more resilient structure than in 2007 and so can be more aggressive in future goals
Recommendations for the Payments System Infrastructure
- Following the detailed assessment of the current infrastructure against the PFMI, seven key recommendations emerged. The central theme of the recommendations is the linkage of scheme governance with scheme risk mitigation.
- The two core recommendations are interlinked and cannot effectively be implemented independently. The PFMI state that FMIs should be financially resilient against settlement risk (liquidity and credit) Currently CBN is ‘Lender of Last Resort’ for ultimate default of a participant in deferred net settlement systems – we need to move, at an appropriate time, to a model where the scheme itself mitigates the default
- Risk and exposures Hence the market must move to a model where defaulter pays initial debit position, but with any potential § shortfall covered by the Survivors (‘Survivor Pays’ model) Participants will then have risk of losses from actions of other participants and therefore have a clear benefit § from ensuring the likelihood of requiring survivors paying is kept to a minimum
- Participants should only accept this change if they are actively responsible, collectively and with a Board Management perspective, for scheme governance Hence scheme governance is critical to implementing an effective Payment Systems Risk Management model. It is stressed that CBN always has responsibility for Regulation and Oversight, as defined by its role as the apex organization for the integrity of the payment’s infrastructure. It should also be noted that the payment schemes have progressed significantly since the original review in 2007, most notably on the level of participant engagement in the payment scheme governance. The recommendations below are only feasible because of this progress.
Recommendation 1 It is strongly recommended that no national payment systems invoke the principle of unwinding. CBN should formally state that unwind must not be invoked in any national payment system. An implication of this recommendation is that each payment scheme must define and formally document the exact point at which payments are deemed to be ‘final and irrevocable’.
The PFMI calls for resilience in the payment system, concentrating on liquidity and settlement risk. The predicted net exposure of a participant bank is typically collateralized. Should a bank on any particular settlement cycle exceed its collateralized position, the simplest method to mitigate risk is to reverse all or some of the payment made by that bank – a process called unwind. Unwind has the very undesirable effects of undermining confidence in the payment system, and even more importantly can create systemic risk in the payment system. It is strongly recommended that CBN does not permit any payment system to invoke unwind.
Recommendation 2 – CBN should indicate an intention to remove its implicit role of ‘Lender of Last Resort’ for the RTGS payment system by December 2016 and Deferred Net Settlement systems by December 2019. An outline deployment plan must be published indicating interim steps to achieving this longer-term objective.
The current methods for collateralization of the payment systems does not confirm to the PFMI. Currently CBN is the de facto Lender of Last Resort for the key payment systems since it allows the banks to borrow, albeit at punitive rates, should the Settlement Account be in debit. All domestic payment systems should be required to adopt risk principles that are in accordance with the PFMI, and move to operate under the principle of ‘Survivor Pays’ – where it is the collective responsibility of the participating banks to operate with rules that minimize the risk of a bank failing to meet its position, but should any member fail, other participants are collectively responsible for any loss in excess of the loss-absorbing capacity of the failing participant.
If participating banks are collectively required to absorb losses of a failing member, they have a strong incentive for good governance of the scheme. CBN will always maintain is primary responsibility for regulation of the payment system as enshrined in the CBN Act 2007. However, scheme governance, management, and operation need not be a responsibility of the pinnacle organization.
A structure has been proposed (see Appendix 2), in line with the provisions of the Payment Systems Management Bill that is currently in the legislative process. The proposed payment scheme Boards will be given the mandate to run the schemes in accordance with the PFMI.
Recommendations 5 and 6 reflect the objective of greater international recognition. Adoption of Naira as a CLS Settlement Currency will position the Naira as an important world currency, although the practical relevance of CLS will only be felt should Naira be a more freely tradable currency – clearly a decision well outside the scope of the Pv2020.
Adopting the Sanctions Checking solution offered by SWIFT – a service that screens all payments and trade instruments against major sanctions databases – will increase the quality of international payments made by Nigerian banks creating a much more positive perception of Nigeria as a place to do business.
Payments Infrastructure is a critical part of the Securities Settlement process, but the overall compliance of the Financial Markets against the PFMI is much broader than the scope of the PSV2020. However, a formal industry assessment against the PFMI should be undertaken to assess current compliance.
CBN can be a strong catalyst for the adoption of electronic payments, and eight industry verticals have been identified as offering particular opportunities for adoption of electronic payments. The formation of Working Groups, comprising of the user community, banks and other service providers, will drive adoption. The groups will work on the principle of identifying quick wins and success transfer. The groups will be formed for a limited period only, two years maximum with the option to extend for one further term should all parties agree. Our initial engagement with the stakeholder community has received extremely positive feedback and a desire to work collaboratively to create a powerful voice for the industry. It is proposed that the Working Groups be formally constituted following the formal launch of the PSV2020 at the forthcoming Payments Conference.
The identified industry verticals are:
- Smart Cities
- Government Flows
- Hotels and Entertainment
- Health Bill Payment and Direct Debits.
A summary of the Agriculture Initiative is provided on the following page.
Implementation of the PSV2020 Release 2, driven by CBN and with the support and co-operation of the financial community will continue the momentum from the original strategy. The objectives are aggressive but achievable, and will position Nigeria as ‘Internationally Recognized’ in the global economy whilst serving all sectors of the domestic market by ensuring the electronic payment systems are ‘Nationally Utilized’.