Common Payment Switch

Another milestone in Lanka’s Payment Industry:

Sunimal weerasooriya GM / ceo Lankaclear (Pvt) Ltd

Being a pioneer in the South Asian Region to adopt technology based financial services, Sri Lanka has a wide range of payment instruments and payment services to support the country’s Banking and Finance Industry.

In this context, the Central Bank of Sri Lanka, the Colombo Stock Exchange, Bankers and Financial Service Organisations have continued to play vital roles in strengthening the payment and settlement channels to meet the demand created by transactions pertaining to the exchange of goods, services and financial assets.

In a nutshell, payment services of financial service providers such as banks provide paper-based instruments namely Cheques and Pay Orders, card-based instruments such as Credit Cards, Debit Cards and Pre-paid Cards and electronic payments through the Sri Lanka Interbank Payment System (SLIPS), Internet Banking and Mobile Banking.

Meanwhile, infrastructure service providers supply islandwide networks for the safe and secure transmission of payment instructions to financial and commercial entities.

The Clearing of the various payment instruments from paying parties to receiving parties is performed by LankaClear (Pvt) Limited., the National Clearing House which is jointly owned by the licensed commercial banks and the Central Bank.

The final step of the aforesaid processes on fulfilling the inter-bank payment obligations is realized through the transfer of funds between banks of transacting parties by debiting the settlement account of the paying bank and crediting the account of the receiving bank being recorded in the books of the Central Bank.

The stability, security and operational reliability of payment systems and clearing and settlement operations are always ensured through the closely integrated processes adopted by Banks, the Central Bank and LankaClear.

Framework

The framework for the country’s payment infrastructure incorporating futuristic payment technologies has been developed under a medium term plan formulated by the National Payment Council which is chaired by the Deputy Governor of the Central Bank in charge of the Financial Stability cluster.

The envisaged developments under this exercise are focused on creating a conducive environment for spearheading electronic payments for the financial services industry.

The Monetary Board, in keeping in line with the objective of promoting a nation-wide non-cash retail payments system, recently approved LankaClear to operate a Common Payment Switch (CPS) for integrating the transmission and clearing of electronic payments between banks to meet the following objectives:

* Introduce international best practices in clearing and settlement of electronic fund transfers among banks for retail payments;

* Improve efficiency and service to bank customers;

* Improve efficiency and service to participant institutions ie. banks;

* Reduce the clearing and settlement risks among participants;

* Serve as an infrastructure for on-line real-time fund transfers, paving the way to Straight Through Processing (STP);

* Enable rapid economic activity through faster payments and

* Facilitate the integration of future financial services.

The Common Payment Switch (CPS) will consist of two main components:-

* A Central On-line Transaction Processing system at LankaClear providing transaction interchange (switching) facility to Member Banks.

* On-line Bank Interface Module System at each Member Bank linking Core Banking and Card Authorisation Hosts to the Central On-line Transaction Processing system through a Virtual Private Network (VPN).

Payment instructions

The CPS is expected to be functional 24 hours a day, supporting on-line real time fund transfers/payments between banks to enable bank customers to initiate transactions at any time of the day and to make payments through ATMs, telephone, SMS or Internet even during non-banking hours. Payment instructions would be transmitted through CPS, only if sufficient funds are available in the sender’s account to cover the transaction value.

To mitigate settlement risks, inter-Bank settlement of CPS transactions will be conducted twice on any business day from 9.00 and 2.00 p.m. via the Central Bank’s LankaSettle -RTGS system which has been set up to settle inter-bank payment transactions.

Transactions to be supported during the Phase 1 and Phase 2 implementations of the CPS are:-

Phase 1

- Account to account fund transfers

- Salary payments

- Bill payments

- Inward remittances

- Direct debit transactions

- Local credit card payments

Phase 2

- Personal Identification Number (PIN) based transactions

- Electronic Cheque payments

Digital certificates

The CPS will initially focus on giving same day value for retail fund transfers/payments effected by the bank’s customers until 2.00 p.m. For transactions performed after 2.00 p.m., the availability of funds will occur on the next business day. Transaction Limits and Inter Bank Exposure Limits are imposed on the switch to control money laundering and bank liquidity exposures.

Also, to ensure confidentiality, authenticity and integrity of data and non-repudiation of transactions, the CPS will apply digital signatures and data encryption standards complying with international best practices.

Along with the launching of the CPS, LankaClear would also supply the Digital Certificates for electronic signing purposes to the finance and banking industry, through the Certificate Authority set up by LankaClear.

The new payment system will commence operations from mid May 2009 with seven participant banks. A further set of eight banks is due to join by end July 2009. All licensed commercial banks are expected to function as member participants of CPS before end 2009.

All activities of the CPS project from planning to the implementation stages, including the development of the Switch, have been carried out entirely with local expertise.

Leadership and guidance from the Central Bank and the National Payment Council and the proactive and enthusiastic participation by all Commercial Banks, Sri Lanka Banks Association and Lanka Clear have immensely contributed to maintaining steady progress on developing the Common Payment Switch, which is a first in payment switching in the South Asian Region.