Modernising Payments

 From cash, cards, mobile money and internet banking, Fijians have more ways to pay than ever before.  In 2021, the Reserve Bank of Fiji (RBF) embarked on a reform to modernise Fiji’s National Payment System (NPS).  This article provides an overview to this reform.

Ways to Pay

Paying for the things we need is an essential part of our lives.  While cash has long been king, there are a number of ways that Government, businesses and the public use for payments.  This includes cheques, which is often used to settle large business payments instead of cash.

Banks have traditionally provided a range of payment services for retail customers, businesses and the Government. Over two decades ago, banks introduced debit and credit cards for use at Automated Teller Machines (ATMs) and later, Electronic Funds Transfer Point of Sale (EFTPOS) terminals. This was followed by the introduction of the internet and mobile banking services which now provide convenient means of making and tracking payments on electronic and mobile devices.  In recent times, technology has significantly transformed payments with non-bank institutions and technology companies providing competitive, innovative alternatives.

Since 2010, Mobile Network Operators (MNOs) introduced new ways for payments via mobile phones by issuing electronic money “e-money” in exchange for cash through services that have come to be known as mobile money.    In recent times, MNOs have also provided Quick-Response (QR) codes i.e. special barcodes that are unique identifiers for businesses that are readable by smartphones to identify the accounts that payments are made to.  Besides MNOs, at least one bank has introduced a similar service for its customers.

While Money Transfer Operators and Restricted Foreign Exchange Dealers (RFEDs) have long been the most common channels of sending and receiving money to and from abroad, inward remittances statistics indicate that many Fijians are now turning to mobile money.  For time-critical inter-bank payments, customers have the option of using FIJICLEAR through their local banks for payments.

Besides the types of payments mentioned above, other, albeit lesser known or used payment services also exist such as stored-value cards that can be redeemed for goods and services at specific businesses.  These payment instruments, which are limited in their acceptance, typically include retail cards and loyalty or prepaid gift cards.

The National Payment System

All of the services described above are called payment services and their providers include banks, MNOs, RFEDs and other specialised businesses.  Many payment service providers are also linked by networks managed by large organisations or companies known as payment system operators.  Examples of payment system operators include the RBF, which manages FIJICLEAR, a payment system that connects local commercial banks through a messaging system for payment orders called SWIFT.  FIJICLEAR is also used to make payments for settlement of investments or securities as well as for transactions between commercial banks.  VISA, MasterCard and UnionPay are examples of payment system operators, whose network of members include selected local commercial banks and other non-bank entities for processing card payments within their respective networks.

These payments services and payment systems perform a complex range of functions that are responsible for moving money between organisations and people, in order to fulfil various obligations such as payments for goods & services, lending and investment.  Collectively, they are known as the NPS.

Market Challenges

Despite the diversity of offerings and improvements in the way we pay, a number of challenges exist.

Apart from cheques, making payments from an account in one bank to another (direct credit transfers as they are known) are processed, cleared and settled using legacy systems and manual interventions which often mean that recipients will receive their money over a day or two, and occasionally even longer, from the time they are initiated.  Inability to make or receive critical payments on a timely basis can be costly to customers and businesses, as well as the economy.

In addition, not all providers of payment services are able to provide their customers the ability to make direct credit transfers to customers whose accounts are held with other unaffiliated providers like the inability to transfer funds from MNOs to commercial banks.  Furthermore, some debit cards cannot be recognised by EFTPOS terminals and ATMs provided by other banks.  The absence of interoperability presents inconvenient and costly work-arounds to customers in order to send money or settle their obligations with businesses or other customers.

There is also a need to update the rules around the way payments are made and how providers conduct themselves to reflect the current developments in the payment space.  This is critical to protect the NPS and customers from risks of money laundering and other criminal activities.  In addition, without specific mandate on payments it was difficult to make rules, provide oversight and lead development efforts, to achieve a NPS that serves the needs of both, businesses and people, reach the communities that have been underserved and provide a level playing field between existing and new players where consumers benefit from competition.

The NPS Reform

In light of the key challenges as well as many other barriers to advancing our development as an economy, the RBF is leading a reform of the NPS which comprises three key components:

1. New rules

As payments are critical to the functioning of an economy, rules are necessary to ensure a safe, efficient and sound NPS.

In other words, rules ensure that payments are processed, cleared and settled on a timely basis.  Rules are also needed to protect users’ funds and their personal information.

Some rules are also needed to ensure fair access to systems and promote competition in the market through interoperability, where customers of different service providers are able to do payments to one another seamlessly.

To balance this, there are also rules that are required to combat key risks to the financial system such as money laundering and terrorist financing.  Rules set to mitigate this risk ensures that the NPS is not abused by criminals and other malicious entities which also enables protection of customer funds.

A broad framework that provides for these rules is outlined in a law known as the National Payment System Act 2021 which has come into legal effect on 30 September 2022 along with the National Payment System Regulations 2022.

2. New Systems

In 2021, the RBF worked collaboratively with the International Finance Corporation (IFC) and key stakeholders developing an assessment of the NPS which formed the basis for procuring and implementing a new system to address some of the key challenges in our market.

The new system, called the Automated Transfer System (ATS), will be operated by the RBF and provides a common platform for banks and non-banks such as MNOs to enable their respective customers to make payments by way of direct credit transfers.

Furthermore, the ATS will be implemented in a phased approach, beginning with a real time gross settlement system that will replace FIJICLEAR (a system that traditionally processes critical large value payments) followed by an Automated Clearing House (ACH), which will cater for retail transfers which are typically smaller in value and greater in volume.

The ACH will enable customers of different bank and non-bank providers to make payments to one another, seamlessly.  In other words, a customer of any bank will be able to make payments to customers of other banks as well as MNOs.  In addition, customers of an MNO will also be able to send payments to another MNO directly as well as any other bank connected over the ACH.  Future payment service providers who meet minimum requirements to participate on the system will be able to interact with other providers.  The ACH will also introduce the ability to make time-critical payments, enabling customers to send and receive payments up to a certain threshold almost instantly i.e. within seconds, from any provider irrespective of affiliation.

In addition, the ATS will operate in conjunction with another system called a Central Securities Depository (CSD).  Investors of Government, government-guaranteed and statutory corporation securities will be able to receive digital certificates and track their portfolio over the CSD while banks and other entities will be able to issue, trade and settle securities over the same system.  Securities or investments, are just as important as payments, as they allow for borrowing and investment activities that support financing for Government and other large corporations in Fiji.

3. New Strategy

A strategy provides the blueprint by which the NPS evolves over time.  The RBF is currently developing a strategy in consultation with the industry that is relevant and appropriate to the Fijian market and its needs.

The strategy acknowledges that there are many other challenges that exist in the market and rules that new systems cannot address alone.  These include the cost of payment acceptance, the financial and digital literacy of ordinary Fijians, access to online payment gateways by small and medium businesses, growing cybersecurity risks in digital payments, the lack of internet connectivity in rural areas and the interoperability of card payments, QR payments and other forms of new payment instruments.

Tackling these complex issues requires collaborating with not just payment service providers and operators, but with Government, other regulators, development partners, technology providers, civil society organisations, consumer advocacy agencies and community-based organisations.

Besides addressing these challenges, the strategy also provides a roadmap of exploring new developments, such as central bank digital currencies and opportunities that come with improved connectivity, smartphone-use and a growing ecosystem for innovative technology-led solutions that provide benefits to customers, businesses and the economy.

With much excitement, we will be unpacking all of the developments mentioned in this brief overview of the NPS reform in a series of articles that will follow in the coming weeks.

To view an educational video on the NPS, please go to the RBF YouTube channel and click on What is the National Payment System?

Reserve Bank of Fiji

15 October 2022