Electronic Fund Transfer & Payment system

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Electronic Fund Transfer& Payment system

Sittikorn DireksoonthornAssumption University 1/2004

BIS3687 : E-Banking & Payment System

E-Banking and Payment system by Sittikorn Direksoonthorn

AgendaBOT Payment system and DevelopmentBOTNET connectivityLarge Value Fund TransferSMART: Retail Fund Transfer (Offline & Online)Electronic Cheque Clearing systemPayment MechanismInternational Electronic Fund Transfer

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Payment System DevelopmentBoth Cash and cheques are still popular because there is no constructive development of other mediums and lack of legal environment in favor of other form of modern payment medium.The limitations issuing cash and cheques are;

1. Risks involved in using cash and cheques2. The substantial cost involved in notes printing, storage

and consignment.3. Cheque clearing is too time-consuming result in cost of

funds and operational cost.


BOT Payment system

Large Value Funds TransferBAHTNET

SMART: Retail Fund TransferORFT - ATM (On-line Retail Fund Transfer)Media Clearing (Off-line Retail Fund Transfer)

Electronic Cheque Clearing

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The Objectives of BOT Payment system Development1. Enable ATM customers to deposit and

withdraw funds from any ATM terminal.2. Facilitate inter-bank retail funds transfer at

their branch or through ATMs.3. Increase the efficiency of salary and utilities

bill payments through bank accounts.4. Speed up the funds transfer process between

various financial institutions.


In order to achieves these objectives, BOT has set up FIVE projects.

1. National ATM Pool.2. Facilitate Inter-bank retail funds transfer.3. Electronic Cheque Clearing System for

Bangkok Metropolitan area.4. Electronic Offline Retail Funds Transfer for

retail payment.5. Large Value Electronic Funds Transfer System.

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BOT Payment System

Large Value Fund Transfer SMART: Retail Fund Transfer

BAHTNET

On-line Off-line

ORFT (ATM) Media Clearing / Cheque


Large Value Fund Transfer

Bank of Thailand provides the LVFT service for member bank in Thailand on an online real time basis. it provides fund transfer between banks, and also transfer to the third party. the development of this wholesale fund transfer network that interface online with bank’s reserved accounts at BOT.

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BOTNET

WS BANGKUNPROM

WS SURIWONG

WS HADYAI

WS CHENGMAI

WS LUMPANG

WS KHONKAEN

BOT C/A

BAHTNETNET Host Computer

Bank 1 Bank NBank 2

BOT Network connectivity


BAHTNET

BAHTNET (Bank of Thailand Automated High-value Transfer Network) is an electronic network payment system owned by BOT. It provides all financial data transmission and funds transfer among member institutions who hold account at BOT. BAHTNET ensures convenience, secured and fast transaction executed via the network.

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BAHTNET ‘s Users

Financial institutionsGovernment agenciesState enterprisesGeneral publicPrivate sectors


BAHTNET Services1. Inter-bank Funds Transfer

Inter-bank loans, Fund transfer form FX Trading, Credit/Debit advice (Payment confirmation).

2. Third Party Funds TransferFunds transfer to the beneficiary at other banks, Customer’s transfer, Expected to reduce the use of cheque.

3. Account InquiryAcquire info. concerning their current account at BOT, A/C balance, A/C movement.

4. Bilateral CommunicationDaily activities, delivery of day-to-day documents, The communication can be carried out in a more secure and timelines.

5. BroadcastingFinancial institutions announcement such as acknowledgement of fraudulent, illegal activities in financial system loss/stolen cheque.

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Electronic Inter-bank Payment systemDomestic Transactions

BAHTNET

$

Head Office

$

Head Office

$$

RECEIVER

$

Branch

$

Branch

$ $$

SENDER

Bank A(Originator Bank)

Bank A(Head Office)

Bank B

Bank B(Beneficiary Bank)

Tel Fax/MessageBank Intranet

Tel Fax/MessageBank Intranet

System for Managing AutomatedRetail Fund Transfer

SMART

Offline & Online

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SMART : BackgroundThe Bank of Thailand (BOT) developed inter-bank retail fund transfer system called 'Media Clearing' which started operation on 16 January 1997, to eliminate the limitaion of inter-bank funds transfer in the past that a payer and a payee had to open deposit accounts at the same bank. Media Clearing is designed for an off-line system using electronic media such as magnetic tapes and diskettes.Later, the BOT enhanced the system to transfer data via on-line by using web technology and changed the name from 'Media Clearing' to 'SMART' (System for Managing Automated Retail Funds Transfer).SMART operates on both on-line and offline basis to accommodate services with large volume, advanced agreement and regular payment interval.The Electronic Clearing House (ECH) acts as the center for receiving, sorting retail funds transfer data and calculating net balance for interbank settlement.


SMART Services

SMART has been designed to support retail funds transfer having large volume and a regular recurring payment period. Service types of SMART are composed of :

1. Credit Transfer is a funds transfer from customer's account at one bank to another account at different bank. these services are such as;

Salary paymentDividend payment,Tax refund payment,Interest payment, etc.

2. Debit transfer is a pre-authorised funds transfer in which a customer has agreed with a bank in prior for its account to be debited. these services are such as;

installment payment for a hire-purchaseinsurance premiumpayment for subscription feespayment for a regular service of mobile phone, cable TV, etc.payment for utilities such as water, electricity, and telephone, etc.

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Media Clearing operation procedureMedia clearing operates on an off-line basis of which transaction information is stored on electronic media such as magnetic tape or diskette. Companies have to contact the commercial bank for a detailed regulation and a contact. The bank will stored the information of customer’s debit/credit funds transfer on the media and submit to the Electronic Clearing House (ECH) 2 to 7 days before the value date(effective date). The ECH will process the information with reports one day before the value date for settlement among the member banks and also for the destination bank to prepare debit/credit information to post to the accounts on the value date. The fund will then be available to the customer.Media clearing enables credit and preauthorized debit transfer from the customers or companies. Credit transfer is a fund transfer order from one account to another account at different bank, while preauthorized debit transfer is a fund transfer order from one account to another which requires prior payment agreement.


Example : Operational Procedure of Credit Transfer

Company

Sending Bank

ECH

Receiving Banks

Employees

3

55

2

6 1 4Procedure of Transferring1. Send funds transfer data2. Send data on-line/off-line3. Sort out, verify and submit data to the

banks4. Credit employee’s account5. Returned data 6. Adjust the company account

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Why do we need Media Clearing?

1. A company wishes to make a ”One to many”point of payment, such as salaries and dividends.

2. “Many to one”point of payment, such as utility payment.

3. As an alternative way for cheque, which concerns a long processing time and is not an efficient mean for interbank payment.


Who can use Media clearing?1. Credit Transfer

Salary paymentDividend paymentTax refund paymentInterest payment for Bonds

2. Preauthorized Debit TransferInstallment payment for Hire-purchase.Insurance premiumPayment for monthly Fee.Payment for Utilities such as electricity, water, telephone, etc.

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Benefit from Media Clearing

1. Payer and payee do not need to have accounts at the same bank for retail payments.

2. Reduce the overall cost including labor cost.3. Easy to verify payment transaction.4. Standard Security system.5. Reliable, fast, easy and can link to the

international network for global payment.


Security system & Fee chargeSecurity System

The Bank of Thailand applies strictly security system for funds transfer data. Member banks send transfer data to the ECH through ERS (Electronic Report Submission) channel, using Digital Signature technology. The senders of funds transfer data have private key to create Digital Signature for data sending. With this technology,SMART can protect unauthorized persons to make any change to thedata. Also, this system can prove data authentication.

Fee ChargeService clients pay 10 Baht per transaction that are separated as follows;Sending Bank 3.50 BahtReceiving Bank 5.90 BahtElectronic Clearing House 0.60 Baht

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2. Electronic Cheque Clearing systemPrior to ECS, member banks exchange physical chequesafter the settlement process.ECS was developed by BOT and implemented in July 1996.Under ECS customers may deposit their cheques at the bank anytime during the banking hours.Cheques deposited and paid within BKK metro area were cleared at the Clearing House on a one-day basis.ECS uses MICR code line data for processing, clearing and settlement.Cheque are cleared by day end, and the funds can be withdrawed by the afternoon of the next working day


MICR data captured on the chequeMICR data on the Cheque is approximately 50 characters;

Bank name

XXXXX XX-XXXX XXX-X-XXXXX-X

4. $ paid Amount

1. Cheque number # 2. Bank and Branch code# 3. Account number #

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Cheque clearing will be on a one-day clearing basis using electronic data transmission technology

1. Member bank transmit data of out-clearing cheques to the clearing house through an electronic communication network.

2. The clearing house accumulates and processes all data continuously. Shortly before the end of banking hours, it will announce the preliminary net clearing positions of all participants.

3. At the end of the day (around 4.15 pm), the clearing house will announce the final Net clearing positions and then settlements will be made.

4. The Clearing house sorts all data by branches and customer’s accounts. Sorted data will be remitted to the corresponding banks.


Electronic Cheque Clearing system (ECS)

1. The volume of cheque exchanged through the clearing house has been growing rapidly at 10% per year.

On the average, about 250,000 chequesOn the peak day, about 500,000 chequesLarge size banks appr. 40,000 cheques/dayMedium size banks appr. 20,000 cheques/daySmall size banks appr. 5,000 cheques/day

2. The clearing house has about 32 member banks, and the net clearing balances are settled by debiting or crediting the participants’ reserved accounts held at BOT.

3. MICR data captured at the bottom line of the cheque.

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Electronic Cheque Clearing System workflow diagram$

Bank A - Branch 1

$

Bank A (H.O.)

$ $$ Payto

$

Bank B

MICR

Consolidate all chequedata from all branches

Payto

$

Physical Cheque COMPUTER CENTER

Gateway to BOT

Data

$

Bank B

BOT CLEARING HOUSE

BOT

Internal Cheque ClearingPayto

$

Physical Cheque

SORT

OutClearingPhysical Cheque

Bank BPhysical Cheque Bank B Cheque

Data

OutClearingData

Cheque Data


3. ATM & Online Retails Funds Transfer

How to issue ATM CardsHow to generate PIN (Personal IN)How the ATM worksAre they secure?

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ATM Card & PIN Issuing

Instant ATM CardPIN Issing

Use H/W Security Module (HSM)Customer Identification by Passbook & ID card

Verify A/C & name on the systemLink A/C & select PIN


ATM Card & Pin Issuing workflow

BranchComputer Center

Card IssuingPIN IssuingProcess

PIN Envelope

ATM Card

Supervisor 1

Supervisor 2

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ATM Process flow

•Journal Log•Switching •Journal Log

•Decryption•PIN Verification•Balance Authorization•PositiveAcknowledgement

ATM Acquirer Bank PCC Issuer Bank

Bank CodeVerification

•Insert Card•PIN Entry•Amount

•CardValidation•Encryption•Journal Log


ATM Transaction flow

IDC

$

Acquirer Bank

$

Issuer Bank

Building 2

ATM Card+

PIN+

Trx Info.

Track 2•Bank No.•Card No.•Expiry Date

Encryption

ATM TerminalFEP

Switching CenterNational ATM Pool

Not-On-Us

•Decryption•PIN Ver.•Balance Auth.

PCC

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Payment Mechanisms

The major options for paying for goods and services include:

CashChequeDirect debit accountDirect credit accountCredit CardDebit Card


Payment Gateway

Credit CardsDebit CardsPrepayment CardsStore Value Cards

Digital MoneyElectronic Payment SystemSWIFTFEDI

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BOT Issues on the Payment system

BOT wants to modernize the Thai Payment system.Fees and service charges must be fair to customersEnhance the efficiency of the payment system by reducing cash dependence, cheques and encoring usage of EFT.Encourage to lower the payment transaction cost, reliability, security and speedy.

International Electronic Fund Transfer

SWIFT/ Fedwire/ CHIPS

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Electronic Funds Transfer

The links between cardholder and merchant and between the merchant and their acquiring bank. The interactions between the financial institutions themselves such as those that take place between the cardholder’s issuing bank and the merchant’s acquiring bank. These interactions are the domain of Electronic Fund Transfer (EFT).


There are three major system in current use

1. SWIFT which operates as a global system

2. Fedwire : Federal Reserve’s fund transfer service

3. CHIPS a private-sector multilateral netting organization.

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1. The Society for Worldwide Inter-bank Financial Telecommunication

Society = Member ClubWorldwide = InternationalInter-bank = Bank correspondingFinancial Telecommunication = Financial Message


S.W.I.F.TThe Society for Worldwide Inter-bank Financial Telecommunication

is a co-operative owned by over 2800 banks from around the world, including over 150 from the Us. It was founded in the early 1970s, and operates a network that processes and transmits financial messages among members and other users in 137 countries. It supports now over 6000 financial institution in 178 countries. In 1998, SWIFT’s global network carries over 900 million messages whose average daily value over 2 trillion USD. Today, in addition to its 2800 members, SWIFT users included both sub-members and participants s.a. brokers, investment managers, securities deposit and clearing organizations and stock exchanges.

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SWIFT1973 SWIFT is born1976 First operating centers open1977 SWIFT goes live1978 First ten million messages1979 Opening of North American Operating Center1980 First Asian countries connect

At the beginning of year 2000, there are 9,797 live users in 189 countries with 1,059,000,000 messages.


SWIFT infrastructureThe operating centers consist of 3 types of processing

components; 1. REGINAL PROCESSORS are the outer layer of processing.

They control the traffic flow to and from the access points, they forward messages into the inner layer of co-called slice processors.

2. SLICE PROCESSOR make up the core store-and-forward infrastructure. They also create copies of messages (for audit purpose) and generate confirmations of message reception to the sender.

3. SYSTEM CONTROL PROCESSORS manage the entire system: they monitor the performance, administer the network, and support maintenance tasks.

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THE SECURITY OF SWIFT NETWORK1. PRIVATE NETWORK: SWIFT is a private network not the public

Internet.2. MESSAGE VALIDATION: message are checked for compliance with

the syntactical rules and message formats.3. MESSAGE SEQUENCE CHECKING: all SWIFT messages are

assigned unique sequence numbers when entering and exiting the system. These numbers are verified during sending and reception and those that do not follow the expected sequence are rejected.

4. MESSAGE INTEGRITY : when a message is input to the SWIFT network, a Message Authentication Code is created, based on the message content.

5. STRONG LOG-IN AUTHENTICATION: this is based on smart cards and the exchange of electronic authentication keys

6. DATA ENCRYTION: data is encrypted through the network from access point to access point, and to user’s interface device.


SWIFT Message

The header consists of address information and message identifiers for message retrieval and tracing.The text is the portion of information entered by the bank.The trailer contains three-character indicators show the status of the message or message receiving negative acknowledgement.

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SWIFT Message formatsISO 15022 Standard consists of a set of syntax and message design rulesSWIFT messages are divided into 10 main categories:0xx General information1xx Customer transfer2xx Financial Institutions Transfers3xx Financial Trading4xx Collections and Cash Letters5xx Financial Trading (Securities)6xx Precious Metals Trading and Syndications7xx Documentary Credits and Guarantees8xx Traveler’s Cheques9xx Cash management and Customer status


SWIFT ConfigurationBank interface to SWIFT network via SWIFT Interface Device (SID)There are three switching centers located in Belgium, Netherlands and the United States.The switching centers are the focal points in the system, they are interconnected and carry out the transaction processing operation between the sending and receiving banks.The switching center are connected by international data transmission lines to the regional concentrators.

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Fund TransferInternational Transaction

S.W.I.F.T

$

Head Office

$

Head Office

$$

RECEIVER

$

Branch

$

Branch

$ $$

SENDER

Bank A(Originator Bank)

Bank A(Head Office)

Bank BBeneficiary Bank

Bank B(Correspondent Bank

of Bank A )

DomesticTransfer Message

Message Transfer


1. Media Clearing - offline

Media clearing is the interbank funds transfer system for pre-authorized retail debit/credit transfer having large volume and a regular recurring period. The system uses electronic means such as magnetic tapes and diskettes. The fund processed through this system is available to customers as soon as the paying bank and the receiving bank have settled their payment on the due date.

Documents

Electronic Fund Transfer & Payment system