Money – as a payment mean

Money – as a payment mean Outline Payment instruments Methods of payment Payment system

Payment instruments (I) • Payments are made: • in cash (banknotes and coins); • by cashless payment instruments. • The transfer of funds can be made by payment service providers: • credit institutions; • payment institutions; • other institutions. based on a payment order sent via payment instruments. • Payment instruments allow the end-users of payment systems to transfer funds between accounts at banks or other financial institutions.

Payment instruments (II) • Payment instruments are an essential part of payment systems. • Generally, they are: • credit transfer; • direct debit; • payment card; • cheque; • bill of exchange; • promissory note. • Based on the instrument type, the payment instruction may be initiated by: • the payer (e.g. in the case of the credit transfer) • the beneficiary (e.g. in the case of direct debit).

Credit transfer and direct debit • Credit transfer: • is an instruction sent by a payer to its bank requesting that a defined amount of funds be transferred to the account of a payee; • is a payment initiated by the payer, by sending a payment instruction to its payment service provider (PSP), e.g. a bank; • the payer’s PSP moves the funds to the payee’s PSP. • Direct debit: • is pre-authorised payment (debit) on the payer’s bank account that is initiated by the payee; • the payer authorizes its bank to pay variable amounts of money (such as bills or invoices) directly to the supplier or utility company, at regular (usually monthly) intervals; • is often used for recurrent payments (such as utility bills).

Payment card • is a card backed by an account holding funds belonging to the cardholder, or offering credit to the cardholder. • can be used by a cardholder to: • make payments to merchants that accept cards or payments of some other obligations (fiscal obligation); • withdraw money from ATM (Automated Teller Machine); • to transfer funds between accounts. • Card payments have been supported by the existence of cheap and efficient national card schemes, complemented by international card schemes (VISA and MasterCard). • Acceptance of national cards for transactions outside the home country is achieved by means of co-branding with one of the international card schemes.

Types of payment cards (I) I. Depending on their functions: • Credit card – allows drawing of funds up to an approved credit limit; can have a grace period, when the customer has to pay only the interest. • Debit card – allows drawing of funds up to the available balance in cardholder’s account; if the available funds are insufficient, the transaction is not completed. • Debit card with an overdraft – can allow an overdraft, which occurs when withdrawals from a card account exceed the available balance (which gives the account a negative balance). • Cash card – allows the customer only to draw money from ATM. • Card for cheque guarantee – is used to back up any cheque writen by customer, usually up to a specified value. • Multifunctional (combined) card – is a cash, debit and cheque guarantee card rolled into one.

Types of payment cards (II) II. Depending on the issuer: • Bank card – is issued by the banks and other financial institutions; • Store card – is issued by the merchants and companies serving the population (gas stations, private clubs, companies that sell through mail order or the Internet, etc.) usually offering to the clients a discount on shopping, • despite the discounts and convenience they offer, store cards usually have a higher interest rate than the credit cards. • Co-branded card – is issued by a bank in partnership with an merchant; • usually, it offer to client discounts on shopping to the merchant; • the bank and the merchant can agree to divide the income coming from their partnership.

Types of payment cards (III) III. Depending on the technology: • Card with a magnetic stripe – is the first type of card issued by financial institutions. • Smart card – is a card with embedded microprocessor chip; • contains more information than a magnetic stripe card and it can be programmed for different applications; • is used in fields like banking, healthcare, entertainment, and transportation; • Dual card - is a card incorporating both magnetic stripe and microprocessor chip.

Types of payment cards (III) IV. Depending on the settlement date: • “Pay now” system – is applied to debit cards. • “Pay before” system – refers to the prepaid cards: • the card-holder spends money which has been “stored” via a prior deposit by the card-holder; • can be a pre-paid phone card, a prepaid gift card or a prepaid sim card. • “Pay later” system – is applied to credit cards. V. Depending on the circulation area • Domestic card – is issued in domestic currency and used only in the domestic territory. • International cards – can be used everywhere in the world no matter in which currency it is issued.

Debit payment instruments • Cheque • is a written order from one party (the drawer) to another (the drawee, normally a bank), requiring the drawee to pay the indicated sum on demand to the drawer or to a third party specified by the drawer. • Bill of exchange • is a document through which a person, the drawer or the issuer, gives an order to another person, the drawee, to pay at maturity, an amount of money to a third person, the payee, or upon his order. • Promissory note • is a document through which the issuer undertakes to pay to the payee, or upon his order, an amount of money, at maturity, in a certain place;

Payment instruments in Euro zone • The most frequently used cashless payment instruments in the euro area are: • Credit transfers • They account for around one-third of all non-cash payments. • Direct debits • They account for around one-third of all non-cash payments. • Payment cards • They account for around one-third of non-cash euro payments. • Cheques • Cheques are still common in a few countries but usage is diminishing. • In most euro area countries cheques are practically non-existent.

Non-cash payment instruments in the euro area (millions of transactions) Source: ECB

Growth in payment instruments per capita per year in the EU (thousands) Source: ECB

Payment methods • refers to assurance in advance of the payment. • There are two major methods of payment: 1. Methods which assure the payment: • Letter of credit • Bank letter of guarantee 2. Acceptance • It does not assure the payment in advance. • It requires the consent of the payer regarding the payment given either through the acceptance of some payment instruments issued by the beneficiary or through the issuing from its own initiative of the payment instruments. • The first type of methods is preponderant in international commercial transactions and the second in the domestic transactions.

Letter of credit • Is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. • Elements of the Letter of Credit: • A payment undertaking given by a bank (issuing bank) • On behalf of a buyer (applicant) • To pay a seller (beneficiary) for a given amount of money • On presentation of specified documents representing the supply of goods • Within specified time limits. • Documents must conform to terms and conditions set out in the letter of credit. • Documents to be presented at a specified place.

Bank letter of guarantee • A bank letter of guarantee is a guarantee made by a bank on behalf of a customer, should the customer fail to deliver the payment, then the bank will pay its client’s debts. • The initial claim is still settled primarily against the bank’s client, and not the bank itself. • Should the client default, then the bank agrees in the bank guarantee to pay for its client’s debts; • A guarantee is a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client’s debt to the merchant.

Bank letter of guarantee vs. bank letter of credit

Payment system • A payment system is a set of instruments, procedures and rules for the transfer of funds among participants in the system (credit institutions or financial institutions) via an agreed upon technical infrastructure • Payment and settlement systems have been growing in importance over the past three decades in the majority of the countries. • This is a result of an increase in both the volume and the value of transactions resulted from financial markets. • A payment system usually comprises the following components: • Real Time Gross Settlement (RTGS)system settles the large-value payments on one to one basis. • Automated Clearing House (ACH) settles low-value and large volume (retail) payments through clearing system on a net basis. • Securities settlement system(SSS) settles transactions with securities.

Payment system in Eurozone • Payment systems are classified into two main categories, depending on the types of payments they transmit and settle: • large-value payment systems: • TARGET2 • EURO1 • CLS • other large-value payment systems • retail payment systems: • STEP 1 • STEP 2 • SEPA • Securities Settlement System operating in euro zone: • TARGET2-Securities (T2S).

TARGET2 • TARGET2 is RTGS system owned and operated by the Eurosystem. • TARGET stands for Trans-European Automated Real-time Gross settlement Express Transfer system. • It is the second generation of TARGET, replacing in 2007 the TARGET1. • TARGET2 links together the participants’ national RTGS systems and the ECB payment mechanism (EPM). • Payment transactions in TARGET2 are settled one by one on a continuous basis, in central bank money with immediate finality. • There is no upper or lower limit on the value of payments. • TARGET2 settles payments related to: • monetary policy operations (central bank operations) • interbank transfers • other large-value or urgent euro payments • TARGET2 is one of the largest payment systems in the world.

TARGET2 facts in 2015 Source: ECB

EURO1 Service of EBA CLEARING • EBA (Euro Banking Association) CLEARING (1998): • EBA Clearing is a private provider of euro clearing services. • It offers both high-value and low-value clearing and settlement services to a wide community of banks in the EU, through its three systems: • EURO 1; • STEP 1; • STEP 2. • EURO1 - the only privately owned RTGS-equivalent on a multilateral net basis (euro clearing and settlement system): • EURO1 is a large value payment system for domestic and cross-border single payments in euro between banks operating in the EU. • It processes transactions of high priority and urgency, of large amount; • The system settles the final positions of its participants via TARGET2 at the end of the day.

CLS - Continuous Linked Settlement system • CLS settles foreign exchange transactions on a payment-versus-payment basis in the books of a privately owned bank (CLS Bank). • CLS was launched in 2002 and owned by the world’s leading FX banks. • CLS settles payment instructions relating to underlying FX transactions in 18 currencies. • CLS mitigates settlement risk through the provision of its unique payment versus payment settlement service which has direct links to the RTGS systems of the currencies it settles. • The ECB acts as the settlement agent for CLS Bank’s euro payments. • All euro funding payments to and from CLS are settled via TARGET2. • The euro is the most important currency settled by CLS after the US dollar: • it accounts for about one-quarter of all settlements.

Retail payment systems • Retail payment systems are used for the bulk of mostly low-value payments to and from individuals, and between individuals, companies and public authorities. • Each country has its own system for processing retail payments. • Oversight responsibilities are assigned to the national central bank of the country where the system is legally incorporated. • STEP2 - is the Pan-European Automated Clearing House (PE-ACH) for retail payments in euro (of up to 50,000 euro/transaction): • In the case STEP2 system, the assessment was made by the ECB

STEP1 • a low-cost offering for commercial payments • is primarily a payment service for commercial transactions and process single cross-border payments in euro. • enables the banks that operate in the EU to exchange commercial payments with other STEP1 participants as well as the entire community of EURO1 banks. • opened access to the EURO1 processing platform to banks hat did not comply with the strict admission criteria. • participants in the STEP1 can make full use of the EURO1 platform and are directly connected to all EURO1 and STEP1 participants. • each STEP1 participant settles with a EURO1 bank of its choice. • STEP1 processes individual credit transfers and direct debits. • Transaction values are typically below €50,000.

SEPA – Single European Payments Area (I) • The SEPA project represents the next major step towards closer European integration. • SEPA enables customers to make non-cash euro payments to any beneficiary located anywhere in the euro area using: • a single bank account; • a single set of payment instruments • all retail payments in euro will thereby become “domestic”. • there will no longer be any differentiation between national and cross border payments within the euro area. • The implementation of SEPA is being undertaken by European banking communities and all other stakeholders.

SEPA – Single European Payments Area (II) • The SEPA is based on: • a common set of payment instruments – SEPA instruments: • SEPA credit transfer – provides customers with a single means of transferring funds, within a single country or a cross-border payment. • SEPA direct debits – makes it possible, for the first time, to charge directly an account in one European country for services provided by a company based in another country. • SEPA card payment – will enable consumers to use the same cards they use in their own country for purchases everywhere in Europe more conveniently; for merchants, accepting cards will become easier and more attractive. • a common standards – regarding business requirements, logical data elements and payment messages; • a legal basis for making payments across Europe.

SEPA – Single European Payments Area (III) • The major objective are: • creation of a single domestic payments market → the customer could make cashless payments in euro zone as easily, efficiently and safely as in their domestic countries, from a single account anywhere in the euro zone using a single set of payments instruments; • common standards and procedures for credit transfers, direct debits and payment cards planning to remove the differences between domestic and cross-border payments in euro; • constructive economic outcomes and opportunities: • encouraging of the competition among banks in order to offer innovative services and new, added value products; • an increasing usage of cards and competition among acquirers and card scheme, which should decrease the costs and fees.

SEPA – Single European Payments Area (IV) • SEPA was implemented in 3 stages: • the design stage (2004) – the plan of the new credit transfer, direct debit scheme, cards framework, and clearing and settlement infrastructure. • the implementation stage (June 2006 – December 2007) – the preparation for the new SEPA instruments, standards and infrastructure adoption; • the migration stage (January 2008) – the coexistence of the national payment schemes with the new SEPA schemes: • January 2008 – start of SEPA credit transfer; • November 2009 – start of SEPA direct debit; • 2011 – framework for card transaction processing.

SEPA – Single European Payments Area (V) • The deadlines for the migration to the new SEPA instruments are: • the deadline for the euro area was 1 February 2014; a further transition period of six months was introduced on European Commission initiative (1 august 2014); • for EU member states with other currencies than the euro the respective end-date was 31 October 2016 for all credit transfers and direct debits in euro. • As of these dates, the existing national euro credit transfer and direct debit schemes were replaced. • The SEPA territory consists of 34 European countries and also includes countries which are not part of the euro area and the European Union: • EU-28 + Iceland, Liechtenstein, Monaco, Norway, San Marino and Switzerland.

STEP1 • a low-cost offering for commercial payments • is primarily a payment service for commercial transactions and process single cross-border payments in euro. • enables the banks that operate in the EU to exchange commercial payments with other STEP1 participants as well as the entire community of EURO1 banks. • opened access to the EURO1 processing platform to banks hat did not comply with the strict admission criteria. • participants in the STEP1 can make full use of the EURO1 platform and are directly connected to all EURO1 and STEP1 participants. • each STEP1 participant settles with a EURO1 bank of its choice. • STEP1 processes individual credit transfers and direct debits. • Transaction values are typically below €50,000.

TARGET2-Securities (T2S) • T2S: • is a single pan-European platform for securities settlement in euro, operated by Eurosystem; • Is aiming to offer centralised delivery-versus-payment settlement in central bank funds across all European securities markets; • cross-border securities transactions within the EU will be settled under the same conditions as the domestic ones; • T2S was implemented in 3 stages: • the user requirements phase, opened in March 2007; • the development phase, launched in January 2008; • the migration phase: between June 2015 and February 2017 • four main periods of migration (“migration waves”). • T2S went-live on 22 June 2015 with the implementation of wave 1. • T2S became fully operational in 7 February 2017.

Cashless payment means in Romania • The payment instruments in Romania are: • credit transfer • direct debit • payment card; • cheque; • bill of exchange; debit insruments • promissory note. • Making a cashless payment via funds transfer from the payer to the payee involves a series of operations which may be performed only by authorised institutions (i.e. payment service providers) and the State Treasury.

Number of payment instruction in Romania (million) Source: NBR

Value of payment instruction in Romania (million) Source: NBR

Number of cards in Romania (units) Source: NBR

Payment system in Romania (I) • According to its statutory tasks, the National Bank of Romania (NBR) promotes the smooth functioning of payment systems with a view to: • ensuring financial stability • maintaining public confidence in the national currency. • The NBR fulfils this task by: • providing settlement means for payments and securities; • supervising payment and securities settlement systems; • cooperating with the national authorities, • promoting efficiency across payment systems and the infrastructures adjustment to SEPA requirements. • The NBR’s settlement agent is TRANSFOND: • a trading company, having as shareholders the NBR (33.33 %) and a number credit institutions (66.67 %). • is in charge of clearing and settling all domestic currency interbank transfers, as operator of the payment system, in line with the mandate granted by the NBR.

Payment system in Romania (II) • In Romania there are three interbank payment systems: • ReGIS (the Romanian electronic Gross Interbank Settlement): • for large-value payments in lei, • the RTGS system • managed by NBR and operated by TRANSFOND; • launched on 2005; • SENT(the System for Electronic Net Settlement run by TRANSFOND) • for retail payments in lei (lower than 50,000 RON); • the automated clearing house; • managed and operated by TRANSFOND; • launched on 2005; • TARGET2-Romania - the Romanian component of TARGET2: • for large-value payments in Euro • managed, on the Eurosystem’ behalf, by NBR; • launched on 4 July 2011.

Payment system in Romania (III) • There are also three securities settlement systems, that settle in ReGIS: • SaFIR (Settlement and Financial Instruments Registration): • managed by NBR and operated by TRANSFOND; • launched on 2005. • and two clearing/settlement system of securities: • RoClear – managed and operated by Depozitarul Central S.A. • DSClear – managed and operated by Depozitarul SIBEX S.A • All the afore-mentioned systems ensure the settlement via credit institutions' accounts opened in NBR. • Together with Depozitarul Central S.A., NBR, as operator of the national component of the TARGET2 payment system has also connected to the T2S platform in the first migration wave.

Payment system in Romania (IV) • To ensure continuity of activity of the electronic payment system, in case of a contingency, a back-up and recovery systemwas also implemented. • Romania also joined the SEPA project: • implementation of the SEPA RON credit transfer national payment scheme – in in June 2012; • Implementation of SEPA RON direct debit national payment scheme - in December 2013 • The Romanian payment systems are compatible with the payment systems in the EU from the viewpoint of both functionality and compliance with European and international standards and practices in the field.

Payment Incidents Register (I) • The Payment Incidents Register (PIR) is a system that collects, stores and compiles information on payment incidents involving cheques, bills of exchange and promissory notes caused by account holders. • The PIR database comprises two files: 1. Payment Incidents National File (PINF) with three components: • Cheques National File (CNF), • Bills of Exchange National File (BNF) • Promissory Notes National File (PNNF) 2. Risky Persons National File (RPNF: • automatically fed from PINF; • collects information on major payment incidents (payments instruments drawn on accounts with insufficient funds, cheques issued without the approval of the drawee, cheques bearing a false date, cheques issued by a drawer with suspended cheque-writing privileges) registered as being caused by a resident or non-resident natural or legal entity.

Payment Incidents Register (II) • Payment incidents can be erased from the database only if cancelled by the same reporting institution which has previously submitted the mentioned information to the PIR on its own initiative or based on an enforceable court decision. • The suspension of cheque-writing privileges is imposed by a bank on an account holder. The latter is no longer allowed to draw cheques for one year starting with the date a major payment incident was recorded with the PIR. Thus, further payment incidents are avoided and account holders who violate relevant rules are penalised. • Prior to the conclusion of a contract with a partner, a company may enquire PIR database, through a bank, to verify if payment incidents with cheques, bills of exchange or promissory notes are registered in the name of the potential partner. According to information received, the company will be in a position to decide whether to continue or cease doing business with the respective partner.

Money – as a payment mean