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Payment Systems Trends in Japan Financial Market Infrastructure Trends and Birth of the Next Generation BOJ-NET . March 2014. Eiichiro Yanagawa Senior Analyst eyanagawa@celent.com Tokyo , Japan. Table of Contents. INTRODUCTION: Payment services and the payment systems. 1.

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slide1
Payment Systems Trends in Japan

Financial Market Infrastructure Trends and

Birth of the Next Generation BOJ-NET

March 2014

Eiichiro Yanagawa

Senior Analyst

eyanagawa@celent.com

Tokyo, Japan

slide4
INTRODUCTION:

Payment services and the payment systems

1

payment system overview
Payment System Overview

Trading / Instruction /

Confirmation

Settlement

Clearing

  • Calculation of clearing balance
  • Clearing center
  • Interbank network
  • Bill and check clearing sites
  • Payment instructions sent, received
  • Private bank
  • Short-term financial market
  • Forex market

Payment systems

  • Funds delivered
  • Central bank
  • Securities delivered
  • CSD
  • Securities trading
  • Securities exchange
  • Over-the-counter market
  • Electronic communications network
  • Confirmation between operators
  • Verification institution
  • Finalize delivery funds and/or securities
  • CCP

Securities settlement

systems

Source: BIS, Bank of Japan, Celent

payments value chain payment instrument provision
Payments Value ChainPayment instrument provision

Post-transaction

activities

Payment instrument

provision

Transactions

  • Attracting payers and payees
  • Marketing and promotion
  • Sales
  • Funding
  • Ensuring funds are available to transact:
    • Credit decision and provisioning
    • Bank account transfers or prepay funding
  • Payment instrument development
  • Scheme development
  • Scheme membership
  • Features and pricing
  • Branding decisions
  • Access channel development
  • Setting up payment services
  • Physical payment instrument procurement and distribution
  • Account set-up
  • Acceptance, access channel enablement

Source: Celent

payments value chain transactions
Payments Value ChainTransactions

Payment instrument

provision

Post-transaction

activities

Transactions

  • Trading, instruction and confirmation
  • Authentication – identity verification of the involved parties
  • Validation of payment instrument
  • Authorization of the transfer of funds by the payer and payer’s financial institution
  • Creation and transmission of payment instruction
  • Clearing
  • Exchange of payment instrument and/or of relevant payment information
    • Matching and sorting of transactions
    • Data collection and aggregation
  • Calculation of gross or net claim
  • Settlement
  • Discharge of a valid payment claim
    • Collection and integrity check of the claims to be settled
    • Ensuring the availability of funds for settlement
    • Settling the claims between financial institutions
  • Logging and communication of settlement information with all parties

Source: Celent

payments value chain post transaction activities and services
Payments Value ChainPost-Transaction Activities and Services

Payment instrument

provision

Post-transaction

activities

Transactions

  • Collection from payer (if credit)
  • Payee cashes out
  • Card chargeback processing
  • Non-sufficient funds (NSF) processing for checks
  • Query management
  • Reporting
  • Reconciliation of payments with invoices and other claims
  • Cash collection, transportation, recycling
  • Transportation and archiving of paper instruments

Link to money supply

Fraud and dispute management

Customer servicing and reporting

Account reconciliation

Payment instrument management

Source: Celent

payment taxonomy areas of focus in the payments ecosystem
Payment TaxonomyAreas of Focus in the Payments Ecosystem

Country Z

Country B

A

Country A

  • Remittances
  • Gifts
  • Social payments
  • Benefits
  • Cash
  • Money-supply account-based instruments
  • Cards
  • Online payments
  • Mobile payments
  • Payroll
  • Expenses
  • Refunds
  • Claims
  • Domestic and international trade
  • Goods and
  • services

B

Business

Individuals

Interbank

network

C

Bank

Bank

  • Subsidies
  • Investments
  • Loans
  • Investments
  • Loans

D

FMI:

Financial Market Infrastructures

Government /

Central bank

  • Taxes
  • Services

Source: Celent

payment services hubs

Channel integration hub

1

Payment

orchestration

layer

3

4

Clearing and settlement mechanism (CSM)

integration hub

2

RTGS

ACH

SWIFT

Cardnetworks

STEP2

Payment Services Hubs

Host-to

-host

Online

(retail)

Online

(corporate)

Treasury

(bank)

ATM

Payment processing platforms

Vertical payment services hub

Cards processing

High-core engine

Low-core engine

Core banking

Source: Celent

research approach
Research Approach

Focuses on Area D (in Light Blue)

Country Z

Country B

A

Country A

  • Remittances
  • Gifts
  • Social payments
  • Benefits
  • Cash
  • Money-supply account-based instruments
  • Cards
  • Online payments
  • Mobile payments
  • Payroll
  • Expenses
  • Refunds
  • Claims
  • Domestic and international trade
  • Goods and
  • services

B

Business

Individuals

Interbank

network

C

Bank

Bank

  • Subsidies
  • Investments
  • Loans
  • Investments
  • Loans

D

FMI:

Financial Market Infrastructures

Government /

Central bank

  • Taxes
  • Services

Source: Celent

overview of japan s payment systems
Overview of Japan’s Payment Systems

Settlement

Trading /

Instruction /

Confirmation

Clearing

BOJ

Treasury

Funds

Services

Paymentsto the

Government

Multi-

Payment

Network

Bill Payments

Debit Cards

Clearing

Center

Zengin

System

Fund Transfers

CD/ATM

CD/ATM

Online

Networks*

Direct Debits

Financial

Institutions

Credit Cards

Payment Systems

Bill and Check Clearing Systems

Bills/Checks

BOJ-NET

Funds

Transfer

System

(BOJ-NET

FTS)

Money

Market

Money Market

Trade

Confirmation

System

SWIFT

FX

Market

CLS

FXYCS

Tokyo Financial Exchange

Financial

Derivatives

Market

Osaka Securities Exchange

TSE

JASDEC

Japan Securities Clearing Corporation

Stock

Exchanges

Stocks

Book-Entry

for Stocks

DVP

JASDEC DVP Clearing Corporation

for

Mutual fund

Pre-

Settlement

Matching

System

(Japan

Securities

Depository

Center)

Mutual fund

Securities

Settlement Systems

JGB

Registration/

Book-Entry

System

(BOJ-NET

JGB Services)

Bonds

for

Bonds

DVP

CP

for CP

JGB

JGB Clearing Corporation

Source: BIS, Bank of Japan, Celent

slide15
Overview of Japan’s Payment SystemsPayment System Function and the Scope of Japan’s Financial Market Infrastructure

Settlement

Payment instruction

Clearing

BOJ-NET FTS

Financial institution

with funds (bank, etc.)

Zengin Net

Payment

Funds settling bank

Tokyo Financial Exchange

Settlement

Clearing

Exchanges

Osaka Securities Exchange

(Listed derivatives),

Listed derivatives

exchange

TSE, etc.

JSCCJapan Securities Clearing Corporation (Equities and listed derivatives)

JASDEC

Japan Securities Depository Center

Equities and

Listed derivatives

JDCCJASDEC DVP Clearing Corporation (equities)

Securities Settlement

Settlement

matching system

BOJ-NET JGB

JGBCCJapan Government Bond Clearing Corporation (JGBs)

JGBs

Bilateral transactions

(OTC derivatives)

OTC derivatives

Trade repositories

Transaction Confirmation

Source: BIS, Bank of Japan, Celent

overview of japan s payment systems scale of japan s primary payment systems
Overview of Japan’s Payment SystemsScale of Japan’s Primary Payment Systems

2012 fiscal business day average, *2: 2011 business day average, *3: Cleared transaction volume (volume of debt underwritten),

*4: Total of underwriting, transfer, redemption, buy-back, setting, cancellation, redemption, and issuance

Source: Source: Bank of Japan, Japan Securities Depository Center, Japan Government Bond Clearing Corporation, Celent

payment systems boj net funds transfer system boj net fts
Payment SystemsBOJ-NET Funds Transfer System (BOJ-NET FTS)
  • (10,000 transactions)
  • (Trillions of yen)

CAGR2.5%

Value (left vertical axis)

Transaction number (right vertical axis)

Source: Bank of Japan, Celent

(CAGR: Compound Annual Growth Rate)

(one business day average)

payment systems clearing system s

(Trillions of yen)

(Trillions of yen)

(Thousands of transactions)

Payment SystemsClearing Systems

Foreign Exchange Yen Clearing System (FXYCS) and CLS(Continuous Linked Settlement)

Zengin Net Domestic Funds Transfer System (Zengin Net)

CAGR0.5%

(Thousands of transactions)

(Trillions of yen)

CAGR17.1%

CAGR-7.7%

Bill and Checks Clearing System / Tokyo Clearing House

CAGR-7.2%

Value

(left vertical axis)

Transaction number

(right vertical axis)

Foreign exchange yen

clearing volume

CLS

(yen value transacted)

Transaction number

(right vertical axis)

Value

(left vertical axis)

Source: Bank of Japan, Celent

(one business day average)

securities settlement systems japanese government bonds settlement boj net jgb

(Thousands of transactions)

(Trillions of yen)

Securities Settlement SystemsJapanese Government Bonds Settlement (BOJ-NET JGB)

CAGR5.4%

Transaction number (right vertical axis)

Value (left vertical axis)

Source: Bank of Japan, Celent

(one business day average)

securities settlement systems clearing settlement o rganizations

(Trillions of yen)

CAGR1.2%

CAGR-1.4%

Securities Settlement Systems Clearing / Settlement Organizations

CAGR-13.5%

CAGR-13.6%

Japan Government Bond Clearing Corporation (JGBCC)

Japan Securities Clearing Corporation (JSCC)

(Trillions of yen)

Post-settlement value

(Settlement value)

Clearing-related trading volume

(Value underwritten)

Post-settlement value

(Settlement value)

Post-settlement value

(Settlement value)

Clearing-related trading volume

(Value underwritten)

Clearing-related trading volume

(Value underwritten)

JASDEC DVP Clearing Corporation (JDCC)

Japan Securities Depository Center (JASDEC)

(Trillions of yen)

(Trillions of yen)

Corporate bond

Mutual funds

Short-term corporate bond

Source: Bank of Japan, Celent

(One-way base, one business day average)

slide21
LESSONS OF THE INTERNATIONAL FINANCIAL CRISIS:

The importance of a Robust Payment System

3

lessons of the international financial crisis the importance of a robust payment system
Lessons of the International Financial CrisisThe importance of a Robust Payment System

What is a robust payment and settlement system?

It is a payment and settlement system capable of preventing the outbreak of a financial crisis even in the face of an extremely stressful shock to itself.

In my view, the following three measures are essential to mitigate systemic risk in payment and settlement systems:

  • Reducing thesize of outstanding settlement positions of individual market participants.
  • Taking appropriate measures depending on the state of interconnectedness embedded in payment and settlement systems.
  • Enhancing alternative arrangements for critical settlement functions.

– Masaaki Shirakawa, Governor of the Bank of Japan

November, 2009

Source: Bank of Japan, Celent

major c hallenges towards the establishment of a robust payment system
Major Challenges Towards the Establishment of a Robust Payment System

Source: Bank of Japan, Celent

boj net operational overview networks linking of payment and settlement systems
BOJ-NET Operational OverviewNetworks Linking of Payment and Settlement Systems

Payment Systems and BOJ-NET

米国の最良執行規制(RNMS)

TFX

Money

market

BOJ-NET

Funds Transfer

System

53,000 TR

/JPY 101.4 tr

CLS

Financial

futures

market

SWIFT

FX

Market

FXYCS

-TFX

JPY 0.0025 tr

-FXYCS

JPY 11.5 tr

-BCCS

JPY 1.1 tr

-Zengin

JPY 10.1 tr

BCCS

Bills/Checks

Fund

transfer

ZenginSystem

CD/ATM

CD/ATM

networks

Direct debit/

bill payments

Postal

savings

network

Financial

Institutions

TFX: Tokyo Financial Exchange

FXYCS: Foreign Exchange Yen Clearing System

BCCS: Bill and Check Clearing Systems

TR: transactions

JPY: Japanese Yen

tr: trillion

average daily value and number for fiscal 2011

Credit card

Clearing

center

Treasury funds

operation

Government

payments

Debit card

Source: Bank of Japan, Celent

boj net operational overview networks linking of payment and settlement systems1
BOJ-NET Operational OverviewNetworks Linking of Payment and Settlement Systems

Securities Settlement Systems and BOJ-NET

米国の最良執行規制(RNMS)

BOJ-NET

JGB Services

16,000 TR

/JPY 75.6tr

JGB

Market

Japan

Government

Bond Clearing

Corporation

(JGBCC)

JGB Book-Entry/

JGB Registration

System

DVP

Book-Entry

for Bonds

BOJ-NET

Funds Transfer

System

Bonds

Market

JASDEC

-JGBCC

JPY 37.3 tr

-Bonds

JPY 0.5 tr

-Mutual Funds

JPY 0.4 tr

-CP

JPY 3.2 tr

-Stocks/ Futures

JPY 0.2 tr

Book-Entry

for Mutual Funds

Mutual

Funds

Market

JASDEC

Book-Entry

for CP

CP

Market

DVP

DVP

DVP

JASDEC

JASDEC: Japan Securities Depository Center

JSCC: Japan Securities Clearing Corporation

JDCC: JASDEC DVP Clearing Corporation

TR: transactions

JPY: Japanese Yen

tr: trillion

average daily value and number for fiscal 2011

Stock

Exchanges

Book-Entry

for Stocks

JSCC

Stock/

Futures

Market

DVP

JASDEC

Off-

Exchange

TR

JDCC

Source: Bank of Japan, Celent

boj net operational overview financial institution use of boj net end of march 2013
BOJ-NET Operational OverviewFinancial Institution Use of BOJ-NET (End of March 2013)

OTHERS: Credit cooperatives, Securities finance companies, Financial instruments clearing organization, Money Market Dealer, etc.,

NUMBER: Total BOJ-NET FTS,

CURRENT ACCOUNTS: BOJ-NET Current Accounts System,

FXYCS: Foreign Exchange Yen Clearing System,

JGB: BOJ-NET JGB System

Source: Bank of Japan, Celent

building a new boj net system events leading up to new boj net
Building a New BOJ-NET SystemEvents Leading Up to New BOJ-NET

Source: Bank of Japan, Celent

building a new boj net system new boj net architecture
Building a New BOJ-NET SystemNew BOJ-NET Architecture

New BOJ-NET Architecture

BOJ-NET Architecture (Current)

User terminal system

User terminal system

User host system

User host system

Network

Network

Network

Channel layers

Channel system X

Channel system Y

Service platform layer

Host connection system

Terminal system

Message transfer

Virtual terminals

Virtual terminals

Service linkage

Product layer

Sub-system A

Sub-system B

Main system

Service B1-3

Service A1-3

Source: Bank of Japan, Celent

building a new boj net system new boj net schedule

Phase 1 goes live

Phase 2 goes live

Building a New BOJ-NET SystemNew BOJ-NET Schedule

Source: Bank of Japan, Celent

from a global survey transaction banking a post financial crisis focus for banks
From A Global SurveyTransaction banking: A post-financial crisis focus for banks

Source: Celent

Source: Celent

  • The global financial crisis (GFC) has created new opportunities for banks, as corporates have changed behavior and are increasingly focused on risk and liquidity management.
    • In terms of revenue growth, transaction banking has outperformed investment and commercial banking in the post-financial crisis period.
  • Transaction banking is an attractive business for banks because it presents a large revenue pool, stable revenue flow, and low risk; and creates “stickier” client relationships than any other product group.
    • Bank intermediated trade-related transactions, for example have increased from 35% of all trade in 2007 to a projected 45% in 2015.
  • These attractions have created intense competition in transaction banking services, among regional and local banks as well as the global incumbents. This is leading banks to:
    • Enhance product and service menus.
    • Automate processes.
    • Increase straight through processing (STP).
    • Build regional—and global—operational and technology platforms to support the business.
asia and the us are often the primary focus for transaction banking business for global banks
Over the next several years, the US and Asia will be the primary focus for transaction banking.

The US is important not only due to its size but also as a means of winning business with US-based multi-national corporations (MNCs).

The high level of intraregional trade in Asia, where global banks may not have a granular presence, is providing opportunities for regional and local banks, driving them to enhance their transaction banking capabilities.

Asia and the US are often the primary focus for transaction banking business for global banks

Source: Celent Transaction Banking Survey 2012

Intraregional Trade Flow as a Percentage of Total Trade

Source: Celent

Source: WTO, Celent

slide38
Transaction banking is typically run on a regional or local basisBanks are working to expand their regional or global capabilities

Source: Celent Transaction Banking Survey 2012

Source: Celent

  • Building seamless global capabilities in transaction banking is a priority for a growing number of banks, but few banks have achieved globally integrated operations.
    • Four-fifths of respondents to the Celent survey run their transaction banking on a regional or local basis.
    • Even some global banks operate regionally or even country-by-country.
  • About one-fifth of respondents say they have achieved a globally integrated operational platform capable of delivering follow-the-sun operations.
    • Typically it is the large global banks that have built out these platforms.
    • Some large regional banks aspiring to a global business have also achieved a global platform or are in the process of building out this capability.
slide39
The Impact of Vertical integration on Enterprise Software Vendors’ BusinessFrom On-Premise Software to Integrated Cloud Services

Horizontal Specialization

(Current Model)

Vertical integration on Cloud

Vertical integration on Products*

BANK

Cloud

Vendor

Products Vendor

Integrated Products Services

On-premise

Cloud Services

purchase

usage

Maintenance

Vertical integration

Vertical integration

Operation

Maintenance

Maintenance

SI-controlled

SI

Operation

Operation

Systems Integration

Systems Integration

Software

Software

Software

Hardware

Hardware

Hardware

Vendor DC

Vendor DC

BANK DC

Source:Celent

slide40
Final ThoughtsReview the customer support from architecture:Service Innovation by Outsourcing Internal Processes

Next Generation

Current

Customer

Customer

Internal process

Internal process

Segmentation,

Customization

Front end

Front end

Back end

Back end

Standardization

External Process

External Process

Source: Celent