Plans to automate payment systems are opening up new potential

Long held back by inefficiencies linked to geography, manual operations and slow procedures, Papua New Guinea’s banking sector marked a watershed in 2013 with the initial implementation of a real-time gross settlement (RTGS) system. Running on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, the high-value settlement system, known as the Kina Automated Transfer System (KATS), has significantly sped up processing times and reduced the level of counterparty risk inherent in deferred net settlement systems. Following neighbouring Fiji’s lead, PNG is the second Pacific Island state to implement a SWIFT-based RTGS. While the next phase, involving migrating to a cheque imaging system, will prove more challenging, it will also transform clients’ attitudes to physical legal tender. Such improvements will be key to supporting growing mobile banking transactions, but also to accelerate the velocity of money in the PNG economy.

Legacy

Despite the recent growth in electronic funds transfer at point of sale (EFTPOS) and mobile transactions, PNG’s payments system remains predominantly cash- and cheque-based. While SWIFT has long been used to settle foreign currency transactions between local banks and their foreign counterparts, local interbank settlements have remained manual. The Port Moresby Clearing House, which handles cheque settlement, operates three cheque exchanges daily, and four on Fridays, with final settlement at working day’s close. Settling low-value interbank transactions, such as cheques, traditionally took four working days in urban areas, but up to two weeks in more remote locations, according to the Bank of PNG (BPNG). While Bank South Pacific (BSP) retains a 56% share of the deposit market and 46% of lending, its share of transactions is higher given the larger share of retail accounts it holds – BSP estimates some 98% of its over 1m accounts in PNG are used purely for transaction banking. But while BSP settles a large share of payments internally, BPNG expects growth in interbank payments driven by new mobile financial service providers like microfinance institutions, telecoms operators and non-bank businesses, such as the post office and retailers (see analysis). “Volumes of interbank payments are expected to increase significantly as economic activities continue to grow rapidly in PNG,” Loi Bakani, the governor of BPNG, told local press in October 2013. “It is vital that we have an efficient, secure and reliable national payments system, based on international standards, to support the movement of money.”

Shift To Kats

The National Payment System bill enacted by Parliament in July 2013 provides the legislative framework for shifting to electronic interbank fund transfers and RTGS through KATS. The bill, backed by the Treasury with support from BPNG, aims to reduce the risk of counterparty default and fraud while improving the system’s efficiency and speed. The first phase of RTGS, which went live in mid-October 2013, involves linking participants through the SWIFT network to provide real-time electronic clearing and settlement for high-value and urgent transactions, direct credits and debit, as well as cheque truncations through an automated clearinghouse.

While using existing fibre-optic connections between the banks and BPNG, the central bank also signed a lease agreement for wireless spectrum with the National Information and Communication Technology Authority for use as back-up capacity for the fibre network. To support the automated electronic RTGS system, BPNG also migrated to the Banking Services System (BSS), a payment system from US-based vendor Montran that automates the central bank’s teller functions, which had previously been largely a manual process. Using open standard, built-in Java language, the BSS platform integrates the bank’s internal payment functions, such as payroll, into KATS. The BSS will also link to the Internal Revenue Commission (IRC), the Ministry of Finance (MoF) and PNG Customs, allowing them to access their statements and balances in real time, as well as to make payments from their computer systems.

Next Phase

While initially linking commercial banks and government institutions like PNG Customs, IRC and the MoF with BPNG, the system will be broadened to include microfinance banks, non-bank financial institutions, savings and loans societies, mobile financial services providers and the local stock exchange. The new system has already reduced transfer times. “As a benefit to the customer, the shift to RTGS has significantly shortened transaction settlement times from as much as four working days to one for local cheques,” Sweta Sud, executive director at the PNG Institute of Banking and Business Management, told OBG. The next phase of the project involves migrating low-value transactions to an electronic and automated settlement process, which will involve further upgrades of banks’ IT systems, but also more efforts to educate the public about electronic fund transfer methods. The new system will use the digital image of cheques rather than the paper cheques themselves, vastly improving efficiency. This will change the way bank tellers operate by allowing them to check signatures and photographs against images already stored in the payments database. Although the number of cheques in circulation is reportedly in decline and the number of electronic and mobile transactions reached 70m in 2012 alone, according to BPNG, cheques remain a key feature of the country’s formal banking system.

While the original deadline for migration for low-value transfers had been fixed for March 2014, it will likely be postponed to later in 2014. “The second phase of KATS will be transformational,” Mark Baker, ANZ’s managing director in PNG, told OBG. “The shift to a cheque imaging system will speed up cheque settlement from as much as two weeks to just a few days.” The aim is to transfer government payments and revenue collections, including shippers’ payments, Customs, tax payments and government payroll, from manual processes to electronic transfers. Retail users will also see improved clearing and settlement times for cheques. Once completed, however, the shift to low-value automated clearing will support the growth of new payment systems, such as mobile payments.

Initial Impact

The shift to high-value RTGS has not placed as much stress on PNG’s financial system as in other markets, where liquidity in the banking sector is tighter and the number of players larger. Indeed, by settling high-value transactions immediately, RTGS can initially place individual banks’ liquidity under significant pressure. In the PNG context, however, where domestic liquidity remains very high, banks retain very high liquidity positions. As of March 2013 banks’ average ratio of liquid assets to total assets was a comfortable 55.9%, according to the IMF.

The shift to real-time settlement could also support growth in PNG’s money market in the medium term. While banks very seldom trade government bond and Treasury bill holdings over-the-counter given this abundant liquidity, KATS facilitates their use of the BPNG-run repurchase facility and could jump-start a dynamic interbank market. This will require the registration of government-inscribed stock and international securities identification numbers, to allow for these securities to be traded either on an exchange or through the Bloomberg platform.

The modernisation of payments systems is key to supporting the growth and diversification in types of electronic transactions. While the migration for high-value transactions was painless, the second phase of the project will be more challenging, but its effects will be wider reaching. By automating and improving the efficiency of fund transfers, authorities hope to support a shift from a predominantly cash economy towards one where dematerialised payments like mobile and electronic transfers play a more central role. Key to the government’s national financial inclusion policy, the new system also significantly reduces risk within the financial sector, facilitating lending and streamlining the process of transferring funds.