This is an Entry to the Government Best Practice Recognition Awards
Settlement Guarantee Mechanism for Instant Retail Payments
Bangko Sentral ng Pilipinas
Best practice Focus Area(s)
Customer and citizen focus, Strategic performance management, Process management, and improvement
In line with the thrust of the Bangko Sentral ng Pilipinas (BSP) to ensure the efficiency of payment systems in the country, the BSP requires BSP-Supervised Financial Institutions (BSFls) participating in an automated clearing house (ACH) for instant retail payments to ensure that this ACH provides for the certainty of the settlement of the multilateral clearing obligations of the clearing participants. To this end, the BSP issued BSP Circular No. 1000 on 23 April 2018 setting out the Guidelines on the Settlement of Instant Retail Payments. Such Circular introduced an innovative regulatory approach requiring a ”pre-funding” scheme, i.e. Settlement Guarantee Mechanism (SGM) for the settlement of the multilateral clearing obligation through the creation of a secured settlement account (SSA) from the funds held in the demand deposit account (DDA) maintained by banks with the BSP.
This policy issuance mitigates the credit risk to BSF|s participating in the instant retail payments ACH and promotes a level playing field for these participants since the issues on the creditworthiness of any participant dissipate.
Background and Problem
The advancements in information technology, including the spread of multifunctional mobile communication devices, make real-time payments more viable. With the country’s fast retail payment service, payment is almost immediately and at any time completed end to end. The payee receives in seconds the funds from the payer who can initiate a payment any time even during weekends and holidays. This means that clearing occurs in real-time or near-real-time and continuously for each payment order such that the payee receives the fund without delay. But beyond enhanced payment speed and funds availability, instant retail payment service increased credit risk particularly to the payee’s bank or Electronic Money Issuer (EMI) for advancing with finality the fund to the payee before receiving it from the bank/EMI of the payer. If the payer’s bank/EMI ultimately fails to transfer the fund at the end of the settlement cycle, the payee’s bank/EMI incurs a loss. This structural blocker became a concern for financial institutions participating in the instant retail payment system because of their potential credit exposure.
Likewise, this concern leads to the hesitations from the industry to accept participation from small institutions casting doubt on their financial capacity to support their instant retail payment services.
Hence, the BSP recognized the need to adopt a policy aimed at mitigating the credit risk arising between payment service providers participating in a fast retail payment system and introduced the guidelines on the settlement among banks and non-bank EMls of their multilateral net clearing obligations arising from the instant retail payment transactions of its clients.
Solution and Impact
To address the credit risk concerns that limit the participation of small institutions in the digital finance ecosystem, the BSP developed and implemented the SGM. The SGM requires pre-funding for settlement of instant retail payments to provide certainty of settlement within the agreed settlement cycle, and minimizing credit risk and ensuring that there is no discrimination in access by all qualified participants to the instant retail payment system.
The SGM involves a “pre-funding” where the instant retail payment clearing participants or their settlement sponsors, shall maintain a Demand Deposit Accounts 2 (known as DDA2 or Secured Settlement Account) with the BSP. This DDA2 is funded through the DDA1 (main account) of the participants. The DDA2 is exclusively for the settlement of a participant’s instant retail payment net clearing obligations. If a participant’s DDA2 balance is not sufficient to cover a payment instruction from its client, the instruction is rejected, and the payment does not go through the clearing process. Hence, there is an assurance of funds availability when it comes to instant retail payment transactions provided that the amount is within the DDA2 balance.
This mechanism was established and prescribed through the issuance of BSP Circular No. 1000 as approved by the Monetary Board.
By substantially minimizing credit risk, the introduction of the SGM created a level playing field among BSFls and placed all clearing participants on an equal footing in terms of creditworthiness. Such a mechanism provided opportunities not only to the large institutions but also the small ones that serve the low-income sector of the society to take part in the instant retail payment ACH. This led to a more inclusive real-time retail payment system and increased the number of institutions participating in the instant payment ACH.
With the increase in the number of institutions participating in the instant retail payment system, the volume of transactions for instant retail payment showed an exponential increase from 1,740 to 3,541,482 while the value dramatically rose from 19,119,358 to 25,406, 232,402.
The BSP intends to prescribe SGM as a settlement mechanism for new payment streams that will arise in the future. its launch and operation improved the Philippine retail payment system and moved the Philippines closer to creating a cash-lite economy and to realizing the vision of creating an interoperable payments ecosystem that allows seamless electronic fund transfers and payments from one account to another.
The BSP has been recognized as a thought leader on an innovative regulatory approach to overseeing the payment system.