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Payment Systems Trends in Japan Financial Market Infrastructure Trends and Birth of the Next Generation BOJ-NET

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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Payment Systems Trends in Japan Financial Market Infrastructure Trends and Birth of the Next Generation BOJ-NET

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  1. 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

  2. Table of Contents

  3. INTRODUCTION: Payment services and the payment systems 1

  4. 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

  5. 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

  6. Payment Instrument Classifications Source: Celent

  7. 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

  8. 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

  9. 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

  10. … 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

  11. 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

  12. PAYMENT SYSTEM TRENDS IN JAPAN 2

  13. 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

  14. 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

  15. 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

  16. 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）

  17. (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）

  18. (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）

  19. （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）

  20. LESSONS OF THE INTERNATIONAL FINANCIAL CRISIS: The importance of a Robust Payment System 3

  21. Major Measures Taken to Reduce Payment and Settlement Risk in Japan Source: Bank of Japan, Celent

  22. 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

  23. Major Challenges Towards the Establishment of a Robust Payment System Source: Bank of Japan, Celent

  24. ESTABLISHMENT OF THE NEW BOJ-NET 4

  25. BOJ-NET Operational OverviewBOJ-NET Operations Source: Bank of Japan, Celent

  26. 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

  27. 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

  28. 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

  29. Building a New BOJ-NET SystemEvents Leading Up to New BOJ-NET Source: Bank of Japan, Celent

  30. 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

  31. Building a New BOJ-NET SystemNew BOJ-NET Technology Source: Bank of Japan, Celent

  32. Phase 1 goes live Phase 2 goes live Building a New BOJ-NET SystemNew BOJ-NET Schedule Source: Bank of Japan, Celent

  33. Phase 1 goes live Phase 2 goes live Building a New BOJ-NET SystemNew BOJ-NET Deal Schedule Source: Celent

  34. FINAL THOUGHTS 5

  35. 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.

  36. 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

  37. 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.

  38. 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

  39. 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

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