National Payments System
A payments System refers to a system or arrangement that enables payments to be effected between a payer and a beneficiary, or facilitates the circulation of money, and includes any instruments and procedures that relate to the system. According to the Bank of International Settlements (BIS), a payment system “consists of a set of instruments, banking procedures and, typically, interbank funds transfer systems that ensure the circulation of money.” They are a major channel by which shocks can be transmitted across domestic and international financial systems and markets.
Therefore, National Payments System are the conduits through which buyers and sellers of financial products and services make transactions and are an important component of a country’s financial system. In Kenya participants comprise of the Central Bank of Kenya, the Government, Commercial Banks, Financial Institutions and Payment System Providers. National Payments Systems in Kenya are classified into two categories; Large Value (Wholesale) and Low Value (Retail) Payment Systems. The classification is based on the throughput in terms of values and volumes processed.
LARGE VALUE PAYMENT SYSTEMS
Kenya Electronic Payment and Settlement System (KEPSS)
The Kenya Electronic Payment and Settlement System (KEPSS) is a Real Time Gross Settlement (RTGS) system, meaning that transactions are cleared and settled on a continuous basis. The real time transfers settled through KEPSS are debited and credited in the commercial banks’ accounts held at the Central Bank, where the banks hold the required cash reserves. [link: Monetary Policy – Reserve Requirements] Throughout the day, the commercial banks transfer funds between their accounts dependent upon their customers’ RTGS payment instructions.
Kenya Electronic Payment and Settlement System (KEPSS)
KEPSS is classified as a Systemically Important Payment Systems (SIPS) due to the value of transactions it processes and its impact in the economy. The system was implemented on July 29, 2005 and is wholly owned and managed by the Central Bank of Kenya (CBK). An RTGS system is defined as a gross settlement system in which both processing and final settlement of funds transfer instructions take place continuously (i.e. in real time) from one bank to another. The transactions are settled individually, continuously and in real time in the accounts of the participants in the Central Bank provided that the sending participant has sufficient covering balance or credit (settlement limit). RTGS systems mitigate systemic settlement risk inherent in large value net settlements.
KEPSS implementation facilitated the mitigation of risks associated with the previous paper-based inter-bank settlement system, transformed the management of liquidity in the banking industry, reduced the systemic importance of the Automated Clearing House (ACH) and enhanced financial stability while providing an efficient mechanism for monetary policy transmission. KEPSS has continued to register remarkable growth in both volume and value of transactions.
Benefits of an RTGS system:
• Real time funds transfer
• Finality of funds settlement
• Risk control mechanism
• Simple payments process
• Optimisation of liquidity
• Efficient funds management
• Allows large value transfers between banks
• Enables fund movement between cities
• Permits on-line real time query of the funds position
Regional Payment Systems
The need to enhance efficiency in payment systems within the East African Community (EAC) and Common Market for East and South Africa (COMESA) regions – and therefore promote regional trade and economic integration – resulted in the development of two regional payment systems. The East African Payment System (EAPS) and the Regional Payment and Settlement System (REPSS) objectives are to facilitate cross border payment and settlement within the EAC and COMESA regions, respectively. Both are integrated in KEPSS.
East African Payment System (EAPS)
EAPS is a funds transfer mechanism used to transfer money from one bank to another across the border within the East African Community countries of Kenya, Rwanda, Tanzania and Uganda. Transactions are carried out in the EAC local currencies. EAPS services are offered to bank customers (public) through RTGS between 8:30am to 4:00pm EAT (East African Time) on weekdays (Monday to Friday), excluding public holidays.
Regional Payment and Settlement System (REPSS)
REPSS is a system designed for effecting cross border payments between countries in the Common Market for Eastern and Southern Africa (COMESA) region. The system allows banks in member countries to transfer funds more easily within COMESA region through their local RTGS in USD and Euro. In Kenya the REPSS services are available to the public in most commercial banks from 8.30am to 2:00pm. The system went live in October 2012 and currently it is available in 8 countries, namely Mauritius, DR Congo, Malawi, Swaziland, Uganda, Zambia, Rwanda and Kenya.
Retail / Low Value Payment Systems
Efficient retail payment systems, including payments cards and mobile money transfers, facilitate e-commerce and robust commercial activities within an economy. Recent developments in retail payment systems, as well as technological developments, have provided customers with a wide array of choices, allowing them to demand greater levels of efficiency and safety in their transactions. Further, final settlement of transactions from many of these retail systems are channelled through the RTGS, thus enhancing safety and efficiency.
Nairobi Automated Clearing House
This infrastructure is used to clear cheques and Electronic Fund Transfers in the country. The Central Bank of Kenya in conjunction with the Kenya Bankers Association and in liaison with the Ministry of Finance implemented the value capping policy in October 2009. This reduced values cleared to less than Kshs. 1 million per cheque pushing payments above that ceiling amount to the RTGS. In October 2011, the Cheque Truncation Project was operationalised, reducing the clearing period from T+3 to T+2. In the year 2013, the clearing cycle was further reduced to T+1, enabling faster turnover of cheque funds in the economy.
Payments Card Industry
Payment cards include credit, debit and prepaid cards, which hold a strong foothold not only in Kenya but globally, offering everyone better access to their money. The banking sector continues to adopt more secure, convenient and safe technology at their cash points to curb insecurity and at the same time enlighten their customers. In 2013, the industry, through the ‘Great Migration to EMV Chip’ project, initiated shifting from magnetic strip based cards to chip enabled cards. This process improved the security of cards and ensured they are globally interoperable, thus further increasing their uptake.
Mobile Phone Money Transfer Services
The mobile phone money transfer operators are authorised as Payment Service Providers under the National Payment System Act 2011 and National Payment System Regulations 2014 under various categories including; Provision of Electronic Retail Transfers, Small Money Issuer, E Money Issuer and Designation of Payment Instrument
Payment Service Providers are defined as:
(i) a person, company or organisation acting as provider in relation to sending, receiving, storing or processing of payments or the provision of other services in relation to payment services through any electronic system;
(ii) a person, company or organisation which owns, possesses, operates, manages or controls a public switched network for the provision of payment services; or
(iii) any other person, company or organisation that processes or stores data on behalf of such payment service providers or users of such payment services.
The mobile financial services industry has grown significantly over the past years since inception in 2007. The growth and viability of these services relies heavily on the existence of a payment platform that is convenient, easy to use, traceable and secure. The emergence of innovative mobile phone money transfers has put Kenya on the world’s payment system map. It is notable that the mobile-based money financial services have greatly enhanced access to financial services, which is one of the key objectives of the Government towards meeting vision 2030 objectives.
In particular, mobile phone money transfer platforms have moved from the traditional role of transferring money to provision of banking services to both banked and unbanked. Commercial banks have partnered with mobile network operators to enable customers to access their bank accounts through mobile phones. Mobile phones can be used for opening and operating virtual bank accounts and access of traditional banking services like depositing, withdrawing and credit facilities without physical representation to the bank.
Role of Central Bank of Kenya in National Payments System
The Central Bank’s overall objective as provided under Section 4 A (i)d of the Central Bank of Kenya Act is to formulate and implement such policies as to best promote the establishment, regulation and supervision of efficient, effective payment, clearing and settlement systems.
In this regard, the Central Bank seeks to ensure that payment systems
(i) Do not generate high level of risks to participants and users of financial services;
(ii) Continue to operate without major disruptions;
(iii) Offer efficient, reliable and safe payment services to customers.
(iv) Have the necessary and regulatory legal framework.
The Central Bank participates in the payment system as a:
• User of payment systems: To effect its own transactions.
• Facilitator of settlement: By providing settlement accounts at the Central Bank to enable Commercial banks exchange obligations.
• Provider of payment systems: It operates and owns the KEPSS system which is used to facilitate real time transactions.
• Supervisor: Supervises the operations of the Nairobi Automated Clearing House on behalf of Kenya Bankers Association in order to maintain integrity and confidence.
• Provider of liquidity: The bank provides liquidity to the system so as to facilitate efficient operation of the settlement system.
• Overseer of the payment system: So as to promote efficiency and soundness in the payment system.
• Catalyst/collaborator; as a catalyst the Bank spurs change in the payment landscape through policy guidelines and as a collaborator provides a platform for open dialogue with all stakeholders geared towards improvement of the national payment system.
Oversight of National Payments System and Instruments
Oversight of payment and settlement systems is defined as a central bank function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against the objectives and, where necessary, inducing change.
The National Payment System Act 2011 was enacted providing a new legal framework for NPS in Kenya. This act makes provision for the regulation and supervision of payment systems and payment service providers, and for connected purposes. Further to this, the National Payment System Regulations 2014 was enacted to operationalise the NPS Act 2011 and provides for the authorisation and oversight of payment service providers, designation of payment systems, designation of payment instruments and Anti-Money Laundering measures. The oversight responsibilities of the Bank are carried out within these legislations and also the Central Bank of Kenya Act 2004, Chapter 491 Section 4(A) (2) in subsection (1) (d), which provides the Bank the mandate to exercise the oversight powers of promoting financial stability through cohesion in financial market infrastructure.
Objectives of Oversight
In performing its duties, the Bank aspires to: –
• Promote Safety and Efficiency of Kenya’s Payments System to ensure the soundness of the National Payment System and hence financial system stability.
• Prevent Market abuse by ensuring anti-trust tendencies are minimised.
• Ensure conditions of fairness, equity and transparency in payment systems – the rights and obligations of parties to funds transfers are allocated in an equitable manner to ensure level field for all payment system participants.
• Promote extension of payment services nationally, regionally and internationally.
• Protect payment systems from criminal abuse such as money laundering and fraud.
• Address risks that could jeopardise the soundness of the payment system by promoting risk reduction measures.
• Reduce and contain the systemic risks inherent in the national payment system.
• Keep abreast with international development in payment system oversight and payment systems in general.
• Monitor the exposures in the National Payment Systems.
In Kenya, the Large Value Payment System is characterised by Real Time Gross Settlement (RTGS) mechanism whereby payment instructions from customers to beneficiaries in commercial banks are settled instantaneously. Retail Payment systems however process mainly consumer payments of large volume but relatively low value through infrastructure such as cheques, credit transfers, direct debits, ATM, mobile money transfers and EFTs (Electronic Funds Transfers).