LV thạc sỹ_Solutions to enhance the oversight of payment and settlement systems of state bank of vietnam

General principles for effective oversight of payment and settlement systems developed by Bank of International Settlement BIS...14 CHAPTER II: PAYMENT AND SETTLEMENT SYSTEMS IN VIETNAM

SOLVAY-BRUSSELS SCHOOL OF

ECONOMICS AND MANAGEMENT

NATIONAL ECONOMICS UNIVERSITY

Vietnam –Belgium Master Programmes MASTERS IN PUBLIC MANAGEMENT AND ECONOMICS

FINAL PROJECT SOLUTIONS TO ENHANCE THE OVERSIGHT OF PAYMENT AND

SETTLEMENT SYSTEMS OF STATE BANK OF VIETNAM

…

Hanoi

I would especially express my sincere thanks to Dr …

Last but not least, I would like to acknowledge ULB-NEU administration andlibrary staff who has helped in some ways to complete this Final Project

EXECUTIVE SUMMARY

The oversight of payment and settlement systems get much concerns fromgovernments, central banks and international organizations because payment andsettlement systems are a major part of a country’s economic and financialinfrastructure They contribute towards promoting economic activity andimproving macroeconomic management, including the release of funds from theclearing and settlement functions for more productive use, the reduction of floatlevels, the lowering of transactions costs, and the control of monetary aggregates Central banks have always had a close interest in safe and efficient functioning ofpayment and settlement systems because of its direct link to their basic functions –safeguarding trust in the national currency and maintaining financial stability That

is to say ensuring the reliability and efficiency of payment and settlement systemsand minimizing systemic risk is the main objective of oversight function

In Vietnam, the oversight of payment and settlement systems has just got intentionrecently because the payment and settlement systems do not much develop so thesystemic risks related to the operations of payment systems do not get a lotconcerns

The Final Project is done aiming at giving “solutions to enhance the oversight of payment and settlement systems of State Bank of Vietnam” In answering

research questions (i) Why does SBV have to oversight payment and settlement

systems?; (ii) What is real situation of carrying out the monitor and oversight function of SBV? and (iii) How to enhance the oversight of payment and settlement systems of SBV?, the study will present a picture of SBV’s oversight.

The picture is uniformly matched with a part of types of non-cash payment andsettlement systems as well as the limitations and risks related to these systems Inaddition, another part of this picture is shown by limitations of the currentsituation of SBV’s oversight of these systems Other part of the picture is theanalysis of chances and challenges of SBV in carrying out oversight function.Basing on the findings, the suggestions are made to enhance the SBV’s oversight

of payment and settlement systems The general suggestions have covered many

fields from (i) Finalizing institutional mechanism for SBV’s oversight function; (ii) Enhancing the SBV’s oversight of payment and settlement systems; (iii) Finalizing payment and settlement in the economy; (iv) Enhancing SBV’s role in organizing and operating interbank payment system; (v) Improving competence and skills for staffs taking in charge of carrying out oversight and supervision of payment and

settlement systems and (vi) Maintaining and improving the cooperation among

relevant authorities A part from the general suggestions, the study also

recommends an oversight framework for SBV in current circumstance

TABLE OF CONTENTS

ACKNOWLEDGEMENT 1

EXECUTIVE SUMMARY 2

LISTS OF ABBREVIATIONS 6

LISTS OF FIGURES 7

LISTS OF ANNEXES 7

INTRODUCTION 8

CHAPTER I: GENERAL OVERVIEW OF THE OVERSIGHT OF PAYMENT AND SETTLEMENT SYSTEMS 11

I.1 The importance of payment and settlement systems in the economy 11

I.2 Roles of the central banks in overseeing payment and settlement systems .12

I.3 General principles for effective oversight of payment and settlement systems developed by Bank of International Settlement (BIS) 14

CHAPTER II: PAYMENT AND SETTLEMENT SYSTEMS IN VIETNAM AND REAL SITUATION OF CARRYING OUT OVERSIGHT FUNCTION OF STATE BANK OF VIETNAM 16

II.1 Types of payment and settlement systems in Vietnam and the limitations and risks related to these systems 16

II.1.1 Payment and settlement systems held by SBV 17

II.1.2 Commercial Banks’ payment systems 22

II.1.3 Payment and settlement systems managed by other State Management Agencies 25

II.2 Oversight of payment and settlement systems of SBV 27

II.2.1 Legal framework for the oversight of payment and settlement systems of SBV 27

II.2.2 Current situation of oversight of payment and settlement systems of SBV 27

II.2.3 General comments on the current situation of oversight of payment and settlement systems of SBV 32

CHAPTER III: SOLUTIONS TO ENHANCE THE OVERSIGHT OF PAYMEMENT AND SETTLEMENT SYSTEMS OF STATE BANK OF

VIETNAM 35

III.1 Chances and challenges for the oversight function of SBV in the future .35

III.1.1 Chances 35

III.1.2 Challenges 35

III.2 Solutions to enhance the oversight of payment and settlement systems of State Bank of Vietnam 36

III.2.1 Some general suggestions and recommendations 36

III.2.2 Suggestions of oversight framework for SBV 39

ANNEX 1 46

ANNEX 2 48

ANNEX 3 53

REFERENCES 56

LISTS OF ABBREVIATIONS

SBV: State Bank of Vietnam

BIS: Bank of International Settlement

WTO: World Trade Organization

ATM: Automated Teller Machine

FRBNY: Federal Reserve Bank of New York

WB: World Bank

PM: Prime Minister

NPSC: National Payment System Center

PPC: Provincial Payment Center

HVTS: High Value Sub-system

LVTS: Low Value Sub-system

KIPS: Korean Inter-Bank Payment System

MoF: Ministry of Finance

VSD: Vietnam Securities Depository

SE: Securities Exchange

STC: Stock Trading Center

DVP: Delivery versusPayment

SSC: State Securities Commission

CPSIPS: Core Principles for Systemically Important Payment

SystemsSIPS: Systemically Important Payment System

Vietcombank: Bank for Foreign Trade of Vietnam

BIDV: Bank for Investment and Development of Vietnam

Agribank: Bank for Agriculture and Rural Development

Eximbank: Vietnam Export Import Bank

Incombank (Vietinbank): Vietnam Joint Stock Commercial Bank for

Industry and Trade

LISTS OF FIGURES AND TABLE

Figure 1 Non-cash payment and settlement systems in Vietnam

Figure 2 The outline of the electronic interbank payment system

provided by Hyundai Information TechnologyFigure 3 The processing model of the electronic interbank payment

system Figure 4 The model of the electronic money transfer system

Figure 5 Model of the paper-based clearing system

Figure 6 Model of electronic clearing system

Figure 7 A model of Core Banking

Table 1 Suggested oversight framework for SBV

LISTS OF ANNEXES

Annex 1 Core principles for systemically important payment systems

and central bank responsibilities

Annex 2 The norms of payment activities (4B, 4C, 4D) of Circular

number 21/2010/QD-NHNN dated October 8th 2010 byGovernor on the regulations of report and statistic modeapplying for SBV agencies and commercial banks

Annex 3 CPSS-IOSCO Task Force Recommendations for Securities

Settlement Systems

1 Rationale of the study

Payment and settlement systems are very important elements of financialinfrastructure of a country Disruptions or inefficient implementation of thesesystems may badly affect to the stability of financial system and the economy as awhole Besides, safe and efficient functioning of payment and settlement systemscan help central bank in implementing effectively monetary policies, maintainingfinancial system and safeguarding public confidence in national currency Thatleads to the fact that the oversight of payment and settlement systems as well asprinciples and standards for effective oversight gets much attention and priorityfrom the government and central banks

After 20 years of carrying out the economic renovation process, Vietnam financialsystem has gained significant changes in broad scale It also has gradually finalizedthe structure and infrastructure Within this development trend, payment andsettlement systems have been broadened Technological infrastructure has beenupgraded and completed Nowadays, most of payment and settlement systems havebeen computerized New payment instruments and services have been adopted andapplied especially electronic ones that make payment transactions quicker andmore convenient However, payment and settlement systems in Vietnam have beeninitially developed and each system exposes certain limitations and risks Forexample, internal payment systems of commercial banks and card-based paymentsystems face up with traditional, hi-tech and foreigner-related crimes and frauds aswell as operational and reputation risks due to the unhomogeneity in paymentsystem infrastructure investment The unhomogeneity causes difficulties inconnecting these systems Besides, treasury payment system and securitiessettlement system haven’t been connected with interbank payment system of SBVthat block the development of payment instruments and expose the systemic risks

A part from that, the interdependency of payment systems in the economy is acertain tendency because payment and settlement systems in supporting financialmarkets and payment flows in the economy are increasingly connected through awide array of complex inter-relationships Through these relationships, the smoothfunctioning of a single system often becomes contingent on the performance ofother systems or being potential source of systemic risk Being the central bank ofVietnam, SBV has a close interest in safe and efficient functioning of payment andsettlement systems because of their direct link to its basic functions – safeguardingtrust in the national currency and maintaining financial stability If SBV has noeffective risk management mechanism as well as a suitable oversight framework to

localize risks of a single payment system, the risks can be transmitted to otherpayment and settlement systems Consequently, systemic risks are easily occurred,threatening the stability of financial system and the economy From these

mentioned reasons, I choose the study named “Solutions to enhance the oversight

of payment systems of State Bank of Vietnam” aiming at reviewing and

evaluating real situation of carrying out the monitoring and oversight function ofSBV Basing on the analysis results some recommendations to enhance the

effective oversight of payment systems of SBV will be pointed out It is also

hopeful that this study results will be suggestions for the policymakers of SBV inbuilding up the master plan for the development of Vietnam banking system to theyear 2020

2 Research objectives

By reviewing and evaluating real situation of carrying out the monitoring andoversight function of SBV, the study will find out some gaps in theimplementation of this function Some suggestions to enhance the oversight ofpayment and settlement systems of SBV will be pointed out basing on the analysisresults The study will answer the following research questions

- Why does SBV have to oversight payment and settlement systems?

- What is real situation of carrying out the monitor and oversight function

Due to the fact that there is any statistic report on the fraud types related to thepayment and settlement systems which is officially published or announced, Imade a list of cases that media mentioned recently Besides, many interviews arecarried out in order to find out popular risks in payment and settlements andcollect ideas on the oversight function of SBV The participants are mainly fromSBV departments and banks The result of interviews is useful source for thesuggestions and recommendations

In addition, the statistical, synthetic, comparative, analysis, annotating andforecasting methods are used to answer the research questions.

4 Research scope

Due to the fact that there is no statistic report on the frauds related to the paymentand settlement systems which is officially published or announced, this studymainly quotes some types and cases that medias mentioned recently

The study is also limited in reviewing and evaluating real situation of carrying outthe monitor and oversight function of SBV from 2002 after the enforcement of theDecree No 64/2001/NĐ-CP dated Sept 20th 2001 on the payment activities bypayment service providers up to now

In addition to giving general suggestions and recommendation, the study will workout an oversight framework for SBV

A part from the Introduction and Conclusion, the study is divided into 3 chapters

Chapter 1: General overview of the oversight of payment and settlement systems.

This chapter works out a summary on oversight issues which pave the way forgiving suggestions and recommendations in chapter 3

Chapter 2: Payment and settlement systems in Vietnam and real situation of

carrying out oversight function of SBV Issues such as types of non-cash payment

and settlement systems in Vietnam as well as the limitations and risks related tothese systems are dealt with in this chapter Besides, current situation of SBV’soversight activities are mentioned also Limitations of current situation of SBV’soversight of these systems are source for suggestions and recommendations toenhance the oversight of SBV

Chapter 3: Solutions to enhance the oversight of payment systems of State Bank

of Vietnam In this chapter, recommendations and suggestions to enhance the

oversight of payment and settlement systems of SBV will be given.Recommendations and suggestions are based on limitations of current situation ofSBV’s oversight of these systems as well as analysis of chances and challenges forthe oversight function of SBV in the future

principles for effective oversight will be a very important base for givingsuggestions of an oversight framework for SBV.

I.1 The importance of payment and settlement systems in the economy

In an economy, people and organizations use various payment instruments (cash,cheque, credit cards, e-money or a claim on a financial institution such as a bank,credit union, etc.) to purchase goods and services, to make investments and totransfer funds from person to another These payment transactions are executedthrough payment and settlement systems which can be classified into populartypes: large value transfer system, automated clearing settlement system smallvalue transfer system and securities clearing and settlement system in the way thatthey enable timely and continuously execution of financial liabilities arising frombusiness operations of economic agents In a broad sense, the term paymentsystem refers to a set of money transfer systems used for circulation of funds.Although, payment system and settlement system have a bit difference in nature,

in this study, the definition of payment system given by BIS is used for both BISdefines that a payment system consists of a set of instruments, banking proceduresand, typically, interbank funds transfer systems that ensure the circulation ofmoney

In the past, payment activities, in general, did not get much attention from thecentral bank and the government Payment and settlement systems have beenbasically recognized as mechanisms or technical activities However, in the past

two decades, due to (i) the robust rise in number and value of processed payment transactions via payment and settlement systems which reflects the significant increase in financial market activities over the world and payment amounts formed from these activities; (ii) developments in technological infrastructure of payment and settlement systems which enable faster, larger and safer transactions and (iii) the increase in number of payment service providers, payment and settlement systems have gained in importance Their impact on the banking sector

and the real economy is greater than ever before That is to say, the roles ofpayment and settlement systems are highly appreciated in most of economies.Here after three main roles of payment and settlement systems are mentioned:

- Payment and settlement systems in relation with financial stability: unsmooth operation of payment and settlement systems can have “domino effect” on financial markets that they serve.

- Payment and settlement systems in relation with implementing central banks’ roles: the smooth functioning of payment and settlement systems is also critical to certain public policy objectives in the areas of monetary policy and banking supervision The effective implementation of monetary policy, for example, depends on both the orderly settlement of open market operations and the efficient distribution of reserve balances throughout the banking system via the money market and payment system Likewise, supervisory objectives regarding the safety and soundness of depository institutions must take into account the risks payment and settlement systems pose to depository institutions that participate directly or indirectly in, or provide settlement, custody, or credit services to such systems Besides, safe and efficient functioning of payment and settlement systems is directly linked to the principal function of a central bank - safeguarding public confidence in national currency.

- Payment and settlement systems in relation with effectiveness of the economy: safe and efficient payment and settlement systems ensure the cash flows circulated timely, quickly and continuously so the efficiency and effectiveness in using these flows in the economy are greatly increased Consequently, the effectiveness of the economy is enhanced as a whole.

As the key financial infrastructure, payment and settlement systems must beregulated and overseen to ensure the safety and efficiency of these systems for thesake of financial sector and the economy Generally, the oversight of payment andsettlement systems is one of the main tasks of central banks

I.2 Roles of the central banks in overseeing payment and settlement systems

Central banks play multi-roles in payment and settlement systems such assettlement institutions; operators and participants; regulators; catalysts fordevelopment and reform; and oversight authorities In this part, the oversight role

of central banks will be clearly defined

There is any solely correct definition of the oversight of payment and settlementsystems The definition by BIS is general and popularly used According to BIS,

oversight of payment and settlement systems is a central bank function wherebythe objectives of safety and efficiency are promoted by monitoring existing andplanned systems, assessing them against these objectives and, where necessary,including change.

Central banks have always had a close interest in safe and efficient functioning ofpayment and settlement systems because of its direct link to their basic functions –safeguarding trust in the national currency and maintaining financial stability Forthat, the oversight is aimed at systems as a whole rather than at any singleparticipants

Generally, the objectives of central bank oversight are to promote the smoothfunctioning of payment and settlement systems and to protect the financial systemfrom possible “domino effects” In other words, oversight of payment andsettlement systems is to ensure the uniform of finance and technology of thesesystems, enhance their anti-market shock ability and minimize systemic risks bydeveloping, regulating and implementing oversight rules and standards In details,oversight of payment and settlement systems is to ensure that infrastructureelements and financial service provision markets:

- operate smoothly, efficiently and equally to all participants and users.

- minimize and control risks which transmit shocks to the economy due to disruptions of payment and settlement systems when payment obligations of one participant cannot be fulfilled.

- promote the developments of technology and legal framework to meet the needs of payment and settlement in the open economy.

The scope of oversight policy is closely related to the objectives to be achieved.Each central bank has set out different criteria for determining its policy scopewhich are suitable for its own circumstance However, the scope of central banks

in oversight usually consists of

- Payment systems: the scope of oversight usually comprises large value systems that are systemically important for the stability of the financial market but also some small value systems if considered of systemic importance which are usually retail payment systems

- Securities settlement systems: these systems are important for the infrastructure

of the financial system Central banks need put close eyes on their safe and efficient functioning because they provide services indispensable for the monetary policy implementation Weaknesses or disruptions in securities settlement systems

can be a source of systemic chaos not only for securities markets but other financial markets and payment systems also.

- Payment instruments: oversight of payment instruments can be carried out either independently or jointly into oversight of payment and settlement systems Typically, in the oversight of payment instruments, central banks set some safety and efficient standards issuers of the instruments must meet.

- Third-party service providers: payment system operators sometimes outsource a part of their operations to a third party (here called a service provider) In this case, the oversight is carried out in a way that the system operators must bear full responsibility for any outsourced activities and ensure that the service provider’s compliance with central bank policy.

In fulfilling the oversight function, the central banks usually carry out thefollowing activities:

- Monitoring and analyzing statistical data, information, reports and other documents relating to the functioning of payment and settlement systems and use

of payment instruments available This activity helps in improving the understanding of the functioning of payment and settlement systems as well as their impact on the overall financial stability.

- Assessing the compliance of relevant policy requirements and standards defined This is a periodic activity conducted to evaluate the compliance degree of payment and settlement systems with the standards and principles of smooth functioning.

- Inducing change is based on the results of monitoring and compliance assessment This activity may be recommendations to the payment and settlement operator about changes necessary to ensure safe and efficient functioning of the system or amendment and supplementation of legal framework for payment transactions as well as issuance of guidelines and recommendations to ensure the achievement of basic oversight objectives.

I.3 General principles for effective oversight of payment and settlement systems developed by Bank of International Settlement (BIS)

Being a leading organization in dealing with payment and settlement issues, thepublications of BIS on the central bank’s oversight of payment and settlementsystems are guidelines for central banks throughout the world in carrying out theiroversight function Due to the limitation in the study scope, only five generalprinciples for effective oversight are introduced as the base for giving suggestions

in the case of SBV

- Transparency: Central banks should set out publicly their oversight policies,

including the policy requirements or standards for systems and criteria for

determining which systems these apply to

- International standards: Central banks should adopt, where relevant,

internationally recognized standards for payment and settlement systems

- Effective powers and capacity: Central banks should have the powers and

capacity to carry out their oversight responsibilities effectively

- Consistency: Oversight standards should be applied consistently to

comparable payment and settlement systems, including systems operated by thecentral bank

- Cooperation with other authorities: Central banks, in promoting the safety

and efficiency of payment and settlement systems, should cooperate with otherrelevant central banks and authorities

II.1 Types of payment and settlement systems in Vietnam and the limitations and risks related to these systems

Like many other countries, there exist two types of payment and settlementsystems in Vietnam: cash and non-cash payment systems In this study, due to thescope that limits in reviewing and evaluating real situation of carrying out themonitor and oversight function of SBV from 2002 after the enforcement of theDecree No 64/2001/NĐ-CP dated Sept 20th2001 on the payment activities bypayment service providers up to now only non-cash payment and settlementsystems are mentioned

Non-cash payment and settlement payment systems can be well viewed in thefigure 1 in the form of a Pyramid Payment systems held by SBV lie in the top ofthe pyramid (level 1) In the level 2, there are commercial bank payment systems.Other payment and settlement systems managed by other State ManagementAgencies are at the bottom of the pyramid

Figure 1: Non-cash payment and settlement systems in Vietnam

II.1.1 Payment and settlement systems held by SBV

At the moment, SBV organizes and manages three payment systems They areelectronic interbank payment system, electronic money transfer system andclearing system

- The electronic interbank payment system:

The electronic interbank payment system was installed in July 2002, to replace thepaper-based inter-bank payment system This system plays the key role inpayment activities in Vietnam This system is built in a subproject of theModernization of Vietnam Banking and Payment Systems Project funded by the

World Bank (WB) The system is a modern payment system built on the basis ofadvanced technology and international standards This system consists of aNational Payment System Center (NPSC) situated at Banking InformaticsTechnology Department, a backup center at Son Tay and six provincial paymentcenters (PPC) at state bank branches: Hanoi, Hai Phong, Da Nang, Ho Chi Minh,Can Tho and Banking Operations Center

In 28th Feb, 2009, SBV organized an opening ceremony of the electronic bank payment system – second phase which sets forth a new period for bankingpayment system with significant changes in terms of technology, modern andeffective processing and procedures applied to international standards andpractices This will satisfy the increasingly real and high volume payment andsettlement need of Vietnam According to 2009 annual report of SBV, the systemhas applied in 63 SBV’s branches and 3 SBV’s departments, 81 payment providersand over 700 commercial banks’ branches all over Vietnam This system hasprocessed about 40.000-44,000 transactions valued at 70,000 billion VND a day.This system has had automatic interfaces that are ready to connect with Treasurypayment system, securities settlement system and other necessary ones Figure 2shows the outline of the electronic interbank payment system provided by HyundaiInformation Technology

inter-Figure 2: The outline of the electronic interbank payment system provided

by Hyundai Information Technology

(Source: Le Van Xuan’s Presentation on Payment Conference in 2007)

As illustrated in the diagram above, the inter-bank electronic payment system iscomposed of two sub-systems: High Value Sub-system (HVTS)1, for large-amountremittances on a gross basis, and Low Value Sub-system (LVTS)2 for small-amount remittances on a net basis This system is based on the Korean Inter-BankPayment System (KIPS), and was developed by Hyundai Information Technology.The system processing model can be easily imagined in figure 3

Figure 3: The processing model of the electronic interbank payment system

(Source: Bui Quang Tien’s Presentation on Payment Conference in 2007)

The electronic interbank payment system is considered the core payment system ofthe banking system in particular and of the whole economy in general According

to standards recommended by BIS, this system is a systemically importantpayment system and needs to meet ten core principles for payment system of thiskind (see annex 1) However, up to now, SBV does not officially recognize andapply these principles as standards to assess the safety and reliability of thesystem

- The electronic money transfer system:

Electronic money transfer system came into effect since August 1999 This hasbeen used by all 67 branches of SBV At that moment, the transaction time for asum of money between two banks was not over 2 minutes The money transferactivity ran stably Due to some improvement in operational procedures since July

2000, the money transfer increased in terms of both transaction volume and value

1 According to SBV, remittances of 500 million dong (US$33,000) or more are handled by HVTS.

The average transaction quantity in last 6 months of 2000 reached 793 transactionsper day (increase 32% in comparison to first 6 months of 2000) The average

volume of year 2000 was nearly 1,700 billion VND (Source: www.sbv.gov.vn)

Since then, the electronic money transfer system has well met the need of payment

in provinces and cities with low cost and high effectiveness In 2009, the averagetransaction volume reached over 18,000 transactions valued at 8,500 billion VND

a day (Source: SBV’s annual report 2009 – www.sbv.gov.vn) However, there are

some obstacles to be solved to ensure the safety and efficiency of this system

They are (i) The system’s operations depend much on the telecommunications network; (ii) Lack of qualified staffs in payment field; (iii) Some participants do not strictly follow technical procedures and processes that bring about bad effects

to the system operations and (iv) The system’s infrastructure is only unpretentious

so it needs to be upgraded and broadened to meet the requirements of money transfer in the future

The model of the electronic money transfer system is shown in figure 4

Figure 4: The model of the electronic money transfer system

(Source: Bui Quang Tien’s Presentation on Payment Conference in 2007)

- The clearing system:

SBV’s clearing system was built and carried out since 1991 Since July 2002, inparallel with paper-based clearing system, an electronic clearing system has beenimplemented in some SVB’s branches Figure 5 and 6 show the model of paper-based and electronic clearing systems

Figure 5: Model of the paper-based clearing system

(Source: Bui Quang Tien’s Presentation on Payment Conference in 2007)

Figure 6: Model of electronic clearing system

(Source: Bui Quang Tien’s Presentation on Payment Conference in 2007)

In general, the clearing systems has made contribution in enhancing paymentspeed at cities and provinces in Vietnam which is better capital savings in paymentespecially at locations applying electronic clearing system However, this system

also shows some weaknesses such as (i) Paper-based clearing becomes backward which is time cost and must strictly follow time defined; (ii) incompliance with operational regulations and procedures of some participants which influence the whole system’s operations; (iii) when errors of program and transmitted line

themselves and need the interference of programmer That leads to slow response

in settling the incidences

II.1.2 Commercial Banks’ payment systems

There are three main payment systems provided by commercial banks in Vietnam.They are: Internal payment systems and card-based payment systems

- The internal payment systems of commercial banks

Payment channel by internal payment systems of commercial banks plays arelative role in payment activities of Vietnam economy In 2001, only 6commercial banks: Vietcombank, BIDV, Incombank, Agribank, Maritimebank,Eximbank which accounted for 80% of payment volume of the whole commercialbank system in Vietnam participated in the Modernization of Vietnam Bankingand Payment Systems Project funded by the World Bank (WB) which helped inmodernizing their internal payment systems Since then, most of commercialbanks in Vietnam have paid much attention to upgrade and develop their internalpayment systems aiming at enhancing capital circulation speed within the systems,increasing competitive capacity in banking market and best satisfying paymentneeds of their customers

Internal payment systems have been designed and operated on the basis of moderntechnology (CORE BANKING – see figure 7), international standards and suitablewith development of economy and payment tendency

Figure 7: A model of Core Banking

(Source: MK company’s Presentation on Banking fair 2010)

Payment by commercial bank internal systems accounts for large proportion interms of volume and value and increase yearly For example, in 2001, transactions

by commercial bank payment systems accounted for 67.78% and 61.35% in terms

of volume and value in comparison to the whole payment transactions of theeconomy This portion reached 77.83% and 69.26% in 2004 Up to now, the

average speed is about 3.35% and 2.64% (Source: www.sbv.gov.vn)

However, because of capital capacity, the investment in developing Core Banking

is different from bank to bank For some banks, Core Banking is applied all overthe whole system but for many banks it is developed in the head-quarter and mainbranches This creates security holes that set forth for frauds and crimes Twopopular types of frauds and crimes related to internal payment systems of

commercial banks are the traditional, the hi-tech ones Main criminal practices in

internal payment systems are young bank staffs with high banking profession andinformatics skill stealing controller code to approve electronic document; forgingcontroller’s signature; deducting other liquidators to do some adjustment entries inaccounting book to withdraw money; etc Cases for this kind of crime are various.For example, Nguyen Hoang Tuan, a bank clerk at Bach Khoa branch of Agribankbenefited by his working post taking his user identification to steal supervisor’spassword and approve final settlement on customers saving accounts, transfermoney to his personal accounts at other banks to illegally withdraw 4,085,000,000VND3

From the main types of frauds and crimes in internal payment systems, I have hadmany interviews with officers from SBV departments and banks to find outpopular risks in these systems They have all admitted that most of internalpayment systems of commercial banks face up with operational risks which comefrom the potential loss ability due to the incompletion and unreliability of thesystems These systems can be hacked from both outside and inside Operationalrisks can also happen because customers make mistake in their fund transfer orcomputer/electronic systems of payment providers are not designed, installed ormaintained in a right way The effects of these risks badly affect to the operations

of these systems That is to say risks related to Privacy and Security as well asdesign, installation and maintenance of computer/electronic systems are two maintypes of operational risks of commercial banks’ internal payment systems

+ Privacy and security risks relate to the access control to risk management system and accounting system of banks, information that banks exchange with other partners If the access control is not well managed, the frauds and crimes from staffs of banks and hi-tech ones can happen easily.

+ Risks due to bad design, installation and maintenance of computer/electronic systems: commercial banks’ payment systems may face up with risks when the selected computer/electronic systems are not perfectly designed or installed For example, banks can encounter risks with internal payment systems if the computer systems are broken down or disconnected because these systems do not fit the needs of users.

- Dual payment systems

Dual payment systems are set up to meet the payment needs of customers of thetwo banks or banks These systems are based on the internal payment systems ofbanks which have interfaces to exchange electronic payment order between twobanks Incombank (Vietinbank now) is the first bank that develops dual paymentsystems Nowadays, most of banks in Vietnam set up dual payment systems withother banks However, as said above, the Core Banking is applied differentlyamong banks that creates incompatibility between systems and decrease theeffectiveness of dual payment systems and processing speed of paymenttransactions

- Card-based payment systems

Thanks to the Decision 291/2006/QD-TTg dated December 29th 2006 by PrimeMinister (PM) approving the non-cash payment proposal, the card-based paymentactivities and systems have boomed According to SBV annual reports, at the end

of 2009, there was 46 card issuance organizations with over 180 card names.Cards in circulation reached 21.5 million (increase 54% in comparison to number

at the end of 2008), over plan set for 2010 (15 millions); ATM system had 9,700machines (increase nearly 27% in comparison to number at the end of 2008); POS/

EDC reached over 34,000 (increase 36%) (Source: www.sbv.gov.vn).

Most of card payment providers in Vietnam have developed and upgraded theircard payment systems as well as taken part in card associates to meet theincreasingly needs However, due to the fact that the technical infrastructure ofcard payment systems of providers is different from each other, the compatibility

of these systems is not good enough This is one of the reasons to explain for thefrauds and crimes in card payment in recent years The crimes for card paymentsare mainly hi-tech and foreigner-related ones The general practice is card frauds

by stealing BIN code to break into customers accounts and transfer money into personal accounts; stealing personal information in the account to print false cards; breaking into payment systems to create transfer orders to appropriate money or using cards accepted to be paid in Vietnam such as Visa, Mastercard, American Express, Dinner Club, JCB, etc which is stolen and has not announced

to be locked to withdraw money For example, the false credit card issuance center

at 324 Le Duan Street, Dong Da District, Hanoi4 This centre opened 33 units tosell credit cards to dispossess billions Or RC company specialized in printingfalse ATM cards Nguyen Tuan Anh, Chairman of the Board of this companydirected his staffs to access into online-sale pages to steal credit card information

of customers, print false cards and then withdraw money from ATM5 Or a caserelated to three Chinese people: Ly Bang, Ly Tat Trung and Lau Thieu Cam.These people brought computer, card reader and printer machines in Vietnam andcooperated with Nguyen Thi Chat at Vinh, Nghe An to illegally withdraw moneyfrom a restaurant which is a card acceptance place Within only one week, theyhad withdrawn 1.3 billons VND6

From the above-mentioned cases, the need of building a uniformed card switchingcenter to connect ATM systems of card associates into a whole and unique onebecomes ever urgent A part from that, there is not any general legal requirements

of ATM standards so card payment providers invest in ATM systems basing ontheir own capital capacity and development strategy There appear holes insecurity and quality of ATM systems In Vietnam, many payment providers(banks) face up with reputation and operational risks in terms of ATMs(Automated Teller Machine) and card payments Many cases related to unsafe ofATMs and slow-responses of payment providers when incidences happen erodepublic belief on card payment systems in particular and other payment andsettlement systems in general

II.1.3 Payment and settlement systems managed by other State Management Agencies

Treasury payment system and Securities settlement system are also important onesfor Vietnam economy They are under management of Ministry of Finance (MoF)

- Treasury payment system

Treasury payment system is set up and developed to timely satisfy the payments ofstate budget beneficiaries In previous period, payment transactions by this systemwere processed manually Processing time for one transaction was 1 week Now,this system has been upgraded and innovated due to the modernization of StateTreasury project A treasury electronic payment system has been developed whichdecreases the processing time to only one day This system designed on the basis

of modern technology with various functions, high security, easily connected with

4 http://vietbao.vn/An-ninh-Phap-luat/Pha-mot-diem-phat-hanh-the-tin-dung-gia/30140110/218/

5 bat.html

http://tuoitre.vn/Chinh-tri-xa-hoi/Phap-luat/115685/Lam-the-ATM-gia%C2%A0mot-bang-toi-pham-bi-6

http://tintuc.timnhanh.com/phap-luat/20100920/35AABEFD/Bat-ba-nguoi-Trung-Quoc-dung-the-tin-other payment systems meeting effectively processing management of Vietnamtreasury system has been applied at Central Treasury and 64 provincial branches.However, this system does not connect with interbank payment system of SBV.These factors block the development of non-cash payment instruments in personaland population payment transactions

- Securities settlement system

The securities settlement system plays a vital role in maintaining the stable andcontinuous operation of the securities market This is under management ofVietnam Securities Depository (VSD) VSD handles clearing and settlement fortransactions of listed and unlisted securities of public companies For transactions

of listed securities, VSD carries out clearing and settlement based on the tradingresults provided by Securities Exchange (SE), Stock Trading Center (STC) Fortransaction of unlisted securities of public companies, VSD carries out clearingand settlement based on trading results of investors executed at securitiescompanies and forwarded to VSD by STC7. The settlement is done on the

settlement accounts opened at BIDV This raises the concern of systemic risk

when the correspondent bank encounters liquidity problem A part from that, this

system still does not connect with interbank payment system of SBV which canmake SBV face up with liquidity risk also if several incidents in stock markethappen For example, in 1985, a major clearing bank in New York in the U.Spayment system and the U.S Government securities settlement system, experience

a computer breakdown, which forced Federal Reserve Bank of New York(FRBNY) had to make overnight loans totaling USD 22 billion8

In short, non-cash payment and settlement systems in Vietnam have been initiallydeveloped and met the need of payment in the economy However, each systemexposes certain limitations and risks In addition, these systems in supportingfinancial markets and payment flows in the economy are increasingly connectedthrough a wide array of complex inter-relationships Through these relationships,the smooth functioning of a single system often becomes contingent on theperformance of other systems or being potential source of systemic risk For thatreason, SBV has to play the leading role in overseeing the payment and settlementsystems in Vietnam so that the safe and efficient functioning of these systems ismaintained By carrying out this oversight function effectively, SBV ensures itsbasic functions – safeguarding trust in the national currency and maintainingfinancial stability

7

Kovsted, Jens, John Rand, and Finn Tarp, Le Viet Thai, Vuong Nhat Huong and Nguyen Minh Thao,

2003 Financial Sector Reforms in Vietnam: Selected Issues and Problems CIEM.

8 http://www.imf.org/external/np/leg/sem/2002/cdmfl/eng/barvell.pdf.

II.2 Oversight of payment and settlement systems of SBV

II.2.1 Legal framework for the oversight of payment and settlement systems of SBV

General legal base for payment activities with banks are regulations defined (i) in State Bank Law 1997 (articles 34 and 36) and amendment of State Bank Law 2003

in which regulate on the roles and functions of SBV as a state management agency and central bank of Vietnam in payment activities; opening accounts, organizing payment systems and other payment activities of SBV and (ii) in Law on Credit Institutes 1997 (articles 19, 65 and 68) and amendment of Law on Credit Institutes 2003 in which regulate on the opening accounts and providing payment services of credit institutes Basing on these two laws, Decree 64/2001/ND-CP by

PM dated on August 20th 2001 on the payment activities with payment providerswas issued Besides, Decrees and Laws on accounting and electronic transactionssuch as Accounting Law dated June 17th 2003, Law on electronic transactionsdated November 29th 2005, Decree number 35/2007/ND-CP dated March 8th 2007

by Government on electronic transaction in banking activities, Decree number26/2007/ND-CP dated February 15th 2007 by Government on detail execution ofLaw on electronic transactions o the issues of digital signature and the certificationservice of digital signature came into being also Under these documents, SBV’sGovernor issued many circulars and decisions on procedures, technical processesrelated to payment activities

The oversight of payment and settlement systems by SBV is defined more clearly

in the State Bank Law number 46/2010/QH12 dated June 16th 2010 Item 16 of Article 4 in this Law regulates that SBV is in charge of organizing, managing and overseeing the national payment system (interbank payment system set up, managed and run by SBV); providing payment services for banks; participating in organizing and overseeing of payment system in the economy.

II.2.2 Current situation of oversight of payment and settlement systems of SBV

As international standards and practices, it’s the central bank’s role in carrying outthe oversight of all payment and settlement systems In Vietnam, the oversightfunction is shared by SBV and MoF SBV covers its oversight activities to thesystems organized and run by SBV, commercial banks’ payment systems andcard-based payment system while MoF takes in charge of managing andoverseeing the Treasury payment system and Securities settlement system In thispart, the focus is on the oversight activities of SBV to its systems, commercialbanks’ payment system and card-based payment system

- Overseeing the payment and settlement systems organized and run by SBV

As said, SBV currently organizes and controls three payment systems in whichelectronic interbank payment system is considered the national payment system inVietnam The oversight of SBV on these systems can be viewed in terms of settinglegal framework for the operations of the systems and carrying out managementactivities for the smooth and safe function of them

a In terms of legal framework

In order to organize and run as well as ensure the smooth function of thesesystems, SBV has issues many circulars, decrees and decisions such as:

+ Decree number 309/2002/QD-NHNN dated April 9th 2002 by Governor on thestatute of electronic interbank payment

+ Decree number 349/2002/QD-NHNN dated April 14th 2002 by Governor on theregulations on setting, issuing, managing and using the security code in theelectronic interbank payment system

+ Decree number 1571/2005/QD-NHNN dated October 31th 2005 by Governor

on adjustment and supplement some articles of the statute of electronic interbankpayment issued along with the Decree number 309/2002/QD-NHNN dated April

9th 2002 by Governor

+ Decree number 1014/2005/QD-NHNN dated July 11th 2005 by Governor onadjustment and supplement some articles of technical procedures and process ofelectronic money transfer in SBV system issued along with the Decree number134/2000/QD-NHNN dated April 18th 2000 by Governor

+ Decree number 33/2006/QD-NHNN dated July 28th 2006 by Governor onadjustment and supplement article13 of the statute of electronic interbank paymentissued along with the Decree number 309/2002/QD-NHNN dated April 9th 2002

by Governor

+ Decree number 34/2006/QD-NHNN dated July 28th 2006 by Governor onadjustment and supplement item 1 article 1 of Decree number 1014/2005/QD-NHNN dated July 11th 2005 by Governor on adjustment and supplement somearticles of technical procedures and process of electronic money transfer in SBVsystem issued along with the Decree number 134/2000/QD-NHNN dated April

18th 2000 by Governor

Very recently, on November 9th 2010, SBV issued Circular number NHNN on regulations on managing, running and using the electronic interbankpayment system This circular replaces all the mentioned-above decrees In thiscircular, all issues related to the management of the electronic interbank paymentsystem are dealt such as the regulations on managing and running the system,