Q&A: Banco de Mexico’s Miguel Diaz on IP
Miguel Diaz, Director of Payment Systems at Banco de Mexico, the country’s central bank, discusses the instant payment (IP) scheme in the country, and the wider Latin America (LatAm) real-time payments sector with Lauren Jones. FinTechs and cross-border interoperability are also addressed in this interview.
In Mexico the Sistema de Pagos Electrónicos Interbancarios (SPEI), or interbank electronic payment system in English, is a real-time hybrid settlement system for payments and other developments that was launched last decade.
Miguel Diaz, Director of Payment Systems at Banco de Mexico, discusses its future and other matters with InstaPay’s deputy editor, Lauren Jones, in this Question and Answer (Q&A) interview.
Question Q1 (Lauren Jones, deputy ed., InstaPay): Mexico is in a unique group of markets that has had an instant payments system for a considerable period of time. The SPEI instant payment system is marking its fourteenth anniversary this year – can you tell our readers about SPEI and its features?
Answer: Miguel Diaz, Director of Payment Systems, Banco de Mexico
In regard to SPEI’s features, there are some aspects that I would like to highlight for you. First, from a final users’ perspective, payments are processed from the issuing account to the recipient account in less than 10 seconds under a 24/7 schedule.
The level of service provided by SPEI is further enhanced by its universality. All Mexican banks operating in the country are direct participants, and it is open to other financial institutions (FIs) as long as they are regulated by a financial authority and comply with the specific regulation of the payment system.
Furthermore, SPEI can be considered a hybrid payment system in two senses:
- SPEI implements a multilateral clearing algorithm to reduce participants’ needs for liquidity. It executes very frequent clearing and settlement cycles – approximately 3 seconds between one cycle and the next one. All SPEI settlements take place in central bank money.
- SPEI is a system that processes large value payments during business hours (participants can also process large value payments on a 24/7 basis, but are not required to do so), and small value payments (less than $US400 USD) are handled on a 24/7 basis.
Regarding SPEI performance, in 2017 SPEI processed approximately 1.3 million payments per day on average, and during its most active day the system processed 7.2m payments. In higher time frequencies, SPEI has processed more than 1,700 payments in a single clearing and settlement cycle (1 second).
SPEI is a very robust payment system. It implements a series of technical and operative measures to guarantee uninterrupted resilient service, taking into consideration several contingency scenarios, such as:
- a failure in the main technological infrastructure of SPEI;
- the impossibility of access to Banco de Mexico’s facilities;
- connection and communication problems, both of a single participant or of SPEI itself with all the participants.
It is in this way SPEI has achieved a mark of 99.99% of system availability in 2016 and 99.98% in 2017. At the same time, the regulatory parameters require participants to maintain an annual availability of 99.80% of the schedules in which they must process operations.
Finally, regarding the messages transmitted, SPEI uses a proprietary set of messages and communication rules. Banco de Mexico designed this protocol to allow the rapid processing of large volumes of transactions, and to foster participants’ adoption of straight-through processing (STP).
At the time of its launch Banco de Mexico evaluated the possibility of adopting other standards, such as ISO 15022, but bandwidth restrictions and message size caused our cost-benefit analysis to favour a proprietary protocol. Nowadays, our messages are still very efficient and carry the necessary information to provide additional services, but we are analysing the possibility of developing translators between our protocol and the proliferating global ISO20022 standard. Pieces of information included in the ISO20022 messaging standard could then be incorporated into our protocol to enhance the capabilities and interoperability of the system.
Q2. (Lauren Jones, InstaPay): How have you seen SPEI evolve over the last ten years?
A2: Miguel Diaz, Director of Payment Systems, Banco de Mexico
SPEI has grown in several aspects. Regarding participation in the system, SPEI had 103 participants as of December 2017, which means that the number of participants has grown 41% since 2008. This is, at least in part, because the entrance to the system is open to all Mexican regulated FIs.
From a transactional point of view, in 2017 SPEI processed about 480 million operations. This means that the volume of payments that SPEI processes has grown at a 41% compound annual rate from 2005 to 2017. Regarding retail payments through SPEI, payments of less than US$400 represented about 67% of SPEI payments volume in 2017. Moreover, the average transaction amount today is about 563 thousand pesos, which contrasts with the average amount in 2005 of approximately 17m pesos. These facts indicate that SPEI is being adopted by the general public to make everyday transactions, so SPEI has been transiting from a Large Value – Small Volume system to a Small Value – Large Volume one.
SPEI operation schedules have also evolved during these years. Before January 2015, SPEI payments instructed by participants’ clients were only processed from 06:00 to 17:30 on business days. However, in 2015 this gradually changed.
First, since January 2015, mobile payments were processed from 06:00 to 17:30 every day; then, from March 2015 to November 2015, mobile payments were processed from 05:00 to 01:00 every day. Since November 2015, we’ve moved again. Mobile payments are now processed around the clock on a 24/7 schedule. In this regard, since December 2017, all SPEI payments of less than US$400 have to be processed on a 24/7 basis.
Q3. (Lauren Jones, InstaPay): Do you see a national instant payments system as vital for customers, as well as for banks in terms of being able to offer innovative services to their customers?
A3: Miguel Diaz, Director of Payment Systems, Banco de Mexico
People know that technology is opening new possibilities and, therefore, they are demanding better services from their providers. Instant payments (IP) are just one of these services being demanded.
At Banco de Mexico we understand that these services can be provided in different ways. Our objective for SPEI is to allow many service providers to connect to a centralized infrastructure that exploits economies-of-scale and positive network externalities. The goal is to bring these benefits within reach to regulated FIs. In this regard, we like to think of SPEI as a central pipeline on which different kind of service can be mounted to satisfy the particular needs of users of the system.
An IP system is vital to fulfil demand and supply requirements for the provision of existing and new payment services. Examples of such demand-side factors include:
- the penetration of information technology (IT) such as internet and smartphones, enhancing connectivity;
- end-user expectations to make and receive payments faster at any time, from anywhere. Financial authorities, including central banks, are expected to accommodate this.
On the supply side, there are factors encouraging IP such as advances in technology related to the internet, big data, mobile technology, computing power and so on which collectively enable banks and payment providers to offer so many more services. As part of this the rise of new market entrants and sometimes the withdrawal of traditional financial firms is pertinent, as are changes in regulatory and supervisory requirements; regulatory arbitrage; and potential cost-cutting through new infrastructures.
In addition, instant payments support a country’s economic development by providing more efficient ways to conduct economic transactions, and by the execution of time-sensitive payments.
Q4. (Lauren Jones, InstaPay): Have you seen take-up of instant payments by Mexican businesses?
A4: Miguel Diaz, Director of Payment Systems, Banco de Mexico
Yes. On one hand, the transactions of large firms are naturally suited for Large Value Payment Systems, because the periodicity and amounts of the payment activities of such enterprises clearly benefit from systems like SPEI. They allow them to instruct payments in a more convenient (e.g. centralized and computerized); safe manner (e.g. avoiding the transportation of large amounts of cash); and cheaper fashion (e.g. avoiding the costs that traditional cash management carries).
On the other hand, as small value payments have gained importance in recent years, in terms of volume, we at the central bank have lately seen small firms using the system to process their payrolls and suppliers. Such transactions do not involve amounts that incentivize big firms to use SPEI, but it is a trend. It shows that the system has been adopted by such enterprises, is gaining traction and universality as we want, and enabling small firms to conduct their daily business operations.
We believe this is, at least in part, due to the benefits of SPEI over other payment alternatives. The benefits of SPEI are:
- instant funds availability;
- more information (thus certainty) about payment status;
- receipts of transactions (known as electronic proof of payment, or CEP, its acronym in Spanish.
In addition, we are developing a Request-To-Pay functionality that will generate further incentives for firms to adopt the use of SPEI in their day-to-day transactions.
Q5. (Lauren Jones, InstaPay): What do you predict for SPEI in the coming ten years?
A5: Miguel Diaz, Director of Payment Systems, Banco de Mexico
On one hand, we expect to see the development of new payment schemes that take more advantage of the presence of smartphones within Mexican society. Moreover, we expect that some of such methods will provide easier and new methods to make any type of payment. In this sense, we believe SPEI must become an alternative to cash and other payment methods and gain ground on them.
Equally, we believe SPEI will continue to support existing payment schemes and become an essential element in the development of a Mexican digital economy. Specifically, we see SPEI becoming another payment alternative for retail transactions and believe it will contribute to the on-going adoption of electronic e-commerce in Mexico.
Latin America (LatAm) Overview
Q6. (Lauren Jones, InstaPay): Instant payments systems are not yet common in other Latin American markets, with less than a handful in operation so far. Why do you think this is and are there efforts to promote IP in the region? [see the Instapay Tracker for more information]
A6: Miguel Diaz, Director of Payment Systems, Banco de Mexico
One possible explanation is the relatively large size of the Mexican economy, which allows for the scope necessary to exploit economies-of-scale in payment systems. The mass of people served by SPEI in Mexico is big enough to justify the expense that creating and maintaining it carries.
Such large critical mass might not be available for every jurisdiction in Latin America (LatAm). However, the fast and continuous advance of technology is pushing down the fixed costs of developing a system that enables the immediate exchange of resources. Thus, it is likely that in the near future we will see other LatAm countries develop systems capable of providing services similar to SPEI, although probably using a different technology as things have changed since our launch.
Q7. (Lauren Jones, InstaPay): Mexico, like many markets in Latin America, have significant financial inclusion challenges. How do instant payments, and other initiatives in Mexico, seek to address these challenges?
A7: Miguel Diaz, Director of Payment Systems, Banco de Mexico
We believe one of the biggest drivers of the lack of financial inclusion is the economic conditions in small communities hindering provision. In other words, those communities that are not dense enough to satisfy a cost-benefit decision from payment service providers to attend to the needs of this segment of the market.
In addition, although the market and some government initiatives have been able to provide some people with accounts, the same may not be true for the provision of the required infrastructure to use them. This is particularly relevant for the adoption of digital payments, since they require a balanced growth between the two sides of the market.
The idea with instant payments is to contribute to the reduction of the costs of performing a transaction. For instance, an IP system may eliminate the need of a business to have a Point of Sale (PoS) to receive electronic payments. A mobile enabled system might replace it.
For instant payments to be successful in the task of financial inclusion, they must be widely adopted by the general public. Uptake matters. To achieve this, we believe implementation should focus on:
- Quality of the services: providing immediate funds availability on a 24/7 basis.
- Simplification of services: payment service providers should strive to construct solutions that are easy-to-use and understand quickly.
- Affordability: Lower prices.
- Safety and security: This is an additional but crucial challenge. It needs to be communicated to the general public that electronic and IP payments are safe, as indeed they are.
If these conditions are fulfilled, then we can expect a faster adoption of IP and associated other payment services using the fast rails. Such schemes reduce the cost of provision, while increasing the value added to final consumers. This delivers a better case for provision by payment service providers from a cost-benefit analysis perspective, enhancing financial inclusion.
Future US / Mexican interoperability?
Q8. (Lauren Jones, InstaPay): The US has just implemented an instant payments system via The Clearing House (TCH RTP) real-time payments launch. Can we expect cross-border IP between the US and Mexico sometime in the future?
A8: Miguel Diaz, Director of Payment Systems, Banco de Mexico
I consider the business case for cross-border instant payments system within North America to be strong. The technology and standards needed in order to implement it are clear. However, there are still obstacles ahead. These are related, in the main, with anti-money laundering and counter terrorist financing (AML/CFT) concerns.
The Mexican financial system has been improving its policies in this area and developing infrastructure such as the Transactional Database on foreign and US Dollar (USD) denominated transactions, in order to reduce this problem and increase trust in the system.
FinTechs, interoperability & openness
Q9. (Lauren Jones, InstaPay): Earlier this year we saw BBVA Bancomer, the largest FI in Mexico, acquire Openpay, a financial technology (FinTech) start-up based in Mexico that enables real-time payments. In other markets, we are seeing greater partnerships between banks and FinTechs/non-traditional payment service providers (PSPs). Is this becoming increasingly common in Mexico?
A9: Miguel Diaz, Director of Payment Systems, Banco de Mexico
Traditional and non-traditional institutions have their own competitive advantages. While non-traditional FIs have the ability to create products that are fast to develop and thus foster innovation, traditional financial firms have their own strengths. They possess an extensive client portfolio, trust from broad sectors of the population, risk mitigation mechanisms and large scale critical infrastructure that allow them to exploit network effects.
It has been observed around various national jurisdictions that these ‘complementarity’ of advantages has led to associations between agents; purchases by traditional institutions of non-traditional ones; and the development of innovative companies with capital from traditional institutions. In other words, FinTechs and banks can cooperate and don’t have to be competitive. However, as these acquisitions are agreements between private companies, we do not have much clarity on how they are taking place in Mexico. It is a function of the marketplace.
Notwithstanding this, modifications of the legislative and regulatory framework are expected to lead to a growth in synergies between non-traditional and traditional FIs. In this regard, we have already seen some small companies start to provide efficient and fast payment services to the Mexican population, as well as technological services to traditional financial firms.
Q10. (Lauren Jones, InstaPay): Open Banking is coming into force via the second Payment Services Directive (PSD2) in Europe, and other countries around the world are in discussions about how to approach this issue. A large European bank that also operates in Mexico has said they want to roll out their Open Banking service in Mexico. Is there a risk that without a central approach the opportunities of open banking could be missed?
A10: Miguel Diaz, Director of Payment Systems, Banco de Mexico
If a bank releases an Open Banking service, and utilises application programming interfaces (APIs) well, it will have an advantage over other banks because it could then more easily provide high added-value services. Other banks could follow the lead and provide such services too, benefitting customers, competition and openness.
However, open banking services make more sense when everyone is on board due to network externalities. A mass migration will allow for the development of more services, like those provided by non-traditional firms, once they have access to all possible end points of a financial transaction.
In this regard, the recent FinTech Law will establish certain obligations to FIs in order to establish APIs and grant financial authorities’ supervision on these topics. It is to mention, however, that the bill, which is currently in discussion in the Congress, grants access only to personal and transactional information. It is not intended to allow third-parties to instruct operations on the financial institutions’ infrastructure.