the payments system in trinidad and tobago - Central Bank of ...

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOpublic education pamphlet series no. 5

public education pamphlet seriesISSN 1817-3160ACKNOWLEDGEMENTSThe Bank wishes to acknowledge the contributions ofMr. Osborne Nurse and Dr. Ronald Ramkissoon, whomade useful and valuable suggestions for thispublication.All rights reserved.No part of this publication may be reproduced in any form or otherwise withoutthe written permission of the Central Bank of Trinidad and Tobago.ISBN:978-976-8134-12-7© Central Bank of Trinidad and Tobago, October 2009

FOREWORDExternal communications are an important part of the businessof the Central Bank of Trinidad and Tobago. The Bank’s outreachinitiatives are intended both to enhance its contribution to educatingand informing the public generally, as well as to assist markets inunderstanding the Bank’s policy actions and intentions.In addition to the regular publications of its Research Department,the Bank’s Outreach Programme has included lectures andspeeches to school children by senior Bank officials, mentoring toundergraduate students and supporting an internship arrangementwith the University of the West Indies.This public education series is also a part of the Programme.Its intention is to provide information on topics and policies thatare relevant to the management of the economy of Trinidadand Tobago. The world of business and trade is a fast-paced,ever-changing and challenging one and the tools of knowledge andinformation must be strategically used to navigate it.This pamphlet series is geared towards a broad readership. Itis likely to be a good source of information for students at thesecondary and tertiary levels, professionals and other membersof the public who are interested in increasing their knowledge ofeconomics and business.Each pamphlet will cover current and topical issues andexplain new economic initiatives. In the series, every effort willbe made to present the material in as non-technical a manner aspossible while adhering to sound economic analysis and the highesteditorial standards.The Payments System of Trinidad and Tobago

FOREWORDTo this end, the Bank invited well-known economists from theprivate sector to join the editorial team, firstly to suggest topics thatwould be of interest to the public and secondly, to advise on ways toreach the target audience. The Bank also intends to invite guestcontributors to the series from time to time.The current pamphlet examines the payments system inTrinidad and Tobago with special emphasis on non cash methods ofpayment.We hope that the series raises the level of public awarenessand public discourse on economic issues and contributes to thestrengthening of economic policy formation in Trinidad and Tobago.Ewart S. WilliamsGovernorThe Payments System of Trinidad and Tobago

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOTABLE OF CONTENTSPageINTRODUCTION 2 - 3ROLE OF THE CENTRAL BANK INTHE NATIONAL PAYMENTS SYSTEM 4 - 5PAPER-BASED PAYMENTS 6 - 11PAYMENT CARDS 12 - 18ELECTRONIC TRANSFER SYSTEMS 19 - 23USAGE OF PAYMENT INSTRUMENTS 24 - 28DELIVERY CHANNELS 29 - 30CONCLUSION 31APPENDICES 32 - 42APPENDIX I - GLOSSARYAPPENDIX II - ADVANCES IN PAYMENTS INTERNATIONALLYAPPENDIX III - CORE PRINCIPLES FOR SYSTEMATICALLY IMPORTANTPAYMENT SYSTEMS

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOprocedures. The Operators for the systemically important paymentsystems are the following:• Cheque System – Central Bank• LINX – Infolink Services Limited (ISL) 1• ACH – Trinidad and Tobago InterbankPayments System (TTIPS)• RTGS – Central BankIn addition to being the operator for the cheque system and the RTGS,the Bank is also a participant in these systems as well as the ACH asit carries out payment transactions for itself and its customers.The diagram below shows the linkages between the Bank and thesystemically important payment systems.Figure 1A Simplified Illustration of theNational Payments SystemMessage flowsTransfer of funds1 LINX is operated by Infolink Services Limited (ISL), a joint venture company created in 1993 byfour commercial banks.

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOII. PAPER-BASED PAYMENTS - CHEQUESThis section discusses the major paper-based payment system, theCheques system. 2The use of cheques in Trinidad and Tobago is governed by the Bills ofExchange Act Chapter 82:31. According to Section 73 of the Act, “acheque is a bill of exchange drawn on a banker payable on demand”.This means that a cheque is a written order from an account holderinstructing his bank to pay upon request a specified sum of money toa named beneficiary (payee).Cheques are required to have certain information which attest to theirauthenticity and facilitate their processing. These are as follows:• Amount• Bank Name• Cheque Number• Customer’s (Payer) Name and Address• Magnetic Ink Character Recognition (MICR) Line• Beneficiary’s (Payee) Name• Payer’s signature2 Other less commonly used paper-based forms of making payments include money orders.

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOFigure 2 below shows the location of this information on a typicalcheque.Figure 2Labelled Image of a ChequePayer’s Nameand detailsPayeeMR. JOHN DOE1645 Address StreetTrinidad and TobagoPAY TO THEORDER OFDATE$243Cheque NumberDate of IssueAmountBank NameBANK NAMEStreet AddressPort-of-SpainTrinidad and Tobago/ 100 DollarsJohn DoeChequeNumberRoute andTransit NumberAccount NumberMICR LinePayer’sSignatureTypes of ChequesCheques can be grouped into three broad categories based on theaccount on which they are drawn:1. Personal Cheques – cheques drawn on the accountof a private individual and generally negotiated in thecountry in which it is issued and in the currency of thatcountry;2. Business or Commercial Cheques – chequesdrawn on a company account and negotiated in thecurrency and country of issue and used to effectpayments of the company to its suppliers, creditors,etc.; and

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGO3. Manager’s Cheques – cheques drawn directly on theaccount of a bank rather than the account of acustomer (individual or business). These are pre-paidinstruments.Negotiation of ChequesCheques must be negotiated to allow the beneficiary (payee) to obtainvalue. This means that the cheque must be (i) endorsed and (ii)presented for payment. Endorsement is done by the payee affixinghis signature to the back of the cheque. In Trinidad and Tobago,banks have agreed to use the crossing stamp of the collecting bank asconfirmation of endorsement for amounts not exceeding $10,000.00.However, the bank upon which the cheque is drawn, the paying bank,has the right to request the endorsement of the payee.A cheque may be transferred to a third party, that is, someone otherthan the named beneficiary. In this case, banks require instructions(written at the back of the cheque) along with the endorsement of thenamed beneficiary to make the item payable to the third party. Banksmay also request identification documents of the named beneficiaryin order to confirm that good title is being transferred to the thirdparty. Details of these documents, such as an identification cardnumber, may be written at the back of the cheque alongside thebeneficiary’s endorsement as further confirmation of the authenticityof the transfer request.

THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOCrossing of ChequesA crossed cheque has two parallel transverse lines, with or withoutany words, drawn at the top of the cheque. A crossed chequewithout any words indicates a General Crossing, while the inclusionof words to the effect “Account Payee Only” indicates a RestrictiveCrossing.By crossing a cheque, a payer gives instruction to his bank todeposit the funds to the payee’s account rather than to pay cash atthe counter. A crossed cheque is therefore payable only through acollecting bank (that is, it must be deposited). By contrast, an opencheque can either be deposited or encashed at the counter of thebank upon which it is drawn (payer’s bank).Clearance and Settlement of ChequesCheques negotiated at the counter of the bank on which they aredrawn are treated as direct debits to payers’ accounts. This meansthat funds are directly withdrawn from the payer’s account and eitherpaid in cash (open cheques) or deposited to the payee’s account forimmediate value. Cheques which are not negotiated at the payer’sbank must be cleared and settled through the cheque paymentsystem.Clearance is the process of verifying that the payer has the money tomake the payment and that the cheque is valid (has all the required

10THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOinformation) while settlement refers to the transfer of funds to thepayee or beneficiary with finality. Clearance ought to be completedahead of settlement.At the end of each business day, banks sort the cheques theyreceive, list them and send the cheques and listing to the respectivepaying banks on which they are drawn. Upon receipt of the physicalcheques, the paying banks peruse the cheques (for cheque detailssuch as the payer’s signature) and verify the availability of funds inthe payers’ accounts. The total value to be paid to each bank asevidenced by the cheques is reconciled against the value on thelisting submitted by each bank.At 9.30 a.m. each morning, banks (including the Central Bank) meetat the clearinghouse at the Central Bank, to reach mutual agreementon the net amounts due to each other on the basis of the chequelistings received the previous day. The Central Bank is the operatorof the Clearinghouse and supervises this meeting. At the close ofthe meeting, the clearance process is complete and the Central Bankcarries out the settlement. The latter is achieved by making a creditor debit of the agreed amount to each bank’s account through theRTGS.By agreement, there is a limit of 4 days, starting from the day thecheque was received by the payer’s bank, for the return of chequeswhich have any kind of irregularity or for which there is a lack offunds in the payer’s account.

11THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOAlthough modern technologies such as cheque sorting and countingmachines are now used to improve the cheque processing operations,there is still a large amount of manual processing in this means ofpayment.The following is a diagrammatic representation of the clearing andsettlement process for cheques.Figure 3Cheque Clearing and SettlementProcess1 2BeneficiaryBankPayerBankBeneficiary36(Credit)CentralChequeClearingHouse4Bank5(Debit)Message flowsTransfer of fundsReal TimeGross SettlementSystem(RTGS)

12THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOIII. PAYMENT CARDSThis section describes the key characteristics as well as theprocessing arrangements for payment cards. Like cheques,payment cards have some essential information and security featuresthat confirm their validity, as well as clearance and settlementarrangements to transfer value to the beneficiary. However, unlikethe cheque system, the clearance and settlement arrangements areautomated.The two most common types of payment cards are credit cards anddebit cards. 3Credit CardsA credit card is a type of payment card which allows the owner tomake payments (or obtain cash) drawing on a line of credit (loan)granted by the issuer of the card. In Trinidad and Tobago, creditcards are issued by the commercial banks under the VISA andMastercard labels.This facilitates their acceptance both locallyand internationally at any merchant (or ATM) that is set up to acceptthese labels. Credit cards are also accepted over the internet andthe telephone to pay for goods and services.Issuers of credit cards usually charge an annual membership feeto the cardholder’s account. Additionally, if the cardholder does not3 There are also prepaid cards, e.g. phone cards, which tend to have less broad-based use. The issuerof a prepaid card is paid upfront for the value on these cards. It operates somewhat like a debit cardthat is drawn on the issuer.

13THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOrepay the entire balance in full when due, an interest fee is applied tothe unpaid portion. In addition some card issuers charge a late fee.The key information on a credit card is the bank’s name, thecardholder’s name, a unique card number, the expiry date, theinternational company label as well as special security features.There is a magnetic strip to the back of the card which stores essentialcustomer and account information and bears the signature of thecard owner. The following diagram shows the key elements on acredit card.Figure 4Labelled Diagram of a Credit Card

14THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOClearance and Settlement of Credit Card TransactionsCredit card payments processing takes place in two phases:(i) authorisation and (ii) clearance and settlement.At the authorisation stage, approval is granted for the card to be usedin payment for goods and services when the cardholder presents itto a merchant. When the merchant swipes the card in the specifiedterminal, the transaction information is transmitted electronicallyto the issuer which almost instantly returns the authorisation. Thecardholder is required to sign a copy of the payment receipt to confirmthe transaction (with some exception, for example, purchases madeover the internet).The transfer of value to the merchant takes place through theclearance and settlement process when the merchant sendshis credit card sales information to his banker. The information issent to the hub of the international credit card company which haspre-approved authorisation from all participating banks to clear andsettle balances. At the hub, the accounts of banks are debited andcredited accordingly and advices sent to the merchant’s bank thatsettlement is made whereupon the merchant is paid. An advice isalso sent to the cardholder’s bank to reduce the available credit. Thecardholder has a deadline by which to settle payment after which hepays interest on the outstanding balance.The following diagram illustrates the clearance and settlementprocess for credit cards.

15THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOFigure 5Credit Card Clearance and Settlement Process1CardholderMessage flowsTransfer of fundsMerchant72MerchantBank3 International4Card Company(VISA Master Card)6 58Cardholder’sBank10SettlementAgent9Debit CardsA debit card is a type of payment card which allows the owner tomake payment (or obtain cash) by drawing directly on his account ata deposit-taking institution. Debit cards have broadly similar featuresand uses as credit cards.

16THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOThe main differences, apart from the source of the funds being used,are the following:1. For point of sale transactions, debit card users mustenter a personal identification number (PIN) to effecta transaction, whereas credit card users affix theirsignatures to a copy of the receipt to complete thetransaction.2. As a security measure, debit cards tend to have adefined maximum amount which may be utilisedwithin a specified cycle time, whereas for credit cardsthe limit reflects the amount of the credit line grantedto the holder by the issuing institution.3. From the merchant’s point of view, there is a flat feeper transaction with the debit card facility, whereasthe fee for the credit card is usually based on apercentage of the transaction value.4. The credit card has a flat annual fee while in generalthere is no annual fee for the debit card.In Trinidad and Tobago, debit cards are issued either under thelocal brand, LINX or under international brands such as VISA andMastercard, but the LINX card is the most common debit card. Insome instances, the LINX debit card is associated with an internationalnetwork to allow cardholders the capability of use wherever theinternational network resides.

17THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOClearance and Settlement of Debit Card TransactionsAs with credit cards, debit card payments processing takes place intwo phases: (i) authorisation and (ii) clearance and settlement.Similar to credit cards, the approval process at the authorisationstage is completed almost instantaneously. When a cardholderpresents a debit card in payment for goods and services, he is requiredto enter his Personal Identification Number (PIN). Information onthe transaction as well as the PIN is transmitted electronically to thecardholder’s bank which checks that funds are available and returnsa message approving the payment, at which point the merchantcompletes the transaction with the customer.The transfer of value to the merchant takes place through theclearance and settlement process. For internationally-brandeddebit cards, the processing arrangements are similar to those forcredit cards (except that money is drawn from the users’ banks andultimately the users’ bank accounts rather than from a credit facility).The merchant sends the transaction information to his banker whothen pays the merchant based funds from the settlement agent.In the case of a LINX card, on a daily basis, the operator of theLINX network (a) sorts all switched transactions received throughPOS terminals and ATMs and calculates net settlement positionsfor member banks and (b) sends advices to all banks on their netsettlement position; and (c) sends payment instructions to thesettlement bank. The settlement bank is responsible for transferring

18THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOvalue to net creditor banks, while the banks in a net debtor positionare required to transfer funds to the settlement bank.The following diagram illustrates the clearance and settlementprocess for LINX.Figure 6LINX Clearing and Settlement Process1Message flowsTransfer of fundsMerchant72MerchantBank3 4Operator(LINX)(CARD COMPANY SWITCH)6 58Cardholder’sBank10SettlementAgent9

19THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOIV. ELECTRONIC TRANSFER SYSTEMSElectronic transfer systems are becoming a more and more popularmeans of payment because they are faster and provide greaterconvenience for a variety of transactions. In this form of payment,there is no physical payment instrument, rather instructions are enteredin an electronic system which completes the processing. In Trinidadand Tobago, the Automated Clearing House (ACH), which is locallybranded as Transach, and the Real Time Gross Settlement (RTGS)system, branded as safe-tt 4 , are the major electronic payment transfermechanisms.Automated Clearing House (ACH)The ACH is owned by six commercial banks and the Central Bank,which have established a company, the Trinidad and Tobago InterbankPayments System (TTIPS), to manage its operations. 5 The ACHis used for large volume, low value (under $500,000) payments.Payments sent through the ACH are cleared and settled within 24hours.Anyone with access to a bank who wants to make a payment tosomeone who has a bank account can use this system. To use theACH, an individual (or company) simply has to request a bank to usethis means of payment and provide details of the payment such asthe amount, the beneficiary’s account number and the date of payment.4 Safe-tt- Settlement Assured for Financial Exchange in Trinidad and Tobago.5 At the time of the introduction of the ACH, there were only six commercial banks.

20THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOCompanies can send an electronic file containing multiple paymentrequests to their bank. (Note if the payer and the beneficiary havethe same bank, this would be processed as an internal transfer andthere is no need to do an ACH transaction).There are two types of ACH transactions: (a) Direct Debit transactionsand (b) Direct Credit transactions. A direct credit is an electronictransfer of a payment from a customer (an individual or company)into the account of the beneficiary on the instruction of the customer.A direct debit is an electronic transfer of a pre-authorised paymentfrom a customer’s account to the account of a beneficiary on theinstruction of the beneficiary. The latter is generally used for regularpayments such as for utility bills.Clearance and Settlement of ACH transactionsThe processing arrangements for ACH transactions (direct credit)are as follows:• Customers request their banks to make paymentsthrough the ACH.• The banks deduct funds from their customers’accounts and electronically send the paymentinstructions to the ACH.• The ACH Operator sorts and batches paymentinstructions received from all banks and (i) forwardsinstructions to the respective receiving banks to credit

21THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGObeneficiaries’ accounts and (ii) sends a net settlementfile to the RTGS to execute the payment.• The payment is settled on the RTGS by debiting andcrediting the respective banks. These steps areshown in the diagram below.Figure 7Diagrammatic Representation ofACH Clearing and SettlementPayer1 2 3Payer’sBankAutomatedClearingHouseReceiver’sBank4Message flowsTransfer of fundsNet DebitBank5 6Real TimeGross SettlementSystem(RTGS)Net CreditBankDirect debit transactions on the ACH network are processed in asimilar manner to the direct credits except that the flows are in theopposite direction, that is, from the beneficiary’s bank to the ACH tothe payer’s bank.

22THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOReal Time Gross Settlement (rtgs)The RTGS system is owned and managed by the Central Bank. It isused for large value ($500,000 and over) or time critical payments ofany amount. It is the only non-cash system in which value is transferredfrom payer to payee with finality almost immediately. All commercialbanks are required to participate in the RTGS system.The process for use of the RTGS is similar to that for the ACH. Anindividual or company simply requests a bank to use this system andprovides the required payment details. Unlike with the ACH whichprocesses payments on a batch basis, the RTGS receives andprocesses each transaction individually as the customer makesthe request.Clearance and Settlement of RTGStransactionsHaving received the customer’s instructions, the bank withdraws moneyfrom the customer’s account and electronically sends a payment instructionto the RTGS. The RTGS system immediately debits the payingbank account and credits the beneficiary’s. All banks are able to viewtheir transactions on line. The receiving bank is required to pass on thefunds to the beneficiary’s account within two hours of receipt.

23THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOThe clearing and settlement process for an RTGS payment is depictedin Figure 8 below.Figure 8RTGS Clearing and SettlementMessage flowsTransfer of funds

24THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOV. USAGE OF PAYMENT INSTRUMENTSCheques have continued to be an important means of payment;however its usage has slowed since 2000. By contrast, there hasbeen a steady increase in the use of electronic payments. Thevolume of electronic transactions grew at an average annual rate of19% between 2000 and 2008 while the volume of cheques usagegrew at an average annual rate of only 2.3% 6 (See Chart I).CHART IVolume Growth of Payment InstrumentMillions Millions403530252015105-2000 2001 2002 2003 2004 2005 2006 2007 2008ChequesElectronicsSource: Central Bank of Trinidad and TobagoIn 2000, 61% of non-cash payments were made by cheques and39% were paid by electronic means. By 2008, the situation wasreversed with 35% of non-cash payments being made by chequesand 65% by electronic methods. (See Chart II).6 Electronic payment instruments consist of debit and credit point of sale transactions, RTGS and ACHtransactions. The point of sale transactions have been in existence since 1994 while the RTGS andACH transactions were introduced in October 2004 and October 2005 respectively.

25THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOCHART IIRelative Importance of Non-Cash Volume of Transactions70%60%50%40%30%20%10%0%2000 2001 2002 2003 2004 2005 2006 2007 2008ElectronicChequesSource: Central Bank of Trinidad and TobagoCheques 7The data shows that cheque usage grew at an average annual rateof 5% between 2002 and 2004 and remained steady thereafter.In terms of the value of payments made by cheque, there was analmost steady increase throughout the entire period with a greateracceleration since 2007. The latter may reflect the higher level ofinflation in that period. Chart III shows the volume and value ofcheque usage between 2000 and 2008.7 The data for cheque usage in this section pertain to those cheques cleared through the clearinghouse.It does not include cheques drawn on the banks at which they were deposited.

26THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOCHART IIIVolume and Value of ChequesMillions1412108642-250.00200.00150.00100.0050.00-Billions200020012002200320042005200620072008VolumeValueSource: Central Bank of Trinidad and Tobago (Cheques cleared via the Central BankClearinghouse)Electronic PaymentsThe largest volumes of electronic payments are made with debitand credit cards. In 2008, they accounted for 95% of all electronicpayments with debit card point of sale transactions accounting forapproximately 61% and credit card point of sale transactions makingup the remaining 34%. In value terms however these transactionsreflect only 3% of electronic payments. This reflects the high usageof these cards for small retail transactions.The ACH, which is also used for retail payments, accounts for a smallernumber of transactions in both volume and value terms. However,in terms of value, it is rapidly reaching the level of payments throughpayment cards.

27THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOOn the other hand, the RTGS system accounted for the largestportion of payments in value terms but the smallest number in volumeterms. In 2008, 96% of the payments in terms of value were madevia the RTGS system but this represented only less than one percentin terms of the volume of payments. This is because, an increasednumber of large value ($500,000) private sector transactions are nowmade through the RTGS system (See Table I). 820072008TABLE IComposition of Electronic Payment Instruments(2006-2008)PercentageYear RTGS ACHVolume 0.1 0.72006Value 95.9 1.1Volume 0.1 3.0ValueVolumeValueSource: Central Bank of Trinidad and TobagoCountry Comparison96.00.195.61.45.31.7Debit andCreditCards99.23.096.92.694.6The trend to greater use of electronic payments in Trinidad andTobago mirrors what is happening worldwide. As countries becomemore developed, there is a growing demand for faster and more2.78 The Ministry of Finance is in the process of amending the Exchequer and Audit Act to allow theGovernment to make payments by electronic means.

28THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOconvenient means of payments and this has led to an increaseduse of electronic systems for payments. Consequently, there tendsto be an increase in the use of more advanced electronic paymentinstruments (See Appendix II). The use of these means of makingpayments, while growing, is less prevalent in Trinidad and Tobagobecause of the lower level of internet penetration and mobiletechnology. Table II below shows the proportionate use of chequesand electronic payments by a select group of countries. In the caseof more developed countries, electronic payments include internet,mobile and other more modern forms of making payments.TABLE IIUse of Payment Instruments in Selected Countries 2008(Percentage)(2006-2008)Year RTGS ACHAustralia 8Canada * 15Japan * 5Sweden * 0T&T 38United Kingdom * 11United States * 29928595100628971Source: * CPSS Red Book Statistical Update (All other countries) Central BankWebsites

29THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOVI. DELIVERY CHANNELSDelivery channels are the mechanisms used to deliver paymentinstructions. They are not payment systems since they do not performthe clearance and settlement function, rather they are the networksthrough which payments instructions are transmitted. Some commonforms of delivery channels are Automated Teller Machines (ATMs),Point-of-Sale (POS) networks, telephones and the internet. 9Automated Teller Machines (ATMs)An Automated Teller Machine (ATM) is a computerised self-servicedevice permitting the holders of an appropriate card and personalidentification number (PIN) to withdraw cash from their account andaccess other banking services. 10 They also form a part of the networksused by card companies (such as LINX, VISA and MasterCard) todeliver cash to customers. These machines are owned and operatedby the commercial banks and are generally located at their branchesand areas with high commercial traffic which have adequate security,such as hotels and shopping malls.ATMs were introduced in Trinidad and Tobago in 1985-86 and thereare currently about 324 of them located throughout the country. Thenumber of withdrawals from ATMs has increased more than threefoldsince 2000.9 There are also a number of payment intermediaries which collect payments on behalf of companiese.g. TTPost.10 Banking services refer to proprietary customer transaction requests such as account transfers andbill payments.

30THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOPoint-of-Sale (POS) TerminalsA Point-of-Sale (POS) terminal is the front end for a computerisedsystem that processes credit and debit card transactions. They areconveniently located at the cashier stations of a large number ofmerchants.POS machines were introduced to Trinidad and Tobago in 1997. Asat the end of 2008 there were approximately 12,000 POS terminalsinstalled throughout the country. The use of these terminals has beenincreasing steadily although the volume and value of transactionsthrough them remain lower than those through ATMs. In 2008, thevolume of transactions through the POS terminals was over fivetimes that in 2000.Telephone and InternetTelephone and internet or online banking were first offered bycommercial banks in Trinidad and Tobago in 1993 and 2000respectively. They offer customers the convenience of monitoringtheir accounts and making payments wherever they have access tothese channels and whenever they choose to access the service.Although historical data on their usage is not available, the statisticsfor 2008 show that there were approximately 390,000 telephonebanking and 443,000 internet banking transactions.

31THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOConclusionRecently, more focus has been placed on the operationsof the payments system and their role in the financialsystem. Developments in technology have led to manyinnovations in the way in which payments are made –both in respect of payment instruments and the clearingand settlement arrangements.These systems have allowed for faster and moreconvenient means of making payments. Given the manychoices that are now available, the speed with whichtransactions are settled and the potential consequencesfor their malfunction, the central banks are now payingcloser attention to the oversight of these systems.

33THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOAPPENDICES

34THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOAPPENDIX IGLOSSARYBatch:The transmission or processing of a groupof payment orders and/or securities’transfer instructions as a set at discreteintervals of time.Beneficiary:A recipient or receiver of a payment,which can be a person or an institution(also known as the payee.)Bill of Exchange:An unconditional order in writingaddressed by one person to another,signed by the person giving it, requiringthe person to whom it is addressed to payon demand, or at a fixed or determinablefuture date, a sum of money to, or to theorder of, a specified person or bearer.Collecting Bank:The bank (usually the seller’s bank) thatcollects payment from a buyer’s bank.The collecting bank forwards the paymentinstrument to the paying bank (usually thebuyer’s bank) for settlement.

35THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOGLOSSARYCrossing Stamp:A stamp which indicates the name of thebank, the location of the office and thedate of the transaction which is imprintedon the face of negotiated instruments.Deposit-TakingInstitution:A licenced financial institution authorisedto receive deposits from an institution orindividual.Draft:An order drawn by a bank on itself oranother local or foreign bank for a sum ofmoney payable to order on demand.Electronic Money:The monetary value represented by aclaim on the issuer which is (a) stored onan electronic device; (b) issued on receiptof funds of an amount not less in valuethan the monetary value issued; and(c) accepted as a means of payment bypersons other than the issuer.Encash:To convert a payment instrument forexample a cheque, into cash.

36THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOGLOSSARYFinality:A settlement or a transfer is final whenit is unconditional, enforceable andirrevocable.Hub:A centralized location that providescoordination and synchronization ofservices to electronic commerce, its usersor partners.Netting (bilateral /multilateral):This is an agreed offsetting of positionsor obligations by trading partners orparticipants. The netting reduces alarge number of individual positionsor obligations to a smaller number ofobligations or positions. In bilateral nettingthere is an arrangement between twoparties to net their bilateral obligations.With multilateral netting the arrangementis among three parties or more.Operator:An institution which is responsible foroperating a payment system.

37THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOGLOSSARYOversight:A public policy activity principally intendedto ensure the safety, soundness, reliabilityand efficiency of the payment systemin order to promote the effectiveness ofmonetary policy, contribute to the stabilityof the financial system by limiting therisk of systemic crises, and ensure thepreservation of public confidence inmoney, money transfer mechanisms andthe use of payment instruments.Payee:See BeneficiaryPayer:The party to a payment transaction whichissues the payment order or agrees to thetransfer of funds.PaymentInstrument:Any instrument which enables the holder/user to transfer funds.

38THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOGLOSSARYPoint Of Sale(POS) Terminal:Device allowing the use of payment cardsat a physical (not virtual) point of sale.The payment information is capturedeither manually on paper vouchers or byelectronic means.Pre-paid Card:A card on which value is stored and forwhich the holder has paid the issuer inadvance.SettlementAccount:An account held at a central bank ora central securities depository or witha central counterparty or any otherinstitution acting as a settlement agent,which is used to settle transactionsbetween participants in a system.Settlement Agent:The institution across whose bookstransfers between participants take placein order to achieve settlement within asettlement system.

39THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOGLOSSARYSwitchedTransactions:Switched transactions are transactionsthat are exchanged between financialinstitutions through a processing network.Wire transfer:A wire transfer is an electronic transfer offunds. The identities of the bank accountholders are confirmed and the funds areguaranteed, so the potential of fraud in awire transfer transaction is limited. A wiretransfer can also be called a bank transferor EFT (electronic funds transfer).Source: Association of Payment Clearing Services Glossary; Bank ofInternational Settlement; ACH Terms Glossary; European Central BankGlossary and relevant laws in Trinidad and Tobago.

40THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOAPPENDIX IIAdvances in Payments InternationallyInternationally, companies have been introducing more sophisticatedtechnology to payment cards and mobile phones to facilitate day today payments. Some of the newer payment methods include thefollowing:-• Contactless payment cards• Smart cards• Mobile paymentsContactless Payment CardsContactless payment instruments, also referred to as “touch andgo”, are credit or debit cards which use radio frequency identificationtechnology to capture the payment information and transmit it to apayment network. They contain a chip and antenna which enablecardholders to make their payments by having their card in closeproximity to the terminal, rather than physically swiping or insertinga card into a point-of-sale device. The benefit of this innovation isthe added convenience and speed with which consumers completetheir transactions. This form of payment is used for high-volumeoperations such as fast-food outlets and mass transit systems inlarger territories such as the United States, Europe and Japan.

41THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOSmart CardsA smart card, also known as a chip card or integrated circuit card,contains an operating system similar to that in a personal computer.It is capable of storing large amounts of information, includingpayments data, which can be processed at terminals configured toaccept them. For example, a single smart card can be used as anidentification card, a pre-paid card and a credit card. In Europe,smart cards are widely used in the health, insurance and bankingindustries.Mobile PaymentsMobile phones are increasingly being used as a channel to makepurchases for small value transactions such as transportation fares,books and magazines in countries in Europe and Asia. In somecases, payment is made through customary payment instrumentssuch as payment cards, while in other cases, the consumer’s mobileaccount is charged for the purchase of goods and services. A keyadvantage of this technology is that a payment transaction does notnecessarily involve the use of a payment card or a bank account,thereby making it convenient for the un-banked.

42THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOAPPENDIX IIICore Principles for Systemically ImportantPayment SystemsI. The system should have a well founded legal basis under allrelevant jurisdictions.II.The system’s rules and procedures should enableparticipants to have a clear understanding of the system’simpact on each of the financial risks they incur throughparticipation in it.III. The system should have clearly defined procedures forthe management of credit risks and liquidity risks,which specify the respective responsibilities of the systemoperator and the participants and which provide appropriateincentives to manage and contain those risks.IV. The system should provide prompt final settlement on theday of value, preferably during the day and at a minimum atthe end of the day.V. A system in which multilateral netting takes place should, ata minimum, be capable of ensuring the timely completion ofdaily settlements in the event of an inability to settleby the participant with the largest single settlementobligation.

43THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOVI. Assets used for settlement should preferably be a claim onthe central bank; where other assets are used, they shouldcarry little or no credit risk and little or no liquidity risk.VII. The system should ensure a high degree of security andoperational reliability and should have contingencyarrangements for timely completion of daily processing.VIII. The system should Key MORTGAGE provide a means TIPS of making paymentswhich is practical for its users and efficient for the economy.IX. The system should have objective and publicly disclosedcriteria for participation, which permit fair and open access.X. The system’s governance arrangements should be effective,accountable and transparent.

44THE PAYMENTS SYSTEMIN TRINIDAD AND TOBAGOEric Williams Plaza, Independence SquarePort of Spain, Trinidad and Tobago, Postal Address: P.O. Box 1250Telephone: (868) 625-4835; 4921; 5028 Fax: (868) 627-4696 Telex: 22532; 22386E-mail Address: info@central-bank.org.tt