Central Banking Technical Assistance to Countries in Transition

Statement on an Electronic Payments System

Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
Published Date:
December 1995
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The great changes in the political and economic areas that have occurred recently in the Baltic countries, Russia, and other countries of the former Soviet Union have also affected the field of banking, including the payments system. The payments system previously in existence was geared toward the needs of a monobank, centralized economy within a unified state structure. The transition to a market economy has rendered this system obsolete.

The National Bank of Ukraine and commercial banks have modified, and continue to modify, the old payments system in order to adapt it to the new conditions and create a reliable, safe, and effective system that is capable of meeting the needs of industry, the trade sector, and after a period of time also individual clients, for making payments.

The National Bank has received excellent assistance and support from foreign colleagues in this effort. Missions of the IMF visited Kiev regularly and met with representatives of the National Bank, commercial banks, and government organizations, delivered lectures on issues of modern payments technologies and the organization of banking, provided advice to Ukrainian specialists, and made qualified expert assessments of the work done in the Ukrainian financial and banking sector. In 1993 alone, IMF missions that included specialists on payments systems visited Kiev three times. The World Bank also provided excellent assistance in this field. A permanent representative office of the World Bank, which employs staff with experience in the area of payments, operates in Kiev and specialized missions visit regularly. Fruitful cooperation has developed between the National Bank and the Deutsche Bundesbank. In terms of history and potential, many common features can be found in the banking systems of the two countries. This is why German experience is very useful to Ukraine. In April 1993, a delegation of executives of the National Bank visited Germany at the invitation of the Bundesbank. The executives were given an opportunity to familiarize themselves with the specifics of the German system of payments. Continuous contacts are maintained between the central banks of the two countries; recently, an advisor from the Bundesbank started to work at the National Bank of Ukraine.

Cooperation with foreign banks and international banking organizations has been very beneficial for the development of the philosophy and a functional model of a Ukraine-wide electronic system for interbank settlements. Representatives of all Ukrainian commercial banks that have shown interest in this development have also taken an active part in it.

The following model of operation of the system for electronic interbank settlements (the network of clearing chambers of Ukraine) was implemented in the first half of 1993. The central clearing chamber is located at the upper level of the system. It should service interregional bank settlements, provide monitoring, and reconcile interregional turnover. The central clearing chamber is a subdivision of the headquarters staff of the National Bank. The central clearing chamber is served by the software/hardware system ARM-1, which ensures protection against unauthorized tampering with the system, the verification of the correctness of the generation of electronic documents, and the transmittal of interregional electronic documents through the facilities of electronic mail of the National Bank. The middle level of the network is represented by regional clearing chambers that service interbank settlements both within their own regions and at the interregional level, and constitute subdivisions of the relevant regional branches of the National Bank. Each regional chamber is served by its own software/hardware system, ARM-2, which ensures protection against unauthorized tampering with electronic documents, the exchange of electronic documents between the network of clearing chambers and banks participating in interbank settlements, the generation and transmittal of interregional payments to the central clearing chamber, and the receipt of interregional payments from that chamber and their analysis.

Subscribers of the network of clearing chambers, that is, participants in electronic settlements, are located at the lower level of the network. The ARM-3 system is put at the disposal of each participant in interbank operations; it ensures the verification of the batches of payments documents prepared by a participating bank, the exchange of documents with the network, and their protection against unauthorized tampering.

All credit and finance enterprises and organizations that have correspondent accounts at the relevant regional branches of the National Bank, meet the technical requirements for operation within the electronic payments system, and take part in interbank settlements in the territory of Ukraine can participate in electronic payments. Participants in electronic payments operate on the basis of contracts with regional branches of the National Bank for effecting interbank settlements and the Statute on Interbank Settlements in Ukraine, in keeping with the Regulations for the Operation of the Network of Clearing Chambers of Ukraine.

The software and data protection features were developed by the specialists of the National Bank and transferred to participants in the system of electronic interbank settlements in July through September 1993. Trial operation of the system began in early October 1993. The implementation of the system of electronic interbank settlements for industry-wide operation began on the basis of the results of trial operation, after appropriate refinements and improvements were made.

The introduction of the new system made it possible to completely abandon the use of postal and cable advice notes effective January 1, 1994 and to improve considerably the speed, quality, and reliability of effecting payments and the security and confidentiality of banking information. The system provides for a complete ban on overdrafts in the accounts of participants during the day. Due to the philosophy of the system architecture, electronic settlements are effected in keeping with the true status of the correspondent accounts of participating banks at the National Bank, and the systemic risk inherent in such systems has been reduced to a minimum. The experience gathered in recent months from the operation of the system of electronic interbank settlements has confirmed its high functional qualities and mapped out the path for its further development and improvement.

A new form of payments instruments—electronic payments documents—is used in electronic interbank settlements. Such documents have a format established by the National Bank; they carry information concerning the transfer of funds. Such documents are prepared, transmitted, and received solely with the use of the software/hardware systems approved and certified by the National Bank, and are kept in files on magnetic media. Electronic documents are protected by special features that are provided in a centralized manner by the National Bank in keeping with the Statute on the Protective System for Electronic Banking Documents in the Computer Network of the National Bank of Ukraine and the Statute on Arbitration Services by the Service for the Protection of Electronic Banking Documents in the Computer Network of the National Bank of Ukraine.

The system for protecting banking information in the network of clearing chambers includes a set of cryptographic measures and a system of keys for them, as well as a set of technological and organizational measures. Each interbank electronic document is protected by encryption in keeping with a special electronic signature algorithm. When such a message is received, it is authenticated and deciphered. Therefore, the authentication of the sender of the payments document and the absolute authenticity and integrity of the document are ensured because forgery in the encrypted form is impossible. It is envisioned that cryptographic and protective hardware will be used in the future.

An archive of signed and transmitted electronic payments documents, as well as of those received and authenticated, is maintained in the encoded form. At the end of a business day, the archive is copied onto magnetic media to be stored or used as evidence in the event that a lawsuit is considered by a court of arbitration (to this end, data are decoded by a special protective service of the National Bank). The system of keys for cryptographic protection and the keys themselves constitute the foundation of protection; for this reason, strict secrecy rules apply to their use. The generation of keys (codes), their transportation, control over their documentation and use, the issuance of permits for their acquisition, technical and maintenance servicing, and so on are effected solely by the protective service of the National Bank.

The key characteristics of the system of electronic payments as of March 1994 were as follows:

  • — 1,475 (almost 100 percent) banking institutions in Ukraine were participating in electronic settlements.

  • — 189 (100 percent) banking institutions in Kiev and Kiev Province were participants.

  • — 300,000 to 400,000 transactions were processed daily by the system, of which 12,000 to 20,000 were interregional payments.

  • — The total amount of daily turnover in Ukraine was about Krb 20 trillion.

  • — The total amount of daily interregional turnover in Ukraine was about Krb 3 trillion.

  • — About 40,000 transactions were processed daily in Kiev and Kiev Province.

  • — The total amount of daily turnover in Kiev and Kiev Province was about Krb 3 trillion.

The Ukrainian system for electronic interbank settlements approximates the standard of similar systems in the developed countries of Europe and the rest of the world.

In the future, the development and improvement of this system is envisioned with a view to switching to operations in real-time mode and to serving not only banks but other transactors of economic operations and, in the long term, individuals also. The potential of the telecommunications network in Ukraine and trends in its development in the immediate future allow us to hope that this task will be accomplished successfully.

However, existing technologies, hardware and software resources, and the available infrastructure, especially means of communication, do not always make it possible to perfect the payments system in line with existing needs. In particular, at present the electronic settlement system cannot function as a centralized system for the payment of large amounts in real-time mode. New, up-to-date methodological, organizational, and technical solutions are necessary in order to accomplish these tasks. There is an acute need to perfect the hardware and software resources that support the electronic payments system.

The implementation of these plans requires considerable effort and additional investment. It will be difficult for the National Bank to cope on its own with the tasks set. However, the entire banking system of Ukraine will enjoy the advantages of the new system. The latter will only operate on the condition of coordination and interaction in the banking industry, of a uniform, coordinated technical policy of all participants in payments.

Not only considerable efforts on our part but also assistance from our friends and well-wishers will be needed in order to cope with all the problems we are facing. Such assistance is already being provided at present, and we hope that it will be stepped up further in the future, as subsequent progress in this area is achieved. Ukraine has now obtained assistance for perfecting the payments system from the U.S. Government through the Agency for International Development. A proportion of an earmarked loan extended to Ukraine by the World Bank will be used for the same purposes. Meetings, consultations, and the provision of the necessary information are in progress.

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