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China International Payment System (CIPS) to launch at end of 2015

A payments system is a powerful ally in the arena of international political negotiations, economic warfare is another way of describing it.

China International Payment System

Control of how payments are processed – and in what currency – carries a lot of weight. Most recently the likes of President Assad in Syria and Russia’s Vladimir Putin have been on the receiving end of payment-related sanctions. This is why there is an ongoing global political power play as Russia and China explore payment processing possibilities to challenge ‘Western’ – and dollar – dominance in this sphere.

Putin’s exposure concerns

In March 2014 Western governments used Visa and MasterCard to cut off prominent Russian businessmen and  political aides of Russian President Vladimir Putin from their accounts. The sanctions also targeted Russian financial institutions (including Bank Rossiya which was also included in a U.S. Government blacklist), a move that infuriated Russia. The businessmen and institutions were placed on this blacklist after Putin’s annexation of Crimea.

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) declined to add its name to those imposing sanctions, allowing Russia to maintain access to the global payments system. They did, however, get involved in 2012 when expelling Iranian banks from their system.

The Crimean episode, and subsequent sanctions, were the catalysts for Russia to explore new payment processing possibilities. Putin was concerned over Russia’s exposure to the global dollar-dominated financial system and its power to instantly cut off Russian individuals and institutions from access to accounts.

Russia’s response was to push a new law through the Duma. This new law – signed on May 1 by Putin – aimed to create an indigenous credit card payments system, to be called the National Payment System. The law required all Russian payments to be processed within the country. It also imposed unprecedented regulations on Visa and MasterCard within Russia.

The law was specifically created in retaliation to Visa and MasterCard freezing services to cards issued by four Russian banks.

The decision for Visa and MasterCard last May was whether to continue supplying services to Russian card holders. In the ten months since deals have been reached. Now, both Visa and MasterCard have agreed to process all Russian payments within the country. The Bank of Russia will operate as the settlement office.

Speaking to Bloomberg TV in mid-May 2014 Dmitry Medvedev, the Russian Prime Minister, said: “What Visa and MasterCard did was a direct violation of their contract with Russian clients, not banks, but individuals who trusted these payment systems.” Medvedev also stated that the use of Russian technology will aid and improve security and provide protection of data.

In early February 2015 the Bank of Russia confirmed that the new National Payment System was processing payments. The first five Russian banks processed their initial payments via MasterCard on January 30, 2015.

Help in the form of the China International Payment System

Recent developments in China could also be to Putin’s advantage.

China is currently in the process of implementing its own system: the China International Payment System (CIPS), which is slated for launch before the end of 2015.

Reuters revealed in an exclusive on March 9 that the CIPS is “expected to use the same messaging format as other international payment systems, making transactions smoother. Currently, cross-border yuan clearing has to be done either through one of the offshore yuan clearing banks in the likes of Hong Kong, Singapore and London, or else with the help of a correspondent bank in mainland China.”

It is believed that the CIPS would be a worldwide payments superhighway for the yuan. It is intended to replace a patchwork of networks and allow hassle-free renminbi transactions, greatly boosting the internationalization of the Chinese currency.

Reuters adds that “the launch of CIPS will enable companies outside China to clear yuan transactions with their Chinese counterparts directly, reducing the number of stages a payment has to go through.”

China has selected 20 banks to do the testing, 13 domestic financial institutions and seven subsidiaries of non-Chinese banks.

In mid-March 2015, Andrey Kostin – head of Russia’s state-owned VTB Bank and Putin advisor – told Bloomberg that Russia may eventually use China’s payment infrastructure instead of SWIFT. TASS – the Russian news agency – quoted Kostin as answering: “With time but not now,” in reply to a question about whether Russia would be able to switch to the CIPS if it experienced problems with SWIFT. “We’ll definitely work closer with our Chinese colleagues to develop alternative systems,” added Kostin.

The TASS report also stated that Kostin believes the SWIFT system was becoming less convenient for Russia as it posed a threat to national security.

A SWIFT challenge

According to Wim Raymaekers, Head of Banking Markets at SWIFT – quoted in the The Washington Post – the implementation of the CIPS is “an important milestone” that confirms the transition of the yuan from an “emerging” to a “business-as-usual” payment currency.

SWIFT is a member-owned co-operative through which the financial world conducts its business operations. It was created in 1973, supported by 239 banks in 15 countries. Today more than 10,800 financial institutions and corporate customers in 195 countries use the SWIFT system to exchange millions of standardised financial messages.

The use of financial messaging has skyrocketed in the past decade. In 1978 alone the SWIFT system processed 21.6 million financial messages – the average daily financial message traffic for January 2015 was 24,021,016. Just under half of this traffic volume (47.8%) was dedicated to payments.

The yuan has consistently featured among the top three currencies in international trade. This move to set up the CIPS will remove China’s dependence on the dollar with more international deals likely settled in yuan.

Putin’s rouble worries

Putin’s plans for currency reform have extended to a possible ‘Eurasian’ currency proposed by the Russian President after a recent meeting with his Belarus and Kazakhstan counterparts.

Such a plan, however, would take 10 to 12 years to come into fruition. Putin’s proposal came about as the rouble continued to slide against the dollar. Of course, a strong dollar undermines Russia and China. A non-dollar orientated payment system would strengthen both countries.

The Wall Street Journal recently surmised that the possibility of a new system may be in the offing (their piece appeared prior to Reuters’ March 9 exclusive).

The WSJ stated that “U.S. legislators and British officials have even contemplated expelling Russian banks from SWIFT — a move Mr. Kostin has warned would be tantamount to a declaration of war.” The article’s authors, Mark Dubowitz and Jonathan Schnauzer, added that the proposed Russian payment processing system “lacks the credibility of SWIFT, and therefore lacks customers—for now. But the combination of an alternative global-reserve asset, a Chinese global credit card, an alternative SWIFT system backed by Russia and China, and a number of banks willing to defy the global financial order, could represent a significant challenge to U.S. interests.”

Where Aviso fits in

The key to the payment process is the messaging system that has been developed over the past four decades. The new China International Payment System (CIPS) will adhere to these standards, and our solutions – specifically our Novate offering – are ready to provide whatever payment interconnection is required by merchants, issuers, or acquirers.

Some of the existing Chinese concerns over the current global payment system concern settlement, messaging difficulties, and the inability to process yuan transactions at certain times of the day. Raymond Yeung, an analyst at ANZ in Hong Kong, was quoted in that Reuters exclusive on March 9 stated that the CIPS is a “breakthrough since it will offer a united platform and enhance efficiency.”

Aviso complements this enhanced efficiency with a real-time, active-active deployment – there is no downtime with Novate and it can accept and process all message types.

Our Novate offering can also be used to meet all acquirer and issuer needs including reporting, settlement file extract, and other real-time and batch file data updates. New settlement file formats can be created using Novate’s file format configuration tool.

In short, any new payment processing system is superbly complemented by our Novate solution.

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