Year 2000 Preparations in the Australian Banking and Financial System 5. Preparations in the Payments System

This chapter provides an update of the work which is under way, or completed, to prepare the technical infrastructure used in Australia's payments clearing systems for the Year 2000.

5.1 The Payments System

Participants in the Australian payments system include banks, building societies, credit unions, special service providers for the building society and credit union industries, card schemes, and non-financial institutions which provide payments switching and clearing services (these are often referred to as payments service bureaus).

The retail payments system consists of clearing systems for cheques and direct entry managed by the Australian Payments Clearing Association (APCA); a series of bilateral arrangements for the interchange of ATM, EFTPOS and credit card transactions; and a bill payment facility (BPAY).

There are three high-value clearing systems in Australia which settle on a real-time gross settlement (RTGS) basis. The core RTGS system is the Reserve Bank Information and Transfer System (RITS), which is also the settlement system for Commonwealth Government securities. RITS is also used to settle multilateral net obligations arising in the retail clearing streams. Two other high-value systems are linked to RITS as ‘RTGS feeder systems’. These are Austraclear Limited's FINTRACS system, a settlement system for private sector and semi-government debt securities, and APCA's SWIFT Payment Delivery System (PDS).

5.2 Year 2000 Testing

The Australian payments system is now in the final stages of preparation for the Year 2000. Industry testing managed by APCA was successfully completed, on schedule, by 30 June 1999. No Year 2000 problems were reported by test participants. The testing covered the exchange of payment information relating to cheques, direct debit and credit transactions, debit and credit card payments in ATM and EFTPOS terminals, BPAY transactions and high-value payments.

Banks, building societies and credit unions, as well as key payments service bureaus, participated in this testing and were required to certify that internal systems supporting their payments operations were Year 2000 ready before testing commenced. The scope of the tests also included posting of transactions to the appropriate customer account. The completion of this testing is being complemented by an industry ‘Preservation Strategy’, described in Chapter 5.3.3, which is designed to ensure that the Year 2000 readiness of the payments system is maintained.

Detail on testing in individual clearing streams and BPAY is set out below.

5.2.1 Australian Paper Clearing System (APCS)

Cheques and other paper-based payment instruments are cleared through the APCS. Exchanges in this system are conducted on a bilateral basis by 12 direct clearers, which are also responsible for clearing paper-based payment instruments drawn on 37 appointor institutions.

Year 2000 testing was completed as part of the introduction of a new electronic message standard for the electronic presentment and dishonour of cheques and payment orders; testing included clearing services provided by payment service bureaus. All direct clearers in the APCS tested their Year 2000 compliance with at least one other direct clearer. Direct clearers also completed testing with each of their appointor institutions.

5.2.2 Bulk Electronic Clearing System (BECS)

Direct entry debits and credits are cleared on a bilateral basis through BECS. At present, the BECS electronic message format only has a six-digit date field (DD/MM/YY). This message format will not change prior to the Year 2000 and participants will be required to make internal systems changes to correctly interpret the ‘00’ appearing in the last two digits of the date field.

Year 2000 testing in BECS focused on those institutions which clear payments directly with at least one other direct clearer in BECS, and also payment clearing services provided by payments service bureaus. Direct clearers also completed testing with those institutions for which they act as clearing agent (ie appointor institutions).

5.2.3 Retail Electronic Payments

Retail electronic payments in Australia include debit, credit and other plastic cards through ATMs and EFTPOS, and other card schemes including MasterCard, Visa and Bankcard.

APCA coordinated testing for debit card payments through ATM and EFTPOS terminals and payment switch mechanisms provided by non-financial institutions. Credit card payments exchanged bilaterally between financial institutions or payments service bureaus were also included. Test participants also completed testing with financial institutions for whom they provide settlement or transaction switching services.

Individual institutions are responsible for ensuring the Year 2000 compliance of their links with systems operated by card schemes (see Chapter 5.4 for details on credit card schemes).

5.2.4 Bill Payment System (BPAY)

BPAY allows customers to pay invoices through financial institutions participating in the scheme. Cardlink Services Limited is the clearing house for the exchange of BPAY transactions.

Testing in this system included members' internal systems used to collate and exchange customers' BPAY transactions, exchanges between Cardlink Services and its members and interbank settlement. BPAY transactions involving only one financial institution were not included in the testing.

Members joining BPAY after end-June 1999 must complete industry Year 2000 testing by 1 September 1999 and must commence live operations before 1 October 1999 (this may be extended to 15 October 1999 with special approval). These dates are consistent with the commencement of the ‘Change Implementation Moratorium’ on 1 November 1999 (refer Chapter 5.3.3), which applies to all payments clearing systems, but is mainly applicable to BPAY where new membership is anticipated.

5.2.5 RTGS Systems

All of the key components of Australia's RTGS infrastructure have been tested, including:

  • RITS – the core system through which final settlement of interbank payments is effected. RITS settles transactions which are entered directly through RITS terminals (eg settlements for Commonwealth Government securities) or routed to it from ‘feeder systems’ (the SWIFT PDS and FINTRACS);
  • the Central SWIFT Interface (CSI) – which provides the interface between RITS and SWIFT for payments between members of the SWIFT PDS;
  • the SWIFT PDS – a high-value funds transfer system based on SWIFT's FIN-Copy Service. Financial institutions access the SWIFT PDS via SWIFT computer-based terminals (CBTs); and
  • banks' CBTs, and proprietary payments systems that access the SWIFT PDS on an automated basis.

The RBA's internal Year 2000 acceptance testing of RITS and its interfaces is complete. Interbank testing of the above systems focused on the automated exchange of high-value payments, account to account, between banks. All holders of Exchange Settlement (ES) accounts at the RBA participated in testing.

Austraclear Limited has completed its stand-alone Year 2000 application testing and internal user acceptance testing of its FINTRACS system. FINTRACS interfaced to RITS in August 1998 for industry tests and all banks have tested their common terminal connection to either RITS or FINTRACS. Most other members of RITS and FINTRACS (in terms of transaction volumes) have now tested their interface to these systems.

5.3 Contingency Planning

5.3.1 RBA/APRA Communications Centre

The RBA and APRA are establishing a joint communications centre which will operate over the New Year period. The centre will monitor the operational status of the payments system and developments in the financial system and in the key infrastructure sectors more generally. Financial institutions and payments service providers will be asked to report regularly on their status (positive reporting) and immediately if serious problems were to arise (exception reporting). Reporting arrangements are now being finalised in close consultation with the industry and will be released in coming weeks.

5.3.2 Settlement Arrangements

The RBA has been coordinating an industry review of the existing RTGS Contingency Procedures in the light of the Year 2000. Members of the review group were drawn from the commercial banks, Credit Union Services Corporation (Australia) Limited, Austraclear and APCA. Updated procedures were released to all ES account holders at the end of August.

The RBA has also developed Year 2000 contingency procedures for the 9.00 am net settlement of low-value payments (ie cheques, direct entry, BPAY and card-based payments). They cover disruptions to banks' internal systems, telecommunications difficulties and disruptions to the RBA's internal systems.

5.3.3 APCA Clearing Systems

Preservation Measures

With testing now complete, the industry's focus has shifted to ensuring that any internal system changes made by participants do not introduce date-related problems. Financial institutions are now required to identify and risk assess any system changes they are intending to make, and report the information to APCA on a regular basis. Institutions are also undertaking bilateral tests where necessary to prove the Year 2000 readiness of new systems. In addition, a ‘Change Moratorium’ will be in place from 1 November 1999 until 17 January 2000, and again from 21 February until 3 March 2000. During the moratorium, only emergency fixes (corrective and preventative) and essential table changes will be able to be made to internal systems involved in the Year 2000 testing.

Contingency planning for the APCA clearing systems is now well under way. This work has three main elements:

  • development of mandatory and recommended risk mitigation strategies for payments system participants. These include the ‘Preservation Strategy’ for industry testing, ensuring that alternative arrangements (eg magnetic tapes) are in place for bilateral exchange of electronic payment information if direct telecommunications links are unavailable and assessing the feasibility of routing card payments through alternate links;
  • updating the industry's existing contingency procedures to take account of the Year 2000. Procedures for the paper clearing system, which will be finalised shortly, cover situations where an individual clearing member, or members, cannot process or electronically exchange payment information; the procedures set out arrangements for communication between APCA and clearing system participants. Contingency procedures for the bulk electronic and retail electronic (card-based) clearing systems are expected to be finalised by end-September. They will be tested and fine-tuned over the remainder of 1999; and
  • the development of an APCA media plan for the Year 2000 which sets out how APCA will coordinate the release of media statements with other payments system stakeholders, the types of messages to be issued and when they will be issued.

5.4 Credit Card Schemes

This section contains information on Year 2000 preparations provided by the major credit card schemes operating in Australia.

5.4.1 Bankcard

The APCA Year 2000 testing program for retail electronic payments included testing for Bankcard members where credit card transactions are exchanged bilaterally between banks.

Bankcard members have also undertaken bilateral testing with another Bankcard member or with Cardlink Services Limited, which provides transfer and processing services for some Bankcard members. This testing, which was completed on 30 June 1999, required members to test functions which support the exchange of transaction details, such as transaction values and information for security purposes. Voice authorisation procedures, which include an electronic authorisation request from Cardlink to the issuing bank, were also tested.

Bankcard and its members are participating in APCA contingency planning for retail electronic systems (see Chapter 5.3.3).

5.4.2 MasterCard

MasterCard completed the updating of its internal systems, including its transaction authorisation system, in 1998. MasterCard has also performed extensive testing with members to determine whether transactions can be processed after the date change, and provided educational material to assist members and merchants in developing their own readiness programs. Members representing approximately 98 per cent of MasterCard's worldwide payment card transaction volumes had successfully tested online in a Year 2000 environment by 30 June 1999.

MasterCard's contingency plans include alternative processes that will help protect cardholders in case of a disruption along the transaction route. It has also expanded system capacity.

5.4.3 Visa International

All VisaNet systems have been successfully tested for Year 2000 readiness and were implemented globally in December 1998. All Australian Visa members successfully completed member to VisaNet testing by 30 June 1999.

A Global VisaNet system freeze was implemented on 1 July 1999. The freeze will continue until at least mid-March 2000.

All principal members have provided detailed statements on their Year 2000 readiness to an independent Year 2000 consultancy organisation. This information, along with similar independent data on the readiness of a country's infrastructure, is currently being used to assess the potential financial exposure for every Visa member.

Visa has established contingency plans which set out business unit recovery processes at the global and individual country levels. Visa is also establishing regional Event Management Centres, which will coordinate Year 2000 operations information. These centres will be fully operational by 30 December 1999 to provide a 24-hour service until at least 10 January 2000.

5.4.4 American Express

American Express has been addressing the Year 2000 issue since 1995 and as a result internal Year 2000 remediation work was more than 99 per cent complete by end-June 1999. As part of an overall compliance program, American Express has been working directly with key external parties to mitigate the potential risks arising from Year 2000.

At this point, remediation and testing of systems is substantially complete. The focus is now on testing, independent test validation and Year 2000 contingency planning. American Express's Year 2000 contingency plans include measures such as selecting alternative suppliers and channels of distribution, creating command centres to coordinate global Year 2000 information and actions, and scheduling the availability of key personnel worldwide. American Express will continue to refine contingency planning activities through the remainder of the year.