Strategy for the Development of the National Payment System

Table of Contents
List of Abbreviations ...............................................................................................................4
Executive Summary ..................................................................................................................5
1 National Payment System ....................................................................................................8
2 Modernization of Mongolia's National Payment System ...................................................10
2.1 Strategy for the Development of Mongolia's NPS from 2009-2020.....................................10
2.2 The Path Forward...................................................................................................................11
2.3 Methodology........................................................................................................................11
2.4 Success Factors ..................................................................................................................12
Strategy for the Development of Mongolia's National Payment System.......................................13
2.5 Vision .................................................................................................................................13
2.6 High-Level Objective..........................................................................................................13
2.7 Target Level and Indicators.............................................................................................13
2.8 Strategic Components.......................................................................................................14
2.9 Strategic Component I: Robust Institutional Framework.................................................15
2.9.1 Legal and Regulatory Framework..................................................................................15
2.9.2 Supervision.......................................................................................................................17
2.9.3 Cooperation...................................................................................................................19
2.10 Strategic Component II: Efficient, Reliable Payment System Infrastructure ...................21
2.11 Strategic Component III: Universal Use of Digital Payment Instruments and Services ..........................................................................................................................27
2.11.1 Payment Instruments and Services .............................................................................27
2.11.2 Government Payments..................................................................................................31
2.11.3 Cross-border Payments and Remittances.......................................................................32
3 Implementation Plan ............................................................................................................35
Annex 1 – Methodology .............................................................................................................44
NPS Modernization Process .......................................................................................................44
Phase 1 – Assessing and Evaluating the Situation ................................................................44
Phase 2 – Developing the NPS Development Strategy and Plan..........................................44
Phase 3: Implementation and Monitoring Process of the NPS Development Plan...........................................................................................................45
Annex 2: Indicators for Measuring NPS Development..............................................................46
Annex 3: Principles of Financial Market Infrastructure (FMI Principles) Issued by CPMI-IOSCO...........................................................................................................................................47

Annex 4: Guidelines on Cybersecurity of Financial Market Infrastructure Issued by CPMI-IOSCO.......................................................................................................................51
Annex 5: Guidelines for Developing a Comprehensive Retail Payment Strategy...................52

1 List of Abbreviations
ACH Automated Clearing House
API Application Programming Interface
ATM Automated Teller Machine
BOM Bank of Mongolia
CBB/TCB Central Bank Securities
CPMI/CPSS Bank for International Settlements Committee on Payments and Market Infrastructures CRC/CCRC Communications Regulatory Commission CSD/CSD Central Securities Depository FATF/FATF Financial Action Task Force FRC/FRC Financial Regulatory Commission FX Foreign Exchange GDP/GDP Gross Domestic Product IBAN International Bank Account Number IOSCO/IOSCO International Organization of Securities Commissions MCSD/MCSD Mongolia Central Securities Depository MOF/MOF Ministry of Finance MOU Memorandum of Understanding MSCC/MCSC Mongolia Central Securities Clearing House MSE/MSE Mongolia Stock Exchange MTOs/MTOs Money Transfer Operators NBFIs/NBFIs Non-Bank Financial Institutions NETC/NETC National Electronic Transaction Center NPS/NPS National Payment System OTC Over-the-Counter / Exchange-not-traded market POS POS Terminal PSD/Payment Dept Payment Department PSP/PSP Service Provider PvP/PvP Payment versus Payment RTGS Real-Time Gross Settlement System (Banklink System) RTP Real-Time Payment SCHCD Mongolia Central Securities Clearing House and Central Depository SSS/SSS Securities Settlement System

Executive Summary
The National Payment System (NPS) is a core component of the financial system. It is infrastructure that provides the economy with channels to execute payments between citizens, businesses, and organizations, and a well-planned payment system plays a crucial role in limiting risks, protecting consumers, and reducing the impact of financial crises. Modern payment systems and their regulation reduce costs and increase the speed of making payments and fulfilling financial obligations, thereby meeting the needs of the financial sector and society and contributing to economic development. The NPS is a comprehensive set of infrastructure and systems related to the execution and processing of monetary and securities transactions. The modernization of Mongolia's NPS began over a decade ago with the implementation of the Bank of Mongolia's "Strategy for the Development of the National Payment System 2009-2014." Key achievements of the 2009-2014 NPS development strategy include: the introduction of the Banklink System for real-time gross settlement; the issuance of the Bank of Mongolia's policy on the payment system and the Payment System Supervision Policy Document; the development of procedures for high-value and low-value inter-participant payments; the reduction of retail transaction fraud; and the increase in the use of digital payment instruments. To further guide the development of Mongolia's NPS, a five-year strategy for 2015-2020 was implemented. During this period, important steps were taken to strengthen the legal and regulatory environment, including the development and enactment of the Law on the National Payment System, and the issuance of regulations regarding electronic money, payment cards, licensing, and supervision. Additionally, the second phase of the Banklink System modernization, direct debit and credit transfers, an Automated Clearing House (ACH) system supporting real-time transactions, and the modernization of the national brand ₮ card and unified card system to enhance card transaction security and efficiency were implemented. The successful implementation of payment system reforms has significantly strengthened public trust in digital payment instruments. The majority of the population now conducts payments through bank accounts or payment cards, leading to an increase in the use of internet and mobile banking by citizens and the emergence of various fintech solutions. As a result, 93% of Mongolia's adult population has accounts at financial institutions, making it nearly universal.

1 It is worth noting that while the use of digital payment instruments has grown rapidly due to the impact of the COVID-19 pandemic, there is a need to diversify services and payment channels to meet citizens' needs and requirements. The NPS Strategy for 2022-2026 was developed based on the progress made over the past 10+ years, the rapidly developing international payment systems, and significant changes in the Mongolian payment system ecosystem. The Strategy for the Development of the NPS 2022-2026 aims to establish a more secure, reliable, efficient, and customer-centric payment system and to digitize payment services. Payments will be processed through reliable payment system infrastructure that protects against cybersecurity risks, allows for fast 24/7 payments, and ensures the confidentiality and security of customer information. A major goal is to digitize the majority of payments by citizens with accounts at financial institutions, relying on the modern infrastructure of the payment system. It is necessary to provide opportunities for cross-border retail transactions and digital payment services to be used nationwide at relatively low costs. Furthermore, the goal is to strengthen citizens' trust in electronic payments by supporting innovation in the payment service market and digitizing government services. Finally, since the legal environment, payment system supervision, and joint supervision system are the main foundation for NPS development, it is necessary to strengthen these. This NPS Development Strategy consists of three main strategic components: (I) Robust Institutional Framework for Payments and Clearing, (II) Efficient, Reliable, and Secure Payment System Infrastructure, and (III) Universal Use of Digital Payment Instruments and Services. Under each strategic component, specific objectives and implementation activities directed toward achieving those objectives are defined. Table 1 shows the components and main objectives defined within this strategy.

Under Strategic Component I, the Bank of Mongolia will strengthen the legal and regulatory environment of the payment system and update necessary regulations and rules as needed, focusing on creating a legal and regulatory environment that supports innovation and appropriately manages emerging risks. Supervision and cooperation in the payment system will be implemented by establishing and using retail payment system supervision standards, updating supervision policy documents, introducing an automated system for collecting and analyzing reports and data, exchanging necessary information and cooperating between competent authorities, and modernizing the payment system with the participation of all stakeholders through the NPS Council. Strategic Component II is directed towards implementing appropriate risk management of the constantly changing payment system infrastructure and payment services. The Bank of Mongolia will establish a comprehensive payment system risk management system and enhance its capacity to monitor cybersecurity risks. A key goal of this component is to work with all stakeholders through customer groups. Under Strategic Component III, the Bank of Mongolia will play a supportive and guiding role in promoting innovation in the payment system to deliver digital payment services universally across Mongolia. To this end, it is urgently necessary to start standardization work in the payment system to ensure service uniformity, promote competition in the market, and facilitate usage. Additionally, the goal is to continue digitizing government services and find solutions to overcome obstacles in e-commerce, cross-border payments, and remittance services.

Table 1. Strategic Components and Objectives
Strategic Component I – Robust Institutional Framework Objective 1 Strengthen the legal and regulatory environment for the payment system, payment instruments, and payment services Objective 2 Effectively supervise Mongolia's National Payment System as a whole Objective 3 Define and use supervision standards for the retail payment system, payment instruments, and services Objective 4 Strengthen cooperation between competent authorities and the payment system market Strategic Component II – Efficient, Reliable Payment System Infrastructure Objective 5 Ensure efficient, secure, reliable, and uninterrupted operation of the NPS Objective 6 Implement Financial Market Infrastructure Principles in the Securities Settlement System and Central Securities Depository System Strategic Component III – Universal Use of Digital Payment Instruments and Services Objective 7 Support innovation and digital payment usage Objective 8 Continue the digitization of government services Objective 9 Increase the efficiency, accessibility, and transparency of cross-border retail payments and protect consumer rights

2 National Payment System

The National Payment System (NPS) is a core component of the financial system. It is infrastructure that provides the economy with channels to execute payments between citizens, businesses, and organizations, and a well-planned payment system plays a crucial role in limiting risks, protecting consumers, and reducing the impact of financial crises. Modern payment systems and their regulation reduce costs and increase the speed of making payments and fulfilling financial obligations, thereby meeting the needs of the financial sector and society and contributing to economic development.
The NPS depends on the matrix of regulatory arrangements of all national institutions and infrastructure related to the execution and processing of payment and securities transactions.
2 Modern NPS consists of the following elements. These include:
(i) Entities that host payment accounts of citizens and organizations, provide payment instruments and services, and offer various products to meet market needs. This includes banks, non-bank financial institutions, and non-financial institutions; (ii) Operators and third-party service providers of payment and clearing systems; (iii) Laws, regulations, and contracts that define and regulate the payment execution process and market activities of the payment system; (iv) Payment instruments such as credit transfers, direct debits, payment cards, and electronic money, and their regulation; (v) Technological infrastructure. This includes transaction transmission and clearing; processing and transmitting payment information; transferring funds between payer and payee institutions; and the infrastructure of the Central Securities Depository for electronic registration of securities and recording changes in ownership of private and government securities; (vi) Clearing and settlement rules and mechanisms; (vii) Supervision systems, including systems for supervising payment systems, their regulation, payment instruments, and services by competent authorities, and joint supervision systems.
The elements of the NPS are interrelated and interdependent. If one element of the NPS is weak, or if the modification or modernization of one component is delayed, there is a risk that the modernization of other components will be slowed down or hindered. Therefore, it is necessary to consider the interrelationships, interdependence, unity, legal framework, and supervisory capacity of competent authorities of various systems together and to solve NPS modernization comprehensively.
When addressing NPS modernization comprehensively, it is defined based on nine pillars that include all the above elements. (i) Legal and regulatory framework; (ii) High-value payment systems; (iii) Retail payment systems; (iv) Government payments; (v) Foreign exchange and interbank money markets; (vi) Securities depository, clearing, and settlement arrangements; (vii) International money transfer services; (viii) Supervision system; (ix) Cooperation.

2 See the Committee on Payments and Market Infrastructures (CPMI) "General Guidelines for the Development of National Payment Systems" (2006).

3 Modernization of Mongolia's National Payment System
3.1 Strategy for the Development of Mongolia's NPS 2009-2020
5. Mongolia began modernizing its NPS over 10 years ago. The Bank of Mongolia successfully implemented most of the objectives of the 2009-2014 National Payment System Strategy. Key tasks carried out under this strategy include:
Introduction of the Banklink System for real-time gross settlement; Determination of the Bank of Mongolia's policy on the payment system and the Payment System Supervision Policy; Issuance of procedures for high-value and low-value inter-participant payments; Reduction of fraud associated with low-value transactions; and Increase in the use of non-cash payment instruments.
6. To further guide the development of Mongolia's NPS, a five-year strategy for 2015-2020 was implemented. The Strategy for the Development of the NPS 2015-2020 was directed towards: establishing an effective mechanism for transferring funds between participants to ensure fast and reliable payment execution; developing a system that effectively contributes to the country's financial stability and economic growth; reducing cash transactions by utilizing the advantages of digital payment instruments; controlling, managing, reducing, and limiting systemic risks and other risks arising from payment and securities systems; and introducing payment services in all sectors of society to increase financial inclusion.
7. Key tasks carried out under the Strategy for the Development of the NPS 2015-2020 include:

Enactment of the Law on the National Payment System to create a legal environment that comprehensively addresses NPS relations.
Introduction of the second phase of the RTGS system modernization, which has a mechanism to maintain fast payment capability, to improve the efficiency, reliability, and security of the Banklink System.
Introduction of a modern Automated Clearing House (ACH) system designed for real-time credit transfers, direct debits, and batch transaction processing.
Modernization of the unified payment card network to ensure the efficiency of payment card services.
Introduction of EMV/NFC technology to support the security and usage of the national brand ₮ card.
Introduction of a unified platform for trading and settlement in the money and foreign exchange markets, and the Central Bank Securities (CBS) centralized depository and settlement system began operating in real-time mode connected to the Banklink System.
Signing of a Memorandum of Understanding between the Bank of Mongolia, the Financial Regulatory Commission (FRC), and the Communications Regulatory Commission (CRC) to improve cooperation mechanisms between competent authorities.
Development and issuance of regulations governing the licensing and supervision of electronic money, payment card service providers, and clearing system operators.
Increased transparency and accountability of the Bank of Mongolia's Payment System Supervision Unit by publishing annual reports on payment system supervision.

The successful implementation of payment system reforms has significantly strengthened the trust of citizens and businesses in digital payment instruments. The majority of the population now conducts payments through bank accounts or payment cards, leading to an increase in the use of internet and mobile banking by citizens and the emergence of various fintech solutions. As a result, 93% of Mongolia's adult population has accounts at financial institutions, making it nearly universal.

3 It is worth noting that while the use of digital payment instruments has grown rapidly due to the impact of the COVID-19 pandemic, there is a need to diversify services and payment channels to meet citizens' needs and requirements.
3.2 The Path Forward
9. The NPS Strategy for 2022-2026 was developed based on the progress made over the past 10+ years, issues that need to be resolved, and significant changes in the Mongolian payment system ecosystem. The payment system market is changing rapidly due to technological innovation, customer preferences, new business models, and new types of payment service providers. New risks and cybersecurity threats pose new challenges for regulators, supervisors, and market participants. Additionally, the demand for electronic payments increased rapidly due to the global "COVID-19" pandemic.
10. The Strategy for the Development of the NPS 2022-2026 will guide the establishment of a payment system dominated by electronic payments, which is reliable and secure, and efficient, customer-centric payment services. Payments will be processed through reliable payment system infrastructure that protects against cybersecurity risks, allows for fast 24/7 payments, and ensures the confidentiality and security of customer information. A major goal is to digitize the majority of payments by citizens with accounts at financial institutions, relying on the modern infrastructure of the payment system. It is necessary to provide opportunities for cross-border retail transactions and digital payment services to be used nationwide at relatively low costs. Furthermore, the goal is to strengthen citizens' trust in electronic payments by supporting innovation in the payment service market and digitizing government services. Finally, since the legal environment, payment system supervision, and joint supervision system are the main foundation for NPS development, it is necessary to strengthen these.
3.3 Methodology
11. NPS modernization is implemented by continuously repeating the following three sequential steps. These are: (i) Conducting a situation assessment; (ii) Defining objectives and relevant key indicators, and developing the NPS strategy and its implementation plan; (iii) Implementing the NPS development plan and monitoring the implementation process.

3 Source: World Bank Global Findex Database, 2017.

The Bank of Mongolia is developing this 2022-2026 strategy based on information collected on the implementation of the 2015-2020 NPS strategy and the state of the payment system, and consultations with all system participants. Detailed information on the methodology is included in Annex 1.
3.4 Success Factors
12. Effective Cooperation. Experience from developing and implementing the 2015-2020 strategy shows that while the Central Bank and the Government play a central role in successfully implementing the NPS strategy, developing the payment system infrastructure requires other regulatory agencies, system participants, banks, and non-bank financial institutions providing payment services...