Status of the Next Generation Zengin System

Last week, Zengin-Net published the minutes of the first meeting of the Working Group on the Advance of the Payment System, held on May 23, 2024, including critical updates on the timeline of various initiatives, which have been impacted by the system outage last year, and related remediation efforts.

Since its second generation, the Zengin System has been updated every eight years. This implies the eighth generation scheduled for 2027, and the ninth generation for 2035. While the title graphic depicts the “Grand Plan” for the overall system architecture, prioritization for the 2027 led to the following approach.

The objective for the eighth-generation Zengin System is to contribute to improving the convenience for participants and users by simultaneously achieving at a high level

• “Safety” to maintain a high level of safety and service of the current system,
• “Efficiency” to improves the cost efficiency of participants by terminating or streamlining unused/excessive functions and enjoy cost-related benefits over the medium to long term, and
• “Flexibility” to be capable of responding to future changes in the environment

In addition, Zengin-Net decided in September 2022 to expand the qualification for participation in the Zengin System to include funds transfer service providers (i.e., non-banks). The decision came with the commitment to develop a new connection method using an application programming interface (API Gateway), which awas expected to be developed while the current seventh-generation Zengin System is in operation, in July 2025.

While in theory, the process from application for membership in the Zengin System to the start of the connection was deemed to take at least 14 months, i.e. the first funds transfer service providers could have been onboarded by the end of 2023, in practice the expectation is that such companies will depend on the availability of the API Gateway to join.

With this as background in mind, the key outcomes of the Working Group meeting are as follows:

• The development of API Gateway was progressing with a target launch date of July 2025. Detailed design work had begun in September last year, but the project was temporarily halted due to the system outage. With the issue addressed and reoccurrence prevention measures implemented, the launch date was revised to November 2025 to ensure the project’s smooth completion.
• Regarding the next-generation Zengin System development project, the project plan was scheduled for completion in October 2023. However, due to the system outage, this was postponed. The project has not yet officially launched, but considering the incident, improvement and reoccurrence prevention measures will be incorporated, and a schedule will be considered with a focus on extending maintenance to ensure the development is conducted safely and steadily. The development schedule and project plan for the next-generation Zengin System are scheduled to be finalized in October of this year.
• The agile area functions and services (see migration diagram above) are positioned as additional functionalities that complement the mission-critical area. These functionalities are being implemented within the Zengin System, but implementation through collaboration with external systems is also under consideration.
• In the agile area, the secretariat reported last year that they would prioritize a full-fledged examination of the beneficiary account verification function. The secretariat clarified that the direction for the beneficiary account verification function should be to “transition to a system that allows for flexible responses to reduce barriers to utilization” and “provide a simple and sustainable function through a low-cost system to promote utilization of the beneficiary account verification function among Zengin System participants.”
• The secretariat also presented a draft policy framework for specific beneficiary account verification measures, categorized into governance, systems, and schedule. Regarding governance, while expectations were raised for Zengin-Net to play a leading role, concerns were also raised. The secretariat presented a framework aiming to create a system that is easily utilized through discussions with stakeholders. Regarding systems, the secretariat proposed using API connections to reduce burden. Concerning the schedule, the secretariat indicated a direction to consider the operational timeframe of the API Gateway.
• Regarding trends in beneficiary account verification in other countries, while there are variations among countries, discussions are progressing to implement such verification on the payment infrastructure side, which the secretariat considers a global trend (also see our LinkedIn post from this week, sharing the iPiD document on “Verification of Payee ” in the EU).

However, in Japan, the beneficiary account verification is currently implemented outside of the Zengin System, in an application called the Integrated ATM Switching Service (Integrated ATMSS). This is an online message relay service used by almost all financial institutions, of which beneficiary account verification is one of the functions provided.

During the review of the next-generation payments system last year, the task force and its subordinate Working Group pointed out three areas for improvement in Integrated ATMSS: governance, systems, and regulations. In response, the Account Verification Utilization Promotion Committee consulted with NTT Data (the operator, same as for the Zengin System) and relevant sectors, and is currently considering the following three points as improvement measures for the Integrated ATMSS:

• Establishment of the Account Verification Utilization Promotion Committee: to establish a permanent body, the Account Verification Utilization Promotion Committee was established. This committee holds decision-making authority regarding operational aspects and aims to build a flexible operational structure. The committee will be responsible for examining regulatory frameworks and the provision of API connection methods (API Gateway). Zengin-Net will participate as an observer in this committee.
• Formalization of beneficiary account verification: transition from the current individual contract method, which burdens new participants, to a collective contract method. Furthermore, aligning the criteria for participation in the system with internal regulations is expected to improve efficiency and reduce workload.
• Provision of API connection methods: NTT Data will take the lead in providing API connection methods. Addressing concerns regarding the significant development burden on participants due to connection specifications and message specifications, a new, general-purpose Integrated ATMSS API Gateway will be developed, reducing the burden on new participants. This will coexist with existing connection methods. NTT Data will bear the initial development costs as a self-investment, and the usage fees will be minimized to reflect only running costs.

The beneficiary account verification system is expected to launch in July 2025. The Account Verification Utilization Promotion Committee plans to finalize the system details by the third quarter this year and then proceed with explanations to existing and new participants.

The Account Verification Utilization Promotion Committee plans to release the Integrated ATMSS API Gateway as early as October 2025. If there are no objections from the Working Group, NTT Data will commence development. A transition assessment will be conducted in the second quarter of 2025, and the release is scheduled for October 2025 at the earliest. The Account Verification Utilization Promotion Committee aims to coordinate closely with payment service providers. The final release date will be adjusted taking into account the release date of API Gateway for the Zengin System.

The discussion did not appear to come to a conclusion regarding the inclusion of the beneficiary account verification in either the Zengin System or the Integrated ATMSS, however, there were a number of comments that suggested a separation of duties along short-, medium-, and long-term objectives. There seemed to be consensus that as a long-term vision, the beneficiary account verification should be part of the Zengin System, and general acceptance that in the short-term, the implementation in the Integrated ATMSS would be pursued.

Takatori-san, the CEO of Kyash inquired whether beneficiary account verification currently allows for utilization in cases that do not involve transfers. Given the growing momentum towards immediate payment of remuneration to gig workers, etc., there is a need for both financial institutions and general businesses to utilize beneficiary account verification at the time of user registration rather than at the time of transfer. This use case is currently not supported as beneficiary account verification assumes utilization in conjunction with transfers. The secretariat explained that this is based on handling in accordance with the Personal Information Protection Act. From the perspective of obtaining consent for the provision of personal information to third parties, beneficiary account verification is required within a series of transfer transactions. However, the committee plans to discuss whether it is possible to address the beneficiary account verification without transfers, given the increasing demand for such a function.

As the last agenda item, the Bank of Japan provided an update on its activities:

• The Bank of Japan has been conducting Proof of Concept (PoC) experiments since April 2021 to verify the technical feasibility of CBDC.
• The initial two years focused on Proof of Concept. PoC Phase 1 verified basic functionalities, while Phase 2 examined peripheral functions.
• Through these two PoC experiments, the Bank of Japan concluded that the fundamental idea of CBDC is technically feasible. However, the Bank of Japan also recognized the need for various refinements and measures to enhance performance, and has been conducting pilot experiments since April last year.
• These pilot experiments consist of two pillars: (1) the development and verification of experimental systems within the Bank of Japan, and (2) discussions and examinations on a wide range of topics within the “CBDC Forum,” which includes private sector participants involved in retail payments. The Bank of Japan is advancing these discussions, incorporating feedback from each other’s work.
• On April 22nd, the Bank of Japan published a report paper on the progress of the experiments on its website. Materials and summaries of discussions from each Working Group are also released after each meeting.

The secretariat acknowledged that while CBDC issuance has not been decided, concrete discussions are progressing. The secretariat stated that while the current discussions and verifications surrounding CBDC are centered around retail CBDC, they believe that it is possible to utilize retail CBDC for interbank settlements. The secretariat pointed out that currently, Zengin-Net utilizes the Bank of Japan’s clearing system for settlements and that it is essential to consider the potential for utilizing CBDC for settlements as a thought exercise if CBDC emerges.

The Bank of Japan representative acknowledged that while the focus of the presentation was on retail CBDC, it is essential to consider the overall positioning within the payment system, including Zengin-Net, and to collaborate with stakeholders during consideration. The Bank of Japan representative reiterated their commitment to actively share information and engage in exchange with relevant parties through various opportunities.

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