Challenge
Prior to the reform of the national payments system, cash and cheques were the main payment methods. Payments were settled manually in a process that required a long time, high transaction costs and which posed high systemic risks for the whole economy. A detailed diagnostic carried out by the World Bank and the Latin American Center for Monetary Studies (abbreviated CEMLA in Spanish) in 2003, provided the roadmap for the modernization of the country's national payments system. This happened when the collapse of three of main national commercial banks in the years 2003 and 2004 led to the country's financial crisis, with a loss of confidence, capital outflows and currency substitution . To deal with these issues and restore confidence the country undertook, with the support of the World Bank, a significant reform of its financial regulation and supervision. This reform included the modernization of its national payments systems so as to increase the certainty of payments, manage risks and reduce transaction times and costs.
Approach
The Bank's Financial Sector Technical Assistance Loan (FTAL) was designed as a comprehensive reform of the financial sector. Its main objective was to strengthen regulation and supervision of financial institutions (banks, pensions, stock exchange, etc…) and to modernize the financial infrastructure. In the area of payments system, this comprehensive approach included the establishment of an appropriate regulatory framework, the implementation in April 2008 of a Real Time Gross Settlement System (RTGS), and the development of the corresponding rules and processes. These reforms aimed at the inclusion in the system of a wider range of participants of the financial sector and at the development of more efficient electronic payments. Today the RGTS clears both large value and retail payments (cheques, cards, ATM, direct debit, mobile payments) as well as securities and government payments.
Results
The results achieved so far have been:
- The settlement of large value payments in real time. Nowadays most large value payments are cleared and settled in real time.
- The new national payments system has handled a total of USD 835 billion from April 2008 to December 2010, which represents about 18 times the country's GDP. This includes the Social Security payments, which have been settled through the RGTS since 2009.
- The volume of payments cleared through the system has significantly increased from US$ 16 bn per month in 2008 to about US$ 30.5 bn per month in 2010, i.e. by 91%.
- The number of the small transactions between private entities and persons cleared through the system (through the Automated Clearing House, ACH, Automatic Teller Machines, ATM, and Point of Sale Devices, POS) has increased by over 110% from 2008 to 2010.
- The complete overhaul of the regulations pertaining to payments in the country has increased the security and certainty for all payment processes. Among other things, the new laws and regulations guarantee the irrevocability of payments once they have been processed by the RGTS. This has increased overall confidence in the financial system.
- The new regulatory framework also allows the establishment of commercial mobile payment administrators, which are already contributing to expand the reach of the electronic payment system to remote and underserved populations, widening access to finance.
As a direct result of the rapid modernization of its payments system, the Dominican Republic has been selected to be the host of the SIP, the hub for the integration of regional payment systems which includes Guatemala, El Salvador, Nicaragua, Costa Rica, Honduras and the Dominican Republic. The SIP went live in February 2011. The DominicanRTGS will clear transactions between the Central American countries, including the Dominican Republic, which were traditionally processed via US banks
Bank Contribution
The Bank provided guidance in the design and implementation of the Dominican payments system reform and funded partially its implementation. The total costs for the RGTS, the related equipment and the consultancies amounted to US$2.4 million and were mostly funded by the FTAL. The costs for the new upgrade are estimated at US$1.7 million and are funded by the FTAL. Overall, the payments system component represented about a third of the total amount of the FTAL.
Beneficiaries
The beneficiaries have been the financial institutions and the final users for whom the certainty and security of payments have been greatly enhanced. For example, the use of cheques, which generally present a high risk of fraud and take more time to be processed, has been greatly reduced by the introduction of the RTGS, while the RTGS has facilitated the growth of electronic payments: In January 2008, 39.4% of the transactions were using cheques, while 60.6% where using electronic payments. In January 2011, cheques transactions were down to 30% and electronic payments up to 70% of the increased number of electronic transactions. This shift is likely to continue, following the trend of strong growth shown by the retail payments in recent years.
Partners
The FTAL was closely coordinated with the IMF and IADB as it was part of a two-phased program. The first phase, supported by the IMF and IADB responded to the urgent needs derived from the 2003 crisis (plan of onsite inspections for banking institutions and drafting of most urgent regulations), while the second phase, supported by the FTAL aimed at strengthening of the institutional and financial infrastructure in the medium term.
Toward the Future
At the current stage, the Dominican payments system is being further modernized with the acquisition of a new clearinghouse to introduce the digitalization of cheques, and with the creation of a platform for public securities auctions. The new cheque clearinghouse will reduce the time to settle cheques from the current T+4 to T+1. Moving forward, the Central Bank wants to expand the usage of internet banking, allowing customers to transfer funds between accounts at different banks in real time. The incorporation of additional countries into the regional payments system, which has been actively supported by the Central Bank of the Dominican Republic, will also be an important step to take advantage of the results achieved until now. The incorporation of Haiti into this regional system may be of special relevance for the payment systems of the two countries, given that about 1 million Haitians live in Dominican Republic and send remittances home. In February 2010, the Governors of the Central Banks of Haiti and the Dominican Republic agreed to cooperate in the area of payment systems.
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