An efficient, secure and reliable payment system reduces the cost of exchanging goods and services. Moreover, it is an essential tool for the effective implementation of monetary policy, and for the smooth functioning of the money and capital markets. It is also the channel for the settlement of all other types of transactions, including cross-border financial flows.
A payment system that, in contrast, is not efficient, secure and reliable can adversely affect the financial system, and can contribute to systemic crises. If the risks inherent in its design and operation are not adequately contained, a financial shock—initially in the form of a liquidity shortfall, which may be followed by default and even bank insolvency—can be passed from one participant to another. Since a bank’s liquidity problems will typically first become visible in the payment systems in which it participates, those systems are by definition vulnerable to a wide range of shocks.
An efficient payment system, in addition, promotes orderly economic development and growth. In particular, a wide and cost-effective range of payment instruments is essential for supporting customers’ needs in a market economy. Some transactions simply do not take place in absence of certain payment instruments.
Moreover, the safe and efficient use of money as a medium of exchange in retail transactions is particularly important for the stability of the currency, and a foundation of the trust people have in it. A fair and open retail payment system has also important social implications when it is able to reach out the underserved segments of the population and provide them with affordable payment and remittance services. For example, interoperable networks for processing payments at low cost are essential to guarantee appropriate coverage of payment instruments in a country.
In light of the above considerations, close attention has been paid since the mid-1980s, initially by central banks and then by other regulators and participants, to the design and operation of payments and securities settlement systems. This was in response to both technological developments, which reduced the cost and increased the speed of the automated processing of payment instructions, and a rapid increase in the values being settled through many of these systems.
As a result, substantial changes are being seen in the design and use of these systems in a wide range of countries and currencies. The Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlement (BIS) has published several important reports and is the standard setter in the area. Its focus has ranged from large value to retail systems, from foreign exchange transactions to securities settlement systems.
The CPSS developed General Guidelines for the reform of the payments system as a whole. The Bank and the Fund participate actively in several of these efforts.
These tasks become increasingly complex as competition and innovation push constantly to the limit the search for better combinations of efficiency, reliability, safety, and system stability in the provision of payment services to larger numbers of individual users and institutions. A strategic and cooperative approach is the most efficient way to overcome reform obstacles.
The Strategic Process of Reform
A strategic process is important to reach an agreed vision by all stakeholders on the future of the National Payments System (NPS). This approach is likely to stimulate local interest and provide a basis for discussion with key stakeholders during the months previous to launching a reform.
Agreements on a number of policy, organizational, technical and operational issues will be required before next steps are undertaken. A successful initiative requires active participation from key stakeholders at both the policy and operational level.
Central banks normally take the leading role in formulating and implementing the strategy for payment system modernization, acting in the interests of the system as a whole. As a neutral agent, central banks are less likely to trigger competitive concerns that could slow progress and are more able to support the creation of a comprehensive vision for the future national payment system.
Typical questions addressed when engaging into this strategic process exercise are:
Do the present arrangements satisfy the needs of all market sectors for making payments?
Do the systems adequately cover the entire country?
Do special procedures exist for processing large value payments?
Are payments cleared and settled sufficiently quickly?
Are the range of available instruments sufficient to satisfy the differing needs of the users?
Are the systems convenient and easy to use from a user’s perspective?
Are the systems reliable and always available for use?
Are the systems safe and secure?
Is the legal underpinning for payments reliable under all circumstances?
Do the systems satisfy international minimum standards?
Addressing the Needs of Consumers, Businesses, the Financial Sector and the Public Sector
Emerging technology in the financial services arena is changing the way businesses, financial sector institutions, governments, and the public interact. It is important to identify the needs of each user group for an efficient development of payment and securities settlement systems.
Consumers demand cost-effective and efficient payment instruments to serve their different needs and rely on providers to minimize the risks associated to their use (e.g. counterfeiting, frauds). Businesses and corporations need reliable and fast services which can facilitate their back-office procedures and are easy to use. The financial sector and its oversight and supervisory authorities ask the payment system to minimize systemic risks and absorb to the extent possible liquidity shocks by eliminating the risk of moral hazard against the central bank.
Given the important number and combined amount of the payments that the governments send and receive each year, and the number of individuals and businesses who are affected by those transactions, the public sector is a major stakeholder of the NPS. In several countries, the public sector has lagged behind the private sector in terms of efficient use of payment instruments and has failed to reach an efficacious integration with the banking sector. In others, where the public sector is a major user of modern payment services, benefits to it and to the general public are substantial.
Environmental Issues Influencing the Reform - The Constraints
The development of modern payments and securities settlement systems relies on the quality of the national infrastructure, but goes beyond Information Technology (IT) systems.
Important environmental issues to be taken into account in the development and oversight of payments and securities settlement systems include: country demographics, physical infrastructure, Involvement in international trade and financial transactions, macroeconomic framework, financial sector, legal and regulatory framework, stakeholders, and business perspective.
The legal basis is of special importance. A fundamental requirement for a stable and secure payment system is that it should operate in a well-defined legal environment, setting out the rights and obligations, in normal as well as in adverse circumstances, of each party involved in transmitting a payment through the system. This requires predictability in the application of rules and regulations by the system operators and overseers, and predictability in their enforcement by the courts. The legal environment needs to cover payment instruments as well as the system.
Governance and Oversight - Reconciling Needs with Constraints
Effective governance of payment systems is essential to ensure that all user needs are satisfied. Effectively governed systems and service providers should meet certain basic requirements. Governance arrangements should be clearly articulated, coherent, comprehensible, and fully transparent.
Governance arrangements should therefore seek to minimize the conflicts between the objectives of owners, users, and other interested parties, and as far as possible to resolve any remaining conflicts. In addition, financial markets operate most efficiently when participants have access to relevant information concerning the risks to which they are exposed and, therefore, can take actions to manage those risks.
The role of the central bank as payment system overseer is particularly relevant to ensure safe and efficient payments and securities settlement systems through reliable and efficient infrastructure and its adequate governance. Direct involvement of the central bank in managing clearing and settlement systems has been, in many countries, the first step to governing the overall structure and operation of a country’s payments system and ensuring that the desire to limit systemic risk especially in the area of large-value payment systems is adequately taken into account.
In all cases, in order to pursue the public interest in the payments and securities settlement systems, central banks and other regulators should ensure that the systems they operate comply with the principles and guidelines they establish and, as overseers, to ensure the financial and operational reliability and efficiency of the clearing and settlement systems they do not operate.