As there is no single recipe for effective development of a national payment system, countries undergoing a reform process are frequently faced with questions relating to issues such as involvement and initiative for development of national payment systems, infrastructures needed and the supporting institutional arrangements, areas of priorities and so on.
In order to give the necessary assistance and advice on the planning and implementation of reforms in national payment systems to the concerned authorities, the Committee on Payment and Settlement Systems (CPSS) has brought out a Report on Payment Systems Development (final Report in Jan 2006). The Report underlines that payment system development is a complex process that should be principally needs-based, not technology-based. Payment system reforms depend on parallel development of the banking system, institutional arrangements for payment services and payment infrastructures, and should therefore be a cooperative effort among the banking sector, regulatory agencies and other relevant stakeholders.
Central Banks and Payment System development
As stated earlier, the development of a safe and efficient national payment system has relevance for the monetary policy, financial stability and overall economic development interests of a central bank. Central banks, therefore, monitor developments in the payment system to assess their impact on the demand for money, the influence of monetary policy transactions and the efficiency and stability of critically related financial markets.
The national payment system is central to the effective implementation of monetary policy using money market transactions to influence overall financial and economic activity. In addition, developments in the payment system can affect the speed and predictability of the turnover of monetary balances, which may influence the overall demand for money in the economy. However, by linking financial institutions together for the purpose of transferring monetary claims and settling payment obligations efficiently, a national payment system also becomes a channel through which financial risks can be transmitted across financial institutions and markets. In promoting a safe and efficient national payment system, central banks try to limit the prospect of financial contagion through this channel.
A central bank is a core contributor to national payment system development. Being an operator, an user and also an overseer, a central bank acquires a broad perspective on the role of the payment system in the financial system and the economy, and an extensive expertise in specific payment systems.
Elements of a National Payment System
According to the CPSS Guidance report, a national payment system is a broad concept including a country’s entire matrix of institutional and infrastructure arrangements and processes for initiating and transferring monetary claims in the form of commercial bank and central bank liabilities. The main elements of a national payment system include:
- payment instruments used to initiate and direct the transfer of funds between the accounts of payers and payees at financial institutions;
- payment infrastructures for transacting and clearing payment instruments, processing and communicating payment information, and transferring the funds between the paying and receiving institutions;
- financial institutions that provide payment accounts, instruments and services to consumers, and businesses and organisations that operate payment transaction, clearing and settlement service networks for those financial institutions;
- market arrangements such as conventions, regulations and contracts for producing, pricing, delivering and acquiring the various payment instruments and services;
- laws, standards, rules and procedures set by legislators, courts and regulators that define and govern the mechanics of the payment transfer process and the conduct of payment service markets.
Reforms in the national payment system are generally triggered by: (i) new developments in the financial and non-financial sectors that present new needs and opportunities for cost-efficient payment instruments and services; (ii) an increasing awareness of payment system risks and concerns about financial stability; (iii) internal and external pressures for reform and a policy decision to comply with relevant international standards; or (iv) political-economic developments sometimes related to a country’s entry into regional or global trade and financial markets. The recent trends in national payment system development have usually involved initiatives to:
- broaden the range of payment instruments and services;
- improve cost efficiency, particularly in terms of operating costs and access to, and usage of, liquidity;
- enhance the interoperability and resiliency of banking, payment and securities
- infrastructures; better contain legal, operational, financial and systemic risks in payment infrastructures;
- create more suitable oversight and regulatory regimes for the national payment system; and
- enhance the efficiency and stability of payment service markets.
However, the development process for a national payment system is not always a smooth and efficient one. The most common problems for effective development are:
- inadequate knowledge about the overall breadth of the national payment system and limited vision and leadership;
- limited information about emerging payment needs and system capabilities;
- weak support and commitment from stakeholders due to inadequate consultation;
- limited development resources; and
- legal, regulatory, public policy and market barriers to ongoing development of the national payment system.
These are the main issues that the general guidance addresses.
An outline of the CPSS guidelines is given below:
A. Banking system
- Guideline 1. Keep the central bank at the centre: due to its overall responsibility for a sound currency, the central bank has a central role in the development of the use of money as an effective means of payment.
- Guideline 2. Promote the role of a sound banking system: payment accounts, instruments and services available to end users are provided by banks and other similar financial institutions, which compete individually but often need to act cooperatively as a system.
- Guideline 3. Recognise complexity: planning should be based on a comprehensive understanding of all the core elements of the national payment system and the principal factors influencing its development.
- Guideline 4. Focus on needs: identify, and be guided by, the payment needs of all users in the national payment system and by the capabilities of the economy.
- Guideline 5. Set clear priorities: plan and prioritise development of the national payment system strategically.
- Guideline 6. Implementation is key: ensure effective implementation of the strategic plan.
C. Institutional framework
- Guideline 7. Promote market development: the expansion and strengthening of market arrangements for payment services are key aspects of the evolution of the national payment system.
- Guideline 8. Involve relevant stakeholders: encourage the development of effective consultation among relevant stakeholders in the national payment system.
- Guideline 9. Collaborate for effective oversight: effective payment system oversight by the central bank often requires collaborative arrangements with other authorities.
- Guideline 10. Promote legal certainty: develop a transparent, comprehensive and sound legal framework for the national payment system.
- Guideline 11. Expand availability of retail payment services: extend the availability and choice of efficient and secure non-cash payment instruments and services available to consumers, businesses and government by expanding and improving retail payment infrastructures.
- Guideline 12. Let the business case guide the large-value payment system: develop a large value payment system based primarily on the needs of financial markets and the growth in time-critical interbank payments.
- Guideline 13. Align development of payment and securities systems: coordinate the development of securities and large-value payment systems for safety and efficiency in the financial system.
- Guideline 14. Coordinate settlement of retail, large-value and securities systems: the settlement processes for the core systems should be operationally coordinated to efficiently manage the interrelated liquidity needs and settlement risks among them.