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RETAIL PAYMENT SYSTEMS TO SUPPORT FINANCIAL ACCESS: INFRASTRUCTURE AND POLICY

RETAIL PAYMENT SYSTEMS TO SUPPORT FINANCIAL ACCESS: INFRASTRUCTURE AND POLICY. Access to Finance Building Inclusive Financial Systems Washington DC, May 30-31, 2006 Massimo Cirasino, Jose Antonio Garcia and Mario Guadamillas World Bank Carlo Tresoldi, Maria Iride Vangelisti and

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RETAIL PAYMENT SYSTEMS TO SUPPORT FINANCIAL ACCESS: INFRASTRUCTURE AND POLICY

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  1. RETAIL PAYMENT SYSTEMS TO SUPPORT FINANCIAL ACCESS: INFRASTRUCTURE AND POLICY Access to Finance Building Inclusive Financial Systems Washington DC, May 30-31, 2006 Massimo Cirasino, Jose Antonio Garcia and Mario Guadamillas World Bank Carlo Tresoldi, Maria Iride Vangelisti and Maria Carmela Zaccagnino Banca d’Italia

  2. PLAN OF THE PRESENTATION • The role of the World Bank in the transformation process of retail payment systems • Retail payment systems and instruments: key issues, major trends and shortfalls worldwide • The growing attention to international remittances • Lessons from the European experience • A framework for reforming retail payment arrangements

  3. THE WORLD BANK ROLE • The World Bank has a highly experienced payment system team which has supported payment system reforms in more than 65 countries • Areas in which the WB Payment System Team intervenes: • -Providing a professional and complete stocktaking analysis • -Helping create momentum for the reform • -Supporting the country to adopt a holistic approach to financial infrastructure reform • -Supporting the country to develop the vision and the strategy • -Supporting the implementation of the reform providing advice

  4. THE WORLD BANK ROLE • Providing expert advice on payment system reform with a particular focus on : • Retail payment systems • International Remittances and other cross-border payment arrangements • Large value payment systems • Legal framework • Government payments • Securities settlement systems • Payment System Oversight • Domestic Cooperative Arrangements • International Cooperation through regional initiatives

  5. THE WORLD BANK ROLE • In the case of retail payment systems, particular areas of expertise are : • wide availability and efficient distribution of instruments • access for the underserved population • integration with the other components of the financial infrastructure such as credit reporting • legal framework • role of central bank and other authorities • cooperative arrangements

  6. THE WORLD BANK ROLE • Typical tools: • Funding through regular Bank loans for system implementation and technical assistance • Fee-based Technical Assistance • Regional Initiatives and FSAPs • Others

  7. RETAIL PAYMENT SYSTEMS: KEY ISSUES • Major source of banking costs and profits • New players: a threat to traditional banks • Many innovative products and services, less costly than their paper based alternative • Electronic technology removing traditional barriers of time and space • Trade off: competition and cooperation/efficiency and risk • Importance of countries peculiarities (e.g. business practices, consumers’ habits, technological development)

  8. RETAIL PAYMENT SYSTEMS: TRENDS AND SHORTFALLS • Attention to retail issues is still low worldwide, but growing • In many countries there are no ACH(s) to process payment transfers electronically • In many countries retail systems are characterized by a low degree of interoperability • In some countries, cheques are not standardized and are, therefore, processed with cumbersome procedures

  9. PAYMENT INSTRUMENTS: TRENDS AND SHORTFALLS • In most countries payment instruments are used in a sub-optimal way, from the efficiency point of view. Evidence shows: • excessive use of cash • insufficient use of electronic instruments: very few credit transfers and direct debit transactions • growing but still insufficient use of payment cards • low use of pre-paid, stored value cards and e-money • low level of transparency of the conditions applied to payment services

  10. TRENDS AND SHORTFALLS: GOVERNMENT PAYMENTS • In many cases, the gains in efficiency and cost reductions for government payments have been the main result of the reform effort, being able to recover the initial investment in a very short time-span • In many countries government payments are processed in a less than efficient way and have several negative implications for the payments system as a whole • For example, bulk collections and disbursements of the public sector are not processed electronically and timely through available automated retail systems.

  11. TRENDS AND SHORTFALLS: LACK OF TRANSPARENCY • In many cases, conditions applied to payment services are not transparent nor is it clear to the stakeholders and the public the policies pursued by authorities • Banks and other financial institutions are not forced to provide information to the public on the services they offer in the payments system • The general public nor are able to resort to a bank’s Ombudsman and/or to the central bank and/or the consumers’ protection agencies for resolution of conflicts related to payment services

  12. KEY REFERENCES: THE CPSS “RETAIL TRILOGY” • Retail Payments in Selected Countries: a Comparative Study, CPSS, September 1999 • Clearing and Settlement Arrangements for Retail Payments in Selected Countries, CPSS, September 2000 • Policy Issues for Central Banks in Retail Payments, CPSS, March 2003

  13. KEY REFERENCES: THE CPSS “GUIDANCE REPORT” • In January 2006, the CPSS released a Report on “Guidance for Payment System Development” • The Report builds on the experience of the World Bank, IMF and many central banks around the world in reforming the payment infrastructure • The Report endorses an integrated and holistic approach to payment system reforms and sets up XIV guidelines for this process Guideline 11: Retail –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.

  14. REMITTANCES AS A PAYMENT SYSTEMS ISSUE • KEY IDEA: Remittance services are part of the broader retail payment system both domestic and cross-border • Some obstacles for the provision of safe and efficient remittance services include: • Lack of physical access to financial institutions • Inadequate financial education • Inefficient and costly remittance services available at financial institutions • Regulatory barriers to the provision of remittances services • Inadequacy of data on remittance flows • Lack of guidance on what regulation/supervision of remittance service providers is necessary to ensure safety and integrity of these services • Payment system development projects are a good vehicle to address the issue

  15. CPSS/WB TASK FORCE ON “GENERAL PRINCIPLES FOR INTERNATIONAL REMITTANCE SERVICES” • Co-chaired by the CPSS and the World Bank. • Consultative report issued in March 2006 • Five general principles • Responsibilities for Remittance Services Providers (RSPs) and for Authorities

  16. THE FIVE GENERAL PRINCIPLES GP1 The market for remittances should be transparent and have adequate consumer protection GP2 Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged GP3 Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework GP4 Competitive market conditions, including appropriate access to domestic payments infrastructures, should be fostered in the remittance service industry GP5 Remittance services should be supported by appropriate governance and risk management practices

  17. ROLE OF RSPs AND AUTHORITIES The role of remittance service providers (RSPs) RSPs should participate actively in the application of the general principles. The role of public authorities Public authorities should evaluate what action to take to achieve the public policy objectives through implementation of the general principles

  18. THE EUROPEAN EXPERIENCE • In Europe the number of transaction performed via electronic payment instruments is steadily increasing • In order to understand which factors may have influenced this trend we have • built an index of factors potentially affecting the use of electronic payment instruments • verified the relationship between the index and the actual use of electronic payment instruments

  19. THE INDEX (1) The index includes three major groups of factors: • INSTITUTIONAL • formalisation of Central bank’s oversight • formalisation of cooperation mechanisms • Central Banks’s management of retail systems • legislative protection of card holders

  20. THE INDEX (2) • SECURITY AND TECHNOLOGY • chip technology on cards • electronic bill presentment • INTEROPERABILITY • interbank cooperation • bank/post office integration • atm/pos functionality on cards • atm/pos/e-money functionality on cards

  21. EMPIRICAL EVIDENCE

  22. EMPIRICAL RESULTS • The number of non-cash transactions is positively related to the index score • Additional regression analyses show that: • security, technology and interoperability have a significant andpositive effect • institutional characteristics are not significant • The available evidence shows that regulatory authorities can have a positive role by: • enhancing the adoption of advanced technology • fostering integration • Authorities’ direct intervention seems to have limited effects

  23. THE SEPA PROJECT: AN EXAMPLE • The objectives of SEPA are: • the integration of national retail payment systems • the gradual replacing of cash and paper based with electronic payment instruments • SEPA is characterized by: • direct management of the project by private entities within the banking sector • high technological standards • authorities’ catalyst role (interventions limited to the cases of market failure)

  24. FRAMEWORK TO REFORM RETAIL PAYMENT SYSTEMS (1) • Our work seems to suggest that the role of Central Banks and other regulatory authorities is effective when they act as a catalyst for the development of market solutions: • fostering cooperation among market participants and integration/interoperability among circuits • raising awareness of the general public on new instruments and circuits • promoting the intensive use of electronic payments e.g. integrating government and business payments in the retail system infrastructure • encouraging the use of high security and technological standards to increase reliability and efficiency

  25. FRAMEWORK TO REFORM RETAIL PAYMENT SYSTEMS (2) • Direct intervention (regulation, operational role) should be considered in presence of: • strong coordination failures (e.g. inability of the market to develop appropriate arrangements to process electronic payments, failure to reach agreements to perform efficiently payments at cross border level) • strong information asymmetries (e.g. benefits of security devices such as the microchip on cards, actual cost of paper based transactions)

  26. FRAMEWORK TO REFORM RETAIL PAYMENT SYSTEMS (3) • Additionally, Central Banks should: • Create, if appropriate, regional links among payment circuits to expand the use of payment instruments across countries • Activate programs around the new CPSS-WB General Principles to ensure the market for domestic and international remittance is transparent, contestable, sound and efficient • Ensure the Central Bank is able to exercise effectively the oversight function on retail payment arrangements

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