Post on 11-Sep-2021
title:
TransformingPaymentSystems:MeetingtheNeedsofEmergingMarketEconomiesWorldBankDiscussionPapers,0259-210X;291
author: Satåo,Setsuya.;Humphrey,DavidB.publisher: WorldBank
isbn10|asin: 0821333550printisbn13: 9780821333556ebookisbn13: 9780585269535
language: English
subject
Banksandbanking--Developingcountries--Communicationsystems,Clearinghouses(Banking)--Developingcountries--Dataprocessing,Payment--Developingcountries--Dataprocessing,Electronicfundstransfers--Developingcountries.
publicationdate: 1995lcc: HG3550.S281995eb
ddc: 332.1/78
subject:
Banksandbanking--Developingcountries--Communicationsystems,Clearinghouses(Banking)--Developingcountries--Dataprocessing,Payment--Developingcountries--Dataprocessing,Electronicfundstransfers--Developingcountries.
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Pagei
291 WorldBankDiscussionPapers
TransformingPaymentSystemsMeetingtheNeedsofEmergingMarketEconomies
SetsuyaSatoDavidBurrasHumphrey
Pageii
Copyright©1995TheInternationalBankforReconstructionandDevelopment/TheWorldBank1818HStreet,N.WWashington,D.C.20433,U.S.A.
AllrightsreservedManufacturedintheUnitedStatesofAmericaFirstprintingJuly1995
DiscussionPaperspresentresultsofcountryanalysisorresearchthatarecirculatedtoencouragediscussionandcommentwithinthedevelopmentcommunity.Topresenttheseresultswiththeleastpossibledelay,thetypescriptofthispaperhasnotbeenpreparedinaccordancewiththeproceduresappropriatetoformalprintedtexts,andtheWorldBankacceptsnoresponsibilityforerrors.Somesourcescitedinthispapermaybeinformaldocumentsthatarenotreadilyavailable.
Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthor(s)andshouldnotbeattributedinanymannertotheWorldBank,toitsaffiliatedorganizations,ortomembersofitsBoardofExecutiveDirectorsorthecountriestheyrepresent.TheWorldBankdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilitywhatsoeverforanyconsequenceoftheiruse.Theboundaries,colors,denominations,andotherinformationshownonanymapinthisvolumedonotimplyonthepartoftheWorldBankGroupanyjudgmentonthelegaltatusofanyterritoryortheendorsementoracceptanceofsuchboundaries.
Thematerialinthispublicationiscopyrighted.RequestsforpermissiontoreproduceportionsofitshouldbesenttotheOfficeofthePublisherattheaddressshowninthecopyrightnoticeabove.TheWorldBankencouragesdisseminationofitsworkandwillnormally
givepermissionpromptlyand,whenthereproductionisfornoncommercialpurposes,withoutaskingafee.PermissiontocopyportionsforclassroomuseisgrantedthroughtheCopyrightClearanceCenter,Inc.,Suite910,222RosewoodDrive,Danvers,Massachusetts01923,U.S.A.
ThecompletebacklistofpublicationsfromtheWorldBankisshownintheannualIndexofPublications,whichcontainsanalphabeticaltitlelist(withfullorderinginformation)andindexesofsubjects,authors,andcountriesandregions.ThelatesteditionisavailablefreeofchargefromtheDistributionUnit,OfficeofthePublisher,TheWorldBank,1818HStreet,N.W,Washington,D.C.20433,U.S.A.,orfromPublications,TheWorldBank,66,avenued'Iéna,75116Paris,France.
ISSN:0259-210X
SetsuyaSatoisfinancialadviserintheWorldBank'sFinancialSectorDevelopmentDepartment.DavidBurrasHumphreyisprofessoroffinanceandFannieWilsonSmithEminentScholarinBankingatFloridaStateUniversity,Tallahassee.
LibraryofCongressCataloging-in-PublicationDataSato,Setsuya,1952-Transformingpaymentsystems:meetingtheneedsofemergingmarketeconomies/SetsuyaSato,DavidBurrasHumphrey.p.cm.(WorldBankdiscussionpapers,ISSN0259-210X;291)Includesbibliographicalreferences(p.).ISBN0-8213-3355-01.BanksandbankingDevelopingcountriesCommunicationsystems.2.Clearinghouses(Banking)DevelopingcountriesDataprocessing.3.PaymentDevelopingcountriesDataprocessing.4.ElectronicfundstransfersDevelopingcountries.I.Humphrey,DavidB.II.Title.III.Series.
HG3550.S281995332.1'78dc2095-23991CIP
Pageiii
Contents
Foreword v
Abstract vi
Introduction 1
I.Differencesinpaymentsystemsincentrally-plannedandmarketeconomies
3
1.Thestructureandoperationofpaymentsincentrally-plannedeconomies
3
Centralplanninginagovernment-ownedmono-bankingsystem
3
Theroleofthepaymentsystems:monitoringtheplan 4
Stateguarantees:nocreditriskforpaymentreceivers 7
Timeinsensitivityofpayments 10
Limitedneedforcomprehensivelegal,accounting,andcommunicationsinfrastructure
10
Cash-basedretailpayments 10
2.Paymentsystemsinmarketeconomies 11
Supportofrealandfinancialmarkets 11
Privateresponsibilityforcreditneedsandriskassessment
12
Paymentfloatandincentivesfortimelypaymentandsettlement
13
Cash,check,GIROretailpayments,andelectroniclargevaluetransfers
14
3.Improvingthepaymentsystemintransitionaleconomies
16
Structure 17
Purpose 17
Enterprisepayments 18
Guarantees 18
Settlement 19
Retailpayments 19
II.Thepaymentcycle:Structureandchoices 21
1.Thestructureofthepaymentcycle 21
Aconceptualmodelofthepaymentcycle 21
Paymententry-Step1 23
Inboundprocessingandtransfer-Step2 23
Inboundclearing-Step3 24
Grossornetsettlement-Step4 24
Outboundclearing-Step5 24
Outboundprocessingandtransfer-Step6 24
Pageiv
Paymentdistribution-Step7 25
Floatandpaymentfinality 26
2.Clearingfinancialmarkettransactions 26
Clearingandsettlementforfinancialmarkets:clearinghouses
26
Paymentcycleforimmobilizedorbook-entrysecuritiesindepositories
28
3.Choicesinthepaymentcycle 30
Supplierandownershipchoice:banksversusthepostoffice
30
Local,regional,ornationalprocessingandsettlement 31
Privatebankversuscentralbankprocessing 32
Accessandsecuritychoices 32
Participantliabilitiesanderrorresolution 33
Settlementofcross-borderpayments 33
III.Marketneedsandchoicesinanevolvingpaymentsystem
35
1.Paymentsystemchoicesinmarketeconomies:theU.S.andEuropeanexperience
35
Centralizedversusdecentralizedsupplyofsavingsandpaymentservices
35
Paperversuselectronicpayments 36
Non-bankcompetitioninsupplyingpaymentservices 36
Paymentpricingandpaymentfloat 37
Commercialbankandcentralbankpaymentfunctions 37
2.Marketneedsintransitionaleconomies 38
Paymentsystemevolution:transitionaleconomies 38
Userneedsandpaymentsystemdesign 40
Appendix:Planningforpaymentsystemimprovements 42
Pagev
ForewordUntilveryrecently,interestinpaymentsystemissueshasoftenbeenofsecondaryimportanceinthefinancialsectordevelopmentagenda.Thisreflectedaviewthatthepaymentsystemisessentiallyamechanicalprocessandthatnothingmorethananautomationofcommercialbanks'back-officesupportfunctionisrequiredtoachievethegoal.
Today,thereisagrowingperceptioninboththeWorldBankanditsclientcountriesthatsuchalimitedviewunderestimatetherolepaymentsystemsplayintheprocessofsoundfinancialmarketdevelopment.Hence,paymentsystemsmodernizationisbecomingoneoftheprioritiesthatneedstobeaddressedatanearlystagetoeliminateconstraintsforthelaterstagesoffinancialsectordevelopment.
TheBank'sexperienceinseveraltransitionalanddevelopingcountries,bothsuccessfulandunsuccessful,shedslightonwhatneedtobeaddressedandansweredinpaymentsprojects,whyandhow.Thesevaluableexperiencesmustbeeffectivelytranslatedintoanimprovementinotherpaymentsystemsprojects.ThispaperbyMr.SetsuyaSatoandProfessorDavidHumphreyisonesucheffort.ItwasoriginallypreparedtobepresentedattheWorldBankProgramon"PaymentSystemsinFinancialSectorDevelopment,"whichwasjointlyorganizedwiththeFederalReserveBankofRichmondundertheinitiativeoftheFinancialSectorDevelopmentDepartmentinApril1995.Giventhepositiveresponsetothispaper,andtheensuingdebateitprovoked,wedecidedtopublishthispapertoawideraudience.
Wearesurethispaperwillprovetobeofgreatinteresttothosewho
specializeinpaymentsystemsissues,aswellasthosewithabroaderinterestinfinancialmattersduringtransitionanddevelopment.
GARYPERLINDIRECTORFINACIALSECTORDEVELOPMENTDEPARTMENTFINANCEANDPRIVATESECTORDEVELOPMENTTHEWORLDBANK
Pagevi
AbstractMarketeconomiesrelyonthepaymentsystemtofacilitatetradeandexchangeamongenterprisesandbetweenenterprisesandconsumersinproductmarkets.Atthesametime,thepaymentsystemisalsousedtotransformdomesticandinternationalsavingsflowsintoproductiveinvestmentsthroughfinancialmarkets.Emergingmarketeconomiesfacethedifficulttaskofattemptingtosimultaneouslypromotethedevelopmentofproductandfinancialmarkets,improvetheefficiencyofproduction,andmobilizedomesticsavings.Theseandothertasksaremadeeasierwhenacost-effectivepaymentsystemexistswhichisresponsivetouserneeds.
Theprimaryissuesassociatedwithtransformingandimprovingpaymentsystemsinformerlycentrallyplannedandemergingmarketeconomiesarediscussedinthispaper.Emphasisisplacedonmeetingthepaymentneedsofconsumersandenterprises,asusersofpaymentservices,andontheroleplayedbythebankingsystemandthecentralbankassupplierand/orregulatorofpaymentservices.Theindirectroleofcountrysize,bankingstructure,andinstitutionalframeworkarealsodiscussed.Theseinfluencesareillustratedbyoutliningtheevolutionofpaymentarrangementsinvariousmarketeconomies.
Theessentialdifferencesinpaymentsystemsbetweencentrally-plannedandmarketeconomiesareoutlinedandbothshort-termandlonger-termmethodstoimprovethesepaymentsystemsarenoted.Distinctionsamongvariouspaymentinstrumentsaremadeclearerbymodelingthepaymentcycleandchoicesregardingalternativesuppliersofpaymentservicesandthetieringofpaymentprocessingarrangementsarediscussed.MarketneedsinanevolvingpaymentsystemareoutlinedbyillustratingthedifferentpathstakeninEuropeandtheU.S.intheevolutionoftheirpaymentsystems.Thebenefits
andcostsofpaperversuselectronicpayments,theroleplayedpaymentpricingandfloat,andtheinterplaybetweencommercialbanksandthecentralbankinthisprocessarealsodiscussed.Thepaperendswithasurveyofthemanyissuesneedingtoberaisedfrompaymentinstrumentdesigntocostrecoverytoprovideuserswithaneffectivepaymentsystem.
Page1
IntroductionOneofthechallengesfacedbytransitionalanddevelopingcountriesistotransformandimprove,bothstructurallyandbehaviorally,theirpaymentsysteminordertomeettheneedsofemergingmarketeconomies.Financialinstitutionsandmarketsrelyonthepaymentsystemtocost-effectivelymobilize,allocate,andtransformdomesticandinternationalsavingsflowsintoproductiveinvestments.Thepaymentsystemalsotransfersvaluefromhouseholdsandenterpriseswhengoodsandservices,producedbytheseinvestments,areconsumed.Theefficiencyofbothofthesetasksishighlydependentontheexistenceofaconvenient,cost-effective,andlowriskmeansofdeliveringpaymentinformationandtransferringvaluefromoneentitytoanother,point-to-point,i.e.,apaymentsystem.Thethreeessentialelementsofapaymentsystemare:
(i)theinitiationofinstructionsbyadebtortomakeapaymenttoacreditor(bycheck,bankorpostalGIRO,debitorcreditcard,telephonecall,orsomeothermeans);
(ii)thetransferofpaymentinformation(bypost,courier,orelectronicmeans)amongbankinginstitutionsenablingthepayor'sinstitutiontodebitthepayor'saccountandthepayee'sinstitutiontocreditthepayee'saccount;and,
(iii)thesettlementofthetransferoffundsbetweenbankinginstitutions,usuallythroughaccountsheldbybanksatthecentralbank.
Thepurposeofthispaperistooutlineanddiscussthemajorissuesassociatedwithtransformingandimprovingpaymentsystemsinemergingmarketeconomies.Anation'spaymentsystemisintimatelyrelatedtothedevelopmentofmoneyandcapitalmarketsandthe
implementationofmonetarypolicy.Inthissense,apaymentsystemissomewhatanalogoustoaneffectiveinternaltransportationsystemwherethelayoutandconnectionsbetweenroads,highways,andothertransportationmodesinacountryhasaprofoundeffectonthefuturepatternoftradeanddevelopmentinaneconomy.Thisiswhyapaymentsystemprojectisregardedasapolicymatter,notasimpletechnologyissue.
Ourgoalistoprovideaframeworkinwhichthebasicelementsimportanttotransformingapaymentsystemareexplained(forthenovice)andtheirinterrelationshipsshown(fortheinformedreader).Inthisprocess,anumberofquestionsareineffectposedandanswered,suchas:
Page2
Whatarethemainproblemsraisedintransformingapaymentsysteminformerlycentrally-plannedeconomies?
Howsimilarordifferentarepaymentsystemsindifferentmarketeconomies?
Whatarethemainrisksinmakinglargevalue,inter-enterprisepaymentsandhowcantheybeminimized?
Whatarethespecificstepstakenwhenmakingapaymentwithdifferentpaymentinstrumentsandhowcanthisprocessbeimproved?
Howhavepaymentsystemsevolvedindevelopedcountriesandwhatdoesthisimplyforemergingmarketeconomies?
Whymightelectronicpaymentsbefavoredoverpaper-basednon-cashpayments?
Whatinformationisneededtoproperlyplanforpaymentsystemimprovements?
Inwhatfollows,thebroad,majordifferencesinpaymentsystemsbetweencentrally-plannedandmarketeconomiesarefirstoutlinedandwaystoimprovethefunctioningofthepaymentsystemintransitionaleconomiesarenoted.Althoughtheexampleofpaymentsystemsincentrally-plannedeconomiesisusedtocontrastthisdifference,theproblemsidentifiedareapplicabletodevelopingcountriesaswell.Second,togainadeeperunderstandingofsomeofthemorecomplexpaymentsystemissuesfacedbytransitionaleconomies(aswellasdevelopingcountries),adetailedmodelofthepaymentcycleispresented.Withsuchamodel,choicesamongalternativeaccess,communication,andsecurityarrangementsbecomecleareranditiseasiertoseewhereandhowdifferentpaymentinstrumentsfitintothenationalpaymentcycle.Third,theneedsofanevolvingandmarket-drivenpaymentsystemareoutlined.The
importanceofacountry'slegalandinstitutionalstructureisillustratedbycontrastingthedifferentevolutionarypathstakenbytheU.S.andEuropeanpaymentsystemsovertime.Thepaperendswithadiscussionofthemanyissuesneedingtoberaisedfrompaymentinstrumentdesigntocostrecoverytoprovideuserswithaneffectivepaymentsystem.Lastly,anAppendixprovidesasummarychecklistofinformationneededtoadequatelyplanforpaymentsystemchange.
Page3
IDifferencesinPaymentSystemsinCentrally-PlannedandMarketEconomiesTransitionaleconomiesaremovingfrombeingcentrally-plannedtobeingmarket-directed.Toappreciatethestructuralandbehavioralchangesthatpaymentsystemsintransitionaleconomiesface,itisnecessarytofirsthaveabasicunderstandingofhowpaymentsystemsactuallyoperateinbothcentrally-plannedandmarketeconomies.Whiletherearesomesimilaritiesinpaymentsystemoperationbetweencentrally-plannedandmarketeconomies,thedifferencesaremorenumerous.Thesedifferences,ofcourse,arewheretheproblemsliefortransitionaleconomies.
1TheStructureandOperationofPaymentsinCentrally-PlannedEconomies
Centralplanninginagovernment-ownedmono-bankingsystem.Centrally-plannedeconomieshaveasingleormono-bankstructure.Whilesuperficiallyitmayappearthatmanydifferentbanksexistwithsomefocusingonprovidingagriculturecredits,othersfocusingonraisingdomesticsavings,andstillothershandlingimportandexporttransactionsthesebanksareallgovernmentownedandcontrolledanddonotcompetewithoneanother.
Theprimarypurposeofbanksinacentrally-plannedeconomyistomonitortheplan.Theplanassignsproductionandoutputgoalsacrossstateenterprisesinabalancedmanner.Theseparategoalsaremadeinternallyconsistentthroughtheapplicationofinput-outputtechniques.Givenasetofplannedfinaldemands,consistingof
plannedlevelsofproductionofallgoodsandservicesforconsumer,military,government,investment,andexportuse,input-outputmodelsdeterminethelevelofstateenterpriseoutputsneeded(directlyandindirectly)tosatisfytheplan.
Theplandeterminestheallocationofalloftheoutputproducedtothesectorsoffinaldemandandalsoplanstheuseoflabor,physicalcapital,andmaterialsinputsbystateenterprises.Thustheplanembodiesvirtuallyalloftheproductionanddistributiondecisionsthatwouldhavebeenmadeseparatelybyindividualfirmsandhouseholdsinteractinginamarketeconomy.
Whiletheplanmonitoring,allocation,andperformancefunctionscouldbeperformedinphysicalterms,andindeedwerehistorically,itiseasiertoperformthesefunctionsinvalueterms.Oncepricesaredevelopedandassignedtoalltheinputsandoutputsinthephysicalorquantitativeplan,aduplicatefinancialplaninvaluetermsisobtained.Notonlyismonitoringsimplified,butthisprocedurealsopermitssomechoiceregardinginputmixin
Page4
productionandoutputmixinconsumption.Whilemanypricesaresettoapproximatescarcity,andthustruecosts,manyothersaresettoachievecertainsocialgoals(suchasprovidinglowcosthousingorinexpensivebasicfoodstuffs).
Theroleofthepaymentsystems:monitoringtheplan.Theprimaryresponsibilityformonitoringthefinancialplanisvestedinthebankingsystem.Eachenterpriseisallowedonlyone(zero-interest)accountwiththestatebankthroughwhichallofitstransactionsaremade.Agrosssettlementsystemisemployedwherebyeachtransactionissettledseparatelyasitoccurs.Thusthepaymentsystemprovidesacomprehensiverecordofallenterprisetransactions.Eachtransactioncanbetracedandcomparedtothefinancialplananddeviationsfromtheplan,onceidentified,leadtocorrectiveactiontoensurecompliance.(Box1containsabriefdiscussionofpaymentclearingversussettlementandanillustrationofgrossversusnetsettlement.)
Twoseparatepaymentcircuitsarecontainedinthefinancialplan:non-cashcreditsanddebitsforenterprisesandcashpaymentsforhouseholds.ThesetwopaymentcircuitsareillustratedinFigure1.1Followingthenon-cashcircuitofthefinancialplan(solidarrows),bankscreateandissuecreditstothestateenterprises.Enterprisesusethesecreditstopurchasephysicalcapitalforinvestment,payforlaboremployed,andcompensateotherstateenterprisesfortheportionoftheiroutputusedasanintermediateinputtoproducetheplannedoutput.
Onlywhenenterprisesaremakingwagepaymentstolaborarecashwithdrawalsallowed.Thisinitiatesthecashcircuitofthefinancialplan(doublearrows)usedbythehouseholdsector.Thecashreceivedbylaborisbyfartheprimarypaymentmethodusedbythissectorinconsumptionandsavingtransactions.However,cashtransactionsare
noteasilymonitored.Conformitytothiscircuitofthefinancialplanisensuredbymonitoringthenon-cashtransactionsbetweenstateenterprisesproducingoutputforthehouseholdsector(EnterpriseA)andthoseenterprisesresponsiblefordistributingthisoutputtohouseholdsthroughretailorotheroutlets(EnterpriseC).Thushouseholduseofcashisindirectlymonitoredbytheflowofgoodsandservices.
Thetwopaymentcircuitsofthefinancialplanrelyonpaperpaymentinstruments:householdsusecashwhileenterprisesusepaper-basedpaymentdemandorders(PDOs).APDOisadebit-basedinstrumentsimilartoacheckexceptthatitisinitiatedbythereceiverofthefunds(thepayee)notthesender(thepayor).ThusaPDOisthepaperequivalenttoanelectronicdirectdebitinamarketeconomy.(Asbackground,Box2(seepage8)outlinesthedifferencebetweenadebittransferandacredittransfer.)
1Seepage5.
Page5
Figure1Twopaymentcircuitsincentrally-plannedeconomies
Page6
Box1:PaymentclearingandgrossandnetsettlementPaymentclearingistheprocessbywhichpaymentinformationistransferredamongbankinginstitutionssothatthepayor'saccountisdebitedandthepayee'saccountiscredited.Thisincludestheinitialprocessingofthepaymentrequestbyabank,itsphysicalorelectronictransferwithinorbetweenbanksthatareinvolvedinthetransfer,andthedebitingandcreditingofthepayor'sandpayee'saccounts.Althoughaccountingentrieshaveoccurred,fundshavenotreallymovedbetweenthepayor'sandpayee'saccountsuntilsettlementoccurs.Settlementinvolvestheactualmovementoffundsamongbanks,usuallyintheformofbalancesheldbybanksatthecentralbank,toextinguishthepaymentobligation.Grosssettlementoccurswheneachtransactionissettledseparately(inrealtime)asitoccursandisbilateralinnature.ConsiderthefollowingfoursequentialtransactionsforvariouspayorsandpayeesofBanksA,B,andC:1.BankAowesBankB$150million;2.BankBowesBankA$75million;3.BankBowesBankC$10million;and4.BankCowesBankA$150million.Withgrosssettlement,eachofthefourbilateralpaymentsaresettledintheorderthattheyaremade.Underanetsettlementarrangement,thenumberofsettlementtransactionsisreducedbysettlingallfourpaymentssimultaneouslyasagroup,ratherthanseparately.Hereonlythenetpositionamongallparticipantsneedstobesettled.Thenetpositionisdeterminedbyaddingupallthecreditstoabanknomatterwhotheyarefromandsubtractingallthedebitsnomatterwhotheymaygoto.Inthissense,netsettlementrepresentsamultilateralpaymentarrangement,notabilateralone.Consideringallfourpaymenttransactions,thetotalcredits,totaldebits,andthenetpositionwouldbe:Banks Credits minus Debits equals NetpositionC 75+150 - 150 = 75B 150 - 75+10 = 65C 10 - 150 = -140Toeffectnetsettlement,C'saccountwiththecentralbankwouldbedebitedby$140millionandthesefundswouldbeplacedtemporarilyinaspecialsettlementaccount.Onlywhenallthenetdebitshavebeenplacedinthe
settlementaccountwouldthisaccountitselfbedebitedtogeneratethenetcreditsof$75millionand$65million,respectively,forA'sandB'saccountswiththecentralbank.Sinceallpaymentsaresettledsimultaneouslyundernetsettlement,itisnecessarytowaituntilallpaymentsareknownbeforenetsettlementoccurs.Thus,unlikegrosssettlement,netsettlementincorporatesariskthatabankinanetdebitposition(BankCabove)mayfailsometimeduringthedaybeforesettlementoccurs.Theriskassociatedwithasettlementfailureisdiscussedinmoredetailinthetext.
Page7
PDOsrepresentarequestforpaymentandaredirectlytiedtointer-enterprisetrade.Oncegoodshavebeenreceivedbyapurchasingenterprise(EnterpriseAthepayor),thesupplyingenterprise(EnterpriseBthepayee)depositsshippingdocuments,titleofownership,andamultiplecopiedPDOatitsbranchofthestatebanktoinitiatethepaymenttransactiondebitingthepayor'saccount(A)andcreditingthepayee'saccount(B).Thepayee'sbranchwilltypicallyextend85%oftheamountbeingcollectedintheformofaninterestfreeloantothepayee(B)priortotheactualtransferoffunds.Theloanisextinguishedandtheremaining15%ofthetransactionvalueisobtainedafterthefundshavebeentransferredtothepayee'sbranch,afterwhichthetitleofownershippassestothepurchasingenterprise(A).
EachpartytothepaymenttransactionhastoapproveandretainacopyofthePDOfromtheinitiatingenterprise,tothevariousbranchesofthestatebankinvolvedinthetransaction,tothereceivingenterprise.Aswell,allenterprisetransactionsareelaboratelycoded.Codingisusedtodeterminetheprecisesourceandpurposeofthecreditscreatedbythestatebankfortheenterpriseaswellasthepurposeandnatureofpaymentsmadebytheenterpriseindrawingdownthesecredits.Ineffect,thepaymentsystemnotonlytransfersvaluebutalsorecordsandretainstheequivalentofbankloanandfirmproductinvoicinginformationofamarketeconomy.
Stateguarantees:nocreditriskforpaymentreceivers.Underthefinancialplan,creditcreation,enterprisepayments,andbankingsystemviabilityareallessentiallyguaranteedbythestate.Creditcreationanditsallocationtoenterprisesisdictatedbythefinancialplanandthusisnotconstrainedbytheavailabilityofdomesticsavingsorhouseholddepositsinthebankingsystem.Thecreditcreatedbythebankingsystemisusedbyenterprisestopayotherenterprisesandinjectcashintothehouseholdsector.Sinceall
enterprisesareownedbythestate,inter-enterprisepaymentsmerelyrepresentatransferofcreditsfromonepartofthestatetotheother.Suchanarrangementissimilartoanintra-firmtransactioninamarketeconomy.Thusinter-enterprisepaymentsareintra-statepayments.lntra-statepaymentsposenorealriskoflossforpaymentreceiversnorforthebankingsystemthatistransferringcreditsfromonestateaccounttoanother.
Aswell,withgrosssettlementofenterprisepaymenttransactions,oneaccountisdebitedbeforeanotheraccountiscredited.Ifcreditsintheaccounttobedebitedareinsufficient,extracreditsareoftenmadeavailablebythestatebank,reducingtheincidenceofenterpriseliquidityproblems.
Page8
Box2:Thedifferencebetweenadebitandacredittransfer
Non-cashpaymentscanbeeitherdebittransfersorcredittransfers.Theconventionalwaytodistinguishbetweenthemdependsonwhothepayororthepayeeisactuallyinitiatingthetransferoffundsfromthepayor'saccounttothepayee'saccount.However,asecondimportantdistinguishingcharacteristicconcernswhetherornotthepaymentbeingmadeisprovisional(andthereforesubjecttoreversal)orisfinalwhenmade.AcommondebittransferinstrumentisthepapercheckwhileacommoncredittransferisapaperorelectronicGIROpayment.DebitandcredittransfersareillustratedinFiguresAandBbelow.
AsshownbythearrowsinFigureA,adebittransferinvolvesgoingfromthepayorwhowritesacheck,tothepayeewhoreceivesthecheck,tothepayee'sbankwherethecheckisdeposited,tothepayor'sbankwhofinallypaysthecheckiftherearesufficientfundsinthepayor'saccount.Ifthefundsinthepayor'saccountareinsufficient,thenthecheckisreturnedbyreversingthepathittooktobecollectedandpresentedforpayment.
Whilethepayorwritesachecktoinitiatethepaymentcycle,itisthepayee(oritsagentbank)whoisactuallyinitiatingthetransferoffundsfromthepayor'saccounttothepayee'saccount.Thepayeeisineffectsaying''debitthepayor'saccount"whichstartsthefundstransferprocess,soacheckisadebittransferinstrument.Importantly,thereisrisktothepayeeinacceptingacheckaspayment:thepayor'sbankmayrefusetopaythecheckifthefundsintheaccountareinsufficienttocoverthedebit.Thusacheckisonlyaprovisionalpaymentinstrumentwhichcanbereturnedunpaid.
Acredittransferfollowsadifferentroute.AsseeninFigureB,a
payorinstructshisGIROtotransferfundsfromhisaccounttothepayee'saccount.Thepayorisineffectsaying"creditthepayee'saccount"tostarttheactualfundstransferprocess,soaGIROpaymentisacredittransfer.Ifthefundsinthepayor'saccountareinsufficient,thetransfernevertakesplace.ThusreturnitemsdonotexistwithinaGIROframework.Asaresult,whenfundsarereceivedinthepayee'saccount,theyaregoodandfinalfunds(notprovisional).
WithaGIROpayment,theentiretransactionoccurswithinasingleorganizationalstructurethepostalorbankGIROsothefundstransferandsettlementprocessisbothsimplerandlessexpensivethanwithadebittransfersystemwhereinterbankpaymentandsettlementistherule.Apaper-basedcheck(debittransfer)systemisbothmorecostlyandcontainsmoreriskoffraudandlossthandoesanelectronic-basedGIRO(credittransfer)system.However,aGIROsystemrequireseitheranaggregatedbankingsystemand/oragreatdealofcooperationamongbankstoworkproperly.Countrieswithahighlydisaggregatedbankingsystemandlittlecooperation(suchastheU.S.)havenotbeenabletodevelopaneffectiveGIROsystemandthusrelyonchecks.
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FigureAIllustrationofadebittransfer
Check:AdebittransferSolidline:Routeofforwardcollection,Point1toPoint4.
Routeofreturneditems,Point4toPoint1.
FigureBIllustrationofacredittransfer
GIRO:AcredittransferSolidline:RouteofforwardcollectionPoint1toPoint2.Therearenoreturnitems.
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Timeinsensitivityofpayments.Enterprisebalancesareheldinstatebankaccountsthatpaynointerest.Thusthereisnoincentivetoreconfiguretheauditingfunctionofthepaymentsystemsothatthisneedismetwhilealsoprovidingfortimelypaymentandsettlementofenterprisetransactions.Aswell,noimportantpenaltyisimposedwhenenterprisesfailtomakepaymentsinatimelymanner.Forthesereasons,paymentsarenotviewedasbeingtime-criticalandthenotionofatimevalueformoneyisundeveloped.Consequently,largevaluepaymentsamongenterprises,orbetweenanenterpriseandaforeignsupplier,cantakedaystocomplete.Whilesuchasystemisacceptableinacentrally-plannedeconomywherenointerestispaidandfundsessentiallymovefromonestateagencytoanother,suchpaymentdelayswouldplaceanunacceptablylargeopportunitycostonpaymentreceiversinamarketeconomywheremoneyhasatimevalue.
Limitedneedforcomprehensivelegal,accounting,andcommunicationsinfrastructure.Asenterprisepaymentsaretransfersfromonestateagencytoanother,thereisonlyalimitedneedforpaymentlawsandregulationsthatdeterminetherightsandliabilitiesofthepartiestoapaymenttransaction.Thisneedislimitedbecausethereisreallynocreditriskortimevalueofmoneyinvolvedinapaymenttransaction.Ifcreditriskexistedandmoneyhadatimevalue,thelegalstructurewouldhavetobeexpandedtospellouttheconditionsunderwhichpayorsandpayees,respectively,wouldbeliableforlossesduetoenterprisefailureordelayedpayments.
Inmonitoringthefinancialplan,theseparatebranchesofthestatebankarereliedupontoindividuallycollect,accountfor,andreportenterprisepaymentinformationtoacentralagency.Inthiscapacity,eachbranchofficeeffectivelyoperatesasifitwereaseparatebanksinceenterpriseaccountsarenotcentrallymanagedandcontrolled.Thusthereislittleneedforacommunicationsinfrastructurethatcould
rapidlyprocessandtransmitpaymentorotherinformationamongbranchesofthestatebank.Indeed,paymentinformationisinpaperformandphysicallytransportedbetweenbranchesusingthepostofficeandothernon-time-criticaltransportationmethods.Domesticcommercialairlineflightsorevendedicatedmotorcourier,commoninamarketeconomy,arenotused.
Cash-basedretailpayments.Currencyistheprimarymethodofpaymentforthehouseholdsectorandissuppliedthroughcashwagepaymentsbyenterprises.Sinceenterpriseoutputallocatedtothehouseholdsectorisdeterminedbytheplan,anyexcessofcurrencyincirculationovertheassignedvalueoftheoutputsuppliedtothissectorisabsorbedasforcedsavings.Althoughhouseholdscandepositexcesscurrencyinbanksandearnaninterestreturn,thisreturniscontrolledbytheplanandnoshort-termmoneymarketinstrumentsexistwhichcouldpayahigherrate.
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Therelianceoncashasvirtuallytheonlymeansofpaymentforthehouseholdsectormeansthatalternativestocashpaymentshavenotdevelopedincentrally-plannedeconomies.Paymentsystemswhicharepredominantlycash-basedoftenareassociatedwithlowcrimeratesand/orfundamentalweaknessesinthebankingsystem.Thisincludestheexistenceofinefficient,costly,orunreliablenon-cashpaymentinstruments,negativerealdepositrates,ordepositorfearofgovernmenttaxationorappropriationmeasures.Ifcrimeratesarelow,inflationiscontrolled,andcurrencyisavailableinlargedenominations,thenuseofcashforallhouseholdtransactionsmaybesafeandnottooinconvenient.However,iftheseconditionsarenotmet,thenalternativestocashforpaymenttransactionscanbequiteuseful.Thisisespeciallytrueforlarger-valuepayments.Herethetransactioncostrelatedtocashuse,forboththebanksandconsumers,canbequitehigh.Thisisduetotheexpenseofcashstorage,countingandverification,andthephysicalshipment(underguard)inordertoeffectpayment,alongwiththeopportunitycostofholdingnon-interest-earningcashbalances.Wheninflationisnotadequatelycontrolled,thisopportunitycostwilldominatetheothercostinfluencesassociatedwiththeuseofcash.
2PaymentSystemsinMarketEconomies
Supportofrealandfinancialmarkets.Thepurposeofthepaymentsysteminmarketeconomiesistoprovidelowcost,timely,andsecurepaymentsforbothenterprisesandhouseholds.Theoverarchinggoalistosupporttradeandexchangeamongenterprises,amonghouseholds,andbetweenhouseholdsandenterprises.Thisencompassesbothreal(goodsandservices)andfinancialmarkets.Asenterprisesandhouseholdsengageintransactionsthatdifferinfrequency,value,andplace,abroadrangeofbothpaper-basedandelectronicpayment
instrumentshavebeendevelopedtoaccommodatethesedifferentneeds.Theaccountingandmonitoringfunctionsofapaymentssystemtheprimarygoalinacentrally-plannedeconomyisbasicallyseparatefrompaymenttransactionsinamarketeconomy.Effortstomorecompletelyintegratethesetwofunctionsthroughelectronicbusinessdatainterchange(EBDI)areintheirinfancy.
Whilemarketeconomiesoftencontainbothprivately-ownedandgovernment-ownedbanks,privately-ownedbanksaredominant.Government-ownedbanksmayprovideloansonlytopoliticallyfavoredsectorsofaneconomy(e.g.,agriculture)or,likecommercialbanks,loantoallsectors.Aswell,governmentagenciesmayguaranteeprivately-providedloanstofavoredgroups(e.g.,smallbusiness,students,homeowners).Althoughexceptionsexist,specificallyintheformofthegovernment-ownedGIRO,inmostmarketeconomiesprivately-ownedbankstypicallyprovidethemajorityoftransaction,savings,andloanservicestoboththehouseholdandthe(privately-owned)enterprisesector.
Thebankingindustryinmarketeconomiesisusuallyconcentrated,withthelargest
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10banksholding90%ormoreofalldepositsorassets.TheU.S.isananomalyasitwouldtake3,000bankstoachievethislevelofconcentration.Differencesinbankingconcentration,geographicdistance,andantitrustpolicy,aswellas(centralized)postofficeprovisionofsavingsandtransactionaccounts,havehelpedtodeterminetherangeofnon-cashpaymentinstrumentsthatcanbecost-effectivelysupplied.Asdiscussedbelow,thesedifferenceshaveledtheU.S.andCanadatorelyonpaper-baseddebittransferinstruments,suchaschecks,whileEuropeandJapanhavefocusedmoreonpaperandelectroniccredittransferinstruments,suchasGIROpayments.(ThewordGIROisderivedfromtheGreekandreflectstheflowoffundsaroundaring,makingacircle.)Althoughthefocusmaybeononepaymentinstrument,alldevelopedcountriesofferbothtousers.
Whileindividualbanks,orthepostoffice,providefortheprocessing,collection,andtransferoffundsamongthemselves,thecentralbanktypicallyprovidesforthefinal,same-day,netsettlementofthemultilateralnetdebitornetcreditpositionsamongtheseinstitutions.Thusgovernmentguaranteesforthepaymentsystemusuallyonlyapplytothegrossornetsettlementcomponentofthepaymentcycle,withprivately-ownedbanksbeingresponsibleforrisksintheothercomponents.
Privateresponsibilityforcreditneedsandriskassessment.Thecreditneedsofenterprisesarenotdeterminedbythegovernmentbutratherbytheassessmentofindividualenterpriseownersregardingtheirabilitytoearna"normal"ormarketreturnoninvestedcapital.Investedcapitalissuppliedbytheenterpriseowners,eitherpersonallyorthroughastockmarket,orfrominternally-generatedcashflowsretainedearningsinthecourseofbusiness(onesourcebeingthedepreciationofphysicalcapital).However,thegovernmentcananddoesinfluencetheoverallmoneysupplyandthebusinesscycleandsoindirectlyinfluencesboththesupplyofanddemandforcreditina
marketeconomy.
Creditisgrantedtotheenterpriseandhouseholdsectorsthroughthebankingsystembasedonanassessmentoftherisksandreturnsinvolved.Whilesomecreditisguaranteedbythestate(usuallyforasmallfee)orcanbeprivatelyinsured,thebankingsystemhastheprimaryresponsibility(monitoredbybankregulators)ofassessingcreditriskinmakingloansorinprovidingpaymentservices.Thisprocessisinformationintensiveandisguidedbylegislation(bankruptcy,rightsandliabilitiesofpayorsandpayees),regulations(loanlimitstosingleborrowers,depositoraccesstofunds),andcaselaw(loancontracts,ownershipofcollateral,bankfees).
Enterprises,ingeneral,facetwopaymentriskswhensupplyinggoodsorservices:(1)theymayneverreceiveanon-cashpayment;and(2)thepaymentinstrumenttheyreceivemaynotleadtogoodfundsbeingtransferred.BothrisksexistforcheckswhileonlythefirstcanoccurwithaGIRO.Receiversofacredittransfer(GIRO)paymentfacenocreditriskbecause
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thepaymentwouldnothavebeensentifthepayor'sbalance(orthepayor'screditagreementwiththeGIRO)wasinsufficienttocoverthefundstransferredtothepayee'saccount.ThusGIROpayments,oncereceived,willnotbereversedandthusarefinalpayments.
Asimilarassurancedoesnotexistwithadebittransfer(check)instrument.IntheU.S.,1%ofthe60billionchecksreceivedbypayees(600million)arereturnedeachyear,eventhoughafeeoffrom$15to$25isincurredbypayorsforeachreturnedcheck.Itemsaremostoftenreturnedbecauseofinsufficientfundsinthepayor'saccount,butreturnsalsooccurbecauseacheckisdrawnonaclosedaccountorthereisnopayorsignatureorthedateistooold.Thuscheckpayments,oncereceived,canbereversedandthusareprovisionalpayments.Bankcreditisoftenextendedtobusinesspayeestocoverthetimegapbetweenreceiptofacheckanditsfinalsettlement.JapanandFrancehaveaddressedtheirreturnitemproblembysimplyremovingbankingprivilegesforenterprisesandindividualswhenchecksarereturnedunpaid.Ingeneral,paymentinstrumentuseisdeterminedbytheconvenience,cost,andfinalityofthedifferentinstrumentsavailablewithinacountryandtheperceivedtrade-offsamongtheseattributesforbothpayorsandpayees.
Paymentfloatandincentivesfortimelypaymentandsettlement.Thetimeittakesbetweenwhenapaymentinstrumentisreceivedaspaymentandwhenthepayeeactuallyhasaccesstogoodandfinalfundsistermedpaymentfloat.Dependingontheinstrumentused,theavailabilityoffundscanbeimmediate(forcash),tolessthanoneday(forlargevalue,electronicwiretransfers),tothesameornextbusinessday(real-timedebitcardpointofsale,creditcard,GIRO,checksdrawnonalocalbank),totwobusinessdays(non-localchecks).
Asinterestispaidondepositedfunds,andevenhigherreturnsmaybe
obtainedthroughpurchasingshort-termmoneymarketinstruments(overnightinterbankfundsorhighlyliquidgovernmentsecurities),theprinciplethatmoneyhasatimevalueiswell-developedinmarketeconomies.Correspondingly,thereexistsastrong(privatesector)incentivetominimizepaymentfloatandinvestinmethodsthatwillprovidetimelypaymentandsettlement.Whilethisinvestmentis"unproductive"fromasocialpointofview,sincefloatisatransferpaymentandlittleornorealoutputisbeingproduced,therearesignificantdistributionaleffectsfromeitherexpandingorcontractingfloat.Indeed,insomecountriesthebankingsystemcapturesmuchofthefloatbenefitandsowillberequiredtolookforalternativerevenuesourcesiffloatisreduced.
Floatreductioncanbeachievedbypurchasinghighspeedpaperprocessingmachineryanddedicatedmotorandaircouriercollectionsystemsforchecks.Fordebitandcreditcardpaymentsandautomatedclearinghouse(ACH)transfers,floatreductionoccursbyhavinganextensivenetworkofcard-readingterminals,computertocomputerhookups,andasophisticatedelectroniccommunicationinfrastructureforelectronicpayments.Paymentsmade
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overlargevaluewiretransfernetworksaretypicallyclearedandsettledwithinthedaytheyaremadeandsousuallydonotcreateany(overnight)float.2
Cash,check,GIROretailpayments,andelectroniclargevaluetransfers.Cashisthemostusedofallthepaymentinstruments.Thisholdsforbothcentrally-plannedormarket-driveneconomies.Forcountrieswhereestimateshavebeenmade,cashtransactionsaccountformorethan75%ofthetotal.Thestockofcashheldperperson,anapproximateindicatorofcashuseacrosscountries,isshownfor11developedcountriesinTable1.Countrieswithlowcrimerates,anaversiontocredituse,orahistoryofholdingsavingsoutsideofthebankingsystemalltendtoholdlargeamountsofcash.
Table1.Valueofcurrencyandcoinperperson(1992,11developedcountries)
ValueinU.S.dollars Transactions:cash/total*Swtzerland 2,748Japan 2,739Germany 1,534 86%Sweden 1,467Netherlands 1,354 78%Belgium 1,239Italy 1,023France 828Canada 652U.S. 465** 83%U.K. 446 90%Source:BIS,December1993.*Varioussources**($1,167totalreported)×(estimated.40insidethecountry)=$465perperson
2Foradiscussionofthetechnologyusedinprocessingelectronicpayments,seeSendrovic(1994).
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Theuseoffourtypesofnon-cashpaymentinstrumentsforthesame11countriesisshowninTable2.Countriesthathaveahighuseofcash(Switzerland,Japan,Germany,Sweden,Netherlands,Belgium,andItalyinTable13)tendtohavethelowestincidenceofcheckuse,choosinginsteadtoconcentrateoncredittransfers(GIRO)anddirectdebits(apayeeinitiatedelectronicdebittoapayor'saccount).Thusintensiveuseofonetypeoffinalpayment(cash)ispositivelycorrelatedwithtwoothers(credittransfersanddirectdebits),tothedetrimentofchecks(aprovisionalpaymentinstrument).However,insomeothercountries(India,Korea,Australia,andSouthAfricainTable34checkuseinnon-cashpaymentsisashighorhigherthanthatofmajorcheckusersamongdevelopedcountries(U.S.,Canada,France).Whiledifferentdevelopedcountriesrelyondifferentmixesofnon-cashpaymentinstruments,theonecommonthemeisacontinuingshiftawayfrompaper-basedtoelectronicpayments.
Table2.Non-cashpaymentuseindevelopedcountries(1992,percent)
Useofchecks
Useofcredittransfers
Useofcards
Useofdirectdebits
Switzerland 4% 81% 12% 3%Japan* 8 32 14 46Germany 9 50 2 39Sweden 9 77 9 5Netherlands 12 61 3 24Belgium 19 56 16 9Italy** 40 42 4 4France** 51 15 15 10Canada 63 4 29 4U.S. 81 2 16 1U.K. 45 21 19 15Source:BIS,December1993.*EstimatedfromBISandothersources.
**Excludesotherpaymenttransactions(electronicbankreceiptsandbillsofexchange.)
3Seepage14.4Seepage16.
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Table3.Non-cashpaymentuseinothercountries(1991or1992,percent)
Useofchecks
Useofcredittransfer
Useofcards
Useofdirectdebits
India 99% 0% 1% 0%Korea 74 16 5 5Australia 60 20 16 4SouthAfrica
60 6 19 15
Thailand 26 7 65 2Source:DattandShanmugham,1994.
Theprimarymethodformakinglargevalueenterpriseandgovernmentpaymentswithinmarketeconomiesisthroughhighlysecureelectronicwiretransfernetworks,suchasFedwireandCHIPSintheU.S.,BOJ-NETinJapan,CHAPSintheU.K.,SAGITTAIREinFrance,andSICinSwitzerland.Tocontrolforthepossiblesystemicriskassociatedwithoneinstitution'sfailuretosettlerealtimeorend-of-daynetpositionsonthesedifferentnetworks,riskcontrolprocedureshaveandarebeingadopted.Thepurposeistopreventapossibledomino-likeseriesofsettlementfailuresortheriskyextensionofcreditbythecentralbank.Riskcontrolproceduresinvolveoneormoreofthefollowingitems:netdebitlimits,privateloss-sharingagreements(commoninstockandcommoditymarkets),thepostingofliquidcollateral,largerpaymentclearingbalances,orrejectionofapaymentrequestifthebalanceisinsufficient.
3ImprovingthePaymentSysteminTransitionalEconomies
Thebankingandpaymentsystemincentrally-plannedeconomieswasgoodatwhatitwasdesignedtodonamelytocloselymonitorenterpriseperformancerelativetothefinancialplanand,inthat
capacity,providecashforpersonaltransactionsandpaymentordersforinter-enterprisepayments.Itisthusnotsurprisingthat,whenthegoalsarealteredastheyareinatransitionaleconomy,anumberofproblemsarise.SiximportantissuesneedingtobeaddressedareoutlinedinTable4.5
5Seepage17.
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Table4.Summaryofpaymentsystemcharateristicsandproblemsfortransitionaleconomies
Centrally-plannedeconomy
Market-driveneconomy
Problemsoftransitionaleconomies
Structure State-ownedmono-bank
Privately-ownedmultiplebanks
Expandlegalstructuretoaccommodateprivateownership
Purpose Monitortheplan Speedyvaluetransfer Improvetimesensitivityofpayments
Enterprisepayments
Paper-based Paperandelectronic Developelectronicpaymentandcommunicationsinfrastructure
GuaranteesStateguarantee(nocreditrisk)
Privateobligation(creditrisk)
Improvecreditriskassessments
Settlement Grosssettlement(alltransactionsthroughoneaccount)
Grosssettlement,netsettlementwithcollateral(manyaccounts)
Developsame-daysettlementforlargevaluepayments
Retailpayments
Cash-based Cash,GIRO,check,electronic(debit/creditcards)
Expandretailpaymentalternatives
Structure.Theshiftfromastate-ownedmono-bankingstructure,toonewherethereismorethanonebankandeachisprivatelyowned,meansthatthelegalstructureunderlyingboththebankingsystemandthepaymentsystemhastobeconsiderablyexpandedfornon-cashpayments.Thisinvolvespropertyrights(forprivateownership),bankruptcylaw(becausebankscanfail),andalegal/regulatorystructurewhichclearlyspellsouttherightsandliabilitiesofpayorsandpayeesinthepaymentschain.6Inthisprocess,itisimportantthattheselawsandregulationspermitnewandcost-effectivepaymentinstrumentstodevelopandevolveiftheymeetbetterthepaymentneedsofhouseholdsandenterprisesinamarketeconomy.Theold
procedure,wherethegovernmentdecides,inisolation,whatpaymentarrangementsshouldbepermittedandthentightlycontrolsallaspectsofapaymentcycle,willnotachievethedesiredresults:household,enterprise,andbankingneedsshouldbegivenalargeweightwhenthepaymentsystemisbeingrestructured.Thisismoreimportantforinter-enterpriseandinterbankpayments,whichtypicallyrelyonnon-cashinstruments,thanitisforhouseholdswhichwillgenerallyrelyoncashformostoftheirpersonaltransactions.
Purpose.Transitionaleconomiesrecognizethatthereisatimevaluetomoney.Thisrecognition,andthefactthatthepaymentsystemisnolongeranenforcementcontroldeviceforthefinancialplan,meansthatthepaymentsystemwillhavetobeadjustedtoservetwopurposes:theaccountingpurposeofprovidinganaudittrailforinter-enterpriseandother
6AgooddescriptionoflegalissuesinapaymentsystemisprovidedbyBhala(1994).
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transactionsplusthetimelyvaluetransferpurposetominimizetheenterpriseandhouseholdfloatcostsassociatedwithtransactions.
Thecostsofuntimelypaymentscanbesubstantial.InRussia,ithasbeenestimatedthatupwardsofone-thirdoftheincreaseinthemoneysupplyhasbeenabsorbedandusedonlytoclearpayments.Becauseofcreditriskandfraud,thePDO(adebittransferinstrumentinitiatedbythepayee(seeFigure1)7hasbeenoutlawed.Initsplaceisthepaymentorderacredittransferinitiatedbythepayor.Whileinthepastapaymenttransactionwasusuallycompletedinamatterofdays,currentlyinRussiaweekscanelapsefromthetimewhenanenterpriseaccountatabankisfirstdebitedtowhenthecreditfinallyentersanotherenterprise'saccountandcanbeused.Thistimegapistheresultofincreasedlagsinprocessing,collecting,andsettlingpaymentswithinthebankingsystemaswellasincreaseddelaysbyenterprisesinmakingrequestedpayments(evidencedbyrisinginter-enterprisearrears).
Thecosttoenterprisesofdelayedpaymentsiseither:(a)thecostofborrowingworkingcapitaltocoverthetimeneededtocollectandsettlepaymentswhich,ifreceivedearlier,couldhavebeenusedasworkingcapital;or(b)ifworkingcapitalreservesaresufficient,thelostinterestrevenuewhichwouldhavebeenearnedoncollectedfundsifthesefundswerecollectedearlier.Inaddition,thecostof(b)isincreased,whilethecostof(a)isreduced,wheninterestratesdonotfullyreflectinflationandthereductioninpurchasingpowerwhichresults.Whenpaymenttransfersarespeededup,theseenterprisecostsarereduced.However,iftheproportionofthemoneysupplytiedupinthepaymentsystemfalls,theproportioninthehandsofthepublicrises.Thischangeisequivalenttoariseinthemoneysupplyandneedstobecoordinatedwiththemonetaryauthority.
Enterprisepayments.Paper-basedenterprisepaymentsmaybe
adequatewhenvaluesaresmallbutareexpensivewhenvaluesarelarge.Intheshort-run,thetimelinessofpaper-basedenterprisepaymentscanbegreatlyimprovedthroughthedevelopmentofmachine-readableMICRencodingforchecksorpaymentordersandprocessingtheseitemsusinghighspeedreader-sorters.Collectiontimescanbemarkedlyreducedbyswitchingfromthepostofficetodedicatedmotorcouriers,domesticcommercialairlines,andevendedicatedaircouriers.Inthelonger-run,particularlywithinandbetweenmajordomestictradingcenters,itwillbecost-effectivetodevelopapersonalcomputerormainframe-basedtelecommunicationsinfrastructurethatwillaccommodateenterprise,moneymarket,andinternationallargevaluepaymentsonasame-daybasis.
Guarantees.Aspaymentsarenolongerfromonestate-ownedenterprisetoanother,thestatenolongerguaranteeseithertheviabilityofthebankingsystemnorthecredit-
7Seepage5.
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worthinessofenterprisepayments.Privateownershipcomesatthecostofalossofstateguaranteesforthepaymentsystem.Thusreceiversofpaymentsneedtodevelopprocedurestoassessthecreditriskofthecounter-partytheydealwithintransactions.Thisisnotasimpleprocess,eveninamarketeconomy:itrequiresinformationonacounter-party'scredithistory,itsfinancialviability,andathoroughunderstandingoftherightsandliabilitiesofallpartiesindifferenttypesofpaymenttransactions.Whenthelegalunderpinningsofthepaymentsystemisitselfuncertain,asitcanbeinatransitionaleconomy,creditriskisevenmoredifficulttojudge.Inthisevent,itisquiteimportanttohavepersonalknowledgeofthecounter-partyandhiscredithistorypriortoengagingintrade.
Settlement.Withthebreakupofamono-bankingstructureintonumerousprivately-ownedbanks,enterprisesmayhavemorethanjustoneaccountanddealwithmorethanjustonebank.Inmarketeconomies,thecentralbankprovidesforinter-banksettlementoflargevaluepaymentsusingeitherreal-timegrosssettlement(RTGS),whereeachtransactionissettledwhensentoveralargevaluenetwork,orend-of-daynetsettlement,whereonlythemultilateralnetpositionofanentireday'sseriesoflargevaluetransactionsissettled.Toreducesystemicrisk,netsettlementnetworkslimitthenetdebitexposuresofbankparticipantsusingreal-timenetdebitcaps,developloss-sharingagreementsallocatingthecostofasettlementfailure,and/orrequirethepostingofliquidcollateraltocoverthesinglelargestpossiblenetdebitinasettlementfailure.Theseandotherpaymentrisk-reductionprocedureshavebeendevelopedbyG-10centralbanksundertheauspicesoftheBankforInternationalSettlements(referredtoasLamfalussystandards).
OnaRTGSnetwork,adequatebalancesareheldtoclearallpaymentsatthetimetheyoccur.However,theopportunitycostofholdingidlepaymentclearingbalancesexceedstheexpenseofpositingliquid
collateral(whichcanearnaninterestreturn).ThusnetsettlementoflargevaluepaymentsbackedbyliquidcollateralisalowercostalternativetoRTGSandcanbestructuredtobejustasfreeofsystemicrisk.Butsystemicriskisonlyoneproblem.Asnotedabove,same-day(orevennext-day)paymentandsettlementofenterpriselargevaluetransactionsshouldbeanimportantgoaltoreducepaymentfloat.
Retailpayments.RetailpaymentscanbemademoreconvenientandsaferifmanyhouseholdpaymentsthatpreviouslyreliedalmostentirelyoncashwereexpandedtopermitcheckorGIROpaymentsandperhapsevenelectronicpointofsaledebitorcreditcards.Whilecashwilllikelyremainthedominantpaymentinstrumentintermsofthenumberoftransactions(e.g.,Table18),largervaluehouseholdtransactionsandtransactionswhereface-to-facecontactiseitherinconvenientorunnecessaryrepresentareaswherealternativepaymentinstrumentuseislikelytoarise.
8Seepage14.
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Animportantsideeffectofareduceduseofcashforlargervaluehouseholdpaymentsisacorrespondingreductioninthefuturegrowthofseignioragebenefitstothegovernment.Whenthegovernmentissuescurrency,itgivesitselfalong-term''loan":thenewlyissuedcurrencyisusedtopurchaserealgoodsandservicesforthegovernment(thevalueofwhichfarexceedstheactualcostofprintingthecurrency)andthepublicmayneverredeemthecurrency(althoughtherewillberecurringcostsofcurrencyreplacementovertime).Whilethestockofcurrencyincirculationneednotfallashouseholdsdevelopandusealternativenon-cashpaymentinstruments,therateofgrowthofcurrencyandhencethebenefitfromseigniorageshouldslowovertime.Asseignioragecreatesrevenueforthegovernment,alternativesourcesofrevenuemustbedeveloped.9Anexpansionofcentralbankcreditstogovernmententerprisesisnottheanswer.Althoughrapidgrowthineithercashorcentralbankcreditscancreateaninflation"tax"ontheeconomy(sincetherealvalueofdebtisreduced),cashrepresentsa"loan"fromthepublictothegovernmentthatisunlikelyevertoberepaid(seigniorage)whilecentralbankcreditstogovernmententerprisesrepresentsaloanthatifnotrepaid,reducesgovernmentpurchasingpowerinthefuture.
9TheseigniorageissueisdiscussedinmoredetailinHumphrey(1995).
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IIThePaymentCycle:StructureandChoicesInordertoillustrateinmoredetailthepaymentchoicesfacingtransitionaleconomies,itisusefultodevelopaconceptualmodelofthepaymentcycle.Withsuchamodelthechoicesamongalternativeaccess,communication,security,andsettlementarrangementsbecomeclearerandtheimplicationsofnewpaymentinstrumentsforanation'spaymentsystemaremoreeasilyidentified.
1TheStructureofthePaymentCycle
Aconceptualmodelofthepaymentcycle.Althoughstylizedandsimplified,Figure210illustratesthemajorcomponentsofatypicalnon-cashpaymentcycle.Non-cashtransactionssuchascheck,GIRO,debitcard,creditcard,directdebit,andwiretransferrequireclearingandsettlementinordertotransfervaluebetweenpayorandpayee.Incontrast,cashtransactionstransfervaluedirectlybetweenpayorandpayeeoutsideofthebankingsystemandthusdonotrequireclearingandsettlement.Thisalsoholdsformanypre-paidinstruments,suchaspre-paidrailroad(Japan),telephone(mostdevelopedcountries),andsubway(U.S.,Japan)cardsissuedbythecommercialfirmsprovidingtheseservices.However,pre-paidinstrumentssuchaspostalmoneyorders,travelerschecks,andbankcashierschecksenterthepaymentcycleasa(pre-paid)checkinstrument.
ThepaymentcyclestartsatthetopofFigure211withanenterpriseorhouseholdprovidingsomegoodorservicetosomeotherenterpriseorhousehold,whothenmusttransfervalue.Thesevenstepsinthe
paymentcycleare:
(1)Paymententry
(2)Inboundprocessingandtransfer
(3)Inboundclearing
(4)Settlement(grossornet)
(5)Outboundclearing
(6)Outboundprocessingandtransfer,and
(7)Paymentdistribution.
10Seepage22.11Seepage22.
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Figure2Paymentcyclefornon-cashpayments
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PaymententryStep1.Entryintothepaymentcyclecanoccurwhentheenterpriseorhouseholdneedingtotransfervaluethepayorinitiates,throughitsentrybankorbranch,acredittransfer(GIROpaymentorwiretransfer)forthebehalfofthereceivingentitythepayee.Alternatively,ifthepayeehasaninstrumentoragreementforadebittransfer(checkordirectdebit)fromthepayor,thepaymentcycleisinitiatedbythepayeethroughthepayee'sentrybank.Dependingontheinstrumentused,eitherpayororpayeemayinitiatethepaymentcycle.Ineithercasethegoalisthesame:totransfervaluefrompayortopayee.
Entrymaybepaper-based(checksorpaperGIROinstructions)orelectronic(ACH,electronicGIRO,debitorcreditcard,wiretransfer).Entrymayalsooccurusingtelexortelephoneinstructionsoracomputer-to-computerinterfacewiththeentrybank.Specificmessageformatshavetobefollowedforelectronicentryintothepaymentcycle.
Regardlessofthetypeofpaymentinstrumentused,theinformationnecessarytoenterthepaymentcycleincludes:(a)thenameandaccountnumberofthepayor(inordertodebitthecorrectaccount);(b)thenameandaccountnumberofthepayee(tocreditthecorrectaccount);(c)thevaluetobetransferred;(d)thedateofthetransactionand/orthedatethevalueistobetransferred;and(e)anauthorizationtoinitiatethetransaction.TheauthorizationmaybethesignatureofthepayorforcheckandpaperGIROpayments,acodenumberreadbyaterminalatthepointofsalefordebitandcreditcardtransactions,awrittenagreementpre-authorizingapayeetodebitapayor'saccount(adirectdebit),atestkeyorsequencenumberfortelextransactions,andpassword,call-back,testkey,anddedicatedcomputer-to-computerinterfaceforlargevaluewiretransfers.
Ifthepayorandpayeehappentohaveaccountsatthesameentrybank
orpostalGIRO,thentheprocessing,clearing,andsettlementofthepaymentisentirelyinternaltotheentryinstitution.Thisisa"on-us"transactionandclearingandsettlementisdeemedtohavetakenplacewhentheentrybank'sinternalaccountingcycleiscompleted,usuallyduringtheeveningofthedaythepaymentinstructionwasreceived.Ifbranchofficeaccountsarecentrallyintegratedandcontrolled,thenthemoreconcentratedisthebankingindustry,thehigherwillbetheproportionofpaymentsthatareon-usratherthan"on-other".Ifintra-bankaccountsarenotcentrallyintegratedtheneachbranchofabankeffectivelyactsasaseparatebankandanon-ustransactioncontinuesthroughthepaymentcycleasifitwasanon-otherpayment.
InboundprocessingandtransferStep2.Theentrybankorbranchinitiallyprocessestheinboundpaperorelectronicpaymentinstructionbycheckingthepaymentinformation,applyingappropriatesecurityprocedures(whennecessary),anddebiting/creditingtheappropriateaccounts.Thepaymentsarethensortedintonumerouson-othercategoriesandforwardedtoitssettlementbankusingcourierphysicaldelivery,off-linetelecommunication(telephone,telex,facsimile),oron-lineelectroniccomputerinterface.Theinboundsettlement
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bankwilleitherbetheheadofficeofthebranchthatactedastheentrypointoritcouldbeanseparatecorrespondentbankthathasagreedtoactasasettlementagentintheclearingprocess.Useofacorrespondentasasettlementbankiscommonwhenmanybanksexist,therearenumerouscentersoftradeandproduction,and/orthecountryislargegeographically.
InboundclearingStep3.Clearingtakesplacewhentheinboundsettlementbankforwardsthepaperorelectronicpaymenttoa(local,regional,ornational)clearinghouseorprocessingcenter.Iftheprocessingcenterreliesonrealtimegrosssettlement,thenthepaymentsaresettledimmediatelyastheyarrive.Suchanarrangementsofarappliesonlytolargevaluepaymentsovercertainwiretransfernetworks(FedwireintheU.S.,SICinSwitzerland,andasubsetofpaymentsoverBOJ-NETinJapan).Muchmorecommonisnetsettlementwherethenetpositionofawholeseriesofinter-banktransactionsaresettledatvarioustimesoftheday:morningforACH,debitcard,creditcard,anddirectdebitsfunctionedthepreviousevening;mid-dayforchecksprocessedandsentovernighttoclearinghouses;orend-of-dayformanywiretransfernetworks(CHIPSintheU.S.,BOJ-NETinJapan,CHAPSintheU.K.,andothersinEurope).
GrossornetsettlementStep4.Settlementisalmostalwaysperformedthroughthecentralbankwhoirreversiblydebitsandcreditsclearingorreserverequirementbalancesofthesettlingbanks.Grosssettlementisbilateral,aseachtransactionbetweentwobanksinvolvesanimmediateandseparatesettlement.Netsettlementsareusuallymultilateral.Inamultilateralsettlement,thesetofallbilateraltransactionsisnetteddowntoasinglenetdebitornetcreditforeachparticipant.Thedebitsoccurfirstandareallpostedtoaspecialsettlementaccount.Thefundsinthissettlementaccountarethendistributedascreditstotheremainingbanksandthenetsettlementiscomplete.Whilealternativesettlementarrangementsexistthatrelyon
correspondentbalancesheldwithasettlingbank,ratherthanthecentralbank,thisalternativecanbetime-consumingandcostlyiftherearemanybankparticipants.Aswell,becauseasettlingbankmayfail,thepreferredsettlementarrangementisthroughthe(governmentbacked)centralbank.
OutboundclearingStep5.Oncesettlementoccurs,theclearinghouseorprocessingcenterinformstheoutboundsettlementbankthatthetransactioniscomplete.Whilesettlementbythecentralbankisfinalandisnotreversible,thepaymentcycleforaprovisionalpayment,suchasacheck,maybereversed.Ifthecheckwriterhasinsufficientfundsattheexitbanktocoverthevalueofthecheckwritten,thenthecheckisreturnedasanentirelynewtransactionwhicheffectivelyreversestheoriginaltransaction.Returnedchecksdonotinvalidatetheoriginalsettlement;theyjustbecomeapaymentinstructionintheoppositedirectionrequiringadditionalprocessingandclearingaswellasanewsettlement.
OutboundprocessingandtransferStep6.Afterthesettlementbankmakesthe
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appropriateaccountingentries,itforwardsthepaymentinformationtotheexitbank.Thisprocessusesthesamepaperorelectronicmethodthatwasusedfortheinboundpartofthepaymentcycle(step2).
PaymentdistributionStep7.Ifthetransactionwasadebittransfer,theexitbankcomparesthedebitwiththecustomer'sbalanceandwillrejectthetransaction(orprovideashort-termoverdraftloanatpositiveinterest)ifthebalanceisinsufficient.Ifthebalanceisadequatetocoverthedebit,theexitbankforwardsthetransactioninformationtotheenterpriseorhouseholdwhoseaccountwasdebited.Ifthetransactionwasacredittransfer,theexitbankcreditsitscustomer'saccountandprovidesthepaymentinformationtotheaccountholder.
Exceptwhenpaperitemsaretruncatedortranslatedintoelectronicterms,exitfromthepaymentcycleisthesameasthemethodofentryandcanbepaper-based(check,paper-basedGIRO)orelectronic(ACH,electronicGIRO,debitorcreditcard,orwiretransfer).Voiceinstructionsoverthephoneorcomputer-to-computerlinkagesareusedforlargevaluetransactions.Forsmallvaluetransactions,accountholdersareinformedofpaymentdebitsorcreditsthroughmonthlyaccountstatementsmailedtocustomersor,ifdesiredsooner,uponcustomerinquiry.
ThemaindifferencesinthepaymentcycleforcheckandGIROpaymentsconcernspaymententry,inboundclearing,settlement,andpaymentdistribution.Insummaryform,thesedifferencesare:
Check GIROPaymententry
Payeereceivescheckfrompayorandinitiatescollection
PayorinitiatesGIROpaymenttopayee
Inboundclearing
Clearingison-usoron-otherinstitutions
Clearingistypicallyon-us
Settlement Effectively,onlyprovisionalnet Typically,finalgross
settlement settlementPaymentdistribution
Checkcanbereturnedtopayeeunpaid
Noreturns
Debitandcreditcardpayments,becausetheyusuallyarehandledatthepointofsaleinareal-timemodeorarecomparedagainstanegativefilewhichisconstantlyupdated,donotinvolvereturnitems.Settlementbetweentheaccountholder'sbankandthepayee'sbankusuallyinvolvesnetsettlement.
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Floatandpaymentfinality.Indevelopedcountries,largevaluepaymentscancompletethepaymentcycleinamatterofminuteswhilemostlowervaluepaymentsarecompletedonanext-daybasis.Thelongerittakestocompletethepaymentcycle,thelargeristhefloatcostofthepaymentsystem.
Almostallpaymentcyclesoffersenderfinalitywhichdoesnotpermitthepaymentsendertoreversethetransactiononcethepaymenthasbeensent,evenifitisinerror.Errorsarereversedbyconvincingthepaymentreceivertoinitiateanewtransactionwhichreversestheoneinerror.Centralbankcontrolledlargevaluepaymentnetworks(Fedwire,BOJ-NET,SIC)andmanyprivatelyoperatedlargevaluenetworks(thetwolargestofwhichareCHIPSandCHAPS)whichsettlethroughthecentralbank,alsoprovideforsettlementfinality.Settlementfinalityiswheresettlementcannotbereversedevenifthereisafailurebyabankparticipanttosettleitsnetdebitposition.Thecentralbank,bylendingfundstoasettlingparticipantforafee(Fedwire),liquidatingcollateralpostedbyparticipants(CHIPS,CHAPS),orbyhavingpreviouslyrejectedtransactionswherebalanceswereinsufficient(SIC,certainBOJ-NETtransactions),allprovideforthefinalityofsettlement.12Alternatively,settlementfinalitymaybeprovidedwhenpaymentnetworkparticipantswithnetcreditslendfundstoparticipantswithnetdebits(mostofBOJ-NETtransactions).
Lastly,thereisreceiverfinalitywheretheexitbank,uponcompletionofthetransaction,wouldirrevocablycreditacustomer'saccountwithgoodandfinalfunds.Nopaymentnetworkhasreceiverfinality,largelybecausebankswishtoreducecreditriskbyhavingtheoptiontousefundsreceivedonbehalfofthecustomertocoveranyofthecustomer'sdefaultedloansornetdebitsinotheraccountsatthesamebank.
2ClearingFinancialMarketTransactions
Clearingandsettlementforfinancialmarkets:clearinghouses.Financialmarketsmobilizesavings,allocateinvestment,andprovidederivativeinstrumentsthat(whenproperlyused)reduceenterpriseriskfromfluctuatinginterestrates,foreignexchangerates,andrawmaterialorcommodityprices.Financialmarkettransactionsincludeinterbankovernightborrowings,banklargevaluecertificatesofdeposit,governmentdebtsecurities,enterpriseequityand(shortandlong-term)debtsecurities,aswellasawholehostoffutures,options,andotherderivativeinstrumentsrelatedtomoneymarketsecurities,foreignexchange,andcommodities.Alltransactionsinfinancialmarketshavetobeclearedandsettled,justliketransactionsthatoccuramongenterprisesorbetweenenterprisesandconsumers.
12AfullerdiscussionoftheseandotherissuesregardingtheoperationofvariouslargevaluepaymentnetworksisprovidedinHoriiandSummers(1994).
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Financialmarkettransactionsaretypicallylargevaluetransactionsandtherearetwoprimarywaystheyareclearedandsettled.13Themostcommonmethodistosetupaclearinghousethatonlyclearsaparticulartypeoffinancialinstrument,suchasonlygovernmentsecurities(foragovernmentdebtmarket)oronlyenterpriseequitysecurities(forastockmarket).Oncethedirectandindirectpartiestoafinancialmarkettransactionhavebeennotifiedbytheclearinghousewhatthenetpositionsarethattheyoweaftereachday'strading,thepaymentandsettlementofthesetransactionsisthenhandledthroughthebankingsystemandthecentralbank,essentiallyfollowingthepaymentcycleoutlinedfornon-cashpaymentsinFigure2.14Thesecondmethodforhandlingfinancialmarkettransactionsinvolvesaspecializeddepositorywhichimmobilizesthesecuritybeingtradedand,asdiscussedbelow,integratestheclearinghousefunctionwiththepaymenttransaction(calleddeliveryagainstpayment).
Financialmarketclearinghousescentralizepurchaseandsaleinformation,performmultilateralnettingofcontractstobuyandsell,andnotifymarketparticipantsofthenetpositionstheyoweoneanother.Ifparticipantsaretradingfortheirownaccount,theythennotifytheirrespectivebankinginstitutionstomakepaymentstypicallyusingelectronicwiretransferstoparticipants'bankstocompletethetransaction,withphysicalorbook-entrydeliveryofthesecuritiesoccurringwithalagthatdiffersamongmarkets.Settlementoftheseinterbankpaymentsiseitherimmediate(onaRTGSnetwork)orend-of-day(onanetsettlementnetwork).Additionalpaymentsanddeliveryarerequiredifparticipantsareactingasanagentinthetransactionforenterprises,banks,orothertypesoffinancialinstitutions(whomaybetheultimatepurchaserofthesecurity).ThepaymentcycleforfinancialmarkettransactionsfollowsthatshowninFigure2.15Asshowninthefigure,paymentsareinitiatedbypurchasersoffinancialinstrumentsthroughanentrybank,whichthen
maygotoasettlementbank,toaprocessingcenter(e.g.,wiretransfernetwork),tothereceivingbank(typicallyalsotheexitbank),andfinallytothepaymentreceiver(whichcanbetheclearinghouseactingasanagentforthesellerofthefinancialinstrument).Settlementisthroughthecentralbank.
Whilesettlementoffinancialmarkettransactionsistimely,clearingmaynotbe.Theefficiencyoftheclearingprocessisafunctionofthenumberofparticipants,thetradingvolume,andtheextentthatthetradinginformationiscomputerized.OnlyrecentlyintheU.S.hasthetimelagformanystockmarkettransactionsandtheirfinalsettlementmovedfrom5to3days.Thistimelaggeneratesrisk.
Iftheparticipantsellingasecurityfailspriortosettlement,twotypesofriskmayoccur.First,paymentmayhavebeenmadebeforethesecuritiesweredeliveredtothe
13GreaterdetailisprovidedinParkinson,etal.(1992).14Seepage22.15Seepage22.
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purchaser,inwhichcasethepurchaserisnowacreditorofthefailedparticipant.Alternatively,ifnopaymentordeliveryofsecuritieshasoccurred,thenthepurchaserfacesthe(likelysmaller)riskthatthepriceofthesecuritymayhaverisenandthepurchaserwillnowhavetopaymoreforthesecuritythanbefore.Theserisksarereducedby(a)reducingthetimelagbetweenwhenafinancialtransactionoccursandwhenthetransactionissettledand(b)institutingloss-sharingagreementsamongparticipantsintheclearinghouse(therebyinternalizingtheriskandprovidinganincentivetocarefullyscreenandcontroltheriskybehaviorofclearinghousemembers).Amajorproblemwiththeclearinghouseapproachhasbeenthatsomeparticipantsaremembersofmanydifferentspecializedclearinghouses,reflectingtheirtradingindifferentfinancialinstruments,sothatafailureofoneparticipantinoneclearinghousemayaffectthesolvencyofparticipantsinclearinghouseswherethefailedparticipantwasnotevenamember(creatingsystemicrisk).Greaterconsolidationandcoordinationamongclearinghousescanreducethisproblembutamoreeffectivesolutionatleastforcertaintypesoffinancialmarketinstrumentsistheestablishmentofadepository.
Paymentcycleforimmobilizedorbook-entrysecuritiesindepositories.Financialtransactionsinvolvepromisestopay(debtsecurities,futures,options)orownershiprights(equitysecurities).Inthosecaseswherethepromisetopayorownershiprightsarehighlyvaluedbythemarket,becauseofthecreditworthinessoftheinstitutionmakingthepromiseorthesolvencyoftheinstitutionbeingowned,itispossibletoimmobilizethesecuritybeingtradedinbook-entryformwithinacentralizeddepositoryanduseittocollateralizetheunderlyingtransaction.Ifthepurchaser(newowner)ofthesecurityfailstopayforthesecurity,thesecurity(collateral)canbereturnedtotheoriginalseller(whoisunpaid)oritcanbeliquidatedinthemarketwiththefundsthentransferredtotheseller.This
arrangementsubstantiallyreducestheriskoflossfromthefailureofafinancialmarketparticipantandtherebyalsoreducesthepossibilitythatthefailureofaparticipantinonemarketwillcauseproblemsforparticipantsinothermarketsinasystemicmanner.
Depositoriesalsofurtherreduceriskbyadoptingrulesandoperatingproceduresthatpermitdeliveryagainstpayment,whichiswhenownershipoftheunderlyingsecurityisnottransferreduntil,andsimultaneouslywith,theactualreceiptofthepayment(overaRTGSwiretransfernetwork).Thiseliminatesthetimegapbetweenwhenatransactionoccursandwhenpaymentandsettlementtakesplace.Ineffect,deliveryagainstpaymentgoesonestepfurtherthana(credittransfer)GIROpaymentsincethetransactiondoesnotevenoccuruntilthesecuritybeingpurchasedisinfactpaidforinfinalfunds.
Figure316illustratesthepaymentcycleforfinancialtransactionswithindepositories.IntheU.S.,depositoriescurrentlyhandleU.S.governmentdebtsecurities,mortgage-backedsecurities,andenterprisecommercialpaper,bonds,andequities(butnot16
16Seepage29.
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futures,options,orforeignexchangetransactions).Indepositorieswithoutdeliveryagainstpayment,thereisaninitiatingfinancialtransactionbetweenthepurchaserandsellerofthesecurity.Thedepository,actingasaclearinghouse,clearsthetradeandnotifiesthepurchaserwhotheninitiatesthepayment(throughitsbankorthroughthedepositoryifitactsasabank)overaRTGSwiretransfernetwork.Thewiretransfernetworksettleseachtransactionseparatelyasitoccursthroughthecentralbankanddistributesthepaymenttothesecurityseller'sbankortothedepository(fortheseller'saccount).Theactualtransferofownershipofthesecuritiesneednotbesimultaneouswiththereceiptofthepayment.Onlyindepositorieswithdeliveryagainstpaymentwilltheownershiptothesecuritiesoccursimultaneouslywiththereceiptofpayment,therebyeliminatingalmostallofthepaymentriskinthefinancialmarkettransaction.
Figure3Paymentcycleforfinancialmarkettransactionsindepositories
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3ChoicesinthePaymentCycle
Supplierandownershipchoice:banksversusthepostoffice.Thepaymentcyclemerelytransfersvaluefrompayortopayee.Theoperationofdebitingoneaccountandcreditinganothercanbedonewithinasinglestate-ownedmono-bank(inacentrally-plannedeconomy),withinasinglestate-ownedpostofficesystem(asoccursinEuropeandJapan),oramongvariousprivately-ownedbanks(asinalldevelopedcountries).
Ingeneral,thesmalleristhenumberofseparatepaymentsuppliersinacountry,thegreaterwillbetheproportionofon-uspayments.Asanon-uspaymentcanbetruncatedsothatthepaymentcycleoccursentirelywithintheentryinstitution,on-uspaymentsaretypicallyperformedatalowercostwithlowerclearingandsettlementriskthanarepaymentsthatrequireprocessingandcollectionthroughmorethanjusttheentryinstitution.
Thelowercostofon-usversuson-othertransactionsmeansthat,otherthingsbeingequal,postalGIROsshouldbeabletoprovidepaymentservicesatalowercostthancanbeobtainedthroughalessthancompletelyaggregatedbankingsystem.17Inturn,anaggregatedbankingsystem(asexistsinEurope,Canada,andJapan)shouldbeabletoprovidelowercostpaymentservicesthanabankingsystemthatishighlydisaggregated(asexistsintheU.S.).Althoughcompletebankaggregationisachievedunderamono-bankingsystem,whereallpaymentsareon-ustransactions,thisarrangementiscostlybecausepaymentsarepaper-basedandaccountsatbranchesofthestate-ownedbankarenotcentrallymanaged(soeachbranchistreatedasifitwereaseparatebank).Whilewedoknowfromvariousstudiesthatelectronicpaymentsindevelopedcountriesarecheaperthanpaper-basedpayments,thepresumptionthatpaymentcostsarelowerfor
moreaggregativebankingsystemsislogicallybasedonthefactthatanon-uspaymentischeapertoprocessthanisanon-othertransaction.
Anadditionalfactorinfluencingpaymentcostsisprivateversusstateownership.Insometransitional(anddeveloping)countries,thecentralbankisdefactotheonlynationwidebankandthesoleproviderofpaymentservices.Whileexceptionssuchasthisexist,theincentiveforprivategaininacompetitivemarketforpaymentservicescanleadtolowercoststhanwhenthesamepaymentservicesareprovidedthroughastate-ownedsupplier.However,thebenefitoflowercostneednotberealizedbyusersofthepaymentsystemifaprivately-ownedbankingsystembecomestooaggregated.Atsomepoint,dependingbothontheeaseofentryintotheindustryandacountry'santitrustpolicy,theincentivetolowercoststoimprovereturnstoownersandmanagersshiftsinsteadtoraisingprice.Thisconsideration,alongwith
17Ifenterprisedeposittransactionaccountspaidclosetoamarketinterestrate,thensomeinterbankpaymenttransactionsthoseforovernight,enterprisecashconcentrationpurposeswouldnotbenecessary,reducingsomewhatthedemandforon-othertransactions.
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costsavingsfromon-uspayments,affectsthechoicebetweenbanks(whichareoftenprivately-owned)versusthepostoffice(whichisstate-owned)aspaymentsystemsupplier.
Local,regional,ornationalprocessingandsettlement.Insmallcountries,withonlyoneorafewclosely-locatedtradecenters,allclearingandsettlementcanbecentralized.However,inlargecountrieswithmultiplemoneyortradecenters,paymentprocessingandsettlementhasmanytiersinordertominimizecollectioncosts.Transfersoffundsbetweenpayorsandpayeeslocatedclosetooneanotherareclearedlocallywithsettlementhandledelectronicallythroughtheregionalofficeofthecentralbank.Paymentsbetweenpartiesmoredistantfromoneanothermayrequiremultiplehandling,ineitherpaperorelectronicform,withinterregionalsettlementamongcentralbankoffices.
Atieringofpaymentprocessingandcollectionfunctionsbetweenlocal,regional,andnationalpaymentsexiststodayintheU.S.andwillbethemodelfollowedinRussia.TheU.S.haslocalclearinghousesforlocalcheckpaymentsandlocalelectronicnetworkstoclearandprocesslocaldebitcardpayments.Ofthetwomajorbankcreditcardissuers,oneprocessesallpaymentsatasinglecentrallocationwhiletheotherhaschosenaregionalconfiguration.
Ingeneral,paymentsrequiringregionalclearingarehandledbothbynetworksofcorrespondentbanksandthe36regional(24branchand12head)officesofthecentralbank.Paymentsbetweenregionsareclearedbymovingpaymentinformationbetweentheseregionalcentersthroughregionalcorrespondentbanksoramongthe12headofficesofthecentralbank.Settlementiseffectedeitherthroughthemovementofcommercialbankbalancesatandwithinoneofthe12headofficesofthecentralbank(forbothlocalandregionalpayments)orthroughthemovementofthesebalancesbetweenthe12head
offices(fornationalpayments).Inbothcases,settlementeffectivelytakesplaceusingthecentralbank'snationwidelargevaluewiretransfernetworkwithentrypointsateachofthe12headoffices.Atpresent,thereisnoneedtocentralizetheholdingofcommercialbankpaymentclearingandsettlementbalancesbecausetheU.S.doesnotyethavenationwidebanks,althoughthiswillchangeinthenearfutureandlikelyleadtosuchcentralization.
Thedistinctionbetweenlocal,regional,andnationalpaymentsinRussiaparallelsthatoftheU.S.forthesimplereasonthatittooisquitelargegeographicallyanddoesnotyethavenationwidebanks.InRussia,thereare1400localofficesofthecentralbanktoprocessandclearlocalpaymentsanddisbursecash.Regionalandinterregionalpaymentsarehandledat71regionalprocessingsites(equivalenttothe24centralbankbranchesintheU.S.)and10superregionalcenters(similartothe12regionalheadofficesintheU.S.).Acentralizednationalprocessingcenterwillclearinterregionalandnationalpayments(similartoFedwire,thecentralbank'swiretransfernetworkintheU.S.)
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Thetieringofprocessingandsettlementinthepaymentcycleassociatedwithcountrysize,bankingaggregation,andtheproportionofon-uspaymentsdictatethenumberofinter-bankcommunicationlinksneededforpaymentsystemoperation.Thetimeliness,cost,andsecurityofdifferenttypesoflinkswilldeterminewhethercommunicationwillbepaper-basedorelectronic.
Privatebankversuscentralbankprocessing.Privately-ownedbanks,ortheiragents,performthevastmajorityoftheclearingandprocessingofpaymentsindevelopedcountries.Consequently,centralbanksinthesecountriesessentiallyprovideonlysettlementservicesforthepaymentsystem.TheU.S.centralbankisthemainexceptiontothisdivisionofresponsibilityasitprovidessettlementservicesaswellasaboutone-fourthofallcheckprocessingandoverone-halfofallACHandwiretransferprocessingservices.Thisoccurredforanumberofspecifichistoricalreasons,involvingrecurrentbankingcrises,thefailureofprivately-operatedclearinghouses,adesiretoimprovepaymenttimelinessbyeliminatingnon-parchecking,andrestrictionsonbankbranchingwhichpreventedthedevelopmentofnationwide(orevenregional)bankingwithahighlevelofon-uspayments.
Tothedegreethatthesespecificproblemsarenotexperiencedintransitionaleconomiesandaviableprivatesectorcanprovideadequateclearingandprocessingofpayments,thecentralbankshouldprobablylimititselftoprovidingonlysettlement,notclearingandprocessing.Usually,theprofitincentiveissufficientfortheprivatesectortomorefullyandcost-effectivelymeettheneedsofpaymentusersthanmaybepossibleforthecentralbank,whichtypicallylacksaprofitincentive.
Settlementcanbeinnetterms,asoccurswithbulkprocessingofaseriesofpaymentswithend-of-periodsettlement,oritcanbegross
whereeachpaymentissettledinrealtimewhenitoccurs.Asnotedearlier,netsettlementcanbestructured(usingcollateralandotherriskreductionprocedures)tobeasrisk-freeasRTGS.Ifthisisdone,thenthelowestcostsettlementmethodwhichisnetsettlementcanbechosenforthepaymentcycle.
Accessandsecuritychoices.Accesstothepaymentsystemhashistoricallybeenlimitedtothebankingsystem.ThemajorexceptionisthepostalGIROwhosepaymentswereinitiallyallon-ustransactions,andthereforerequirednointeractionorsettlementbetweenbanksanditself.Incertaininstances,wheretherearealargenumberoftransactionsamongcommercialfirms,inter-firmpaymentsarenettedoutsideofthebankingsystempriortoentryintothepaymentcycletobesettled.Sucharrangementsexistintheairline,petroleum,andtruckingindustries(whereairlineshaveexchangedcustomerflightticketswhencustomerschangeflights,oilfirmshavetradedoilshipments,andtruckingfirmshavenettedfreightfeeswhentheyheavilyuseeachother'sservicesincompletingshipments).
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Attemptsbycommercialfirmstobypassbanksandobtaindirectaccesstothepaymentsystem,andthusthelow-costandrisk-lesssettlementserviceprovidedbycentralbanks,havebeenrejected.Onereasonisthatinmostcountries,bankingandcommercehavealwaysbeenseparate(goingbackover300years).Aswell,commercialfirmshaveahigherearningsvariancethandobanks,yieldingagreaterprobabilityofbankruptcy.Keepingbankingandcommerceseparateservesbothtolimitdisruptionofthemoneysupplyandthepaymentsystemaswellasrestrictaccesstoacountry's(usuallysubsidized)depositinsurancefundandcentralbankdiscountwindowloans.Althoughstringent''firewalls"couldbebuilttoseparatebankingandcommercialactivitieswithinasinglefirm,muchasthetrustactivitiesofabankareseparatedfromtherestofthebank,thesolutionadoptedinalmostallcountrieshasbeentolimitorprohibittheownershipofbanksbycommercialfirmsandviceversa.Thusbothdirectandindirectaccesstothepaymentsystembycommercialfirmsisseverelylimitedandbanks,relyingontheirmonopolyaccesstocentralbanksettlement,remainthepredominantsupplierofpaymentservices.
Paymentsystemsecurityneedsaredirectlyrelatedtothevalueofthepaymentsbeingprocessed.Lowvalue(check,GIRO,creditanddebitcard)paymentsdonotusethemoreexpensiveproceduresinvolvedinlargevalueelectronicACH,GIRO,orwiretransferpayments.Largevaluepaymentstypicallyusededicatedcommunicationlines,passwords,testkey,andmessageencryption.Thesenetworksalsohavedevelopedback-upfacilitiesintheeventofmessageinterruption(frompoweroutage,naturaldisaster,oreventerroristattack).Ausefulcriteriaindecidingwhetherornottoadoptaparticularsecurityprocedureistocomparetheamortisedcostofadoptingtheprocedurewiththeestimatedcostofinsuringagainsttheexpectedlossifitisnotimplemented.
Participantliabilitiesanderrorresolution.Althoughanadequate
legalstructureshouldcontainacomprehensivelistofpayor,payee,andagentbankrightsandliabilitiesfordifferentpaymentinstrumentsundernumerousfailureconditions,thisdoesnotalwaysoccur(evenindevelopedcountries).Thusthereisaneedforadditional,andoftenmorespecific,banksupervisororcentralbankrulesandregulationscoveringtheseandotheraspectsofthepaymentcycle(likepaymentinstrumentstandards,customeraccessofdepositedfunds,andconditionsforprovidingsettlement).Inaddition,participationinclearinghousesisgovernedbyrulesconcerningbankdepositdeadlines,whensettlementoccurs,andtheresolutionoferrors.Typically,errorsareresolvedbyinitiatinganewpaymentwhichreversestheoriginalerror.Ifthevalueoftheerrorislarge,thecorrectionprocessincludesaninterestpayment.Errorsunidentifiedwithinastipulatedperiodoftimearenotsubjecttoreversalorcompensation.
Settlementofcross-borderpayments.Becausethereisno"worldcentralbank"andnocommoncurrency,cross-borderpaymentsbetweenenterprisesintwodifferentcountriesaretypicallyperformedusingcorrespondentaccountsatoneortwobanksinoneofthe
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countries,usuallythecountrywheretheenterprisereceivingthepaymentislocated(enablingtheenterprisetoreceivepaymentindomesticcurrency).Cross-borderpaymentsrelyonamessagetransfernetwork,suchasSWIFT(SocietyforWorldwideInterbankFinancialTelecommunication),totransmitpaymentinformationwhichtellsthereceivingcorrespondentbanktodebitoneofitscorrespondentbalancesandcreditanother.Thetwocorrespondentbalancesmaybewithinthesamebank(an"onus"transfersettledwithinthebank)oratanotherbankwithinthesamecountry(withsettlementprovidedbythecentralbank).ThusSWIFTtransmitsthemessage,thecorrespondentbanktransfersthefunds,andthebankorthecentralbankprovidesthesettlement.
Correspondentbalancesusedforcross-bordersettlementarereplenishedbybuyingforeignexchangeandliquidatedthroughdebitsorwithdrawaldenominatedindomesticcurrencyunits.Althoughclearingandsettlementofcross-borderpaymentsismorecumbersomethanclearingandsettlementwithinacountry,theSWIFTarrangementiscost-effectivecomparedtootheralternatives(which,historically,involvedtheactualphysicalmovementofgoldorareservecurrencybetweencountries).
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IIIMarketNeedsandChoicesinanEvolvingPaymentSystemThepaymentsystemofatransitionaleconomyneednotevolveinapre-determinedway.Indeed,differentcountrieshaveattimeschosentorelyupondifferentpaymentinstrumentsfornon-cashpayments.Theyhavealsosometimesallocatedpaymentsystemfunctionsandresponsibilitiesdifferentlybetweencommercialbanksandthecentralbank.TheproximatecausesofthesedifferencesaremorehistoricandpoliticalthaneconomicandarebestillustratedbynotingthedifferingevolutionofthepaymentsystemsoftheU.S.andEurope.Thechoicesfacingtransitionaleconomiesinimprovingtheirpaymentsystemareoutlinedandtheirinterrelationshipsnoted.Issuesimportanttothisprocess,particularlyinlettingmarketneedsinfluencethepaymentarrangementspermittedanddeveloped,arediscussed.AsummarychecklistofinformationneededtoadequatelyplanforpaymentsystemchangeispresentedinanAppendix.
1PaymentSystemChoicesinMarketEconomies:TheU.S.andEuropeanExperience
Centralizedversusdecentralizedsupplyofsavingsandpaymentservices.With81%ofallnon-cashtransactionsmadebycheck(Table2),18theU.S.istheheaviestuserofthispaymentinstrumentamongdevelopedcountries.(CheckuseinIndia,at99%,isevenhigherTable3.19Checkuseisassociatedwithadisaggregatedbankingsystem,alargegeographicarea,andahistoricalrelianceonaprivately-ownedbankingsystemforsafekeepingofsavingsforthegeneralpublic.
MostcountriesinEurope,incontrast,relyuponGIROpaymentsratherthanchecks.AlthoughEuropeanbanksareaggregated,whileU.S.banksarenot,thisdifferenceisnotthemainreasonforEurope'srelativelylowuseofchecks.Theprimaryreasonisthat,untilrecently,banksinEuropedidnotfocusonprovidingsavingsortransactionservicestothegeneralpublic:thistaskhashistoricallybeenthepurviewofthecentralizedandpublicly-ownedpostoffice.Thishistoricalrelianceonacentralizednon-bankproviderforsavingsservices,andthefactthatmostcountriesinEuropearerelativelysmallgeographically,madetheshiftfromcashpaymentstonon-cashGIROpaymentseasyinEuropebutimpossibleintheU.S.Instead,thehistoricallycost-effectivewaytomakepaymentsinadisaggregatedbankingsystemwithinalargecountryhasbeenbycheck.
18Seepage15.19Seepage16.
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Paperversuselectronicpayments.ThesamereasonsthathavedeterminedtheuseofdifferentpaymentinstrumentsintheU.S.andEuropehavealsoinfluencedtheshiftfrompapertoelectronicpayments.EuropeancountrieshavebeenmuchmoresuccessfulinimplementingelectronicpaymentsthanhastheU.S.foratleastfourreasons.Europehas:(1)acentralizedpostalGIROandanaggregatedbankingsystem;(2)asystemofnationwidepostalandbankingoffices;(3)agreateremphasisonexplicitpricingofpaymentservicestousers;and(4)agovernment/bankingsystempolicyofdirectingpaymentinstrumentusetowardthemostcost-efficientmethods.Thefirsttworeasonsleadtoahighproportionofon-uspaymentssothatelectronicpaymentsareanaturaloutgrowthofshiftingfrompapertoelectronicaccountingwithineachbankorthepostoffice.ThelasttworeasonsexplicitpricinganddirectinterventioninthemarketforpaymentserviceshasbeenmoreevidentinEuropeandhelpedtoshiftusersfrommoretolesscostlypaymentalternatives.
Importantly,onceacountryisinthepositionofrelyingheavilyonapaperpaymentinstrument,itisverydifficulttochangethatrelianceevenwhennewelectronicinstrumentsaredevelopedwhichhavedemonstrablyloweraveragecosts.Thisisbecausetheappropriatecostcomparisonisessentiallybetweentheaveragevariablecostofthepaperinstrumentandtheaveragetotal(fixedplusvariable)costofthenewelectronicinstrument.Onlyvariablecostisrelevantforthepaperinstrumentbecausethefixedexpenseshavealreadybeenmadetheyaresunkcostsand,typically,theonlynewfixedexpendituresareforreplacementoffullydepreciatedcapitalandtrainingofnewworkers.Sincenoneofthefixedexpensesofthenewelectronicinstrumenthaveyetbeenmade,averagetotalcostneedstobecoverediftheelectronicinstrumentisadopted.Thusanewelectronicpaymentinstrumentwillonlybeadoptedifitsaveragetotalcostislessthanthevariableexpensesoftheexistingpaperinstrument,whichisamore
difficulthurdletosurmount.
Non-bankcompetitioninsupplyingpaymentservices.InEuropetoday,bothbanksandthepostofficeprovidepaymentservices.Ifonesupplieroffersamoredesiredinstrument,theirmarketshareandpaymentrevenuesrise.Competitionbetweenbankandnon-bankprovidersofpaymentserviceshasbeenafactorinpromotingtheshiftfrompapertoelectronics.
AsimilarincentivedoesnotexistintheU.S.asbanksare(effectively)theonlysuppliersofbothpaperandelectronicpaymentservices.Shiftingacustomerfromcheckusetoelectronicpaymentsmerelysucceedsinshiftingtransactionbusinessfromonepartofthebanktoanother.Marketshareandrevenuesarelittleaffectedaselectronicpaymentscannibalizecheckvolume.Evenso,aredistributionofpaymentbusinesswithinabankwouldbeinabank'sinterestifstrongscaleeconomiesexistedforelectronicpayments.Althoughthereissomeevidenceofsuchscaleeconomies,bankshavenotpricedtheircheckandelectronicpaymentproductsinamannertomakethesecostdifferencesevidenttotheir
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customers.
Paymentpricingandpaymentfloat.Thepriceofdifferentpaymentinstrumentsshouldreflecttheirunderlyingcostsousers,giventheirneeds,canchoosethelowestcostalternative.IntheU.S.,thepertransactioncostofusingcash,acheck,ortheequivalentofaGIROpaymentisestimatedtobe,respectively,$.04,$.79,and$.29.20Intermsofrealresources,cashischeapestwhilechecksaremoreexpensivethanGIRO(orevendebitcard)payments.However,oncefloatcosts/benefitsareincluded,theusercostsrealresourcecostplusfloatbecomes$.09,$-.04,and$.29.Whenfloatisnotchargedfor,checksareusuallycheaperforusersthanisaGIROoradebitcardpayment.Butthesecostdifferences,especiallyfornon-cashpayments,willnotbeclearly"seen"byuserswhenbankschargeforpaymentservicesbyrequiringaminimumbalancetobeheldand/orpayabelow-marketinterestrateontransactiondeposits.Herethemarginalcostofpaymentinstrumentuseseenbytheuseriseffectivelyzero,notpositiveanddifferentiatedasitwouldbeifadirectfeewereassessedfordifferentnon-cashpaymentinstruments.Withoutanexplicitfeeonpaymentinstrumentuse,thereisnorealincentiveforuserstodemandthelowestcostinstrument.Althoughrelativebankcostsmayfavorelectronicpayments,asintheU.S.,usershavetoseethiscostdifferencereflectedintherelativepricestheypayinordertodemandthelowcostservice.Becauseofdistortionsassociatedwithcheckfloatandbankpricingpolicies,resourcesarewastedandpaymentcoststousersarehigherthanwhattheywouldotherwisebe.Thisillustratestheresultthatanefficientpaymentsystemcanonlyariseinamarketeconomywhenpaymentservicesareproperlypricedsothatuserscancorrectlychoosethelowestcostservice.
Commercialbankandcentralbankpaymentfunctions.Inprinciple,allofthefunctionsofapaymentsystemuserinterface,clearing,
settlement,andregulationcouldbeprovidedeitherentirelybycommercialbanksorbythecentralbank.Inpractice,thesefunctionsaredivided.Commercialbanksperformtheuserinterfacefunctionandtypicallyprovideforallofthetransferofpaymentinformationneededtoprocess,clear,andaccountforthepaymentsbeingmade.Centralbanksprovideforthefinalsettlementofinterbankpaymentsandcontrolthevastmajorityoftheregulatoryfunction.Thisisthetypicaldivisionofpaymentfunctionsforallbutlarge-valuepaymentsinmostcountries.Becauseoftheirimportanceforthesmoothoperationofcommerceandfinancialmarkets,centralbanksoftenownand/oroperatelarge-valuepaymentnetworksthemselvesandthusdirectlyprovidethesespecificpaymentprocessingandclearingservicesratherthanleavethisfunctionsolelytocommercialbanks.
Whenthereisamajordifferenceinpaymentfunctionsprovidedbycommercialandcentralbanks,itconcernsthepaymentprocessingandclearingfunctionforlow-valueconsumerandenterprisepayments.IntheU.S.,thecentralbankprocessesaroundone-fourth
20MoredetailissuppliedinHumphrey(1995),Chapter2.
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ofallcheckpaymentsandcompeteswithcommercialbanks.Thisisthedirectresultofhavingahighlydisaggregatedbankingsystem(withover11,000banks),whichwasduetoalonghistoryofpoliticallymotivatedgeographicalrestrictionspreventingthedevelopmentofasmallsetofverylarge,trulynationalbanksthatexistsinvirtuallyallotherdevelopedcountries.Whenthebankingsystemisconcentratedandtrulynationalinscope,commercialbankstypicallyprovidealloftheprocessingandclearingoflowvaluepayments,postalGIROpaymentsexcepted.Thegreatertheconcentration,thelargeristhepercentageofpaymentswhichcanbeclearedinternally.Withanationalbranchnetwork,paymentsdrawnonotherinstitutionscanoftenbepresentedforpaymentatthelocalofficeofotherlargebanksratherthanneedingtransportationtothe(possibly)non-localofficewherethepayor'saccountisactuallylocated.Inthisevent,paymentsdrawnonotherinstitutionscanbecost-effectivelycollectedusingabank'sownresourcesratherthanthoseofcompetingcorrespondentbanks(orthecentralbank).ThisisthearrangementthatcurrentlyexistsinCanada.
2MarketNeedsinTransitionalEconomies
Paymentsystemevolution:transitionaleconomies.Transitionaleconomiesaremovingfromapaper-basedmono-bankingsystemwithlocal/regionalclearingandsettlement.Thetransitionisaccompaniedwithashiftfromstatetoprivateownership,thedisaggregationofthemono-bankingstructure,seriouslegaluncertainties,ariseincreditrisk,andexpandedpaymentfloatwhichsignificantlyaffectsenterprisetradeandthemoneysupply(seeTable4).21Theseandotherproblemsareaddressedbysimultaneously:(a)expandingthelegalstructuretosupportprivateownershipandpayments;(b)speedinguptheprocessingandsettlementprocessforexistingpaper-
basedpayments;(c)developingasame-dayornext-daypaymentnetworkrestrictedtoenterpriseandinternationallargevaluepayments;and(d)determiningthedegreethatthebankingandpaymentsystemwillbeautomatedandcentralizedinthefuture.Thisisanexceedinglycomplexundertakinganditishelpfultohavealist,suchasthatprovidedinTable5,22ofthevariousissuesoneshouldbeawareofinthisprocess.
Pointsofexcessivepaymentdelaysshouldbeidentifiedandthevalueoffloatestimated.Relativelylow-costprocedurescanbeimplementedtoalleviatethisproblemintheshort-run.Existing"off-the-shelf"paymenttechnologycanusually,withsomemodification,beadaptedtolocalconditionsandperformwithsimilareffectivenessinmostenvironments.Overall,paymentsystemchangeshouldbeevolutionaryratherthanrevolutionary;successfulimprovementstoapaymentsystemdependtoalargedegreeonidentifyingimportantunmetmarketneedsandworkingcloselywithuserstofindsolutionstheycanaccept.Theseconditions
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forsuccessrecommendprovenpaymentsproceduresratherthanthenewesttechnology.Indeed,itwouldnotbeanexaggerationtosaythatallshort-runandlong-runchangestoapaymentsysteminatransitionaleconomycanbemorethanadequatelyhandledwithcurrenttechnologyandprocedures:thenewesttechnologyisnotneededandwillnotbecost-effectiveifused.
Table5.IssuestoaddressinrestructuringapaymentsystemUSERNEEDS SYSTEMREQUIREMENTSEnterprises VolumeforecastsConsumers CapacityBanks ProcessingspeedCentralbank Timing(clearing/settlement)Government CostsNon-bankfinancial ReliabilityIntra-regional Controls/oversightNational Inter-networkinterfacingInternational Typeofsettlement(net/gross)PAYMENTINSTRUMENTDESIGN
OWNERSHIPANDCONTROL
Paper PrivateversuspublicElectronic DegreeofaggregationCards(debit/credit/ATM/pre-paid)
Accesstoclearing/settlement
Hybrid(truncatedpaper) PerformancestandardsCredit/debittransfer StandardizedformatsFinalfunds(highvalue) Finalfunds(highvalue)Provisionalfunds(lowvalue) COSTRECOVERYBatchprocessed Directfees/balancesOn-lineprocessed Full/partial(subsidy)recovery
Pricecontrol(market/government)RISKCONTROLDESIGN OTHERISSUESSettlementrisk Legal/regulatoryrequirementsFraudrisk Technology(off-the-shelfversusstateofthe
art)
ClearinghousefailureSecurityriskBankfailureSource:AdaptedfromListfieldandMontes-Negret,1994.
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Userneedsandpaymentsystemdesign.Adetailedknowledgeofhowpaymentsystemsindevelopedmarketeconomiesarestructuredandoperateisquitehelpfultoaccuratelyidentifyareaswherepaymentsystemsmaybeimprovedinemergingmarketeconomies.Aproperlystructuredpaymentsystemshouldhaveanumberofattributes,drivenbyenterpriseandhouseholdneedforacceptability,timeliness,andreliability.Afterthiscomessafety,efficiency,andeaseofuse.Inrestructuringapaymentssystem,thegoalistolookforeffectivewaystoimprovetheseattributesforbothcurrentandfutureusers.
Theinitialstepinimprovingapaymentsystemshouldbetoaccuratelydetermineuserneedswhich,inturn,willformthebasisforappropriatepaymentsystemdesign,systemrequirements,legalstructure,andriskcontrols.AnAppendixprovidesinformationneededforthistask.Thisinvolvesanassessmentofthecurrentphysical,legal,andinformationinfrastructure,aknowledgeofthestructureandtechnologyofthefinancialsystem,aninventoryofcurrentlyusedpaymentinstrumentsandhowtheyareprocessed,andtheexistenceofincentivestoguidepaymentusetowardthemostcost-effectiveoutcomes.
Enterpriseneedsforpaymentsprimarilyconcerntheabilitytoquicklyandsafelytransferlargevaluesamongfirmsdistantfromoneanotherwithinandbetweencountries.Aswell,enterprisesrequirefinancingwhichistypicallyobtainedbyissuingdebtandequitysecuritiesinfinancialmarkets.Thisalsorequiresthetransferoflargepaymentvalues.Theseenterpriseneedsarelargelymetthroughthedevelopmentofasinglesecureelectroniclargevaluetransfernetworkwhichconnectsacountry'smajortradingcentersandtiesintoexistinginternationalfundstransferarrangements.Suchanetworkmaybepubliclyownedandoperatediftheprivatesectorisinsufficientlydevelopedtohandlesuchatask.Inanycase,settlementcanbemostcost-effectivelyhandledthroughthecentralbank.Riskisminimized
withRTGSusingeitheridleorinterest-earningbalancesorpostedliquidcollateral.Feesshouldbesettofullyrecovercostsandthelegalrightsandliabilitiesofthevariouspartiestothepaymenttransactionshouldbeclearandenforceable.
Whilemostconsumerneedsforpaymentsarelargelymetthroughtheprovisionofcashforsmallervalueretailtransactions,thisisusefullysupplementedwithnoncashpaymentinstrumentswhichallowforlargervalueconsumerpaymentsbothatandawayfromthepointofsale(e.g.,forbillpayments).Inrelativelyaggregatedbankingsystems,whichisthetypicalcase,thiscanbecost-effectivelyrealizedthroughacentralizedpaper-basedorelectronicGIROsystemdeveloped,owned,andoperatedeitherbythebankingsystemorsomegovernmententity.GIROpayments,oncemade,arefinalpaymentsandsettlementisinternal(socentralbanksettlementisnotneeded).Acheck-basedsystemisreallyonlyaviablealternativewhenthebankingsystemishighlydisaggregatedandwhenthereareeffectiveinstitutional,legal,orcommunicationinfrastructurebarrierstoelectronicallyconnectlargenumbersofinstitutionstoacentralizedclearinghouse.Also,checkscostmorethanGIROpaymentstoprocess,clear,and
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settleand,becauseofreturnitems,representaprovisionalratherthanafinalfundstransfer.
Theissueofwhatentitiesbanks,non-bankfinancialinstitutions,orenterprisesmayhavedirectaccesstothepaymentsystemisthesameonefacedinmostcountries.Thetypicaloutcomehasbeentoallowdirectaccesstothepaymentsystem,andhencetocentralbanksettlement,almostexclusivelytobanksandothertypesofdeposit-basedfinancialinstitutions(savingsbanks,creditunions,co-operativebanks,etc.)Directaccessisnotusuallygiventonon-depositfinancialinstitutions(insurancecompanies,securitiesfirms)ortoenterprisesandtheirfinancialsubsidiaries.Althoughthepaymentaccessissuehasneverbeenadequatelyinvestigatedandseeminglyrestsonadesiretoseparateriskycommercialenterprisesfromlessriskybankingactivities,scaleeconomiesarelikelyrealizedattheclearinghouseandpaymentnetworklevelwhenthenumberofdirectpaymentparticipantsaresmallratherthanverylarge.
Ownershipofpaymentprocessingcentersandpaymentnetworksisusuallyintheprivatesector.TheexceptionsaretheU.S.whereaboutone-fourthofallpaymentsareprocessedbycentralbankoffices(duetoadisaggregatedbankingsystem)andvariouscountries'GIROcenters(ownedbythepostalservice).Theownershipissueistiedinwithhowpaymentservicesarepriced.Iftheprivatesectorownsthesefacilities,thenpricingshouldcoverallcosts,includingareasonablereturnoninvestedcapital.Whenacentralbankownsandprovidestheseservices,theyhavebeeneitherbeensubsidized(asintheU.S.priortothe1980s)orpricedasiftheywereprivatelyownedwhereallcostsarecovered(theU.S.currently).Ingeneral,resourceallocationisenhancedifpaymentservicesarepricedtorecoverallthecostsoftheirproduction.
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AppendixPlanningforPaymentSystemImprovementsAdequatelyplanningforpossibleimprovementsinacountry'spaymentsystemfirstinvolvesstock-takingknowingwhereyouaretobeginwithandforecastinglikelypaymentsystemgrowthknowingwhereyoumightbeinthefuture.AsummarylistofquantitativeinformationusefulforthistaskisshowninTableA1.Stock-takingconcernsthedevelopmentofbenchmarkinformationregardingacountry'sinfrastructure(communication/transportation,legal,andinformational)itsfinancialsystem(bankingsystemstructure,distribution,andtechnology),itsexistingpaymentsystem(instrumentsused,typesofprocessing,andclearingarrangements),anditsincentivestructureanduserneeds.Ifdatadonotalreadyexist,surveyscanbedevelopedtocollectsampledataontheseelements.Alloftheseelementshavebeentouchedonordiscussedinthetextandthusrepresentsausefulsummaryofpaymentissuesraisedinthispaper.
Althoughnotexplicitlylistedinthetable,thedatacollectedshouldincludeestimatesofcurrentvolumesandvaluesofpaymentflowsbymajortypesofpaymentinstruments,focusingonflowsbothwithinandamongacountry'smajortradingcenters.Withthisdata,projectionsoflikelypaymentgrowthcanbeapproximatedbytieingpaymentgrowthbytypeofpaymenttotheexpectedgrowthinproductionandtrade.Informationoncurrentandprojectedpaymentvolumesiscrucialinordertoproperlydesignthemajorcomponentsofalltypesofpaymentsystems,includinglarge-valuenetworks,clearinghousesforsmall-valuepayments,andtheinterbankandbank-centralbankcommunicationsinfrastructurethattiesthemtogether.
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TableA1.Informationneededforstock-takingInfrastructureanalysis
Financialsystem Currentpaymentsystem
Incentivesanduserneeds
PHYSICAL STRUCTURE INSTRUMENTS COSTSCommunication Centralbank Debit RelativepricesTransportation Commercial
banksCredit Float
Mailsystem Postoffice Paper AvailabilityCountrysize Moneymarkets Electronic SubsidiesTradingcenters Concentration Non-bank SeigniorageLEGAL DISTRIBUTION PROCESSING USERNEEDSLaws/rules Local/nationwideBatch TimelinessContracts Banksize On-line InterestratesJudicialsystem Proportionon-us Automation Largevaluepayments
convenienceEnforcement Settlementaccess
Inter-network
Supervision Tiering Networkaccess SecurityINFORMATIONTECHNOLOGY CLEARING COMPETITIONAcountingsystem
Paper-based Bilateral Intense
Reliability Electronic Multilateral WeakTimeliness Decentralized Correspondents InternationalInstitutions Centralized SettlementtypeBackup Security RiskcontrolsSource:AdaptedfromListfieldandMontes-Negret,1994.
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