COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 1 The role of central banks in retail payments Robert...

COMMITTEE ON COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMSPAYMENT AND SETTLEMENT SYSTEMS

1

The role of central banks in retail payments

Robert LindleyDeputy Head, CPSS Secretariat

Regional workshop on reforming payment and securities settlement systems for the Middle East and North AfricaBahrain, Thursday 17 March 2005


What are retail payments?

Low values, large numbers Used by everybody Wide range of contexts Wide range of instruments

Compared to large-value payments: large values, small numbers, mostly by financial institutions for market transactions, mostly credit transfers


Is there a real difference?

More a matter of degree A payment is a payment is a payment ….. Retail is more diverse But key issue is cost: speed and security In the future, cheaper IT may make this matter

less Some RTGS systems already handle retail

payments in “off-peak” hours


Central bank approach to payment systems

Payment systems are important Normal philosophy: “markets work best” But sometimes there are market failures

Negative externalities (especially systemic risk)

Network effects

Monopoly

May justify central bank “intervention”


Forms of “intervention”(or “modes of engagement”) Service provider and operator

settlement accounts (settlement asset) system operator

nb: some operational involvement does not reflect current market failures but, instead, past failures or a different “philosophy”

Catalyst (may be part of oversight)

Overseer

“… a function whereby objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change” (forthcoming CPSS report on oversight)


Central bank policy objectives

Intervene to achieve what? Some common ground: safety and efficiency What is the focus of these two objectives in the

case of retail payment systems?


Efficiency

All payment systems

Significant costs are involved Economic needs must be met So important choices must be made


Safety

Systemically important payment systems – potential for systemic riskFinancial, legal, operational risks

Retail payment systems – importance to economic activityOperational risks – security and operational reliability


A difference of emphasis:

Although all central banks have safety and efficiency objectives, some

- give primacy to safety

- interpret “safety” to mean “systemic risk” only

and thus do not actively oversee and/or operate retail systems


Trends in retail payments with possible policy implications

Pace of change is relatively slow – consumer conservatism, need to reach interbank agreement, costs, need for new laws etc

IT innovations (eg paper to electronic) Cross-border developments (eg euro area) Market structure changes (eg consolidation) New participants (eg non-banks)


Policy issues

Implications for efficiency are generally favourable (although may need to draw a distinction between benefits for banks and those for customers) but risk implications are often unclear.

Legal and regulatory Market structure and performance

(balance between competition and cooperation) Market infrastructure and standards

(technical issues) Central bank services


Legal and regulatory issues

Legal and regulatory provisions may fail to keep pace with payment innovationeg e-money, electronic signatures, cheque truncation

Inadequate safeguards against criminal use Cross-border payments may be a problem Legal and regulatory provisions may create

unwanted entry barriers (eg for non-banks)

Any issue where laws and rules are drafted for instruments, systems or participants that are no longer completely relevant


Market structure and performance

Balance between cooperation and competition– competition usually good for innovation and efficiency

– but too much competition may cause risk

– and competition needs to be tempered with cooperation

– but too much “cooperation” may cause inefficiencies (eg access restrictions, lack of innovation)

Demand as well as supply: transparency of service and price …

… and structure of pricing


Market infrastructure and standards

Adequate security Adequate operational reliability Standards, especially for interoperability Governance structures


Central bank services

Need to keep pace with market developments Facilitate innovation and competition?

eg access, providing credit, operating hours

Contain moral hazard and credit risk? Transparency


Public policy goals

Policies should be designed to: address legal/regulatory impediments foster competitive market conditions and behaviour support development of effective standards and

infrastructure provide central bank services effectively


Recommended minimum actions by central banks

Actions will depend on the central bank’s responsibilities the seriousness of any market failures relevant to

those responsibilities the available tools (under the

operate/catalyst/oversee headings)

Minimum actions are Monitoring Cooperate and advise (re the market and re other

authorities) - catalyst role


Possible additional actions

More proactive catalyst/facilitator activity Intervention as overseers Intervention as service providers and operators

Depending on market conditions and on central banks’ responsibilities and powers


Summary

A first attempt to find common policy themes Common objectives Diversity of central banks’ current involvement Policy issues arising out of current market trends –

not everywhere at the same time Central bank actions – recommended minimum

actions and possible additional actions

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