The Role of Central Banks in Retail Payments

1
The Role of Central Banks in Retail Payments

• Marc Hollanders
• Bank for International Settlements
• Washington, 4 November 2003

2
What are retail payments?

• Large numbers, low values
• Many transactors (individuals and businesses)
• Goods, services, personal
• Wide range of contexts
• Wide range of instruments

3
Policy objectives

• Safety and Efficiency
• What is the focus of these two objectives in
  the case of retail payments?

4
Policy objectives

• Safety
• Systemically important payment systems
  potential for systemic risk
• Legal, financial, operational risks
• Retail payment systems importance to economic
  activity
• Operational risks security and operational
  reliability

5
Policy objectives

• Efficiency
• All payment systems
• Significant costs are involved
• Important economic needs must be met
• Significant choices must be made

6
Retail payment instruments

• Cash
• Cheques
• Giro payments
• Direct debits
• Direct credits

• Credit cards
• Debit cards
• Wire transfers
• Travellers cheques
• etc

7
How are retail payments processed?

• Transaction process creation, validation and
  transmission
• Clearing exchange of instrument/information and
  calculation of settlement claims
• Settlement discharge of settlement claims

8
Current trends services to end-users

• Continuing use of cash and of paper instruments
• Increasing use of direct debits
• Increasing and more diverse use of payment cards
• New types of service and delivery channels
• E-money
• Increasing demand for cross-border services

9
Current trends - processing

• Transaction process payment card model
  proprietary arrangements, interchange fees
• Clearing automation, safety improvements
• Settlement more prompt/more frequent

10
Current trends - institutional

• Financial sector consolidation
• But increasing fragmentation in market in
  services to end-users
• Outsourcing and specialisation
• New market participants

11
Policy issues

• Legal and regulatory
• Structure and performance of the market
• Market infrastructure and standards
• Central bank services

12
Legal and regulatory issues

• Legal and regulatory provisions may fail to keep
  pace with payment innovation in unintended ways.
• There may be gaps or inconsistencies.
• Safeguards against criminal use may not be
  adequate.
• Cross-border payments may be a particular
  problem.
• Legal and regulatory provisions may create entry
  barriers contrary to policy intentions.

13
Structure and performance of the market

• Importance of competition
• Balance between cooperation and competition
• Access restrictions
• Pricing and transparency

14
Market infrastructure and standards

• Adequate security
• Adequate operational reliability
• Infrastructure arrangements
• - more concentrated risk
• - governance structures
• Standardisation and interoperablility network
  effects and market incentives

15
Central bank services

• Need to keep pace with market developments
• Transparency
• Pricing
• Access

16
Public policy goals for all relevant public
authorities

• Policies should be designed to
• address legal/regulatory impediments
• foster competitive market conditions and
  behaviours
• support development of effective standards and
  infrastructure
• provide central bank services effectively

17
Role of central banks

• Variety from country to country
• Operational settlement, clearing, other
  services
• Oversight
• Catalyst or facilitator based on cooperative
  relationships with public and private sector

18
Recommended minimum actions by central banks

• Review and monitor
• Cooperate and advise

19
Possible additional actions

• Depending on market conditions and on central
  banks powers and responsibilities
• More proactive catalyst/facilitator activity
• Intervention as overseers
• Intervention as service providers

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Summary

• A first attempt to find common policy themes on
  retail payments
• Diversity of central banks current involvement
• Common objectives
• Policy issues arising out of current market
  trends not everywhere at the same time
• Common public policy goals
• Central bank actions recommended minimum
  actions and possible additional actions