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«July 2012 THE WORLD BANK Acknowledgements The preparation of this paper was led by the Financial Inclusion Practice of the World Bank. Lead author is ...»

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July 2012



The preparation of this paper was led by the Financial Inclusion Practice of the World

Bank. Lead author is Harish Natarajan, under the overall guidance of Massimo Cirasino, Manager, Financial infrastructure, and Jose Antonio Garcia (World Bank). The core drafting team for this report included Hemant Baijal (formerly World Bank) and Robert Keppler (World Bank). Alice Zanza, Maria Teresa Chimienti, Ceu Perera, and Sean O‘ Connor (all World Bank) also contributed immensely to the development of this report.

Contents List of Acronyms

Executive Summary

I. Introduction

I.1 Payment System Modernization Efforts and the Growing Interest in Retail Payment Systems

I.2 Previous Work on Retail Payments by the World Bank and Other International Organizations

I.3 Purpose of the Report

I.4 New Terminology and Definitions Used Throughout the Report

II. Overview of Retail Payments

II.1 Retail Payment Instruments

II.2 The Evolution of Retail Payment Instruments and Services

II.3 Factors Influencing the Adoption of Specific Retail Payment Instruments.................. 25 II.4 Clearing and Settlement Processes in Retail Payment Systems

II.5 Different Roles within Retail Payment Systems

II.6 Concluding Remarks on the Observed Trends in Retail Payments

III. Public Policy Objectives in Retail Payments

III.1 Overall Safety and Efficiency

III.2 Affordability and Ease of Access to Payment Instruments and Services

III.3 Availability of an Efficient Infrastructure to Process Payment Instruments and Support Retail Customers

III.4 Availability of a Socially Optimal mix of Payment Instruments

IV. Guidelines for Developing a Comprehensive Strategy for Reforming Retail Payments

IV.1 General Framework Underlying the Guidelines

Guideline I: The market for retail payments should be transparent, have adequate protection of payers and payees‘ interests, and be cost-effective.

Guideline II: Retail payments require reliable underlying financial, communications and other types of infrastructure.

Guideline III: Retail payments should be supported by a sound, predictable, nondiscriminatory, and proportionate legal and regulatory framework.

Guideline IV: Competitive market conditions should be fostered in the retail payments industry, with an appropriate balance between cooperation and competition.

Guideline V: Retail payments should be supported by appropriate governance and risk management practices.

Guideline VI: Public authorities should exercise effective oversight over the retail payments market and consider direct interventions where appropriate.

V. Implementing Reforms for Retail Payments

V.1 Stocktaking

V.2 Establish Appropriate Internal Organizational Arrangements

V.3 Develop an Appropriate Coordination Framework with Key Stakeholders.................. 80 V.4 Developing a Common Vision of the Desired End-state

V.5 Developing an Implementation Plan

V.6 Monitoring and Evaluation

Annex 1: Public Policy Goals, Central Bank Minimum Actions, and Range of Possible Additional Actions for Retail Payment Systems (from CPSS ―Policy Issues for Central Banks in Retail Payments‖)

Annex 2: Model for National Payments Council -Terms of Reference

Annex 3: Financial Inclusion Initiatives in India

Annex 4: Interventions by the Reserve Bank of Australia (RBA) in Card Payments.................. 93 Annex 5: Key Elements of a Strategic National Payment Systems Development Plan (from CPSS ―General Guidance for National Payment System Development, January 2006‖)

Annex 6: SADC‘s Guide to Developing a Strategic Framework for Payment System Modernization

Annex 7: M-PESA in a Nut shell

Annex 8: Glossary

Annex 9: References

Box 1: The World Bank Global Payment Systems Survey 2010

Box 2: The Role of Mandates in Direct Debit

Box 3: Enhancements to the ACH to Support Authenticated E-commerce Transactions.......... 29 Box 4: Main Results of the World Bank Survey on Innovations in Retail Payments.................. 40 Box 5: CPSS Public Policy Goals for Maintaining and Promoting Efficiency and Safety in Retail Payments

Box 6: The General Principles for International Remittance Services and Related Roles......... 49 Box 7: The World Bank Remittances Price Database

Box 8: Durbin Amendment – The Dodd-Frank Wall Street Reform and Consumer Protection Act

Box 9: The Payment Cards Industry Security Standards Council

Box 10: A Practical Guide for Retail Payments Stocktaking

Figure 1: Non-Cash Retail Payment Transactions Per Capita

Figure 2: Generalized Clearing and Settlement Model

Figure 3: Clearing and Settlement for Mobile Money Schemes

Figure 4: Types of Disputes

Figure 5: Dispute Resolution

Figure 6: Protection of Customer Funds in Innovative Payment Products

Table 1: Mapping of Payment Instruments to Payment Needs

Table 2: Select Banking Infrastructure and Access Metrics

Table 3: Payment Instruments used for Government Payments

Table 4: Key Areas for Standards in Retail Payment Systems

Table 5: Basic Metrics to Assess Progress in Retail Payments Development

List of Acronyms

ACH Automated clearinghouse AML/CFT Anti-Money Laundering / Combating The Financing of Terrorism APR Annual percentage rate ATM Automated teller machines BIS Bank for International Settlements CEMLA Centre for Latin American Monetary Studies CGAP Consultative Group to Assist the Poor CPSS Committee on Payment and Settlement Systems ECC Electronic cheque conversion EFT Electronic fund transfer EFTPOS Electronic funds transfer at point of sale FATF Financial Action Task Force FDIC Federal Deposit Insurance Corporation FIF Financial Inclusion Fund FITF Financial Inclusion Technology Fund FPD Financial and Private Sector Development of the World Bank GDP Gross domestic product GPs CPSS-World Bank General Principles for International Remittance Services HAC Honor all cards IAT International ACH transactions IC Integrated circuit IVR Interactive voice response KYC Know-your-customer MFI Microfinance institution MICR Magnetic ink character recognition MNO Mobile network operator MSF Merchant service fee MTO Money transfer operator NABARD National Bank for Agriculture and Rural Development NFC Near field communication NPC National payments council NSP No surcharge policy NSR No surcharge rule PCI DSS Payment card industry data security standards PCI DSS Payment application industry data security standards PIN Personal identification number POS Point of sale PSDG Payment Systems Development Group of the World Bank RBA Reserve Bank of Australia RBI Reserve Bank of India RFID Radio frequency identification RPSP Retail Payments Service Providers RTGS Real-time gross settlement SADC Southern Africa Development Community SEACEN South East Asia Central Banks SEPA Single Euro Payments Area SHG Self-help group SME Small and medium enterprise Executive Summary Reforms in the area of retail payments are becoming increasingly important. Given the nature of retail payment systems and the structure of the retail payments industry, there are multiple challenges and roadblocks that impede those much needed reforms.

Navigating through these challenges requires a comprehensive and strategic approach.

In this document, the Payment Systems Development Group (PSDG) of the World Bank presents a framework for countries to use in developing a comprehensive retail payments strategy. This framework has been developed by synthesizing the past studies of the World Bank, the CPSS, and other international and national bodies, and also the worldwide experience of the World Bank‘s PSDG in supporting payment systems reforms in over 100 countries.

This document is organized into five sections. The first section discusses the importance of retail payments and the ongoing efforts by public authorities and international organizations in this area. This section also provides working definitions for a few new terms, for some existing terms that need a re-look given the ongoing developments in the retail payments area, and for other terms commonly used in the industry but not yet formally defined by the international standard-setting bodies.

The second section scans the evolution of retail payment systems over the last five to six decades, the types of retail payment instruments, the challenges in increasing the adoption of electronic payment instruments, and finally the various processes and entities that together constitute the national retail payments system. The analysis of the

evolution of retail payments over the last five to six decades shows the following trends:

(i) the successful adoption of advances in technology have played a key role in the development of new channels for payment initiation, improved authentication, and efficient processing; (ii) new and emerging payment needs at Internet auction sites and social networking sites, among others, and for transit payments, as well as the need to find efficient mechanisms for advancing financial inclusion objectives have led to the creation of new payment mechanisms; and, (iii) the payment infrastructure created for one payment product has been successfully leveraged for other payment products—one example is the use of the ACH for online banking-enabled payments.

The third section analyzes the public policy objectives in the area of retail payments. It builds a case for expanding and elaborating on the range of public policy goals with respect to retail payments from the general overarching goals of ensuring safety and efficiency of the National Payments System. The additional public policy goals

advocated are:

 Promote affordability and ease of access to payment services;

 Promote development of efficient infrastructure to support development of payment instruments and mechanisms to meet retail payment needs; and,  Promote socially optimal usage of payment instruments.

The fourth section, and the heart of this report, builds a case for adapting the CPSSWorld Bank General Principles for International Remittance Services to build a framework for a comprehensive retail payments strategy. The following guidelines are


 Guideline I: The market for retail payments should be transparent, have adequate protection of payers and payees interests, and be cost-effective.

 Guideline II: Retail payments require reliable underlying financial, communications, and other types of infrastructure; these infrastructures should be put in place to increase the efficiency of retail payments. These infrastructures include an inter-bank electronic funds transfer system, an inter-bank card payment platform, credit reporting platforms, data sharing platforms, large value inter-bank gross settlement systems, availability of robust communications infrastructure, and also a national identification infrastructure.

 Guideline III: Retail payments should be supported by a sound, predictable, non-discriminatory, and proportionate legal and regulatory framework.

 Guideline IV: Competitive market conditions should be fostered in the retail payments industry, with an appropriate balance between co-operation and competition to foster, among other things, the proper level of interoperability in the retail payment infrastructure.

 Guideline V: Retail payments should be supported by appropriate governance and risk management practices.

 Guideline VI: Public authorities should exercise effective oversight over the retail payments market and consider proactive interventions where appropriate.

Under each of these guidelines, the key issues pertaining to them, including, where appropriate, some instrument-specific issues, are discussed. In addition, indicative lists of actions that can be envisaged are also discussed for each of the guidelines.

The fifth and final section of the report discusses the implementation aspects of a retail payments strategy. This builds on PSDG expertise in implementing national payments system strategy. This section identifies six key steps: (i) stocktaking; (ii) establishing appropriate internal organizational arrangements; (iii) developing a coordination framework; (iv) developing a vision; (v) developing an implementation plan; and finally, (vi) ongoing monitoring and evaluation.1 This document is not intended to provide an all-encompassing and universal guide to develop a retail payments strategy. It is rather intended to provide a framework that can be used to think through the retail payments landscape in a particular jurisdiction and to 1 The topic of stocktaking is also discussed in detail in an accompanying publication – ―A Practical Guide to Retail Payments Stocktaking.‖ offer guidance on what the building blocks for a successful retail payments strategy could be.

I. Introduction I.1 Payment System Modernization Efforts and the Growing Interest in Retail Payment Systems Over the last three decades, payment system modernization has become a prominent feature in financial sector reform programs in many countries. In many cases, central banks have played a leading role in these modernization efforts, which have been mainly driven by increased financial activity as evidenced by growing volumes and values of payment transactions, greater appreciation of risks inherent in the use of payment systems, technological innovations, globalization, and the general realization of the important beneficial role that stems from active central bank involvement in payment systems development and oversight. Central banks tend to become involved because of their universal objectives to achieve financial stability through policies and measures to ensure the safety and soundness of the financial system, and to maintain trust in the currency.

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