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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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Methodology and Data Collection: In the remittances market, in particular, the total cost might not always be clear to customers as there are a number of variables that go into it: the transaction fee, the exchange rate applied and the margin eventually charged, and the speed of the service, among others. Researchers posed as customers and contacted individual firms to collect within each corridor. Data was obtained within each corridor on the same day, in order to control for fluctuations in exchange rates and other changes in fee structures. It should be noted that data in this database is intended to serve as a snapshot of a moment in time, and that pricing may vary over time.

The following data is collected from 8-10 major service providers in each corridor including both the primary Money Transfer Operator (MTO) and Banks active in the market, for standard remittance amounts of US$ 200 and US$500.

Transfer fee: This is the most visible cost component, and can differ significantly among market players. This fee usually represents the charge the sender pays at the initiation point, and usually varies with the amount sent, within set bands. In some cases, there may be fees and taxes charged at the destination that have not been detected in this database.

Exchange Rate Fee: An important portion of the remittance cost is the exchange rate spread, which is generally not quoted in the transfer fee. Even though in some receiving countries remittances can be paid in the same currency of the sending country, the majority of remittance transactions are paid in local currencies, and, thus, an exchange operation is required.

Product: The survey covered mainly cash-to-cash transactions. For some RSPs different products were surveyed.

Speed of transfer: The speed of transfer is the time needed for the remittance to be available for the receiver.

Network coverage: The following categories are used to describe RSP coverage: nationwide, urban only, rural only, main city, and major cities.

Develop initiatives to foster consumer education and awareness. The success of the actions mentioned above is based on a certain minimum level of consumer awareness.

Initiatives to improve consumer awareness through education campaigns are therefore critical. These initiatives should be developed in a format that is appropriate to the socioeconomic context and literacy levels of the target populations.

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 inter-bank electronic funds transfer systems, inter-bank card payment platforms, credit reporting systems, data sharing platforms, large-value inter-bank gross settlement systems, a reliable communications infrastructure, and a national identification infrastructure.

Description As earlier discussed, an effective national retail payments system should be able to provide users with an adequate mix of payment instruments and services to satisfy a wide variety of payment needs, ranging from card payments that can be initiated at merchant locations to electronic funds transfers that can be initiated through a variety of channels. Providing such services efficiently requires an appropriate infrastructure of access points and for transaction processing. These include payment card switches to enable online authorization of card payments, a sufficient number of POS terminals to initiate card payments, or an ACH to process EFT-based products efficiently and within standardized service levels, among others. Absence of such infrastructure components severely hinders the system from exploiting the potential benefits of modern payment instruments. For example, credit card payments being manually authorized and manually processed thereafter are not very much different in efficiency terms from paper-based instruments.

The provision of safe and efficient retail payment services also relies to an important extent on there being appropriate clearing and settlement arrangements. A centralized inter-bank clearing and settlement system enables the entities providing the payment services to focus on their particular transaction authorization services, account management services, and operational responsibilities in the payment clearing and settlement networks.

A safe and reliable clearing and settlement mechanism is based on a robust infrastructure as well as on a sound and clear set of rules and procedures for sorting and exchanging information pertinent to the individual payments and participants involved, and for transferring the funds related to these payment transactions. In this last regard, a crucial element is a system for final settlement with appropriate risk management mechanisms. Typically, time-critical payments such as those associated with financial market transactions settle in a system that guarantees finality and has appropriate risk management mechanisms to address credit risk and liquidity risks of participants. Very often, real-time gross settlement (RTGS) systems serve this function. RTGS systems typically settle transactions in central bank money and there are defined risk management mechanisms like queuing, liquidity optimization, and liquidity injection through repos. By settling the final positions of retail system participants (i.e. usually net positions stemming from the clearing cycle) in an RTGS system, retail systems also benefit from RTGS arrangements.60 Provision of credit cards and other credit services like overdraft on debit cards and current accounts, and also for merchant acquiring for payment cards involves a credit decision process by the issuer. The lack of an effective industry-wide credit reporting system hampers an institutions ability to take a view of the credit risk associated with the applicant. This could result in denial of the service itself. This is particularly important for enhancing usage of payment services by Small and Medium Enterprises (SME). Studies have shown that access to finance is higher in countries with credit reporting systems.61 The flow of information of payment services usage to credit reporting systems could also enhance the information available for credit decision process.

A payer or payee wanting to avail non-cash based payment services, needs to have a formal relationship with an institution providing payment services. Increasingly, because of money laundering and terrorism financing concerns, the institutions providing payment services require a robust identity-verification mechanism.

All the aforementioned systems and infrastructure interconnect multiple parties requiring a fast response to their requests or enquiries. Therefore, a robust telecommunications infrastructure in the country is a critical prerequisite for the effective functioning of all the various systems supporting and underlying retail payment services.

It must be noted that, in order to benefit from the infrastructure components discussed in this section, the participating institutions themselves need to have certain basic systems for their internal operation. Financial institutions and other institutions that offer payment services need to have automated and centralized account management infrastructure, in order to support electronic payment mechanisms. Electronic payments involve electronic transmission of the payment instruction between the payer and his financial institution, between the payer‘s financial institution and payee‘s financial institution, and finally between payer and his financial institution. Since these exchanges of instructions happen in real-time or near real-time, the financial institutions would need an automated centralized customer account management system for processing these, because a decentralized system would require additional steps, which would be inefficient, and if the operations are manual, impossible.

Possible Actions Develop an implementation plan to deploy the required industry level infrastructure components, anchored in an overall payment system development plan: This has been The World Bank Global Payments System survey 2010 showed that 86 percent of ACH systems worldwide were using an RTGS system for their final settlements. The equivalent figure for payment card switches was 54 percent.

The World Bank Group 2009.

found to be very successful in addressing the infrastructural shortcomings in a rapid manner. Retail payments infrastructure development is a complex task typically involving a high degree of collaboration between various institutions that often are also direct competitors in the provision of payment services. Therefore, infrastructure development needs to be a well-deliberated and collaborative exercise involving detailed analysis of the needs, the usage patterns, pricing levels, risk management, governance arrangements, ongoing enhancements, and evaluation of potential to reuse and build on existing infrastructure.

Promote the adoption of common technical and usage standards for payment services to facilitate interoperability and thereby widespread adoption of electronic payment instruments: Common technical standards are a basic requirement for developing interoperable platforms. Interoperability improves overall efficiency (e.g. by enabling straight-through processing) and increases convenience to users. Lack of common standards is likely to result in each payment service provider needing to create its own proprietary systems, procedures, and in many cases enter into specific business alignments with payees and payers.62 Collaborate with industry players to speed-up the implementation of innovative mechanisms that may help in addressing infrastructural gaps: Authorities should use all mechanisms available to promote, in coordination with industry participants, the sound expansion of access points to electronic payment instruments and services. Authorities should also analyze whether there is a business case for developing some basic infrastructure (e.g. telecommunications network) to be used collectively by small service providers to offer electronic payment services, and also link up their service outlets to provide a virtual large service delivery network.63 In some cases authorities may also consider creating suitable incentives (e.g. some tax incentives) to promote private sector investment in infrastructure for retail payments.

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

In a retail payment system there are multiple levels of standards: (i) customer to financial institution; (ii) interbank standards; and, (iii) financial institution to customer standards. There have been multiple developments in the area of interbank standards like ISO20022, ISO 8583, etc. focusing on data formats for transaction processing. In addition, there have been standards focused on specific areas like authentication – 3D Secure for e-commerce card transactions, EMV for chip cards; data security – Payment Card Industry Data Security Standards (PCI DSS); and, account numbering – IBAN. There are also standards for specific products like SEPA credit and debit transfers, and standards for specific card products by Visa, MasterCard, and American Express.

A good example of this is the establishment of ―LA RED DE LA GENTE‖ by creating a common infrastructure of credit co-operatives and establishment of a fund ―FIMPE‖ for rapidly expanding POS terminals.

Description Payers and payees need to be confident that their interests are protected when a particular payment instrument is being used for settling their mutual payment obligation.

These interests include receipt of actual funds as per agreed timelines, protection from operational errors/fraud, and that only the agreed-upon cost is charged. The intermediaries and service providers also need a clear and predictable legal environment, wherein they are clear about their obligations and also how any disputes that arise would be settled.

The legal and regulatory environment includes laws, regulations issued by the central bank or other regulatory bodies, and the set of rules, standards, and procedures agreed upon by the participants of a payment system and between providers of payment instruments and services and their subscribers.

Increasingly, laws with specific applicability to payment and settlement systems are being developed—as opposite to laws of general applicability to all relevant sectors of the economy—to address in a more precise way the specificities and particularities of payment systems and services. Some of the most relevant legal provisions supporting a

well-functioning retail payments market include:

 Recognition of electronic payments as valid means of payments, including the responsibilities and rights of the parties involved.

 Acceptance of digital signatures, digital records, and digital exchange of payment instructions as equivalent to their physical equivalents. Likewise, recognizing frauds made with or through these elements as crimes and typifying them.

 Finality of the settlement of positions stemming from clearinghouses and other clearing mechanisms.

 A designated authority, usually the central bank, vested with oversight powers.

 Recognition of payments as a business service that has a number of functions that can be regulated and overseen separately from some of the other traditional banking functions such as lending or deposit-taking.

 Adopting a regulatory framework that is proportionate to the nature, scale, and risk profile of the various types of payment service providers.

 Creation of an enabling environment for innovation, including provisions guarding against anti-competitive practices and ensuring consumer protection.

While laws are normally the appropriate means to enforce a general objective in the payments field, in some cases regulation by the overseers might be an efficient way to react to a rapidly changing environment. In other cases, for example for detailed operational issues and scenarios, specific agreements among participants might be adequate. In this case, an appropriate professional assessment of the enforceability of these arrangements is usually required.

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