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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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It is increasingly accepted that the central bank should play a central role in oversight of all payment systems due to its stake in the confidence in money and functioning of commerce.81 In practice, however, there are significant cross-country differences in the extent to which central banks have legal authority in the oversight of retail payment systems and arrangements.

It is nevertheless a fact that central banks in all regions of the world are paying increasing attention to retail payment systems, and are undertaking certain oversight activities in this area regardless of their specific legal mandate. For example, central banks with a weak or non-existent legal mandate for overseeing retail payment systems are opting for so-called ―soft‖ or less interventionist oversight tools such as monitoring and engaging in dialogue with market participants. Many central banks also act as catalyst or facilitators, promoting public policy debate via relevant research, by establishing cooperative and consultative arrangements with the private sector, and by driving the adoption of better infrastructure or common operating standards and practices. Central banks with stronger legal mandates also have at their disposal more interventionist oversight tools such as the possibility to issue regulations and sanctions.

In the case of retail payments, there is usually a need to reconcile multiple public policy goals relating to safety and efficiency, information transparency, reliability, infrastructure development, access, and socially optimal usage of payment instruments and related See Bossone and Cirasino 2001.

infrastructures.82 Apart from the need to prioritize or choose among these objectives, transforming them into specific policy actions can be a difficult task.

First, as discussed under Guideline 4, retail payments are usually characterized by certain dynamics, market complexities and particularities for which there is no standard approach or policy response. Moreover, some of the public policy goals mentioned earlier are not the sole or even a direct responsibility of the payment system overseer.

For example, while the central bank in its role as overseer is clearly interested in avoiding anti-competitive practices that may lead to lower levels of efficiency, the regulatory powers or tools to act upon such practices will more likely be vested in a different authority, such as the antitrust agency and/or the consumer protection agency.

Coordination and information sharing amongst the relevant authorities is therefore crucial, and a key challenge for effective oversight.

Possible Actions Given the multitude of objectives and actors involved in retail payments systems, a clear oversight framework is required to, among other basic objectives, ensure proper coordination and resolution of collective action problems.83 Although the central bank should be expected to lead oversight activities, the overall framework should also consider the role of other authorities, where applicable, in attaining the public policy objectives for the retail payments market.

In order to substantiate the need for public intervention, evidence of the type and extent of market failure needs to be documented. One approach in this regard is to conduct a detailed study of the retail payments market through data collection, analysis of relevant literature, and interviews with a broad set of key market players, and to compare the situation in the country to international peers. The PSDG, in association with the European Central Bank and the Central Bank of Brazil, have recently developed a ―Practical Guide for Retail Payments Stocktaking Retail Payments Stocktaking‖ (see Box 11).

Any direct intervention should be assessed within a cost-benefit framework: For this purpose, the welfare costs of the identified market failure and the benefits from its partial or full correction should also be estimated. A cost-benefit analysis is also useful to determine priorities when several direct interventions are being considered. The rapidly changing nature of retail payment markets should also be recognized and considered in the analysis.

For a discussion of public policy objectives in payments systems, see Bossone and Cirasino 2001.

Some of the main building blocks for an oversight framework are described in CPSS 2006, and Bossone and Cirasino 2001.

Strong cooperative mechanisms are crucial for effective oversight. These include mechanisms whereby stakeholders may voice their views to authorities on the design and evolution of retail payment systems, and mechanisms to coordinate regulatory functions amongst the various authorities.

Box 11: A Practical Guide for Retail Payments Stocktaking

Guideline 1: The overall scope and structure of the stocktaking exercise shall be driven by the high-level public policy goals set forth. The public policy goals would vary from country to country, but in general are associated with the safety and efficiency of retail payment systems in the country. Some other relevant public policy areas in this area may include increased access and affordability, the availability of a socially optimal mix of payment instruments, and the availability of the required industry infrastructure to process such payment instruments. The retail payments stocktaking exercise should be designed so as to enable a clear understanding of the issues and areas of improvements required for achieving the stated public policy goals. The scope should be broad-based and should be developed in close co-ordination with all stakeholders.

Guideline 2: Adequate attention needs to be devoted to the planning and organization of the stocktaking exercise. Retail payments stocktaking is a complex undertaking requiring meticulous planning and active involvement of numerous stakeholders. A wide range of information sources should be used, including the information available in the broader payment systems community and also other sources. This information helps in benchmarking the status in the particular country.

Where obtaining direct data might be difficult, information from other sources will help in assessing the intended aspects or variables in an indirect manner.

Guideline 3: Involve the industry players from the very early stages. The retail payments industry will require adequate background information and sufficient time to ensure availability of good quality information when the stocktaking exercise is rolled out.

In addition, the central bank should actively seek dialogue with industry participants as the latter can provide valuable inputs in structuring the exercise, including agreeing on certain common terminologies and helping to determine the appropriateness of the data being required as well as the feasibility of obtaining such data reliably.

Guideline 4: Obtaining sufficient, high-quality data and other types of information is at the heart of the stocktaking exercise. The collection, organization, validation and analysis of data is a critical part of the stocktaking exercise, and is probably the most resource-intensive one. Appropriate human and technological resources should therefore be devoted to this element of the exercise, including a strong emphasis on validating the data received from the industry. A retail payments stocktaking exercise is also not a one-off exercise; hence, an approach to enable comparison across iterations to measure evolution should also be considered.

Guideline 5: Report preparation and strategy for the wide dissemination of results.

Being able to properly document and communicate the results of the stocktaking exercise as well as the alternatives available to address the underlying shortfalls is of outmost importance. A carefully designed strategy for the communication and dissemination of the Diagnosis Report should be developed to provide useful feedback to the various stakeholders and relevant information to the overall public.

V. Implementing Reforms for Retail Payments

The CPSS and the World Bank‘s PSDG, among others, have developed specific guidance for the reforming of the national payments systems that has been tested successfully in many countries and under many different circumstances.84 This chapter presents the same overall framework with the necessary adaptations to reflect the particularities associated with retail payments and their development.

The implementation of any significant national retail payments system development initiative should be based on a strategic, well-structured development plan. The key

components of this plan include:

 Stocktaking of current situation;

 Creating appropriate internal organizational arrangements;

 Developing an appropriate coordination framework to involve all stakeholders;

 Developing a common vision of the desired end state;

 Developing an implementation plan after agreement on actions that need to be taken and their priorities; and  Monitoring progress.

Each of these steps is described below.

V.1 Stocktaking To get a good understanding of the prevailing state of retail payments system in a country and to achieve the desired state for retail payment systems, it is important to fully understand the dynamics that prevail in the existing market for retail payments so that appropriate reform initiatives can be designed. Stocktaking of the prevailing state of

retail payments system would involve:

 Identifying and unambiguously classifying the various types of instruments available for retail payments, the institutional as well as the clearing and settlement arrangements for processing these instruments, and their usage statistics, including the typical processing costs;

 The payment needs which are currently met largely through cash-based payments, paper-based payments, and electronic payments;

 The general trend in the processing costs, recent improvements and new features introduced for these payment instruments;

 The level of customer disputes, frauds and other risks related to usage of these payment instruments;

 Patterns in the usage and adoption levels of these payment instruments— geographic, socio-economic, or transaction size; and Annex 5 presents the relevant section of the CPSS General Guidance for National Payment System Development. Annex 6 presents a summary of the strategic framework for payment system modernization developed by the Southern Africa Development Community (SADC).

 The levels of overall population access to the payment instruments under the overall context of financial inclusion objectives.

Stocktaking exercises should be done periodically to measure progress over time and also identify new developments and trends. As discussed under Guideline VI, The World Bank, in association with the Central Bank of Brazil and the European Central Bank/Eurosystem, has developed a set of practical guidelines for effective retail payments stocktaking (see Box 11).

V.2 Establish Appropriate Internal Organizational Arrangements A retail payments system development plan ideally needs to be part of an overall NPS development plan and hence can leverage the organizational arrangements already in place. Moreover, reforming retail payments system in isolation without consideration to other aspects of the payment systems may not yield the intended results. For example, several structures that are created for the overall reform such as internal and external working groups and other cooperation bodies can be leveraged with some minor rearrangements to also support retail payments system reform efforts.

Central banks would also need to ensure appropriate internal staffing before embarking upon a comprehensive retail payments system development plan. For example, a payment systems policy department or unit with no operational responsibilities is typically well positioned to lead the retail payments system reform. Where such a step is not possible right away, as an interim measure, the central bank may consider creating an empowered committee comprising senior central bank officers from the various relevant departments such as legal, policy management, operations, and technology.

V.3 Develop an Appropriate Coordination Framework with Key Stakeholders Comprehensive reforms of retail payment systems require significant coordination with many stakeholders. These include commercial banks, some non-banking financial institutions, retail payment services providers including any new players such as telecom companies, the national treasury, and other government ministries involved in social benefit transfers, major billers like utility companies, merchant associations, and representatives of final users (including consumers).

A national payments council (NPC) led by the central banks that includes all the relevant institutions previously described has proven an effective arrangement for coordination of such a variety of stakeholders.85 For retail payment reforming, a specialized committee The existence of a NPC seems to be not too common, in the response to the World Bank Global Payments Survey 2010, only around 40 percent of the central banks mentioned existence of NPC in their jurisdictions.

within the NPC is normally most well positioned to discuss the specific matters related to this sector. Appropriate levels of representation for effective decision-making and the active involvement and leadership from the central bank to build wide support for the various reform initiatives are among the key elements to this committee‘s success.

V.4 Developing a Common Vision of the Desired End-state Envisioning the desired state of retail payments system assists in catalyzing action and serves as a reference point for all future endeavors. The desired state of retail payments systems might vary from country to country/region to region depending on a variety of factors.

In general, developing a vision for retail payments system should consider the following


 The desired level of penetration of electronic payment mechanisms;

 Reducing the cost of retail payments to the society;

 Payment mechanisms being able to meet the payment needs of individuals and businesses;

 Appropriate levels of customer satisfaction; and  Continuous innovation and improvement in the retail payments area.

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