«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 ...»
World Bank research has shown that while a large number of countries have already implemented or are in the process of implementing successful payment system modernization reforms focusing on improvements to large-value payments systems, the area of retail payments has remained relatively underdeveloped in many countries.2 This is well illustrated in Figure 1.
Large-value payment systems typically process a relatively small number of high-value and time-critical payments. These systems are essential to the proper functioning of the financial system; a failure could trigger disruptions or transmit shocks, both at local and at cross-border level. These payments are also referred to as systemically important payments and include: interbank money market operations, the cash leg of securities trades, and the cash leg of foreign exchange trades. Some customer transactions may also be processed in large-value payment systems.
160 80% 140 70% 117.0 120 60% 60% 55% 100 50% 50% 45% 80 40%
However, this situation is changing. Indeed, in the last few years, a renewed interest in retail payments and retail payment systems has emerged, recognizing that such systems are very important in that they facilitate the conduct of commerce and improve the efficiency of both day-to-day transactions among consumers and businesses and the distribution and collection of payments made by and to government agencies.
Among other relevant elements, it has been widely acknowledged that moving from cash and paper-based instruments to electronic payment instruments is beneficial for the economy as a whole. Recent academic findings based on empirical data reveal that shifting from paper-based payments to electronic ones could entail yearly savings to a country‘s economy of about one percent of its GDP. This estimate is primarily attributed to savings in back-office operations, reductions in leakages of government benefit transfers and collections, and significant improvements in overall payment process efficiency.3 For example, a recent study by McKinsey et al. estimated that the Indian Government could save 1.6 percent of the country‘s gross domestic product for 2009 by moving all government payments to electronic payment mechanisms. In the same vein, a study done by the South East Asian Central Banks (SEACEN) research and training centre in 2008 estimated that the cost of cash handling in select Southeast Asian countries ranged from 0.29 percent to 2.23 percent of GDP. For additional information on these cases see McKinsey et al., 2010, and Choon Seng 2008.
From another perspective, retail payments are usually the point of entry to broader financial services. It is therefore paramount that the integrity of the design and operation of retail payment systems should cause the user to have complete trust in the institutions that provide the relevant services and on the payment mechanisms themselves.
Empirical evidence has also shown that providing broad-based geographical access to financial services to all consumers—including those currently unbanked—can be an important means of addressing poverty issues.
When taken together, all of these factors demonstrate the great importance of an effective retail payment system to a country‘s financial outlook and future.
I.2 Previous Work on Retail Payments by the World Bank and Other International Organizations In an effort to improve the understanding of retail payments, some international organizations such as the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements (BIS), the World Bank, and others have produced several key studies and publications in this field. In addition to providing invaluable input and guidance to modernization efforts, some of these publications now constitute best practice or standards for the design and implementation of payment systems.
In terms of creating a better understanding of retail payments across G-10 countries, the first step was taken by the CPSS in the mid-1990s, resulting in the 1999 publication of a comparative study for these countries.4 This was followed by two more publications in 2000 and 2003, with the latter drawing attention to policy issues for central banks with regard to retail payments.5 Since then, the debate on retail payments has intensified, with focus not only on payment instruments and consumer protection issues like user fees, but also on market trends, customer needs, and other relevant public policy issues. In 2006, the CPSS published the report ―General Guidance for National Payment Systems Development‖.6 This report identified 13 Guidelines that countries could use to plan the development of their national payments system. Guideline 11 specifically refers to retail payments, as follows: ―Expand availability of retail payment services.‖ In 2007, the CPSS and the World Bank jointly issued the ―General Principles for International Remittance Services‖.7 While international or cross-border remittances are the primary target of the General Principles, the report itself envisages applicability of the same to the broader retail payment systems market.
CPSS and The World Bank 2007.
Apart from the aforementioned effort, the World Bank, through its Payment Systems Development Group (PSDG), which is part of the Financial Infrastructure business service line in the Financial Inclusion practice of the Finance and Private Sector Development (FPD), has also been intensifying its commitment to promote and disseminate both policy and research on retail payments topics, with a special focus on the development of an effective national retail payments system.
In 2007, the PSDG published a new study, jointly with CEMLA, entitled ―Retail Payment Systems to Support Financial Access: Infrastructure and Policy".8 This study focused on identifying a set of common issues in retail payment systems in Latin America and the Caribbean, and on this basis, as well as other World Bank experience, proposed an agenda for retail payments system reforms in developing countries.
Moreover, in 2008 the PSDG published the study Balancing Cooperation and Competition in Retail Payment Systems: Lessons from Latin America Case Studies which defined a conceptual framework to identify the issues pertaining to the development of retail payments infrastructure, and proposed policy guidelines for use by the authorities and other stakeholders in implementing practical reforms to their retail payments mechanisms.9 Box 1: The World Bank Global Payment Systems Survey 2010 The World Bank‘s PSDG launched its second Global Payment Systems Survey in July 2010.
In all, 132 central banks have responded, representing 139 countries. As in the first iteration, the survey provided a snapshot of the payment and securities settlement systems worldwide and is also helping in identifying the developments in this field in the last few years.
The survey covered the following areas: legal and regulatory framework, large-value payment systems, retail payment instruments and systems, cross-border payments and international remittances, securities settlement systems, and payment system oversight and cooperation.
In addition, in recognition of the relevant innovation taking place in the retail payments arena and the interest on this matter expressed by local authorities as well as by international bodies such as the G-8 and the G-20, a dedicated questionnaire to capture developments in this space such as new products or innovations in processing was also included as an annex.
This additional questionnaire built on the CPSS Survey on Electronic Money and Internet and Mobile Payments from 2004.
The outcomes of the Global Payment Systems Survey 2010 are available at www.worldbank.org/paymentsystems. A separate publication on the specific outcomes of the questionnaire on innovations in retail payments will be released in 2012 as part of the set of documents being prepared by the PSDG to provide guidance on the development of effective retail payment systems.
In 2007 the PSDG also launched the first Global Payment Systems Survey, covering retail payment systems as well as several other elements of the national payments systems. In further work based on this survey, countries were ranked according to the Cirasino, et al., 2007 Guadamillas (study coordinator) 2008.
level of development achieved in retail payments as well as in other areas.10 A new version of the Global Payment Systems Survey was launched in 2010 (see Box 1).
Currently, the PSDG has developed a set of documents collectively referred to as the ―retail package,‖ which consists of this document and the following additional documents: ―A Practical Guide for Retail Payments Stocktaking‖ developed jointly with the Central Bank of Brazil and the European Central Bank; ―Legal and Regulatory Framework for Retail Payments – issues to consider and practical approaches,‖ which discusses the development of legal and regulatory framework that enables development of an efficient retail payments market; and ―Innovations in Retail Payments Worldwide: A Snapshot. Outcomes of the Global Survey on Innovations in Retail Payments Instruments and Methods 2010,” which was prepared in the context of the World Bank Global Survey 2010, and discusses the results of a specific survey on innovations taking place in the retail payments arena.11 Also worth mentioning is the fact that the CPSS has recently re-convened a retail payments working group to actively examine the scope for improvements in retail payments systems. The working group studied the recent innovations in retail payments and a report was published in May 2012. The PSDG is a member of this working group.
I.3 Purpose of the Report The Global Payment Systems Survey 2008 showed that the disparities between highand low-income countries in the area of large-value payment systems have been narrowing, mainly as a result of many middle- and low-income countries embarking on reforms in this specific area. Based on survey data, a country ranking exercise by Cirasino and Garcia, showed that many middle-income and low-income countries were in fact assessed at a high level or medium-high level of development for the large-value payment systems component.12 On the retail payments front, huge disparities were, however, noted between the highand low-income countries and between developed and developing regions. In the aforementioned country ranking study there were no middle-income and low-income countries ranked at a high level of development on the retail payments indicators, and the number of these countries rated at a medium-high level of development was also lower than for the large-value payment systems component.
These disparities can be attributed to a variety of factors such as: the slow development of infrastructure and access channels for electronic payments in most developing Cirasino and Garcia 2008.
Apart from these studies and research work, since the early 1990‘s the PSDG has assisted more than 100 countries in the design, development and implementation of comprehensive payment system reforms. For more information, visit the PSDG‘s website at: www.worldbank.org/paymentsystems.
Cirasino and Garcia 2008.
countries; limited development of the internal payments system in corporate, banks, and financial service providers; limited competition among banks and between the banks and other service providers; and absence of specific strategies for addressing these issues.
Also revealed by the survey is the fact that a significant number of central banks do not actively track the developments and market conditions for retail payments.
A specific thrust of the guidelines stemming from the 2008 study on cooperation and competition in retail payments was a discussion on the measures that could be taken to achieve the right balance between competition and cooperation, especially the benefits that can accrue through cooperative investments in basic infrastructure and as to how each institution might use the common infrastructure while still retaining its competitive advantage. It also explored two key public policy objectives that arise when designing retail payments systems, namely access to and affordability of payment services, and extent to which the trade-off between cooperation and competition can have an impact on the quality and accessibility of retail payments infrastructures.
Driven by these findings and others obtained through field work, and also drawing on work that has already been done in the retail payments arena in many developed countries, the PSDG has compiled this document with a view to: (a) analyzing the key obstacles and constraints faced by countries when promoting and adopting a modern retail payments system strategy; and (b) providing a basic framework for addressing these constraints to promote faster adoption of a comprehensive retail payments system improvement strategy. In addition to the analysis of the traditional retail payment instruments, this document also takes into account the importance and effectiveness of innovative payment instruments that have emerged in some markets to fill gaps in the existing payments landscape.
I.4 New Terminology and Definitions Used Throughout the Report The CPSS and other bodies have defined various retail payments-related terms. To a large extent, this document embraces these definitions. However, given the recent advances in the field, some new terms that have gained prominence in general discussions on retail payments by non-payment systems practitioners need to be formally defined. This section offers definitions for such terms. A few other terms are discussed in the appropriate place in the document and are included in the glossary (see Annex 8). It needs to be noted that these definitions are offered here for consideration by the payment systems community and broader stakeholders, and where there is no real consensus on a definition; the definition offered in this document should be seen as for the limited purpose of this document only.
A retail payment is often defined indirectly as anything that is not a large-value payment.