The role of central banks in retail payments

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The role of central banks in retail payments

• Robert Lindley
• Deputy Head, CPSS Secretariat
• Regional workshop on reforming payment and
  securities settlement systems for the Middle East
  and North Africa
• Bahrain, Thursday 17 March 2005

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What are retail payments?

• Low values, large numbers
• Used by everybody
• Wide range of contexts
• Wide range of instruments

Compared to large-value payments large values,
small numbers, mostly by financial institutions
for market transactions, mostly credit transfers
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Is there a real difference?

• More a matter of degree
• A payment is a payment is a payment ..
• Retail is more diverse
• But key issue is cost speed and security
• In the future, cheaper IT may make this matter
  less
• Some RTGS systems already handle retail payments
  in off-peak hours

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Central bank approach to payment systems

• Payment systems are important
• Normal philosophy markets work best
• But sometimes there are market failures
• Negative externalities (especially systemic risk)
• Network effects
• Monopoly
• May justify central bank intervention

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Forms of intervention(or modes of engagement)

• Service provider and operator
• settlement accounts (settlement asset)
• system operator
• nb some operational involvement does not
  reflect current market failures but, instead,
  past failures or a different philosophy
• Catalyst (may be part of oversight)
• Overseer
• a function whereby objectives of safety and
  efficiency are promoted by monitoring existing
  and planned systems, assessing them against these
  objectives and, where necessary, inducing change
  (forthcoming CPSS report on oversight)

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Central bank policy objectives

• Intervene to achieve what?
• Some common ground safety and efficiency
• What is the focus of these two objectives in the
  case of retail payment systems?

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• Efficiency
• All payment systems
• Significant costs are involved
• Economic needs must be met
• So important choices must be made

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

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• A difference of emphasis
• Although all central banks have safety and
  efficiency objectives, some
• - give primacy to safety
• - interpret safety to mean systemic risk only
• and thus do not actively oversee and/or operate
  retail systems

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Trends in retail payments with possible policy
implications

• Pace of change is relatively slow consumer
  conservatism, need to reach interbank agreement,
  costs, need for new laws etc
• IT innovations (eg paper to electronic)
• Cross-border developments (eg euro area)
• Market structure changes (eg consolidation)
• New participants (eg non-banks)

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Policy issues

• Implications for efficiency are generally
  favourable (although may need to draw a
  distinction between benefits for banks and those
  for customers) but risk implications are often
  unclear.
• Legal and regulatory
• Market structure and performance
• (balance between competition and cooperation)
• Market infrastructure and standards
• (technical issues)
• Central bank services

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Legal and regulatory issues

• Legal and regulatory provisions may fail to keep
  pace with payment innovation
• eg e-money, electronic signatures, cheque
  truncation
• Inadequate safeguards against criminal use
• Cross-border payments may be a problem
• Legal and regulatory provisions may create
  unwanted entry barriers (eg for non-banks)

Any issue where laws and rules are drafted for
instruments, systems or participants that are no
longer completely relevant
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Market structure and performance

• Balance between cooperation and competition
• competition usually good for innovation and
  efficiency
• but too much competition may cause risk
• and competition needs to be tempered with
  cooperation
• but too much cooperation may cause
  inefficiencies (eg access restrictions,
  lack of innovation)
• Demand as well as supply transparency of service
  and price
• and structure of pricing

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Market infrastructure and standards

• Adequate security
• Adequate operational reliability
• Standards, especially for interoperability
• Governance structures

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Central bank services

• Need to keep pace with market developments
• Facilitate innovation and competition?
• eg access, providing credit, operating hours
• Contain moral hazard and credit risk?
• Transparency

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Public policy goals

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

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Recommended minimum actions by central banks

• Actions will depend on
• the central banks responsibilities
• the seriousness of any market failures relevant
  to those responsibilities
• the available tools (under the operate/catalyst/ov
  ersee headings)
• Minimum actions are
• Monitoring
• Cooperate and advise (re the market and re other
  authorities) - catalyst role

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Possible additional actions
Depending on market conditions and on central
banks responsibilities and powers

• More proactive catalyst/facilitator activity
• Intervention as overseers
• Intervention as service providers and operators

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Summary

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