Current Developments of Macedonian Payments Systems Toni Mircheski, Head, Payment Systems Oversight Unit 4th Conference on Payments and Securities Settlement Systems Ohrid, Republic of Macedonia, 20 June 2011

Agenda I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016

National payment system development process I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience National payment system development process The worldwide experiences show that there is no single formula for payment system development, but most of the issues that appear in the process of reform are similar. Example: Who should be involved and who should initiate this process? What are the investment priorities and are they based on solid knowledge of the payment system? What are the various infrastructure needs and what are their institutional support arrangements? 3 3 3 3 3 3 3 3

Factors and reasons for payment system reforms I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Factors and reasons for payment system reforms The success of the reform initiatives and results of the national payment system development depend on: -environmental factors, -economic factors, -financial factors and -public policy factors. 4 4 4 4 4 4 4 4

Factors and reasons for payment system reforms I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Factors and reasons for payment system reforms Demographic, geographic and social factors are among the most significant environmental factors that create individual development initiatives through their influence on the potential payment service demand. Economic factors include various market factors such as qualified workforce and industrial infrastructure such as telecommunications and transport. Financial factors include cost balance, benefits and risks surrounding the new payment instruments and services between providers and users who make decisions on investing in the development of these services. The important public policy factors are in correlation with the regulatory framework governing the national payment system and play a leading role in the provision of various payment services. 5 5 5 5 5 5 5 5

Factors and reasons for payment system reforms I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Factors and reasons for payment system reforms National payment system reforms result from: the higher awareness of the payment system risks and the concern about the financial stability; decisions on payment system policies for conforming with the international standards for payment system operations, sometimes related to the participation of the countries in regional integrations, global trade and financial arrangements; new development and enhanced needs of the users in the financial and nonfinancial sector which require new, efficient and low-cost payment instruments and services; extension of responsibilities of the central banks and the needs for payment. 6 6 6 6 6 6 6 6

Problems identified in the development of the national payment system I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Problems identified in the development of the national payment system Experiences show that the development process of the national payment system is not always steady and efficient. The largest problems for effective developments usually include: limited vision and conduct of development due to the limited understanding of the national payment system components (the most frequent expression of this limited understanding is that the payment system is a technique and the issues arising from its functioning are merely technical) limited understanding for the urgent payment needs and systemic possibilities; insufficient support and responsibility of the participants (banks) due to inadequate consulting process; restricted development of resources; legal, regulatory, public and market barriers for further development of the national payment system. 7 7 7 7 7 7 7 7

I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Generally accepted rules for development of the national payment system There are fourteen generally accepted1) rules for development of the national payment system which jointly reflect four crucial dimensions of the national payment system development, as follows: role of the banking sector efficient project planning and implementation development of institutional framework aimed to support the payment system reform and designing of safe and efficient payment infrastructure in order to meet the any extraordinary needs of the economy of the country. 1) CPSS (Committee on Payment and Settlement Systems). 2006. General Guidance for National Payment System Development. Bank for International Settlements. Basel, Switzerland (January). 8 8 8 8 8 8 8 8

I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Generally accepted rules for development of the national payment system А. Banking system Rule no. 1: Keep the central bank at the centre: due to its overall responsibility for a sound currency, the central bank has a central role in the development of the use of money as an effective means of payment. Rule no. 2: Promote the role of a sound banking system: payment accounts, instruments and services available to end users are provided by banks and other similar financial institutions, which compete individually but often need to act cooperatively as a system. 9 9 9 9 9 9 9 9

I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Generally accepted rules for development of the national payment system B. Planning Rule no. 3: Recognise complexity: planning should be based on a comprehensive understanding of all the core elements of the national payment system and the principal factors influencing its development. Rule no. 4: Focus on needs: identify, and be guided by, the payment needs of all users in the national payment system and by the capabilities of the economy. Rule no. 5: Set clear priorities: plan and prioritise development of the national payment system strategically. Rule no. 6: Implementation is key: ensure effective implementation of the strategic plan. 10 10 10 10 10 10 10 10

I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Generally accepted rules for development of the national payment system C. Institutional framework Rule no. 7: Promote market development: the expansion and strengthening of market arrangements for payment services are key aspects of the evolution of the national payment system. Rule no. 8: Involve relevant stakeholders: encourage the development of effective consultation among relevant stakeholders in the national payment system. Rule no. 9: Collaborate for effective oversight: effective payment system oversight by the central bank often requires collaborative arrangements with other authorities. Rule no. 10: Promote legal certainty: develop a transparent, comprehensive and sound legal framework for the national payment system. 11 11 11 11 11 11 11 11

I. APPROACHES TO THE DEVELOPMENT OF THE NATIONAL PAYMENT SYSTEM – international experience Generally accepted rules for development of the national payment system D. Infrastructure Rule no. 11: Expand availability of retail payment services: extend the availability and choice of efficient and secure non-cash payment instruments and services available to consumers, businesses and government by expanding and improving retail payment infrastructures. Rule no. 12: Let the business case guide the large-value payment system: develop a largevalue payment system based primarily on the needs of financial markets and the growth in time-critical interbank payments. Rule no. 13: Align development of payment and securities systems: coordinate the development of securities and large-value payment systems for safety and efficiency in the financial system. Rule no. 14: Coordinate settlement of retail, large-value and securities systems: the settlement processes for the core systems should be operationally coordinated to efficiently manage the interrelated liquidity needs and settlement risks among them. . 12 12 12 12 12 12 12 12

National Payment System Council of the Republic of Macedonia II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 National Payment System Council of the Republic of Macedonia The National Payment System Council of the Republic of Macedonia (hereinafter referred to as NPC) was established in October 2004 by adopting the Incorporation Act between the Governor of the National Bank of the Republic of Macedonia, the Minister of Finance and the President of the Bank and Insurance Association at the Macedonian Chamber of Commerce. 13 13 13 13 13 13 13 13

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Duties of the National Payment System Council of the Republic of Macedonia According to the Incorporation Act, the National Payment System Council of the Republic of Macedonia shall address issues tackling all aspects of the payment systems in the country, and particularly: -encourages cooperation between participants and competent market institutions (regulators) in the field of payment systems; -launches initiative to the competent institutions on adoption of payment operation regulations, and if needed, undertake initiatives for amendments to the existing laws and bylaws; -takes part in the preparation of the Payment System Development Strategy in the Republic of Macedonia; 14 14 14 14 14 14 14 14

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Payment System Development Strategy of the Republic of Macedonia, 2007-2011 Strategic guideline no. 1: Legal framework – harmonization with the European regulation Status: Ongoing 1. Regulations have been identified in the national legislature that need to be amended in order to be harmonized with the European regulation. 2. Technical assistance has been requested from the IPA 2007 funds of the European Union for implementation of Directive 64/2007/ЕС Strategic guideline no. 2: Definition of the role of the National Bank of the Republic of Macedonia in the payment systems (European context) Status: Completed. Decisions were adopted on the payment systems oversight and on payment system operations criteria and standards, and Instructions for assessment of the conformity of payment system operations with the standards. 15 15 15 15 15 15 15 15

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Payment System Development Strategy of the Republic of Macedonia, 2007-2011 Strategic guideline no. 3: Consolidation of the existing balance of payment operations accounts and their standard definition in consistence with their purpose as transaction accounts Status: Completed, within the period specified in the Payment Operations Law (end of 2007) Strategic guideline no. 4: Encouraging upward trends of cash-free payments Status: Ongoing Activities take place and are monitored through the work groups for Encouraging upward trends of cash-free payments, and active participation in creation of measures the implementation of which rests with the Government of the Republic of Macedonia 16 16 16 16 16 16 16 16

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Payment System Development Strategy of the Republic of Macedonia, 2007-2011 Strategic guideline no. 5: Harmonization of payment instruments and introduction of new instruments for the purposes of smooth and efficient transition from national payment infrastructure to Pan-European one. Status: Ongoing Work groups have been established that operate according to the NPC recommendations Strategic guideline no. 6: Introduction of e-money Status: Completed Provisions of the E-money Directives have been transposed to the Payment Operations Law and NBRM adopted a bylaw, making the E-money Directive fully transposed 17 17 17 17 17 17 17 17

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Payment System Development Strategy of the Republic of Macedonia, 2007-2011 Strategic guideline no. 7: Acceptance of international methodology and standards Status: Completed The NBRM adopted a Decision on payment system operations criteria and standards – Basic principles are being accepted as standards Strategic guideline no. 8: Transparency of payment service costs The Payment Operations Law includes provisions, and the NBRM supervises the banks on the implementation of their transparency obligations. 18 18 18 18 18 18 18 18

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Payment System Development Strategy of the Republic of Macedonia, 2007-2011 Strategic guideline no. 9: Definition of terms and functions of the payment systems and the securities settlement systems Status: Ongoing The new Payment Operations Law incorporates the payment system terms and functions. These issues require further permanent monitoring and implementation. Strategic guideline no. 10: Definition of the Treasury as a specific payment operations carrier. Status: Completed Implemented in the Payment Operations Law 19 19 19 19 19 19 19 19

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Payment System Development Strategy of the Republic of Macedonia, 2007-2011 Strategic guideline no. 11: Professional training, international cooperation, conferences, workshops, seminars Status: Ongoing Within the technical cooperation with de Nederlandsche Bank, 3 conferences for the work groups were held on issues for Strategy implementation (2008, 2009, 2010) Also, this 4th conference contributes to the international cooperation in the Southeast European region, in the field of payment systems and securities settlement systems. EU integrations are our mutual challenge 20 20 20 20 20 20 20 20

Strategy implementation II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Strategy implementation On 10.08.2007, on its 11th session, the NPC also adopted the Strategy Implementation Action Plan. According to the action plan, the NPC established the following work groups: Work group for electronic credit transfers; Work group for electronic direct borrowings; Work group for payment cards; Work group for cash; Work group for legal support; Work group for support of operations, infrastructure, technology and standards; Work group for encouraging upward trends of cash-free payments. 21 21 21 21 21 21 21 21

Strategy implementation II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Strategy implementation The work groups consist of representatives of the National Bank of the Republic of Macedonia, the Ministry of Finance, banks, Clearing House KIBS AD Skopje and Kasis AD Skopje. The implementation of Strategic guideline no. 5 (Harmonization of payment instruments and introduction of new instruments for the purposes of smooth and efficient transition from national payment infrastructure to Pan-European one) and Strategic guideline no. 1 (Legal framework – harmonization with the European regulations) rests with the work groups I mentioned above. 22 22 22 22 22 22 22 22

II. DEVELOPMENT OF THE PAYMENT SYSTEM IN THE REPUBLIC OF MACEDONIA 2007-2011 Expected outputs to 2011 Outputs of the work groups are development of individual SEPA plans for: - electronic credit transfers; - electronic direct borrowings, and - payment cards; These plans should be integrated in a National SEPA plan. This plan implies that a great Decision will be required after 2011 of all stakeholders (Government of the Republic of Macedonia, National Bank of the Republic of Macedonia and the bank community) to launch the second major reform of the payment system of the Republic of Macedonia for full implementation of the European standards. 23 23 23 23 23 23 23 23

1. Legal framework – harmonization with the European regulation III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 1. Legal framework – harmonization with the European regulation This strategic guideline was also included in the current strategy. That strategy remains effective in the future period to the membership of the Republic Macedonian in the EU.   It implies implementation of all EU Directives in this field of the legal system of the Republic of Macedonia. 24 24 24 24 24 24 24 24

III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 2. Harmonization of the payment statistics methodology with the methodology of the European Central Bank The implementation of this strategic guideline ensures timely methodological and operational readiness in terms of payment statistics of the National Bank of the Republic of Macedonia as a future member of the European System of Central Banks. 25 25 25 25 25 25 25 25

3.Encouraging upward trends of cash-free payments III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 3.Encouraging upward trends of cash-free payments This strategic guideline was also in the current strategy. The NBRM Payment Systems Department finds that there is still a room for implementation in the 2012-2016 period. The reduction of cash payments in the Republic of Macedonia requires activities for encouraging cash-free payments and convergence to the instruments of modern and developed market economies. 26 26 26 26 26 26 26 26

4. Acceptance of SEPA standards by banks III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 4. Acceptance of SEPA standards by banks This implies creation of individual SEPA plans for: electronic credit transfers electronic direct borrowings and payment cards These plans should be integrated in a National SEPA plan 27 27 27 27 27 27 27 27

5. Acceptance of international methodology and standards III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 5. Acceptance of international methodology and standards At the beginning of 2012, CPSS and IOSCO are expected to publish a single set of standards which will supersede the current standards of payment systems, securities settlement systems and CCP – Central counterparties.   These standards (Principles for Financial Market Infrastructures) will create a need of adequate adjustments by the central banks in their everyday operations, with more integrated approach to the implementation of standards, regulations and oversight of the financial market infrastructure. 28 28 28 28 28 28 28 28

6. Modernization of the Treasury System III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 6. Modernization of the Treasury System This strategic guideline implies modernization of the Treasury System, thus ensuring use of a single set of payment instruments in the Republic of Macedonia, i.e. uniformity of payments, regardless of the nature of payment. 29 29 29 29 29 29 29 29

III. FUTURE DRAFT STRATEGIC GUIDELINES – as a ground for Payment System Development Strategy 2012-2016 ????????????????????????????????????????????? These were draft strategic guidelines as a ground for consultation process which should include the central bank, the Ministry of Finance, the clearing institutions, banks and payment service users. We expect new proposals for strategic guidelines and / or modification of the proposals. The new set of strategic guidelines should be a basis for the future Payment System Development Strategy of the Republic of Macedonia in the 2012 – 2016 period. 30 30 30 30 30 30 30 30