1. 1 Main Elements and Issues in Retail Systems Regional Workshop on “Reforming Payment and Securities Settlement Systems” Manama, Bahrain, March 17, 2005 José Antonio García

2. 2 Key Considerations Payment Services Providers Customer Demands Payment Instruments and Systems Cheques Systems Direct Funds Transfer Systems Card Systems Other Products and New Access Channels Contents

3. 3 A wide range of payment instruments is essential for supporting customers’ needs in a market economy. A less than optimal supply of payment instruments may ultimately have an impact on economic development and growth. Moreover, the safe and efficient use of money as a medium of exchange in retail transactions is particularly important for the stability of the currency and a foundation of the trust people have in it. Key Considerations

4. 4 Although the use of retail payment instruments differs across countries, some common trends may be observed: the continued primacy of cash (in volume terms) for face-to-face payments; growth in payment cards use; increased use of direct funds transfers, especially direct credit transfers, for remote payments; changes in the market arrangements for providing and pricing the retail payment instruments and services delivered to end-users. In an increasing number of countries more and more attention is being devoted by authorities and market participants to the efficiency and efficacy of the production and distribution of payment instruments (including cash). Key Considerations

5. 5 Payment Services Providers Retail Payment Services: One of the major sources of revenues (and costs) for banks. Many innovative products and services Innovations in retail payment technologies and services also open new possibilities for banks to reduce costs in other fronts (e.g. having to maintain a large branch network) New technologies are erasing traditional time and space barriers New players: a threat to traditional banks Costs and benefits: competition vs. cooperation / efficiency vs. risk

6. 6 Customer Demands Customers expect a set of convenient, cheap, reliable and predictable instruments to cover their most important payments needs, including: –face-to-face-payments –one-off and recurring remote payments –ATM cash withdrawals From another perspective, retail customers expect: 1) security and predictability; 2) certainty of payment; 3) convenience and universality; 4) low cost; and, 5) increased payment speed

7. 7 Customer Demands Security/safety and Certainty of Payment are key because they are the basis of user confidence in any payment system Thus, user confidence must be established that: –The correct amount will be paid –The correct party will be paid –Payment will be made on the correct date –Clear understanding when payment finality (non- revocability) occurs –The system is taking all the necessary steps to protect its customers against fraud

8. 8 Instruments and Systems

9. 9 Cheques Cheques still used intensively for retail payments, although declining (as a share of total retail payments) in some countries Why cheques are still major payment instruments for retail transactions? –Pricing issues: in general, the full or even partial processing costs are not transferred directly to consumers (i.e. fees directly related to cheque usage). In many cases, cheques appear cheaper to consumers than other, more efficient, payment instruments –Still low degree of “bancarization” in developing countries

10. 10 Cheques Why cheques are still major payment instruments for retail transactions? (cont…) –In some countries, a variety of services related to cheques have been implemented that promote cheque usage. For example, post-dated cheques, cheque guaranteeing services, etc. –Improvements to cheque processing and clearing to reduce costs and time for final accreditation. –Such improvements not only make cheques more attractive, but also divert resources that could be used to develop alternative payment methods and systems

11. 11 Cheques Why cheques are still major payment instruments for retail transactions? (cont…) –Key payment system users like governments (mainly local) and other public agencies (e.g. social security institutions) still make their payments with cheques. –Insufficient consumer education –Laws and regulations that do not support the use of paperless payment instruments –Unsafe and/or inefficient alternative payment systems

12. 12 Direct Funds Transfers Direct Credits are growing at a very fast pace in many countries Intrabank Direct Credits boosted by Internet Banking Interbank Direct Credits only recently (5 years or so) are becoming a major payment instrument –Improved ACH infrastructures: fuller standardization and higher STP rates are being achieved –Enhanced cooperation among banks to promote the use of fully electronic payment instruments

13. 13 Direct Funds Transfers Direct Debits also growing However, in many countries Direct Debits are still only available at the intrabank level or are related to credit card schemes In many countries, consumers are still reluctant to letting a third party (e.g. a telephone company) make direct charges to their bank accounts –There is a clear need for clear and effective system rules for customers being able to reverse undue charges quickly and at no cost. –In cases likes these, it is also key that the burden of proof does not lie on the consumer.

14. 14 Direct Funds Transfers Problems that hinder further progress (in addition to those identified in the cheques section): The existence of multiple systems for direct funds transfers. –This could mean, for example, that a payment made through Bank A (which is a member of system X), may not be accepted at Bank B (a member of system Y) –In some cases even the Central Bank operates a direct funds transfer system for the Treasury and other public entities. –In countries with small banking systems, this could make the ACH system for purely electronic payments unfeasible from a business perspective. –Alternatively, banks would have to invest in two different ACH platforms

15. 15 Direct Funds Transfers Problems that hinder further progress (cont…): Big retail banks’ attempts to block efforts in this area, since they perceive a well-functioning system could reduce the competitive advantage they have with a large branch network Incomplete standardization, leading to frequent errors and low STP rates Insufficient Central Bank leadership –Lack of coordination with the government and other major payment system users to channel their payments through the ACH –Inadequate system rules, governance, etc. –Central Bank unwilling to extend its settlement services to contribute to safe and efficient outcomes

16. 16 Card Systems The use of cards continues to grow worldwide –Cards are very flexible payment instruments, allowing for face-to-face payments, remote payments, direct debits, cash withdrawals, etc. –Cards are probably the only payments infrastructure with seamless domestic and cross-border processing Cards continue to be used more as indirect payment instruments, i.e., to withdraw cash from ATM machines, than as direct ones In many countries extensive ATM and EFTPOS networks already exist.

17. 17 Card Systems However, despite some improvements a sub- optimal use of the infrastructure and of card system efficiency potential persists –It is common to observe the existence of two or more ATM networks with no interconnection among them –It is also common to observe multiple EFTPOS devices at the same merchant, since certain card brands are not accepted by some acquirers –In countries lacking retail electronic payment instruments (e.g. direct credits), payment from the card issuer to the merchants are still made with cheques

18. 18 Card Systems Problems that hinder further card usage: Additional fees being applied when paying with credit/debit cards –To some extent, a problem related to tax evasion –Insufficient competition in the acquiring business –Additionally, merchants cannot be expected to absorb fully or even partially the fees applied by acquirers costs if they also have to bear the additional costs implied by an inefficient use of the available infrastructure

19. 19 Card Systems Problems that hinder further card usage (cont..): It is also common to see interbank obligations deriving from card schemes being settled at a commercial bank or with cheques Fraud still a major concern in card systems –Major card brands have been promoting migration from magnetic band to chip technology in an attempt to reduce fraud. –The process is very advanced in the EU and even in (few) developing economies like Brazil.

20. 20 Other Products and New Access Channels E-money, prepaid cards, software-based products –A new paradigm: payments made through an alternative value storing element (i.e., a chip), instead of cash (banknotes and coins) or transferable bank deposits –Multi-purpose vs. single-purpose –In general, these products still function on a limited basis because of insufficient infrastructure development –In part, the latter problem has to do with a multiplicity of standards and technologies (quick obsolescence) –Hence, these products are not widely accepted when buying goods and services, i.e. lack of “universality” –Also, at present they cannot be recharged easily

21. 21 Other Products and New Access Channels Mobile payments –Make use of payment instruments and clearing and settlement infrastructure already available (e.g., ACH for electronic funds transfers) –Therefore, it can be expected that these and other delivery channels will be rapidly and widely adopted in the near future