1. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 1 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

2. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

3. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

4. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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”

5. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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)

6. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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?

7. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS Efficiency All payment systems Significant costs are involved Economic needs must be met So important choices must be made

8. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

9. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

10. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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)

11. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

12. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

13. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

14. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS Market infrastructure and standards Adequate security Adequate operational reliability Standards, especially for interoperability Governance structures

15. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

16. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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

17. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS Recommended minimum actions by central banks Actions will depend on the central bank’s responsibilities the seriousness of any market failures relevant to those responsibilities the available tools (under the operate/catalyst/oversee headings) Minimum actions are Monitoring Cooperate and advise (re the market and re other authorities) - catalyst role

18. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS Possible additional actions More proactive catalyst/facilitator activity Intervention as overseers Intervention as service providers and operators Depending on market conditions and on central banks’ responsibilities and powers

19. COMMITTEE ON PAYMENT AND SETTLEMENT SYSTEMS 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