What About Payment System Integration? An Overview of Regional Experiences Presented at the World Bank Conference on Redefining the Landscape of Payment Systems April 7 10, 2009 Cape Town, South Africa By Sean O Connor Payment Systems Development Group World Bank Group
Motivation and Purpose Regionally integrated economies => emergence of new regional payment systems Why regionalize national payments systems? What are best designs for systemically efficient and safe regional payments system? Purposes of this presentation Report preliminary analysis of selected regional payments systems in place, starting up, and planned Overview of key high-level common and distinguishing features Set general context for region-specific presentations
Scope of Presentation Focus of presentation clearing and settlement processes in the regional integration of national systems integration => inter-linking of large-value payment systems for settlement of intra-regional cross-border payments Interdependency of systems via system-to-system linkage Potential further interdependencies via common commercial bank participants and/or 3 rd party users and/or service providers (e.g., CLS Bank, SWIFT) multiple potential inter-linking mechanisms
Why Integrate National Systems? Basic non-integrated system => correspondent banking system indirect 3 rd party linkage mechanism for national clearing and settlement systems bilateral decentralized, non-standardized, relatively unorganized system for cross-border payments Common issues: correspondent banking system high liquidity requirements in multiple currencies Long and unpredictable payment lags High all-in fees (i.e., stacked or layered service and messaging)
Factors Driving System Integration Regional economic and financial integration rising intra-regional trade, labor & capital mobility emergence of regional trans-national enterprises increasing institutional harmonization Greater regional political and social cohesion via cooperative monetary/payment arrangements an visible element in a larger social and political agenda for a particular region
Common Objectives and Constraints Specific objectives for regional payment systems lower relative costs and faster, more predictable payment services than correspondent banks provide support on-going regional economic and financial integration and development allow coordination of regional monetary policies and, in some cases, support a single regional currency Main design constraints build on existing national payments systems limit systemic risks via compliance with int l standards
Common Pre-Conditions and Pitfalls Pre-conditions for payment system integration Broad-based and forward-looking business case for integration of national payments systems Commonly accepted and well-specified objectives, constraints and expectations Harmonization of key institutional & structural elements in participating national systems Sustainable stakeholder commitment Common pitfalls => unsustainable commitment unrealistic expectations about net payoffs overly rapid expansion of participation with inadequate harmonization
Common Properties of Regional Systems Relative to correspondent banking systems greater standardization and centralization of clearing and settlement processes for intra-regional payments settlement liquidity concentrated around fewer currencies possibly a single currency higher level of coordination among national payment systems and often among monetary/fx rate policies Regional coordinating/clearing/settlement agent Direct participation of national central banks in most cases, along with commercial banks in some Cooperative oversight of the regional systems formal or informal
Organizational and Structural Models Main differences among RPS s range around: degree of regional centralization in overall clearing & settlement for intra-regional payments specific types of clearing and settlement services functionally centralized and left decentralized oversight arrangements for the RPS regionally cooperative or nationally based and informal
Main Features of Decentralized Structure Most decentralized: corresponding central bank system central communications network with bilateral account arrangements among member central banks final settlement usually on deferred gross bilateral basis in currency of the receiving central bank Centralization and standardization via common communications network use of single correspondent in each member country Principal gains for national commercial banks: lower operating costs & service fees, especially if central bank prices below full cost recovery standardization in message formats and procedures => faster payment settlement & some liquidity cost-saving
Main Features of Centralized Structure Most centralized: regional settlement bank & single settlement currency multilateral system with central banks holding settlement accounts at the regional settlement bank that operates the regional system settlement in a single currency on multilateral net basis, possibly with multiple daily settlement points Centralization and standardization via common communications network single settlement bank => single settlement account and single settlement currency and common rules & procedures single correspondent in each member country Principal gains/risks for central and commercial banks significant set-up costs but relatively low operating costs standardization, multilateral netting and single settlement currency => relatively significant liquidity cost savings concentration risk => systemic risk management and controls required
Overall Net Payoffs from Regionalization Many gross pay-offs externalized and implicit while most costs internalized and explicit hard to measure net gain from payment system reform independently of net marginal benefits of rising regional integration hard to assess allocation and alignment of marginal benefits and costs over the member countries Overall or net macro pay-offs vary in level and length of payback period according to type of regional payment system structure typically perceived as higher, but more gradual, with higher degrees of overall centralization Net macro pay-offs of regional payment system generally rise regionally as regional economic and financial integration grows
Final Points Excellent, more detailed, case studies to come Key general points to remember: forward-looking business case fundamental for RPS net pay-offs medium-to-long term with gains much more externalized than costs for direct participants level and speed of net pay-offs vary directly with degree of standardization and centralization as does concentration of risk and need for effective risk controls Credible and sustainable commitment required <= willingness to compromise somewhat on national policy Cooperative oversight critical to systemically efficient and safe regional payment system.
Some Issues for Discussion What other driving factors, objectives, constraints for regional payments system integration should be highlighted? What is most important pre-condition for success mentioned here or not mentioned? Are there other barriers or pitfalls to success and how might they be avoided or overcome? What is the minimum degree of standardization and/or centralization required for a regional payments system?