Modernizing payment systems in emerging economies

The authors address the following questions in this overview of payment systems: What is a payment system? How can efficient systems contribute to the development of modern, market-based financial institutions and markets? What elements are necessary for payment systems to operate efficiently? What are the operational characteristics of a modern payment system? What is the World Bank approach to selected payment system initiatives, design, and development? Effective, efficient payment systems, they conclude, are vital for the economic development of emerging economies. Efficient payment systems help promote the development of commerce, enhance economic policy oversight, control the risk inherent in moving large values, and reduce the financial, capital and human resources devoted to the transfer of payments. Many emerging economies lack the financial and technical resources to develop such systems. Many turn technical resources to develop such systems. Many turn to the World Bank and other international agencies for assistance. Unfortunately, some believe that the entire solution for an effective payment system rests in obtaining modern computer hardware and believe the World Bank's sole contribution is to finance hardware costs. Hardware procurement alone will not solve problems of payment systems. These countries need organizational plans and structure for national payment systems before they spend money on computer equipment. They often lack the expertise to design and operate modern payment systems, so they may need technical assistance from financial experts before they invest in systems development. The design of a new payment system should be kept simple. Many emerging economies lack the infrastructure and banking sophistication to leapfrog from basic to state-of-the-art payment systems. The first task is to fix the most serious problems. The second is to upgrade the current systems incrementally, to meet basic standards of timeliness, security, and reliability. As these improvements are made, the countries can turn their attention to long-term, advanced solutions. Each country's payments system is unique. To simply import another country's system without adjusting for the target country's geography, infrastructure, banking and legal structures, culture, and needs could lead to suboptimal solutions. Development of the system should follow a disciplined plan for defining the needs of users and for organizing the project team and project goals.Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Information Technology

Payment systems in Latin America : a tale of two countries - Colombia and El Salvador

Payment systems include all the paper (including cash) and electronic systems a country uses to exchange financial value to discharge obligations. Financial markets rely on promptness and certainty of payment and settlement for borrowing and investing. Consumers want convenience, choice (of payment options), privacy, and low cost. Inefficiencies in payment systems cause a drag on the national economy. The authors compare trends and areas for improvement in payment systems in Colombia and El Salvador, two countries that differ in size, volume of check-based transactions, and national issues. Check standards have developed slowly in both countries, which has retarded automation, particularly in Colombia, where the volume of checks handled makes manual processing unmanageable. Both countries need stronger leadership from central banks and bankers associations; incentives to adopt common check standards; streamlined check sorting and encoding, microfilming, and manual data processing; alternative (especially credit-based) payment mechanisms and private check-processing bureaus; and settlement of stock exchange transactions through several banks, rather than one bank. The countries differ in important ways: 1) it will be easier to reach economies of scale in check processing in Colombia (which has too many local clearinghouses) than in El Salvador (which has too few). Both countries need a more balanced approach; 2) same day payments are possible in Colombia; payments in El Salvador are next day, at best; 3) financial markets are less mature in El Salvador and may not need to be as sophisticated as markets in other countries; and 4) Colombia has yet to create effective disincentives for writing checks against insufficient funds. Both countries must take certain actions to develop a system for electronic payment and the settlement of payments at the central bank: 1) draft new laws and regulations; 2) provide more systematic data collection and analysis of payment flows; 3) undertake more risk analysis and prevention in the central banks and supervisory agencies, and draft contingency plans for major failures; 4) reexamine the dual roles of the central banks and other government agencies in operating and supervising payment systems; 5) review check-clearing pricing policies; and 6) analyze the economics of automating check processing.Banks&Banking Reform,Payment Systems&Infrastructure,Financial Intermediation,Banking Law,Economic Theory&Research,Payment Systems&Infrastructure,Banks&Banking Reform,Financial Intermediation,Banking Law,Economic Theory&Research

Brazil's efficient payment system : a legacy of high inflation

Brazil's efficient, highly automated payment system developed over many years in response to hyperinflationary conditions. The authors describe the system, its payment instruments, and its links to other networks and the government's payment and collections operations. They examine factors that have affected system development, planned innovations and improvement opportunities. The principal payment instruments used in Brazil are cash, checks, cobrancas (like European GIRO payments) and DOCs (Documentos de Credito). DOCs are used to make interbank credit payments, intrabank transfers of funds between a client's different accounts and client to client payments between parties with accounts at the same banking institution. Although they can be initiated on paper, all DOCs are electronic and processed only by banks. Networks include direct deposit and direct debit services, automated teller machines, credit cards and home banking services. The system is highly automated, with separate systems for clearing and settling checks and credit payments; government securities, private securities, state, local, and municipal securities; government payments; and foreign exchange. Among the lessons learned: a) banks can cut costs by cooperating on check processing and transportation; b) a broad, inclusive approach should be taken to modernizing the payments system, taking into account the needs of all users; and c) a wider menu of payment instruments should be offered.Financial Intermediation,Payment Systems&Infrastructure,Banks&Banking Reform,Banking Law,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,Banking Law