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THE WORLD BANK AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TRAINING COURSEREFORMING PAYMENT AND SECURITIES SETTLEMENT SYSTEMS Washington, D.C., November 3-7, 2003

POLITICAL AND INSTITUTIONAL ENVIRONMENT

Mario Guadamillas, World Bank

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Content

A.What is the political and institutional

environment?

B.What are the main issues from the

political and institutional

environment affecting a National

Payments System (NPS) reform?

C.Conclusion

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A. POLITICAL AND INSTITUTIONAL ENVIRONMENT

Country demographics and physical infrastructureSize, population, GDP per capita, urban vs. rural

population, literacy rates, access to internet, etc.

Transport system, mail system, electricity supply, telecommunications network, degree of automation, etc.

Involvement in international trade and financial transactions

Macroeconomic frameworkHigh-middle-low income country

Macroeconomic indicators (GDP growth, inflation, unemployment, public sector deficit)

Monetary, exchange rate and fiscal policies

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A. POLITICAL AND INSTITUTIONAL ENVIRONMENT

Financial sectorLevel of development of financial sector

Stock Exchange vs. OTC markets

Level of development of the interbank money market

Legal and Regulatory frameworkLaws and regulations

Contracts

Judicial systems

Oversight/supervision

Enforcement

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A. POLITICAL AND INSTITUTIONAL ENVIRONMENT

StakeholdersGovernment (central bank, supervisory agencies,

Treasury, etc.)

Banking industry

Stock Exchange

Other players (securities dealers and brokers, etc.)

Business perspectivePayment instruments

Payment practices

Processing systems and procedures

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B. COUNTRY DEMOGRAPHICS AND PHYSICAL INFRASTRUCTURE

Payments systems have been normally created on ad hoc basis in response to specific requirements, thus, adding institutional and functional complexity (lack of a driven strategic approach)

Continuous decline in the cost of information technology and telecommunication services

Increasing access to internet is introducing changes in the business landscape resulting from the development of business to business (B2B), consumer-to-consumer (C2C), consumer to small business payments, among others

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B. COUNTRY DEMOGRAPHICS AND PHYSICAL INFRASTRUCTURE

Rapid development of communication networks accelerates the trend toward the creation of new payment and settlement systems

Automation is widespread but not uniform, particularly, at the retail level, reflecting continuing customer preference for paper-based instruments

The internet model dissociates the network from the physical infrastructure. Its development is no longer controlled by a single entity or even a group of entities, and thus allows interconnection between heterogeneous networks. Security remains the paramount issue (financial, technological, operational and legal risks)

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B. INTERNATIONAL TRADE AND FINANCIAL TRANSACTIONS

Deregulation and globalization have led to a spectacular growth in the value of non-trade related financial transactions, settled through electronic large value payment systems

The increasing emphasis on non-trade-related settlement has created an agenda of concerns which are increasingly divorced from the issues faced by businesses and individuals seeking to make low-value transfers

Different acces to payments between large multi-national corporations (trade within their own network of subsidiary companies) and SMEs

Changes induced by the implementation of several global initiatives to increase efficiency and reduce risks (e.g., CLS Bank)

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B. MACROECONOMIC FRAMEWORK

Unstable macroeconomic conditions (e.g., hyperinflation) have incentivated ad hoc improvements on payment systems but made difficult a strategic approach

Recent developments on payment systems made them resilient to financial crises, thus, financial sector crises have been reflected on them but they have not been the cause and/or exacerbated the crisis

Economic policy mix important to design the payments system, that should be neutral in this regard

E-money: A further evolutionary state from fiat money, a monetary system in which convertibility into legal tender ceases to be a condition for electronic money

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B. FINANCIAL SECTOR

Changes in the industrial organization of the sector, banks look for economies of scale via consolidation and economies of scope deepening the universal banking model

Stock exchanges and pension funds are also consolidating, following the liberalization of access and deregulation of brokerage commissions

Changes in the output-mix with development of new banking products and decline of others (e.g., checks)

Rapid process of globalization of financial institutions through cross-border investments

Increasing cost pressures on payment system providers because of a much lower interest rates environment

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B. LEGAL AND REGULATORY FRAMEWORK

Legal certainty, clear property rigths and enforceability of contracts are preconditions for well functioning payment systems

Important implication of electronic trading for the contract law, which attaches great importance to the existence of an offer and acceptance, as evidence that the parties to an asserted contract have in fact agreed

Trading takes place global while underlying legal systems continue to be domestic

Absence of a unique framework

Problems with legal certainty in collateralized transactions

Uneven application of national conflict of law rules

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B. STAKEHOLDERS

Provision of payment services is not the exclusive domain of banks

Differences among countries in organization of payment systems and level of interbak cooperation, reflecting the underlying structure of the banking industry

Delicate balance between cooperation and competition. Importance of interinstitutional arrangements (e.g., securities depository)

Central bank oversight role focused on large value payment systems (financial stability) less on retail systems

Restricted access and cooperative governance by financial institutions are being challenged, large users, industrial corporations or big retailers want direct access and a say in governance

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B. BUSINESS PERSPECTIVE

Proprietary closed networks have been developed by financial institutions to handle large and increasingly internationally based payment systems. Underlying technology is often mainframe-based with communications restricted to leased circuits

Paper-based non-automated payment systems remain an established part of accepted business practice for varying institutional reasons, thereby remaining ingrained in the economic system

Internet has become an important delivery channel well suited for the provision of standardized and commoditized financial products and services

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C. CONCLUSION

The environmental aspects are changing continuously and quickly, thus, the payments system reform should be considered as an on-going process to adapt the systems, their regulation and their oversight to the new emerging needs of users