Shyamala Gopinath: Retail payment systems - select issues
Inaugural address by Ms Shyamala Gopinath, Deputy Governor of the Reserve Bank of
India, at the Regional Seminar on Payment Systems, jointly organised by the Reserve Bank
of India and the Bank for International Settlements, Mamallapuram, Chennai, 17 March 2009.
Assistance provided by Mr. K.N. Krishnamurthy, Mr. P. Vasudevan and Ms. Charulatha Kar in preparation of the
remarks is gratefully acknowledged.
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Ladies and Gentlemen,
It is indeed an honour to be the first speaker in a gathering of Payment and Settlement
System professionals who will be deliberating upon various issues that I am sure will go a
long way in strengthening the payment systems fabric in individual countries as well as in a
global context. In the context of an otherwise gloomy scenario in the global financial system,
the presence of robust payment and settlement systems infrastructure around the world has
been a matter of great solace.
As I can see from the agenda, fruitful deliberations on various issues concerning retail
payment systems will be the focus of this Seminar, which I consider to be highly appropriate
as it is an exciting and most happening area. Being the first speaker, I have an advantage - I
am not constrained by what has been said or covered before. Disadvantage though is not
having the benefit of a chartered path to cover. Let me make best use of the advantages. I
will share not only some of my perspectives with you but also present the relative status in
the Indian context.
The payment systems in any economy can be compared to the arteries in a human body. So
long as the arteries are performing their tasks silently and efficiently, the human body
remains healthy and their role is hardly noticed. Once they start clogging or malfunctioning,
they can impair and impact the efficient functioning of all other parts of the body. Similarly,
efficiently functioning payment and settlement systems often remain in the background, but
come to lime light when an inefficient payment system or any failure in any segment of
payment system causes ripple effects in the economy.
Depending on the nature or type of transactions that are handled by any payment system,
their importance to the larger financial system is determined which in turn influences the
extent of regulatory focus that is given to the system. Besides, inter-temporal and
interspatial developments in the context of payment systems further necessitate continuous
changes to be incorporated in regulatory attention too. Thus, in the initial stages of evolution
of oversight structure for regulation and supervision of payment and settlement systems, a
greater attention may be given to Systemically Important Payment Systems (SIPS) as
compared to retail payment systems, for obvious reasons, especially as these SIPS usually
handle payments of large value and settlement of inter-bank transactions emanating from
financial markets pass through such systems. However, as regulatory attention on these
large value payments get stabilised and simultaneously developments in retail payment
mechanisms evolve, the span of oversight attention widens to encompass these systems as
well. Let me briefly highlight some of the issues that merit attention in the context of retail
payment systems.
I am not sure whether a standard definition of "Retail Payment System" has been given
anywhere, but a reference to the "Glossary of terms used in Payment Systems" (by CPSS -
Committee on Payment and Settlement Systems) shows that "retail payments" are defined
as mainly consumer payments of relatively low value and urgency. Accordingly, "retail funds
transfer system" is defined as a "system which handles a large volume of payments of
relatively low value in such forms as cheques, credit transfers, direct debits, ATM and
EFTPOS (Electronic Funds Transfer at Point of Sale) transactions. Even going by this
working definition, what clearly emerges is that the user base for retail payment systems is
very large as they touch every economic activity in the country and even cross-border
transactions of such nature. In terms of volumes, paper-based and electronic retail payment
systems far exceed the large value payment transactions, while they may be lower in terms
of value.
Efficient retail payment systems bring in operational efficiencies for all commercial activities
and greatly facilitate e-commerce. Recent developments in payment systems, aided by
developments in information and communication technologies, have provided customers with
a wide array of choices, demanding greater levels of efficiency and safety in their operations.
Further, final settlement of transactions from many of these retail systems may also occur in
one or the other large-value payment systems, increasing their systemic importance. Thus,
such retail payment systems, even though they are not SIPS, can be aptly called as Systems
of System-Wide Importance. Oversight arrangements of such systems should, therefore, not
lose sight of this relevance of retail payment mechanisms in the larger economic context.
The presence of a sound legal framework greatly enhances the efficacy and efficiency of the
oversight function. In India, we have recently enacted the Payment & Settlement Systems
Act, 2007 - an exclusive legislation for regulating and supervising payment activities, with the
Reserve Bank of India being designated as the authority to do so. This legislation, not only
empowers the Reserve Bank of India to authorise, monitor and supervise various players
and infrastructural arrangements in place for payment and settlement systems, but also
eliminates certain ambiguities that existed in adherence to processes and procedures related
to payment and settlement activities.
Retail payment systems are growing in terms of their reach and variety - products, delivery
channels, number of service providers and diverse technological solutions. The rapid
migration from paper to electronic modes can largely be attributed to the extraordinary
growth in issuance and usage of cards (both debit and credit), increasing ACH transactions
(for repetitive bill and utility payments), multiple delivery channels (ATMs, net-banking and
core-banking solutions) and the changing appetite of the present generation of consumers.
What we are witnessing is the favourable shift from the beneficiary-initiated transactions
(from debit-pull in cheques) to the beneficiary-facilitated transactions (to credit-push in ACH).
This, to be precise, is what makes this segment most exciting to the players and most
challenging to the regulators. The responsibility of both, though, is to make it a win-win
situation to the users - by ushering products that are "competitive yet comparative", "unique
yet generic", "feature-rich yet cost-effective" and "comprehensive-in-coverage yet
transparent-in-content".
Under such a scenario, any country planning for an efficient payment system needs to put in
place a roadmap, which is often called as the "Vision Document". The vision document lays
out the future direction of the payment systems - which normally gives a reasonable
description of what could be expected in a span covering the next 3-5 years in various
segments, both wholesale and retail. This document is expected to represent the initial
direction of the approach of a central bank from the point of transparency of its policies.
Vision document would cover the aspirations and desires of the consumers, the service
providers, technological capabilities, global developments and domestic requirements. All or
major policy pronouncements thereafter would broadly traverse this path. In the Indian
context, the aspects outlaid in the "Payments System Vision Document" encompassing the
three-year period 2005-2008 have largely been achieved and we are now in the process of
framing the vision document covering the period up to 2011.
Given the wider range of economic activities that impact and in turn are influenced by the
presence of a safe and efficient retail payments infrastructure in the country, developments in
these systems can be harnessed to widen the scope of coverage of the services particularly
in the context of financial inclusion. In countries like ours, developments in retail payments
and their delivery channels can be effectively dove-tailed for bridging not only geographical
gaps but also in terms of extension of financial activities and access to these activities to a
wider section of society.
Payment and settlement systems in India have, and I am sure it is the case in many other
jurisdictions too, players that are common across the retail and wholesale segments. Access
criteria for membership to the clearing houses that provide the retail products (cheques,
ACH, etc.) and eligibility to offer various payment products (pre-paid instruments, mobile
payments, etc.) should be stringent enough to permit only strong entities with better risk
management practices to enter. What we should aim for is a level-playing-field with players
firmly-on-the-ground. Infirmities and arbitrage opportunities in one segment should not be
allowed to transcend into the other. Procedures should be in place to benchmark and lay
down the expectations and roles of different stakeholders in each product-segment. The
endeavour should be to correspondingly benchmark these requirements and standards with
international standards, wherever they are available. A word of caution - the international
standards and benchmarks, including vendor solutions operating elsewhere, have to be
dovetailed and customised to suit domestic requirements and situations.
Deliberations in Seminars such as these also need to highlight the need for a set of
standards or recommendations for best practices in the context of retail payment systems
just as the prescriptions in the context of SIPS or Securities Settlement Systems etc. May be
a beginning could be made along the lines of the European Central Bank's "Oversight
standards for euro retail payment systems" (June 2003) which seek to apply some of the
Core Principles for SIPS to specific retail payment systems as well depending upon the
assessment made by the central bank with respect to the systemic implication such retail
systems can have. In the Indian context, we have already made our electronic funds transfer
systems such as RTGS (Real Time Gross Settlement) and NEFT (National Electronic Funds
Transfer) compliant with the FATF (Financial Action Task Force) requirements on wire
transfers. We have also prepared bench mark documents covering cheque clearing - both
mechanical and manual, as also retail electronic products which cover the aspects of
minimum standards that have to be put in practice to ensure their efficient operations. These
benchmark standards are applicable to both the processing centres run by the Reserve Bank
as well as other commercial banks.
Another issue that merits attention is that of service charges. It can be argued that the
competitiveness and competition or a buyer's market would bring down costs in a
near-tomedium timeframe and definitely in the longer run. Yet, the fears of cartelisation, excessive
cost-recovery in the initial years and lack of transparency in the cost-structure are concerns
that need to be addressed. While the charges-framework should be remunerative to
providers they should not be prohibitive to users. The challenges lie in striking a balance
between cost and cost-recovery, including the issues relating to transparency in the charges
framework and rationalisation of charges across banks / service providers. In UK, the Office
of Fair Trading (OFT) has been addressing these issues. We, in India, have recently
mandated the service charges that could be levied by banks for providing electronic payment
products to their customers, as also for usage of shared-ATM networks by banks' customers.
Besides other kinds of financial risks and risk mitigation measures that need to be taken,
operational risk assumes significant importance in the context of retail payments and their
settlement mechanisms because of the wider scope of operations of such systems which is
not limited to a few players (unlike large-value or inter-bank payment systems). While Retail
payment systems need to be sized appropriately to handle substantial volumes and reduce
the load on large-value payment systems, appropriate and well-tested
business-continuityplans with sufficient built-in-redundancies should also be in place to ensure availability of the
retail payment systems in the eventuality of any disruption / contingency. I am sure important
issues such as process innovation, outsourcing, Business Continuity Planning etc will be
substantially covered during the seminar deliberations.
While banks and other financial intermediaries are often the major players in any payment
system arrangement, the role of non-bank operators such as technology and communication
service-providers, support services for ATM networks, issuance of pre-paid payment
instruments, etc certainly cannot be ignored. Modern payment systems, be it wholesale or
retail, depend extensively on technology and communications for their effective and efficient
functioning. The role of non-banks gains more importance when e-wallets and pre-paid
instruments are widely accepted as convenient channels of effecting payment; the impact of
such instruments in replacing the physical needs of cash in an economy is enormous and
warrants delicate policy handling.
Another issue that needs to be examined in retail payment systems, relates to the role of
industry organisations and self-regulatory organisations in meeting the expectations of
various consumer-groups, information dissemination, building awareness of the products
among the banks' operational staff, public and the like as also in promoting the usage
thereof. Consolidation of infrastructure and patronising umbrella organisations is what we
have been aiming at in India. Recently the National Payments Corporation of India (NPCI),
an umbrella organisation set-up by banks, has been institutionalised which is expected to
take over the various retail payment products operating in the country. Being an organisation
with banks as stakeholders, NPCI is expected to provide uniformity in operations, standard
operating procedures, and promote resiliency and efficiency of the retail payments
infrastructure.
The Seminar would also give us the opportunity of learning from developments in various
jurisdictions. UK has recently implemented the benchmark 24x7 system (known as Faster
Payments Service), wherein retail customers are in a position to transfer funds at any point of
time in a day, while the related inter-bank settlements take place only during the working of
hours of the RTGS system. Bank customers can initiate such transfers either through net or
phone banking. I believe the speakers from the People's Bank of China would also be
sharing with us their experience and success of similar systems implemented in their
country. In India, the NEFT (a retail electronic funds transfer facility), has six net settlements
during the day, for providing funds transfer facilities. This network handles transfer volumes
of around three million transactions a month, while that in UK, I understand, handles as high
a volume as five million a day.
As I said earlier, the issues are endless, and before I take your leave, let me flag a few
developments which are presently being considered by us. These relate to white-labelling of
ATMs (complete out-sourcing of most of the ATM-related activities by banks), cash
withdrawal at points-of-sale, transfer of social security benefits through electronic means,
hastening the migration of paper instruments to the paper-less mode, two-factor
authentication for use of cards, consolidation of infrastructure, supporting the need for a
single national-id for customer identification and KYC purposes, providing low-value
one-toone transfers on a 24x7 basis, etc. Giving a logical direction to settlement finality in
netsettlement systems by examining guaranteed settlement is yet another thought process.
Ladies and gentlemen, you would agree with me that the host of issues that revolve around
the retail payment systems cannot be addressed in a matter of few minutes. All that I have
attempted is to draw your attention to the important issues that any regulator needs to be
conscious about. I am sure over the next three days some of these issues may see solutions
emerging with your active participation. At the end of the Seminar, let us all hope to carry
with us sufficient knowledge to steer the course of the retail payment systems not just within
our jurisdictions but also strive to harmonise the efforts of retail payment activities across
jurisdictions.
Let me conclude by quoting what Leonardo da Vinci had said - "I have been impressed with
the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we
must do." What was true then is equally applicable today. I wish you all the very best and
happy deliberations.