Jon Nicolaisen: How important is it for a nation to have a payment
system?
Speech by Mr Jon Nicolaisen, Deputy Governor of Norges Bank (Central Bank of Norway), at
Finance Norway's payments conference, Oslo, 14 November 2019.
* * *
Please note that the text below may differ slightly from the actual presentation.
The payment system and Norges Bank
A nation needs to have a well-functioning payment system. Without fast, inexpensive and secure
payments, a modern society grinds to a halt. Users today have access to payment methods that
are dependent on large-scale IT systems to process payments efficiently. We need to ensure
that the payment system can adapt to new technologies and meet the needs of business and
consumers in the future.
The Storting (Norwegian parliament) has assigned Norges Bank the task of promoting an
efficient and secure payment system. This is clearly spelled out in the new Central Bank Act,
which enters into force at the turn of the year. Norges Bank is the operator of the payment
settlement system and supervises interbank payment systems. These operational roles may
take on greater importance in the coming years. Let me point out two trends.
First, we note increasing vertical integration in the payment market. Customer interface services
are becoming more tightly linked to the underlying infrastructure. We saw an example here in
Norway when Vipps merged with BankID and BankAxept. There is also a tendency for common
contractual arrangements that were previously situated with industry organisations to be
relocated to product companies. Another example is Apple, which is restricting which payment
services can be offered on its mobile devices. In addition, plans are constantly being launched for
new kinds of money and payment systems that offer both customer services and settlement,
most recently Libra, a venture backed by Facebook and other investors. As an authority
responsible for promoting an efficient payment system, Norges Bank needs to consider the
whole payments chain. We also need to ask ourselves whether it is enough to be a promoter and
regulator or whether we need to take on greater operational responsibility in order to perform our
social mission.
Second, changes are taking place in the ownership of critical parts of the payment system. A
relevant example is Mastercard's planned acquisition of one of the key parts of Nets. The Nordic
P27 initiative is hardly the last push for more international ownership of infrastructure for
payments in Norwegian kroner. At Norges Bank, we need to assess the best way for us to
ensure that society's interests are being safeguarded.
Future structure of real-time payments
Norway was an early adopter of digitalisation and its payments infrastructure has been
worldclass. We have reaped the benefits for many years. But then the development of common
infrastructure came to a halt. A number of neighbouring countries have built payment
infrastructures that in some areas are now ahead of ours.
Common infrastructure makes sense. It enables us to realise economies of scale, a
wellfunctioning payment network and a level playing field. Payment service providers will be able to
compete for customers supported by an efficient and secure system. Banks save considerable
sums because an extensive network of branches is no longer necessary. The infrastructure is a
collective good that benefits everyone.
It has long been our experience that industry operators come together and agree good solutions
in partnership with Norges Bank. But developments in technology and market structure, where
payment services are increasingly becoming a competitive arena, may hinder the emergence of
good common solutions. We run the risk that progress will slow and the payment system will
become fragmented because the common infrastructure is eroding. We must now consider
whether Norges Bank should take action to counter this fragmentation.
Future users of payment services will hardly be satisfied with payment transactions that take
several hours or days to complete. The infrastructure for real-time payments is therefore critical.
In 2016, Norges Bank took the initiative on a joint project with the banking industry to put in place
an improved real-time payment platform. In spring, Norwegian banks declined the invitation to
participate in the P27 project.
The soon-to-be-launched Straks 2.0 instant payment platform is an improvement, but not a
permanent solution for real-time payments in Norway. Among other things, it is not sufficiently
well-suited to business users. The question is how we proceed from here. It has proved to be a
challenge to drum up support for carrying out the necessary modernisation of the infrastructure
owned by industry bodies.
Norges Bank has launched a project to assess the payment and settlement system as a whole.
The aim is to ensure that we have an efficient and secure payment infrastructure also in the
future. Some key issues are:
Should our payment infrastructure continue to be all-Norwegian or could it be more
international?
In that case, how do we resolve the questions relating to national contingency
preparedness?
Should payments continue to be cleared between banks prior to settlement at the central
bank, or is it more efficient to settle payments one-by-one directly at Norges Bank?
When the current settlement systems were introduced, technological limitations and costs
placed restrictions on the volume of payments that could be settled in real time at the central
bank. The main rule has been for large interbank payments to be settled individually at the central
bank, while payments between banks' customers are sent to a clearing house before banks'
positions are settled at the central bank. At Norges Bank, these positions are settled five times a
day Monday through Friday.
Technological developments in recent years - with cheaper and more secure IT infrastructure -
now make it possible to settle retail payments as well directly and in virtually real time at the
central bank. Unlike the traditional settlement systems, the new systems can be kept open
around the clock seven days a week. This will pave the way for more efficient general purpose
infrastructures directly operated by central banks.
An increasing number of countries have put in place or are developing solutions like these. Even
in large economies with large payment volumes, round-the-clock settlement of all kinds of
payments directly at the central banks is being facilitated. In 2018, the Eurosystem launched
TARGET Instant Payment Settlement (TIPS). In autumn, the Federal Reserve announced that a
similar system called FedNow! would be established for settlement of real-time payments in US
dollars. Iceland already has a similar system The Riksbank is planning a transition to settlement
of real-time payments directly at the central bank by linking to the European TIPS system.
Settling real-time payments individually and directly at the central bank automatically eliminates
the credit risk between system participants. The system is simplified because banks no longer
need to take a detour via a clearing house. With fewer steps, the operational risk in the payment
system may also be reduced.
The EU Payment Services Directive 2 (PSD2) was implemented in Norwegian law with effect
from April 2019. One of the purposes of PSD2 is to facilitate greater competition and innovation.
Similar regulations are being implemented elsewhere in the world and may help enable new
entrants to gain a foothold in the payments market, whether they are global tech giants like Apple,
Google and Facebook or smaller, more local operators. New services and service providers will
require adjustments to underlying infrastructure and rules. Equal and transparent competitive
terms are crucial. At the same time, national governance, control and security considerations
must be addressed.
A neutral platform and set of rules at the central bank for the direct settlement of all payment
types is also in this context an obvious option which we are considering. For settlement of this
kind in Norwegian kroner at Norges Bank, one may envisage a system either directly linked to
Norges Bank's settlement system (NBO) or by linking to TIPS, as Sweden is now planning.
In the near future, we will begin a dialogue with industry representatives. Progress on further
modernisation of the Norwegian infrastructure must now be a paramount consideration.
Security and national governance and control
If a business enterprise performs tasks that are critical to the functioning of society, policymakers
need to assess the regulations and systems that are necessary to ensure adequate national
governance and control. This issue gains in relevance when more and more of our critical
infrastructure becomes a part of or is owned by global tech giants and payment companies.
The operation of ICT systems has largely been outsourced. This presents a number of
challenges. The private financial market infrastructure (FMI) owners in the payment system have
reported to Norges Bank that it is difficult to obtain necessary ICT expertise to operate and
maintain key functions. If ICT operation and maintenance are moved abroad, it may, in the short
term, provide access to better and more secure solutions. But we must also consider the
longterm consequences. Offshoring may impair the national capacity for systems operations,
development and follow-up. It may also become difficult for the Norwegian authorities to
coordinate contingency planning, if large parts of operations are managed from another country.
Norges Bank sets conditions for interbank systems when tasks are moved abroad. Among these
conditions are that hardware must be physically located in Norway. There must also be
contingency arrangements in Norway that in a crisis can quickly take over tasks that are
performed abroad.
Norges Bank is of the opinion that critical providers of services to the payment system need to be
more closely monitored. Norges Bank will, in consultation with Finanstilsynet (Financial
Supervisory Authority of Norway), examine the contingency arrangements and security of the
payment system's critical ICT service providers and data centres. This will not entail a change in
FMI owners' responsibilities for outsourced operations.
The banking and payment system in Norway is dependent on a very small number of ICT
providers and data centres that are also vital to other critical infrastructure. This systemic risk
needs to be followed up by the authorities. ICT service providers are not subject to direct
supervision in the same way as entities in the banking and payment system.
In its official report from last year, the ICT Security Commission found that the supervision of
subcontractors may present a challenge for a number of systemically critical institutions. The
Commission made no specific recommendations for how the challenges related to supervision
and regulation of critical ICT service providers and data centres should be followed up. In its
consultation response, Norges Bank wrote that the following points deserve particular attention:
The significance and management of concentration risk because many critical functions
rely on a small number of ICT service providers and data centres.
The supervisory frameworks for ICT service providers and data centres that are important
for key public functions, including the payment system.
Whether the contingency arrangements of key ICT service providers and data centres are
sufficient.
ICT service providers, FMI owners and financial institutions need to address cyber risks.
Finanstilsynet and Norges Bank have recently taken the initiative to engage in a dialogue with the
industry on whether to introduce a framework for testing cybersecurity in the banking and
payment system in Norway. This framework, called TIBER-EU, has been developed by the
European Central Bank (ECB). A number of Norway's neighbours, including Denmark and
Sweden, have introduced or are about to introduce the ECB testing framework, ie TIBER-DK and
TIBER-SE, respectively. Finanstilsynet and Norges Bank are planning to invite the industry to a
dialogue on this testing framework. It can also be used to bolster security linked to key ICT
service providers in the banking and payment system.
The government ministries are currently engaged in work to define which private entities are of
crucial importance to basic national functions and should be subject to the Security Act. A basic
national function is defined to mean that a total or partial loss of that function will have
consequences for the government's ability to protect national security interests. The purposes of
the Security Act include protecting critical infrastructure, critical public functions and sensitive
information from intentional, undesirable incidents. Norges Bank is providing the Ministry of
Finance with input in this effort. Clarification of which private entities come under the Security Act
may be of significance for Norges Bank's follow-up and supervisory activities.
New digital forms of money
I have so far discussed measures to strengthen bank deposit-based payment systems. Another
trend is the emergence of new forms of money and payment systems. They may ultimately alter
the architecture of the systems.
Norges Bank is closely monitoring the development of Libra and other initiatives. A common
feature of many of these new systems is that they are closed payment systems outside the
common infrastructure. They have a global reach, and in some cases, like Libra, operate with
their own currency units. Often a variant of distributed ledger technology (DLT) is used.
Such new systems promote competition and innovation. They also help to focus attention on
parts of the existing payment system that do not function satisfactorily. An example is expensive
and slow cross-border payments. Even with the improvements of the past few years, including
under the auspices of SWIFT, there is still considerable potential for efficiency gains.
At the same time, new money and payment systems entail a number of challenges. Individual
users will face new security risks. Privacy may be at issue. If they become large enough to attain
market power, these systems may become a source of systemic risk. For some countries that
are vulnerable to a transition to payments in foreign currency, national room for manoeuvre and
the ability to conduct monetary policy may be weakened.
Norges Bank is currently assessing whether the existing regulatory framework, such as the
emoney rules, is an adequate response to the challenges these new systems raise. The new
systems may either fall outside the scope of the existing framework or they are not sufficiently
addressed by it. We must therefore consider adjustments to the rules and whether new
regulations are needed. It is likely that a broader collaborative effort among policymakers at both
national and international levels is needed to formulate a robust response.
Another possible response to new private digital currency is a central bank digital currency. The
central bank money currently available to the public takes the form of banknotes and coins. Cash
has important attributes. It needs to be available and easy to use in order to fulfil its role in the
payment system. Falling cash usage and the possibility of more profound structural changes in
the monetary and payment system mean that we need to consider whether it would be wise also
to issue a central bank digital currency.
A working group at Norges Bank has looked more closely at the purpose and relevant forms of a
central bank digital currency. The group finds that a central bank digital currency could function
as a back-up solution in the event of a disruption in banks' payment systems. This contingency
aspect may gain importance if banks' systems become more international. Moreover, a central
bank digital currency may help to maintain competition in the payments market and offer the
characteristics of legal tender.
Looking ahead, Norges Bank will assess further how well the solutions being considered are able
to offer the necessary and desirable characteristics. Then we will decide whether to proceed with
testing. This is a long-term undertaking, and it is still too early to draw any conclusions. This work
also interfaces with other measures to ensure a sound payment system and confidence in the
monetary system. We must consider the combination of measures, by both public and private
entities, that can best enable us to perform our social mission.
The payment system is changing. New structural features like vertical integration,
internationalisation, new market entrants and increased concentration of providers suggest that
Norges Bank must assess how it will perform its role. Our ambition must be to maintain a
payment system that is at least on par with comparable countries.
I said at the outset that a nation needs an efficient and secure payment system. If it does not
function, that nation's currency will lose its place in the monetary system. And therefore, for every
central bank that issues a currency, it is important to govern and control developments in the
payment system. This is the core issue: Only Norges Bank can provide final and secure
settlement in Norwegian kroner. This will be the fundamental tenet for ensuring that the payment
system in Norway continues to be efficient and up-to-date.