The payments industry has undergone fundamental changes over the past ten years. According to the Global Payment Systems Survey (GPSS) conducted by the World Bank, the use of retail payments instruments differs among countries due to cultural, historical, economic and legal factors. 1
Central banks worldwide have been designing policies to build cashless economies while ensuring safe, secure and robust payments systems. There are multiple triggers that have been driving reforms across the global landscape of payments systems. Some of these are customer behaviour and expectations, technological innovation, emergence of non-banking and FinTech players, financial inclusion and the need for better payments instruments and settlement services.
Regulatory institutions and central banks follow certain guiding principles to draft policies and guidelines to regulate and govern key stakeholders within the digital payments ecosystem.
These guiding principles broadly cover the following areas:
Cards continue to be the preferred payments instrument, along with cash. Although there has been a significant shift towards mobile and contactless payments, prepaid cards or SVFs are widely accepted.
International card networks dominate more than 70% of the card payments market. Central banks are regulating the retail payments schemes in respective countries and are issuing licences to payments system operators, allowing them to set up domestic card schemes.
Regulators and the central banks of developed countries like the US, the United Arab Emirates (UAE) and Singapore, as well as developing countries like India, have been proactively taking initiatives to boost digital payments and increase their adoption.
Some of the key initiatives taken by central banks worldwide are given below:
HVPS plays a vital role in the overall financial infrastructure by ensuring settlement of payments obligations between banks. HVPS has come a long way from deferred net settlement (DNS) systems which settle transactions only at the end of each day to real-time gross settlement (RTGS) systems which settle transactions on a continuous basis. RTGS systems have been adopted by almost all countries. More than 150 RTGS systems are currently in operation, a few of which have also introduced multi-currency functionality to enable cross-border payments.
A few key payments trends adopted by countries worldwide are detailed below:
International remittances contribute to more than 20% of the gross domestic product (GDP) of certain countries. Central banks have recognised the importance of remittances for economic development and growth, and have therefore drafted policies to control the operations of remittance service providers (RSPs). Commercial banks, international money transfer operators (MTOs), local MTOs, postal networks, exchange bureau and agents can all be categorised as RSPs. Cash is still one of the dominant payment instruments in developing countries. Regulators and central banks in many developing countries are forming policies and guidelines to enable the use of e-money and account-to-account bank transfers to reduce the overall dependency on cash and gradually move towards a cashless economy. The average cost of remittance currently stands at 7% and is targeted to be lowered up to 3% under the United Nations (UN) designed Sustainable Development Goals by inviting new players to operate and leverage on partnerships.
Financial inclusion has been able to bring unbanked population from primarily rural/semi-urban areas under the ambit of banking services. It has also given rural banking services an opportunity to become a part of mainstream banking. As per a survey conducted by the Bank for International Settlements (BIS) in 2015 that focused on the measures taken by central banks on financial inclusion, more than half of the central banks worldwide have some sort of policy/mandate on financial inclusion. 3 The survey also mentions that the central banks can directly contribute across three major areas of promoting financial education, acting as financial supervisors and leading inclusive initiatives targeted at the financially excluded population segments.
In recent years, Brazil has been successful in increasing financial inclusion because it adopted and worked towards the concept earlier than other countries.
Nearly 70% of the global population has been given access to formal banking services through initiatives like government schemes, policy changes and inclusive regulations, but a large segment of the global population remains unbanked. 4 The World Bank has outlined some key measures in partnership with central banks of some countries to eliminate the existing challenges in the sector of financial inclusion.
In the last five years, there has been a substantial growth in the digitalisation of economies worldwide. Central banks are playing an important role in constituting working committees/groups to review the developmental status in improving the digital payments ecosystem. One of the key objectives of such committees is to contribute towards developing consultative papers comprising vision, benchmarking and a future roadmap strategy for the growth of digital payments. The consultation papers are drafted to invite views and recommendations from public and industry experts, and further improve existing digital payments ecosystems. Due to the ongoing technological revolution and changing business operating models, the objectives, scope and legal framework of oversight will change over the next few years. In order to adapt to the changing scenario, central banks have come up with clear and focused objectives of separating the roles and responsibilities of a regulator and entities like payment operators. For example, the National Payment Corporation of India (NPCI) is a retail payments infrastructure and system operator which is regulated under the RBI’s Payments And Settlement Systems Act (PSS Act), 2007.
The Global Payment Systems Survey conducted by the World Bank in 2018 defines two critical aspects related to the scope of payments systems oversight – depth dimension and breadth dimension. 5 The depth dimension typically defines the roles of the operator and the breadth dimension captures the central bank’s engagement model, typically controlling the critical fund transfer systems.
Whilst some changes are evolutionary, others are disruptive and thus require regulators to formulate differentiated approaches. Central banks play a critical role in regulating payments systems to meet the public policy objectives of safety and efficiency, and end-user needs and expectations. In the following sections, we will look at the regulatory approaches at the disposal of central banks with proposed payments regulations in different jurisdictions.
The various risks related to payments demonstrate the need to put in place regulations as safeguards against market failures. The major objectives of a well-constructed payments regulatory system are to:
Regulatory responses to supervise the changing payments landscape vary across jurisdictions and are dependent on multiple factors. The two key general approaches for the achievement of regulatory objectives are rules-based regulatory approach and principle-based regulatory approach.
A rules-based approach generally involves rules that are precisely drafted and highly prescriptive. This approach advises participants on the actions they can and cannot engage in and provides no or limited exceptions and limited flexibility. For example, the RBI adopts a rulebased approach when it comes to achieving regulatory objectives.
On the other hand, in the case of a principle-based approach, the regulators tend to define parameters like goals and outcomes, along with the principles and standards to be followed at a high level. This allows regulated participants to define and follow their own approaches in order to achieve the defined outcome. For example, the EU and Monetary Authority of Singapore (MAS) have adopted a principle-based approach.
Both the approaches have their own merits and demerits. Due to its low flexibility, the rule-based approach requires all the participants to follow defined approaches that leave no scope of ideating or evaluating the best approach. However, in this approach, all the participants follow a uniform approach that removes ambiguity and the regulator takes up the ultimate ownership.
In the case of a principle-based approach, the regulator only outlines the regulations and gives an opportunity to the participants to define their own approaches. This creates flexibility in the ecosystem through individual learnings.
It is also evident that there are downsides to following only a single approach and hence, it is very rare to see that only a rule- or a principle-based approach being followed. As an optimal solution, a hybrid of both the approaches are followed, creating a balance and serving the ultimate purpose.
A comparison between both the approaches is discussed below.