Transcript Exploring Frontiers in Payment System Development

Global Conference
“Exploring Frontiers in Payment System Development”
Washington, DC Tuesday May 29, 2007
Payment Systems: Cost
Recovery and Pricing
Issues
Massimo Cirasino
Robert Keppler
Payment System Development Group
The World Bank
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A. Background and context
• Reforms in payments systems are needed
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continuously to satisfy the evolving needs of
all sectors of the economy;
The primary objectives of reform programs
include increased end-to-end efficiency
(speed, cost, certainty, linkages with related
systems, etc,) and risk reduction (especially
the elimination of settlement and systemic
risk);
Payment systems cost money (Design and
Development, Operation, On-going
enhancements);
Key questions: Who funds? / Who pays? /
Role of temporary subsidies?
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B. Beneficiaries of reform programs
• Users should obtain quantified service
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benefits (quantification is required to justify
a pricing tariff for it to be acceptable);
Beneficiaries should expect to pay for
payments services (should not be an issue if
they perceive that they are getting value for
money spent);
Beneficiaries include, the central bank as
both user and lender of last resort,
commercial banks and other direct users,
and end customers;
However, in this discussion the focus will be
on the System Operator and Direct System
Participants.
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C. Realizing value for money spent – some
facilitating factors
• Opportunity for active involvement by direct users
should be provided from the outset of the reform
program and early attention should be paid to
targeted benefits as well as cost and pricing policy
issues;
• Cost management – a major contributor to any
pricing tariff - should be a matter of concern at the
vision and design stage of any reform program, if
unanticipated future problems are to be avoided;
• A transaction volume model covering at least the
first three years of operations should be
constructed to underpin pricing discussions. This is
especially important in low transaction volume
environments in which some form of initial
subsidies may be justified;
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C. Realizing value for money spent –
some facilitating factors
• Payment services should be viewed as
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having pricing characteristics similar to
that of any regulated utility in which
costs and prices have to be approved;
Investment and operating costs as well
as any allowed surpluses (to cover profit
and future enhancements) should be
routinely justified and tightly controlled;
Feedback from participants should be
sought and reflected in the pricing
decisions.
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D. Experience-based suggestions
• Retail payment services should not be
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subsidized in the longer term; however
short term subsidies might be used to
encourage use until the full transaction
volume potential is realized (typically, this
should be no more than three years);
Steps should be taken to actively increase
transaction volume through the formal
systems;
Non-essential competition for transaction
volume (through systems competing for the
same market segments should be avoided
especially in low transaction volume
markets;
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D. Experience-based suggestions
• Wholesale systems have a unique
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characteristic as the central bank in its
lender of last resort mode benefits
substantially if a gross settlement risk
mitigation mechanism is in place and should
be willing to pay for this benefit (through,
for example the assumption of some, if not
all, of the initial design and development
costs);
Well functioning payment systems assist
central banks avoid some reputational risk;
a factor that can also justify some form of
price subsidy;
Accurate cost data is essential for factbased decision making.
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E. Cost containment implications
• Appropriate balance must be achieved
between costs (especially IT and
Human Resource costs) and providing
high quality service levels and support;
• Application of a range of cost
containment techniques can assist in
achieving this balance and can also
improve service and reduce risk - if
they reduce operational and support
complexity;
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E. Cost containment implications
• Much research has been devoted to this topic. For
example, an excellent structured framework to
underpin IT cost containment initiatives is
described in the October 2006 “Gartner EXP
Premier Reports” which describes 25 IT cost
containment techniques and case studies
(www.gartner.com); covering three broad clusters
of activity; linking costs with demand (give
participants what they need rather than what they
may want), reducing resource costs, and assuring
appropriate operating practices;
• In summary, costs should be actively controlled
from the outset and on a continuing basis. The need
to achieve value for money spent should never be
ignored.
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F. Pricing policy implications
• Typically, the central bank assumes a leadership
role in payments system reform;
• This leadership role should not automatically lead
to a conclusion that the central bank, will assume
all financial costs associated with a reform
program;
• Although, the central bank may provide the funds to
cover the initial design, development and
implementation costs (especially of a wholesale
system), there must never be any confusion that a
pricing tariff will be introduced to ensure that ongoing operational costs are fully recovered from the
system users and that system users will be
responsible for funding future enhancements;
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F. Pricing policy implications
• However, some central banks might choose
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to absorb the design and development costs
of a comprehensive program viewing these
costs as being necessary to satisfy a specific
central bank objective, such as - (a)
provision of appropriate payment services,
and (b) the reduction / elimination of
systemic risk;
Central bank oversight should also focus on
the continuous delivery of value for money
spent and should also include some actions
to assure appropriate value to end
customers.
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Concluding Remarks
[email protected]
[email protected]
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