Modern payment systems transfer staggering sums: more than 120 times annual GNP in some OECD countries. Over the past decade, politicians as well as central bankers have woken up to the critical role which payment systems play in contemporary economies, and the havoc which payment systems failure causes. Banks and other financial institutions are also now more aware of the need to manage payment risks, and manage their liquidity professionally.

There is a critical need to strengthen payments architecture. Much work is already underway.

However, payment systems reform has wide-ranging implications for monetary policy, market regulation, the financial sector and the role of the central bank. Governments and central banks need to understand the full legal and regulatory implications, such as the competition issues which are involved. Financial institutions need to make strategic decisions about uncertain technological developments.

Increasingly, the leaders of market and official-sector institutions appreciate that payments systems issues can not simply be left to technical specialists. They must be grasped and understood at the very top of the organization. Not easy, when most literature addresses the technical, rather than the policy implications of change.

Emoney and Payment Systems Review, published by Central Banking Publications, fills this gap. As you would expect, this new guide is informed by the latest technical developments and risk management techniques in the discipline. However, the expert contributors to Emoney and Payment System Review focus above all on the policy issues involved. In particular, the Review examines the role of central banks in the payment system and the key role which central banks must play in any reform programme. Critical, because in all countries, it is the central bank which provides final settlement in reserve money, and - now more than ever - it is the central bank which oversees other systems operating in a country. The core question is this: how to reengineer a payment system? In practice, not just in theory. At the core of this perspective is a brand new survey of central bank heads of payment systems which documents the real concerns and plans of central banks over the next five years.

State of the art

In such a complex field it is critical to benchmark progress against other countries. At the core of this book is the new survey of central bank payment system heads from 40 countries. This reveals how central banks in fact discharge their role in this area. This detailed report shows how central banks themselves benchmark their efforts. Also it will help payment system providers appreciate the central bank outlook. The survey addresses key questions: Right now, which central banks are planning reforms; How central banks organise their oversight of the payments function; What are the critical risk management norms; How they expect continuous linked settlement to develop; How RTGS systems will spread; What the future holds for emoney; How they expect payment systems to develop over the next five years Because the majority of respondents are from the senior staff responsible for this function around the world, readers are assured of a an authoritative global overview. What is more, the appendices to the volume reproduce in detail, and by region, central bank's key plans and concerns.

Pressure for reform

Pressure from international monetary authorities such as the IMF is one driver for reform. This has led to the core principles for systemically important payment systems - a blueprint from the BIS for central banks to upgrade their payment systems architecture. But what concrete measures do the core principles require? How are they actually being used? To help understand this, Emoney and Payment System Review includes key contributions from leading officials of the IMF, the Bank of England and the Bank for International Settlements (BIS) who explain the official-sector view. Contributors include the Bank of England's John Trundle (who chaired the committee which wrote the principles); Omotunde Johnson, the IMF's former head of payment systems, who takes a practical view of how countries can manage payment systems review to comply with the core principles; and Robert Lindley from the committee on payment and settlement systems (CPSS) at the BIS who analyses how payment system risks affect countries at different states of development.

What central banks must do

Payment systems reform is highly challenging for central banks, many of which have set up dedicated payment systems departments only recently. The review draws on the experience of senior central bankers who can offer "tried and tested" solutions to some key issues involved in reengineering payment systems. For instance, Karsten Biltoft, head of payment systems at the Danmarks Nationalbank, describes the novel way in which the Danmarks Nationalbank has managed the sometimes conflicting demands on the central bank in this area.

Effective reform

Peter Allsopp, former head of payment systems at the Bank of England (and author of the influential 1996 report on risks in international foreign exchange payments) outlines a critical path for reform in this area, so that developing market countries can benefit from the experiences of other reform efforts before embarking on payment systems reform. Allsopp shows how central banks can navigate this potential minefield with a combination of consultation and firm leadership. Central banks, and in particular their senior leadership, have a crucial role in ensuring objectivity and challenging payment system suppliers' vested interests. In a case study on reform in South Africa, Philip Tromp stresses again the need for extensive consultation. Tromp emphasizes the need for reform to be overseen by a project owner: ideally the governor of the central bank.

Realising RTGS

Until recently, real-time gross settlement systems were few in number. This is changing fast. Not least because central banks have become aware of the huge risks which can arise in uncollateralised net settlement systems. As the review's survey reveals, many central banks now plan to introduce RTGS for the first time. However, the switch to gross settlement has far wider implications than simply technical ones. Emoney and Payment Systems Review provides readers with an analysis of the most critical implications of this change. Morten Linnemann Bech and Kimmo Soramäki show how increased demands for liquidity in RTGS systems can lead to payment system gridlock. They then describe a potential solution which uses sophisticated algorithms to avoid these problems. A system which has reduced delays in settlement - especially during liquidity droughts, as on September 11. Rahul Dhumale, from the New York Fed considers other risk-reducing strategies: the use of collateralised overdrafts, and the relative merits of using intraday credit or queuing systems to manage risk in RTGS systems, the costs and benefits of delivery-versus- payment (DVP) systems, the use of ex ante caps and ex post loss-sharing agreements and the virtues of decentralised monitoring.

Regulatory concerns

Safety is not the only issue which financial market authorities must consider. Payment systems can give rise to tortuous regulatory and competition issues. Bidisha Ganguly and Alistair Milne ask whether official-sector intervention in retail payment systems is needed, and if so, what form this intervention should take. By analysing the economics of retail payment systems in the UK the authors develop a framework that can be used by any country needing to think about these issues.

Emoney

According to the survey of payment system heads, one of the critical areas of payment system development relates to electronic money: what forms will become most prevalent and the extent to which it will replace central bank money. Some academics have argued that this has critical implications for central banks, because emoney will tend to upset monetary transition mechanisms and perhaps challenge the critical role of central bank money in the payment system. Emoney and Payment System Review presents both sides of this critical argument. Benjamin Friedman's influential article on: "The future of monetary policy" describes the scenario by which widely circulating emoney might erode the power of the central bank, reducing the efficiency of monetary policy and seigniorage. Professor Charles Goodhart argues instead that because the central bank is the governments' bank, and can intervene in the financial markets without concern for profitability, it can retain its influence over short term interest rates even with widely circulating network money. Is emoney actually developing? David Birch surveys the development of retail electronic money and examines the key sources of innovation in the future. He suggests that banks may not be the right people to develop products, such as the electronic purse, "it is highly likely that a significant fraction of the retail payments franchise will be outside the traditional banking system".

Understanding the future

The final section of the book examines some key developments which are likely to prove of major importance to central banks and all payment system experts over the next 5-10 years. The critical impact of CLS Bank is examined by Peter Allsopp, who explains how continuous linked settlement will work and how central banks should approach the scheme. On the technological front, Harry Leinonen from the Central Bank of Finland, outlines cutting-edge developments in Scandinavia and gives his detailed perspective on the payment systems of the future. Katy Massey examines whether central banks will also have to decide whether they need to regulate on-line payments providers and if so, how. Indeed, global industry developments with 24-hour operations such as CLS may force overseers to look again at the definition of "overnight" and "intraday" credit. Taken together, all these sections of this 400 page edition build to create a must-read resource for decision makers and payment system specialists in central banks, financial institutions, and all organisations which have a role to play in this critical and complex area.

Secure your copy now

Central bank payment systems heads, risk managers, IT departments, and board members with responsibility for risk and payments issues

Payment system solution providers

IT managers

Technology directors of major banks and financial intermediates

Consultants and IT solutions providers

Senior executives of clearing houses

Software providers

Middle and back offices staff in clearing banks

Senior staff at central banks responsible for payment systems

Specialist consultants

Academics interested in payments