Policy Papers No. 4 - Managing change in payment systems

May 1998


Recent years have seen unprecedented change in payment systems. The pressures behind this change vary from country to country, but a common theme has been the liberalisation of financial transactions - and indeed economic liberalisation more generally - which, when combined with improvements in technology, has led to rapid growth and innovation in financial markets. At the same time, there has been growing recognition that the significant risks inherent in many systems need to be tackled. Reflecting changes in financial markets more generally, payment systems have therefore had to modernise both to increase efficiency and to reduce risk.

The Committee on Payment and Settlement Systems (CPSS) of the G-10 central bank governors, under the auspices of the BIS, has published reports on many different aspects of payment and settlement arrangements. For example, reports published in recent years include those on real-time gross settlement, securities settlement systems, electronic money, foreign exchange settlement risk and the settlement of exchange-traded derivatives. The analysis in these reports has helped to increase understanding of the way systems work and the implications system designs have for efficiency and stability. The reports have thus played a key role in encouraging the introduction of sound and secure payment mechanisms. However, there is another aspect to the task of reform that is also crucial - namely the process of managing the change. For many, payment system reform is unfamiliar territory, and resources and experience are limited. Turning theory into practice is therefore not always easy.

It was with this issue in mind that, in December 1997, the BIS, in conjunction with the CPSS, hosted a Global Conference on Managing Change in Payment Systems. Attended by representatives from more than 80 central banks from around the world, the conference provided a unique opportunity to share experiences of how countries had managed, or are managing, the process of change.

This compendium contains the presentations made by the speakers and panellists at the conference. We hope that this information about the issues that are being faced, and how they are being tackled, will be useful for all those who are in the process of reform or who are about to embark on it.

With so many central banks represented, the conference had a very wide range of experience to draw on. The participants came from developing countries where the existing payments infrastructure is minimal, from emerging market countries where the infrastructure exists but is becoming stretched by market growth, from countries that are in transition from a planned to a market economy and where a completely new type of infrastructure is therefore needed, and from developed economies where infrastructure changes are driven primarily by the need to cut costs and reduce risk.

Nevertheless, it became clear at the conference that, despite this diversity, there are certain issues that many central banks face when it comes to the process of managing change in payment systems. A common problem is acquiring the necessary information and experience - finding out what the possible options are, learning what other countries are doing, and generally making the best use of available advice. Obtaining the necessary resources and using them effectively is also often difficult - payment system reform can be costly and time consuming, and needs to bring together expertise from a wide range of disciplines both in the public and private sectors. Indeed, building a consensus on the type of reform needed, and how the costs will be shared, is a key issue since it is not unusual for different institutions - and even different functions within the same institution - to start with conflicting views on what is desirable.

Sometimes there are constraints that are external to the financial sector and therefore perhaps harder to tackle - for example, payment system changes may require changes to the law or improvements in communications infrastructure. Where new payment instruments are involved, overcoming public resistance to change can be an even bigger challenge.

However, it would be wrong to over-emphasise the difficulties. Another clear message to come from the conference was that these issues can be - and are being - successfully tackled under a wide range of different circumstances. It was striking how much change has already been achieved or is well underway. The process of payment system reform will not be completed overnight, but the necessary momentum is there and the goal of safer and more efficient systems is within reach.

Finally, we feel that the global representation at the conference and the many ideas contained in this compendium provide further evidence of the relevance of the work of the BIS and the CPSS for both G-10 and non-G-10 countries: financial markets are becoming increasingly international, and it is in everyone's best interests that global market infrastructures, including payment systems, become more efficient and robust. Our thanks go to all those who participated in the conference and made it such a success.

Andrew Crockett
General Manager

William J. McDonough
Chairman, Committee on Payment and Settlement Settlements Systems,
and President, Federal Reserve Bank of New York