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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 1 A. Background and context • Reforms in payments systems are needed • • • 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? 2 B. Beneficiaries of reform programs • Users should obtain quantified service • • • 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. 3 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; 4 C. Realizing value for money spent – some facilitating factors • Payment services should be viewed as • • 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. 5 D. Experience-based suggestions • Retail payment services should not be • • 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; 6 D. Experience-based suggestions • Wholesale systems have a unique • • 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. 7 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; 8 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. 9 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; 10 F. Pricing policy implications • However, some central banks might choose • 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. 11 Concluding Remarks [email protected] [email protected] 12