Transforming Payments Systems · Meeting the Needs of Emerging Market Economies

Market economies rely on the payment system to facilitate trade and exchange among enterprises and between enterprises and consumers in product markets. At the same time, the payment system is also used to transform domestic and international savings flows into productive investments through financial markets. Emerging market economies face the difficult task of attempting to simultaneously promote the development of product and financial markets, improve the efficiency of production, and mobilize domestic savings. These and other tasks are made easier when a cost-effective payment system exists which is responsive to user needs. The primary issues associated with transforming and improving payment systems in formerly centrally planned and emerging market economies are discussed in this paper. Emphasis is placed on meeting the payment needs of consumers and enterprises, as users of payment services, and on the role played by the banking system and the central bank as supplier and/or regulator of payment services. The indirect role of country size, banking structure, and institutional framework are also discussed. These influences are illustrated by outlining the evolution of payment arrangements in various market economies. The essential differences in payment systems between centrally-planned and market economies are outlined and both short-term and longer-term methods to improve these payment systems are noted. Distinctions among various payment instruments are made clearer by modeling the payment cycle and choices regarding alternative suppliers of payment services and the tiering of payment processing arrangements are discussed. Market needs in an evolving payment system areoutlined by illustrating the different paths taken in Europe and the U.S. in the evolution of their payment systems. The benefits and costs of paper versus electronic payments, the role played by payment pricing and float, and the interplay between commercial banks and the central bank in this process are also discussed. The paper ends with a survey of the many issues needing to be raised - from payment instrument design to cost recovery - to provide users with an effective payment system.