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Building the payment systems capabilities of the nigerian banking industry april 2007


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A presentation developed for Banking industry forum in 2007 addressing the issues around Nigeria's payment system.

Published in: Government & Nonprofit
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Building the payment systems capabilities of the nigerian banking industry april 2007

  1. 1. Building the payment systems capabilities of the Nigerian Economy
  2. 2. Presentation Outline  Setting the stage…  Elements of a national payment system  National payment systems: the change drivers  Why reform the national payment systems?  A model for national payment reform  A four-stage, 14-step guideline  Problems, Opportunities & Prospects  Question & Answer
  4. 4. Elements of a National Payment System  Payment instruments used to initiate and direct the transfer of funds between the accounts of payers and payees at financial institutions;  Network arrangements for transacting and clearing payment instruments, processing and communicating payment information, and transferring the funds between the paying and receiving institutions;  Institutions that provide payment accounts, instruments and services to consumers and businesses and organisations that operate payment transaction, clearing and settlement service networks for those financial institutions;  Market conventions, regulations and contractual arrangements for producing, pricing, delivering and acquiring the various payment instruments and services; and  Laws, standards, rules and procedures set by legislators, courts, regulators and payment organisations that define and govern the mechanics of the payment transfer process and the conduct of payment service markets.
  5. 5. Elements of a National Payment System (graphical illustration) A complex interaction of instruments, institutions, networks, rules, etc.
  6. 6. National Payment Systems: the change drivers…  an increasing awareness of payment system risks and concerns about financial stability;  new developments and increasing user needs in the financial and non-financial sectors requiring new cost-efficient payment instruments and services;  a policy decision to comply with international standards for payment systems, sometimes related to a country’s entry into regional or global trade and financial arrangements; or  evolving central bank responsibilities and payment needs.
  7. 7. Why countries reform the National Payment Systems  To broaden the range of payment instruments and services;  To better contain legal, operational, financial and systemic risks in payment infrastructures;  To enhance the interoperability and resiliency of banking, payment and securities infrastructures;  To improve cost efficiency, particularly in terms of operating costs and liquidity usage, and access to settlement credit for financial institutions;  To create a more suitable oversight and regulatory regime for the national payment system; and  To establish more efficient and better organised markets for delivering and pricing payment
  10. 10. Stage 1: Banking System Reform Step 1: Keep the Central Bank at the centre  Central Bank possible roles include issuer of money, primary creator of liquidity, interbank settlement agent, provider of payment services, adviser on legislation, overseer, banking supervisor, catalyst and user. Step 2: Promote sound banking system  There is need for banks; who are the principal providers of the payment accounts, instruments and services; to act cooperatively in the overall interest of the payment system.
  11. 11. Stage 2: Payment System Planning Step 3: Recognise complexity  The payment system should be seen broadly as a full set of instruments, networks, rules, procedures & institutions that ensure circulation of money. Step 4: Focus on Needs  Identify, and be guided by, the payment needs of all users in the system and by capabilities of the economy. Step 5: Set Clear priorities  Plan & prioritize development efforts. Step 6: Implementation is key  Develop a clear execution/implementation plan.
  12. 12. Stage 3: Establish institutional framework Step 7: Promote market developments  Expand & strengthen market arrangements. Step 8: Involve relevant stakeholders  Effective & extensive consultation is key. Step 9: Cooperate with other authorities  Central Bank must liaise with other authorities including the NFIU, SEC, NDIC, etc. Step 10: Promote legal certainty  Develop sound, transparent legal framework for the system.
  13. 13. Stage 4: Build payment infrastructure Step 11: For Retail-give more choice to people  Extend choice & coverage of non-cash payments. Step 12: For Large value-build business case  RTGS should be based on needs & growth in time-critical interbank payments. Step 13: Securities-plan with payment system  Coordinate securities & large-value payment infrastructure. Step 14: Coordinate settlement process  Coordinate settlement processes to properly manage related liquidity needs & settlement risks.
  15. 15. Generic issues/problems in national payment system reforms  Limited vision and leadership for development due to a narrow view as to what constitutes a national payment system;  Limited knowledge of emerging payment needs and system capabilities;  Weak support and commitment from stakeholders due to inadequate consultation;  Limited development resources; and  Legal, regulatory, public policy and market barriers to ongoing development of the national payment system.
  16. 16. Specific challenges to reforming payment system in Nigeria  Poor state of infrastructure especially electricity and telecomms (data services);  Low banking penetration especially of rural communities where majority of the population lives;  Low consumer confidence in non-cash payment instruments especially cheques & cards due to frauds & history of failures;  Low level of terminal deployment for accepting non-cash payments at merchant locations; and  High investment value and long payback period has historically served as disincentive to potential innovators in the payment system space.
  17. 17. Opportunities for payment system reforms in Nigeria  Let me start by acknowledging that a lot is already happening here…  There are opportunities to deepen card-based payment through:  Further consumer education/awareness;  Increasing reliability & security to prevent frauds;  Integrating MFBs into the system in rural areas;  Deploying low-cost merchant terminals;  Integration with mobile phone operators (mobile payments)  Other short-term opportunities include:  Increasing reliability of cheque-based payments;  Reducing payment switching cost for low-value transactions; and  Enforcing blacklist of system abuse(e.g. dud cheques).
  18. 18. Prospects for change: Keeping end-user in focus End-user demands are largely:  High availability & choice of instruments;  Information: on benefits, costs, and risks;  Low user costs;  Interoperability among rival networks for the same type of instruments e.g. cards;  High information security; and  Low legal risk.
  19. 19. Prospects for change: Notes for service providers Financial institutions demand the following from service providers:  Equitable access to services;  Low network participation fees;  Fast and predictable delivery of transaction, clearing & settlement services;  Low settlement risk; and  Settlement finality or non-repudiation especially for large-value payments.
  20. 20. Closing remarks  Nigeria must continue on the path of reform in the banking & payment space beyond current Government;  Existing reform agenda should be reviewed periodically for consistency with regional projects e.g. the WAEMU-RTGS project;  Service providers such as Interswitch, e- Transact, Visa/Valucard must cooperate more in the interest of the system; and  Stakeholder early involvement/buy-in and End-user education is key to success.
  21. 21. Question & Answer