Discover: The Role of Central Banks in Supporting Domestic Payments Schemes and the Benefits for Their CountryPosted on Dec 14, 2021 by Jerry Fosker, Head of Network Alliances EMEA, Discover® Global Network
The opinions expressed in this publication are those of the author. They do necessarily reflect the official policies or positions of Discover® Global Network or other related entities.
There are over 50 domestic payment schemes around the world. They take different ownership structures: some are government or central bank sponsored and owned, such as NPCI/RuPay in India and Troy in Turkey, and some are bank-owned, such as Elo in Brazil, but they all have common aims:
- Promote financial inclusion, especially in countries where there are large unbanked populations
- Reduce the use of cash and encourage electronic and traceable transactions
- Serve the payments needs of the banks, issuers, merchants, and consumers in their countries
- Provide payment choice and encourage competition in their markets
- Reduce the cost of payments for their country
- Retain payment volumes and thus revenues in their countries
- Reduce the payments technology and payments network reliance on the big international payment schemes (this is especially relevant in the case of technical outages)
- Keep up-to-date with new payments technologies
- Ensure that transactions can be made securely with protection against fraud and criminal activities
Clearly, these aims and functions are beneficial for a country, its businesses and population as a whole. As such, central bank support is crucial to achieving them. Central banks should play a pivotal role in ensuring the safety and integrity of the payment systems in their countries by acting as guardians of the stability of money and payments for their countries.
Advances in Technology Bring a World of New Approaches
New technologies have presented both challenges and opportunities. Customers want to use their smartphones and other innovative technologies to push and receive payments, which addresses the financial inclusion aspects and reduces cash payments to encourage electronic and traceable transactions. This has motivated different institutions to look into new and innovative solutions. Central banks need to facilitate this progress by putting the regulations in place that support rather than hinder innovation. They need to be able to strike a balance between keeping an eye on consumer protection and, at the same time, enabling and facilitating the innovation happening in this industry.
Sweden is the role model for moving towards cashless. With merchants free to not accept cash and some bank branches no longer providing ATMs, as well as a broad popular consensus that cash is less convenient than other modes of payment, Sweden is a useful model for any nation that seeks to transform its economy. Its final steps towards becoming fully cashless are currently halted as both banks and members of the government advocate for treating cash availability as a basic right of its citizens that should not be given up.
Convenience, reliability, and speed are very important to younger demographics, for example, in countries such as Kuwait. With commercial banking, however, there is still a lag. The Central Bank of Kuwait is leading a National Payments System project to create a cashless environment where consumers can send a P2P payment based on a mobile number, national ID, or email.
Other countries pursuing similar initiatives include:
- The Central Bank of Egypt has a national payments scheme underway that not only includes an important thread on financial inclusion, but also has the ability to support its population in providing payments products that promote access to basic food items.
- In Nigeria, the Central Bank has implemented daily limits on cash withdrawals in an effort to push people towards using some of the existing cashless channels. The policy is primarily driven by an effort to reduce the cost of banking services, improve the effectiveness of monetary policy, and to drive development of payments systems.
- South Korea is looking to become a cashless society, with the push coming primarily from the government. The first milestone, the government has announced, is the removal of all coins from circulation.
India Among the Leaders of a Cashless Transition
Among the most forward-looking countries seeking to shape the future of payment globalization is India.
India moved to demonetize five years ago as it sought to push millions of new users onto the country’s digital economic grid. By temporarily turning off the engines that drove the cash economy, India hoped that more people could be brought into the fold by using trackable—and taxable—digital financing vehicles, like debit cards and e-wallets. Since then, there has been a marked increase in tools and solutions available in the country’s e-payments sectors. The Indian consumer has the choice of e-wallets, United Payments Interface (UPI) systems, Unstructured Supplementary Service Data (USSD) services, and more, to transact financially online.
After demonetization, even traditional banks began to incentivize customers to make payments digitally from their own bank accounts. Among the leaders in the industry has been RuPay, an operating arm of the National Payments Corporation of India (NPCI), which is a government-driven initiative to build a proprietary brand and domestic payments network in India. The aim was to reduce the unbanked population, reduce the “black” economy, and shift cash to electronic payments to increase control, support domestic transactions, and expand the use of proprietary cards on a global scale.
Domestic vs. International in Advancing Payment Schemes
Similar goals to make payments more seamless, faster, and trackable also exist for cross-border payments. Customers have increasingly demanded similar experiences in cross-border payments that also exist in domestic payment schemes through both cards and banking real-time payments. To achieve this, consumers need to be offered equivalent products among those offered by the large international payment schemes.
However, this can be particularly difficult without up-to-date technical payments capabilities, which are time-consuming and expensive to develop and generally suffer from a lack of international and e-commerce acceptance interoperability if sourced or built independently. Instead, banks, merchants, and consumers tend to be reliant on products from the big international payment schemes which compete against the domestic payment schemes in their own markets.
In response, domestic payment schemes and their networks are responding to these challenges by engaging in partnerships that: 1) expand the global reach of all parties; 2) make it easier for the central banks to achieve their goals; and 3) make it faster and simpler for businesses and individuals to transact both domestically and abroad.
Central Banks Responding to the Potential of Payments
The global payments landscape has been undergoing unprecedented changes, and digital innovation is radically reshaping the financial services industry. Over the past year, the impact of the COVID-19 pandemic has been a catalyst to further reinforce the shift to contactless and digital payments at POS as well as to e-commerce. It also confirms the vital importance of safe and convenient payments, both domestically and globally.
The concept of partnering with an alternative international payments scheme that allows for domestic scheme independence while sharing common technology is a model that provides scale, global acceptance, and standardizes the rules for international transactions.
Such a model provides a platform by which the central banks can achieve their aims and goals towards reducing the reliance on cash payments, serve the payments needs of the banks, issuers, merchants, and consumers in their countries, provide payment choice and encourage competition in their markets, and reduce the cost of payments for their country, all while retaining payment volumes and thus revenues in their countries.
This ability to bridge the gap with payment networks internationally has been a central impact of many of the moves taken originally by the banks in Turkey, but which is now under the control of Turkey’s central bank, and that of India’s NPCI, whose domestic scheme formation was driven by the government.
These two companies and 24 other domestic schemes around the world are serving both domestic and international goals through their partnership with Discover® Global Network.
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About Discover® Global Network
Discover® Global Network, the global payments brand of Discover Financial Services, processes millions of cardholder transactions each day. With industry expertise, innovative technology and a closed-loop infrastructure, Discover Global Network provides effective, customized solutions that evolve as needs change. Discover Global Network has alliances with 20+ payment networks around the world, and is led by three Discover businesses: Discover Network, with millions of retail and cash access locations; PULSE®, one of the leading ATM/debit networks in the U.S.; and Diners Club International®, a global payments network with acceptance in more than 200 countries and territories.
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