Policy Approaches to Payment Systems Efficiency In The SEACEN Countries

This study examined policy approaches to payment systems efficiency in the SEACEN countries. Two major findings were as follows. First, cash remained a dominant payment method in a majority of SEACEN countries. A declining trend, however, was found in three countries ¨C Korea, Singapore and Taiwan - where existing empirical data suggested a shift towards the use of more efficiency-enhancing cashless transactions such as debit cards, credit cards and electronic credit transfers. Using pooled data from four countries for the period 1995-2002, results indicated the following: use of cashless transactions increased with the rise in per capita income; use of cash transactions was negatively co-related with the use of cheque and debit card transactions; an increase in ATM terminals was negatively co-related with the use of cashless transactions, suggesting a rise in cash withdrawals; and an increase in crime rates is positively correlated with an increase in the number of cheque and credit card transactions. Second, total investment cost in payment and settlement systems amounted to approximately USD 28 million for the period 2000-2004. These investments were largely for the development and enhancement of real-time gross settlement systems. Survey data suggests that a majority of payment systems did not fully recover cost. Subsidies amounted to approximately USD 3.7 million in 2003. Unit cost recovery ratios also suggest that transaction fees did not fully recover unit cost in a majority of the payment systems. This can be explained by three reasons: periodical price schedule reviews were lacking; payment revenues relied largely on transaction fees; and the structure of transaction fees are largely flat. Using pooled data for 21 large-value payment systems for the period 2001-2003, results indicated that the average unit cost demonstrated an L-shaped curve where the predicted unit costs can fall from USD 3 to USD 0.40 in the shift from small-scale to large-scale operations. This suggests relatively strong scale economies and payment systems efficiency. While there are arguments in favor of subsidization, as payment systems are viewed as a public good, there are also arguments in favor of cost-based pricing to prevent price distortions and payment market failure. Therefore, the key challenge for the central bank is to strike a balance between the risk-cost tradeoff objectives it pursues. The role of the central bank in promoting payment systems efficiency is two-fold. The first role focuses on market guidance. This involves encouraging the public to shift from the use of cash to more efficiency-enhancing cashless transactions. This may be achieved through the co-operation of payment associations, banking associations, or the banking industry in general as retail payment services are largely owned and operated by the private sector. The second role focuses on a four-step process to improve the efficiency of central bank payment services in the following areas: collection of cost and revenue data; forecasting of demand; formulation of pricing strategy; and review of price schedule.