Payment Systems

Sign saying "Pay here"

Payment systems refer to the set of rules, procedures, and mechanisms for transferring money between two or more financial institutions and their customers. Efficient, secure and reliable payments and settlements systems reduce the transactions costs and are essential for the effective implementation of monetary policy and smooth functioning of money and capital markets.

The principal components of a payment system infrastructure are: (i) payment instruments; (ii) the network arrangements for communication between the participants and the system provider; and (iii) the facilities for clearing and settlement operated by the system.

Payment and securities settlement systems play an essential role in the functioning of financial markets, maintaining and promoting financial stability and facilitating the development of the economy. A broad international consensus has emerged on the need to strengthen payments systems by promoting internationally accepted standards and practices for their design and operation. The Committee on Payment and Settlement Systems (CPSS), representing central banks from around the world as well as representatives from multilateral financial institutions, has developed the Core Principles for Systemically Important Payment Systems (CPSIPS), which have become the global standard for assessing payments systems. The principles cover: (i) legal issues, (ii) effective risk management, (iii) electronic data processing (EDP) audit aspects, (iv) efficiency and level playing field, and (v) governance.

In modern payments systems the use of paper documents is practically eliminated. To promote efficiency and reduce the settlement cycle, payments orders are sent electronically via an international communication network, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT), or via a proprietary network that is specifically constructed for the relevant payment system. Also, internet technology is used for communication purposes that entail, in addition to payment orders, information exchange on statements of accounts, lists of settled payments, queued payments.

The payments and settlements systems of several African economies lag those of other regions. Many remain cash-based while, in several others, the reliance on the use of paper documents, primarily checks, is prevalent. Clearing and settlement is often done manually, increasing the time required and transactions costs.

Some African countries are, however, taking several steps to improve or adopt efficient payments and settlement systems. Notable among these payment systems reforms are the two payments systems projects in the West African Monetary Zone (WAMZ) and West African Economic and Monetary Union (WAEMU) regions on developing the SWIFT and Real Time Gross Settlement Systems (RTGS). Both projects have components based on harmonization and promotion of regional financial integration. Also, innovative payment methods, such as the M-PESA system of money transfer by mobile telephone in Kenya, introduced in March 2007, are quickly gaining popularity.