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   The World Bank Group                                                                 June 2005 | Issue No. 5
                         AccessFinance
A Newsletter Published by the Financial Sector Vice Presidency             Access to Finance Thematic Group



                         Developing a Modern Payments System
                               Ambitious vision becomes a reality

 By Robert Keppler (FSE)


 I well remember the day in Beijing in April 1993 that I submitted the Payments System Vision Report to
 members of The People's Bank of China Steering Committee, The Domestic Advisory Committee, and
 The International Advisory Committee. At that time, I did not imagine that some twelve years later I would
 read an article in Electronic Payments Week ("Chinese Payments System: Sleek, Powerful, Advanced")
 describing the way in which the CNAPS (Chinese National Automated Payments System ) vision is now
 becoming a reality that positions China amongst the best of breed in the payments system world. The
 participative structured approach which we now take for granted - Stocktaking, Vision, Conceptual
 Design, and System Acquisition ­ works in practice and should be pursued actively by all countries that
 are serious about soundly based benefits driven reform that satisfies the needs of all sectors of an
 evolving economy.

 When China's payments system--arguably the world's most modern--is fully operational, it may make that
 nation the world's most financially competitive. China's payments system which has been underway since
 1990 is based on a fully centralized fiber-optic network that funnels all payments through the People's
 Bank of China. While it is still being rolled out across China's vast interior, the system, when it's fully
 functional, will allow the People's Bank-the Chinese central bank-to know, intra-day, what is going on in
 its financial system. Many central bankers in the West would give their eyeteeth for information like that
 as a fully electronic system such as this can feed data to both commercial bankers and treasurers of
 major corporations, allowing them to know what's going on with their balance sheets. Proactive liquidity
 management would free up capital at both types of institutions, allowing them to be more competitive
 internally and internationally.

 The new electronic banking system is built, owned and operated by the Zhong Yuan Financial Data
 Network Co. Ltd--a joint venture owned by China's Ministry of Post and Telecommunications, the
 People's Bank of China, and some of the nation's major commercial banks. It was financed with loans
 from the World Bank and the Asian Development Bank. The World Bank's assistance was provided
 through a financial sector assistance project which included a detailed Vision and Conceptual Design of
 an integrated suite of systems that together serve the needs of all sectors of the economy for payments
 services. This included a Bulk Electronic Retail Payments System, a special purpose Large Value
 Payments System, a Government Securities Book Entry System, an Authorization System to authenticate
 card based payments, a centralized Settlement System and an automation strategy for modernizing the
 large number of local Clearing House Systems.

 Among its most impressive features is the concept of a single shared data communications network. Not
 only does all credit and debit card payments transaction information travel over the network but many
 large employers have been paying their employees via payment cards instead of with cash or checks.
 Chinese institutions quickly recognized the advantages of cooperating when making large investments in
 technology based infrastructure whilst recognizing that competition can still exist by offering value added
 services that take advantage of the features and functions offered by the common infrastructure.

Can others emulate China's success?

The simple answer is yes. In fact the need to do so is increasing rapidly. Governments now recognize the
economic benefits that stem from cost efficient access to financial services; especially payments systems
that can process and deliver domestic and international funds transfers throughout the country to all
citizens and businesses with legal and technical certainty. Additionally, well designed and well functioning
payments systems provide real opportunities to use the available money stock multiple times per day
without risk and thus create benefits similar to those that would stem from a real increase in money
supply without the inflationary risks that would accompany such a real increase. Payments systems, even
those in modern well developed economies, need to be continuously improved. The following questions
might allow the need for specific improvements to be identified when speaking with country counterparts:

     Do the present arrangements satisfy the needs of all market sectors for making and receiving
     payments? Such payments would include; individual/consumer payments, retail point-of-sale
     payments, industrial & commercial payments, financial payments (interbank, money market, open
     market operations, securities trades, etc.), government payments (receipts & disbursements), and
     international payments.

     Do the systems adequately cover the entire country?

     Is there a specialized system for processing large value payments?

     Are payments cleared & settled sufficiently quickly? In particular, how quickly is a payment settled
     with legal finality or certainty (funds not revocable & available for immediate use)?

     Is the range of available payment instruments sufficient to satisfy the differing needs of the users?
     These might include paper and electronic debits. And should also (preferably) include paper and
     electronic credit instruments

     Are the systems convenient and easy to use from a user perspective? And, are systems reliable and
     always available for use?

     Are the systems safe and secure? For example, do the arrangements adequately address fraud, risk,
     rules to resolve disputes promptly and fairly, unauthorized access or tampering with payment system
     data, confidentiality of data and to the mechanisms minimize the credit exposure between
     participants?

     Is the legal & regulatory underpinning of the system sufficient? For example, if electronic payments
     are available, does the law provide for the legal validity of an electronic record and do the courts
     recognize electronic records as evidentiary material? (Many older legal arrangements insist on a
     signed paper document).

     Do the systems satisfy international minimum standards?

If the answer to any of the above questions is unsatisfactory, then there may be a good case for having
an expert opinion as to how the situation can be improved to ensure that market needs are satisfied in a
cost effective manner.




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