Retail Payment Systems
In the OIC Member Countries
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2. BACKGROUND
Payment systems play an important role not only within the financial system but also for the
rest of the economy. A country’s payment system is the backbone of its economy and without
such effective systems there will be reduced economic activity and everyday commerce will
face significant obstacles (Scott, 2014). In following World Bank usage, we understand a
payment system to be infrastructure that is comprised of institutions, instruments, rules,
procedures, standards, and other technical means established to enable the transfer of
monetary value between parties discharging mutual obligations (World Bank, 2008).
A payment system is a network of interconnecting entities that facilitates the exchange of data
required to initiate, authorise, clear, and settle cash or credit claims between payors and
payees (Scott, 2014). An efficient payment system accomplishes these tasks at a relatively low
cost to the parties involved. Payment systems are not mere infrastructure such as roads and
bridges—they come in various forms, as driven by the needs of transactors, to facilitate
economic transactions.
Every year, the global economy executes about $500 trillion of ‘real economy’ payment
transactions, about $100 trillion of which represent retail sales transactions and bill payments
(Mellyn, 2012). About 85% of individual transactions by volume are executed in ‘cash’ legal
tender bank notes and coins. The remaining 15% of transactions by volume, representing over
90% of the value, are largely executed in the retail payments system (Mellyn, 2012), as distinct
from the large value or wholesale payment systems that today are operated by central banks
to provide real time gross settlement (RTGS). However, this is not always the case. For
example, Mexico’s Central Bank (Banco de Mexico’s) has set up the Interbank Electronic
Payment System (SPEI), which is a combination of real-time and multilateral settlement
systems. SPEI was designed for low operating cost and does not impose a threshold on
transaction value—making the line between large and small value payment system became
blurred.
In discussing payment systems, a distinction is usually made between wholesale and retail,
with the main differences between the two involving volume of transaction and the
participants involved.3 Thus, payment systems can be broadly classified into two categories:
large value payment systems (LVPS) and the retail payment system; we focus here on retail
payment systems. Both forms of payments also bring with them a distinct set of issues that
3 Retail payments are usually small in value but high in volume and dominated by non-banks or non-financial institutions.