Retail Payment Systems
In the OIC Member Countries
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able to do so in the future. Liquidity problems have the potential to create systemic problems,
particularly if they occur when markets are closed or illiquid or when asset prices are changing
rapidly, or if they create concerns about solvency.
Risk and Liquidity Trade-off
Payment system’s liquidity is measured by how fast and easy it is to make a payment at a given
time (Martin, 2005). Since delay and interruption is not an option, a well-designed payment
system must allow every participant to obtain funds through intraday credit. The easier it is to
acquire these funds, the more liquid the payment system. In a liquid system, any institution
could make a payment regardless of their current balance with regard to other institution or
the system’s settlement institution (usually a central bank).
However, as it becomes easier to obtain intraday credit, the default risk will inevitably
increase. Since an institution in the system might not be able to settle their obligations to their
counterparts, this kind of risk can generate settlement risk. Settlement risk is generally used to
designate the risk that settlement in a transfer system will not take place as expected, either
because of credit risk or liquidity risk (BIS, 2003; 2012).
There is a fundamental trade-off between liquidity and settlement risk. A payment system can
become more liquid by making it easier for institutions to borrow intraday credit, but such
borrowing increases the possibility for default and a failure to settle with the institution
extending credit. Conversely, a system can become less risky by eliminating transactions that
are most likely to result in default, but limiting transactions will reduce the liquidity of the
system.
The 1990s experienced a major transformation in the design of these settlement systems: from
deferred net settlement (DNS) systems, which settled only at the end of the day, to real-time
gross settlement (RTGS) systems, which settle on a continuous basis. This transformation was
largely due to the possibilities offered by information and communication technology and to
the measures taken by central banks to reduce systemic risks in these systems.14
The World Bank has for many years compiled data and worked to push central banks to
engage with the process of coordinating national strategies on retail payments (Pereira, 2011).
In a recent World Bank study the strategy proposal for retail payments took the following form
(Pereira, 2011):
14 Some countries are currently moving towards Large-Value Payment Systems (LVPS) that allow more flexibility in
addressing various risk and cost trade-offs than DNS and RTGS, mostly in the U.S., Canada, and Western Europe.