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Essential role of payment systems in the payments contingency

While banks are obliged to have contingency plans in place, ability to use clearing and settlement services is not fully in their control.

Deniss Filipovs / April 07, 2022

Unfortunately, shocks are becoming the norm in today’s world and payments are not an exemption. How to ensure that national authorities have enough control over payment infrastructures and confidence about the contingency plans when something goes wrong?

Clearing and settlement infrastructures operated by the central banks are the cornerstone of national payment systems. Payments have evolved rapidly during the last decade, throwing central banks and other payments system operators difficult challenges to overcome.  

While bank or retailer specific issues would impact a very limited number of users of payments services, payment systems, in turn, are crucial to the functioning of the national financial system and would have a systemic impact on the economy of the country and its population.  

Payments have undergone a fundamental transformation towards standardization, centralization, and globalization. Centralized and simply bigger infrastructures are naturally better positioned to address the growing customer demands and stay competitive to the private initiatives driven by BigTech. At the same time, payment systems need to be cost-efficient.  

Growing dominance of global players and cross-regional infrastructures has raised concerns about the independency and autonomy of the national payment system, as well as the ability to ensure that this systemically important business continues in the event of operational problems.

When something goes wrong

While many like to speculate, that any contingency policy is powerless in power outages, there are many of risks that can materialize and disrupt payment operations. Yet the likelihood of a complete country-wide blackout in Europe is extremely low.  

The number of non-cash payments is constantly growing, and Covid-19 pandemic has strengthened the trend. The shift is also addressed by the modern contingency regulations and provisions that do not follow the approach ensuring access to cash, but rather ensure a certain level of availability of payments. While banks are obliged to have contingency plans in place to be able to fulfil the requirements, ability to use clearing and settlement services is not fully in their control. 

 

Struggles that pay off for Baltics

Local systems are becoming more dependent on European or global infrastructures and even “outsourced”. Nevertheless, some of the Nordic-Baltic countries are still operating their own systems. Those central banks are used to put a substantial effort to ensure that infrastructures can remain competitive and efficient.

Good examples here are retail payment systems EKS, operated by the Bank of Latvia, and Centrolink owned by the Bank of Lithuania. While the latter has successfully found a new category of market players to focus on, Bank of Latvia has been among leaders in the Euro area in driving the development of instant payments and related value-added services during last years. In 2017, Latvia was the first country in the Euro area to process instant payments in accordance with the SCT Inst rulebook. A few years later, they introduced a proxy service, which is used by the top Latvian and Estonian banks and has recently delivered a request-to-pay service to the Baltic market.  

Ownership over national infrastructures provide central banks and national authorities a higher level of flexibility and control in business continuity and contingency. Such a setup allows authorities to develop more efficient contingency procedures, where requirements can be translated into comprehensive strategy – to focus on the contingency of the core infrastructures, where banks would build their tactics as alternative connection to the national infrastructure even if they are not participating in it. Thus, national systems allow countries to keep control of the contingency strategy and have procedures for the domestic clearing of credit transfers or card payments as the main part of the business continuity plan.  

 

Options available

For countries that rely on foreign systems, the objective of a greater confidence and control of the national payments contingency strategy may seem to be unattainable.  

The current preferences of banks towards central bank services are mainly commercially driven since banks can freely choose if they want to participate in the central bank systems.

National authorities aiming to ensure reasonable and realistic contingency measures could define requirements for a back-up connectivity to the local clearing and settlement mechanisms and claim central banks the liability to provide a functional back-up payment facility if it is not there.

Local implementation of the secondary facility for a clearing and settlement mechanism would deliver an essential building block for the payments contingency plan of the national economy. It would enable local clearing and settlement of card payments and credit transfers being so crucial for financial stability. 

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Deniss Filipovs
Strategic Business Developer

Author

Deniss Filipovs

Strategic Business Developer

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