Retail Payment Methods

inSight

07 Sep 2000

Retail Payment Methods

Financial innovation has led to a proliferation of payment methods - such as credit cards and electronic money - not all of which are under the direct supervision of the HKMA. A review of retail payment systems recently initiated by the HKMA will determine, among other things, whether a more developed framework is necessary for overseeing these systems.

One of the important functions of money is to serve as a medium of transaction. Indeed, in any modern economy, transactions of any nature, involving for example the sale and purchase of goods and services, are conducted or settled with the use of money, in one form or another. Many payments, in particular retail payments, are made with the use of cash, in the form of currency notes and coins issued by or with the authority of the central bank or monetary authority. If not, they are made through payment services or mechanisms provided predominantly by banks that are regulated by the central bank or the monetary authority - for example the use of cheques, and the direct crediting and debiting of bank accounts. Then there are the wholesale transactions of a largely financial nature, for example borrowing and lending, or foreign exchange transactions, conducted among the banks themselves. Payments of these interbank transactions are effected again through the direct crediting and debiting of clearing accounts that the banks maintain with the central bank, and in the case of Hong Kong, with the HKMA.

Under these arrangements, the central bank de facto becomes responsible for overseeing the payment system. Indeed, we see this as one of the important policy objectives of the HKMA, although this is not spelt out in detail in any legislation. But the integrity of the payment system clearly has an important bearing on the confidence in the currency itself, and this falls squarely on the HKMA under delegated authority of the Financial Secretary. That is why we take seriously the recent surfacing of counterfeit bank notes, notwithstanding the fact that it was of a scale smaller than that for other major currencies. That is why we took the initiative back in 1996 in introducing the Real Time Gross Settlement (RTGS) interbank payment system, which is one of the most robust of its kind in the world. That is also why the HKMA, in partnership with the Hong Kong Association of Banks, runs Hong Kong Interbank Clearing Limited, which apart from operating the RTGS system and other electronic payment systems, conducts one of the most efficient cheque clearing systems in the world as well.

But, with financial innovation made possible by the advance of technology, other forms of money and payment mechanisms have been emerging, and some of them are provided by institutions that are not supervised by the HKMA or by any other financial regulator. The most notable examples are credit cards not issued by banks and electronic money issued for specific purposes. Although, in selected cases, the HKMA can make use of certain provisions in the Banking Ordinance to impose appropriate restrictions consistent with the objectives of that Ordinance, there is generally speaking a lack of locus on the part of the HKMA to get involved. It would be difficult to argue, for example, that the use of unscrupulous debt collection agencies by credit card issuers that are not banks would undermine confidence in the currency. Neither would it be right to stand in the way of progress simply for fear of erosion of seignorage of the currency issue by privately issued electronic money, although we must protect what rightfully accrues to the people of Hong Kong.

We thus face a dilemma in respect of retail payment services, particularly those not run by banks. And we have examples in which the interests of users are perhaps not adequately safeguarded. As the organisation closest to the subject, although not having a direct responsibility over it when banks are not involved, we felt that we need to take the initiative to conduct a comprehensive review on it so as to identify what, if anything, needs to be done. As announced on 1 August, this Review of Retail Payments will be conducted by a working group set up within the HKMA. We shall look at issues concerning competition, efficiency and systemic implications. We hope that the Review will, among other things, help us determine whether a more developed framework is necessary for overseeing retail payment systems. We also hope to have the co-operation of service providers and other interested parties to ensure that this Review is a meaningful one.

Joseph Yam
7 September 2000

More information on settlement and payment systems can be found here.

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Last revision date : 07 September 2000