The Hong Kong Monetary Authority (HKMA) has completed a comprehensive review of retail payment services in Hong Kong ("the Review"), which was conducted by an internal task force of the HKMA set up in August 2000. The Review examined issues such as efficiency, pricing and costs, degree of market access, level of competition and risks associated with the various means of retail payment. It also considered what should be the appropriate regulatory approach for oversight of retail payment services in Hong Kong.
The Review has concluded that Hong Kong's retail payment systems generally function well. They are considered to be efficient and effective, and there exists a wide range of payment instruments. The payment system providers are generally innovative. With Hong Kong's open regime for operation of and participation in retail payment systems, market forces function well to meet the market needs. There are no major shortcomings in Hong Kong's retail payment systems that pose risks to the systemic stability of Hong Kong's financial system or to public confidence.
Observations and recommendations
Looking ahead, the usage of credit cards, stored value cards, debit cards and electronic non point-of-sale debit instructions is likely to increase relative to cash and cheques. Credit cards and stored value cards, in particular, are likely to grow faster than average - the former because of the advantageous payment terms and keen competitive offers from credit card issuers; the latter because of the convenience provided, e.g. the Octopus card's contactless feature. The growth of stored valued cards, including Octopus, may displace some of the demand for bank notes in the longer term, but there has been no noticeable sign of this happening so far. E-payments through the Internet or other software-based devices have yet to develop significantly in Hong Kong.
To reinforce the efficiency and effectiveness of existing retail payment systems, the Review makes a number of sectoral recommendations with respect to different retail payment channels as well as the appropriate regulatory approach for oversight of retail payment services in Hong Kong.
Cash - The Review notes that a review of the design and security of bank notes is making good progress, paving the way for the launch of a new generation of bank notes.
Cheques - There is merit in extending the existing joint cheque clearing service in Shenzhen and cities in Guangdong to US dollar cheques issued by banks in Hong Kong. This will enable US dollar cheques to be presented in Mainland China and cleared on the next working day in Hong Kong.
Credit and debit cards - The Review sees benefits in the ready availability of credit checking facilities and the sharing of positive credit data of individuals through a credit reference agency. An appropriate framework to foster greater transparency in fee setting for credit and debit cards is also needed.
Stored value cards - The Review concludes that it is appropriate that the operation of stored value cards, should continue to be regulated by the HKMA as a licensed deposit-taking company under the Banking Ordinance. The Review supports the promotion of competition in the use of stored value card schemes. The Review recommends that the definition of "stored value card" be broadened to cover new non-card payment devices, such as digital cash. There is no current concern over erosion of seignorage because of increased usage of multi-purpose stored value cards, but the Review notes that this topic might require reconsideration at some stage.
E-payment and e-legal tender - The Review sees the benefits of wider availability of cost-efficient facilities for e-payments to be settled across inter-bank accounts to facilitate e-trading. The international development of e-legal tender has yet to mature. At an appropriate time, the HKMA may launch a study on e-legal tender in view of changes in market demand, both within and outside Hong Kong.
Regulatory approach - The Review notes that there are three key policy objectives to be addressed in Hong Kong's oversight of retail payment systems: promoting transparency of the operation of payment systems and services, monitoring the determination of fees and charges, and promoting market access, competition and efficiency. These issues are in turn essential to the overall stability, efficiency and competitiveness of Hong Kong's payment systems. Currently, there is no competition authority or regulatory body to oversee payment systems and services in Hong Kong. The Review considered regulatory approaches in Australia, Canada, the United Kingdom and the United States. The Review finds that a fully fledged regulatory authority may not be necessary in Hong Kong at this stage. The Review therefore suggests a progressive approach to improve regulatory oversight in Hong Kong to achieve the three objectives stated above. The recommendation is to introduce a self-regulatory approach, under which the industry would draw up codes of practices and also monitor compliance with such codes by the trade, while the HKMA would oversee the overall implementation of such approach.
The recommendations in the Review have been considered and endorsed by -
a. the Competition Policy Advisory Group (COMPAG) chaired by the Financial Secretary, with relevant government officials and Chief Executive of the Consumer Council as members;
b. the Committee on Payment Systems - chaired by the Chief Executive of the HKMA, with members from the financial industry; and
c. the Exchange Fund Advisory Committee - chaired by the Financial Secretary.
As a next step, the HKMA will hold discussions with the payment system operators and the participants in the retail payment systems to follow up the recommendations in the Review.
For further enquiries, please contact:
Jasmin Fung, Manager (Press), at 2878 8246 or
Thomas Chan, Senior Manager (Press), at 2878 1480
Hong Kong Monetary Authority
29 October 2001
