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Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. The rapid growth and innovation in retail payments have drawn renewed attention to the framework and arrangements for governance of retail payment systems. The mandates of retail payment systems have gained importance as the digital economy has expanded. The changes in market structure, competition, and notions of dynamic efficiency, as well as the ongoing need to enhance inclusion and participation in the economy, underline the important public-sector interests at stake. The governance framework and arrangements for such institutions are hence matters of interest to both the private and the public sector and warrant ongoing management and review. Effective governance arrangements are critical to the pursuit of the key policy objectives of ensuring the safety, reliability, and efficiency of payment systems and their broader role in supporting sector economic activity. This document, Governance of Retail Payment Systems: Keeping Pace with Changing Markets, has been prepared by a team of experts from the World Bank’s Payment Systems Development Group of the Financial, Competitiveness and Innovation Global Practice and the International Finance Corporation’s Creating Markets Advisory. The World Bank has been a very active player in the area of payment systems for more than two decades and has helped with the setup of legal frameworks and the governance, supervision, and implementation of retail payment systems reforms across emerging and developing economies. The World Bank also coordinates closely with and participates in international standard-setting bodies with relevance to payment systems, including the Financial Stability Board and the Committee on Payment Market Infrastructures. Governance of Retail Payment Systems: Keeping Pace with Changing Markets presents an analysis of the context, objectives, challenges, and approaches to ensuring effective governance of retail payment systems. It builds on existing principles and guidance for financial market infrastructures and corporate governance to provide guidance to authorities, operators, and other relevant stakeholders for the setup, review, and management of governance frameworks and arrangements specific to retail systems. Mahesh Uttamchandani Practice Manager Finance, Competitiveness and Innovation World Bank Group This report has been drafted by a team co-led by Nilima Ramteke and Holti Banka and comprising of Peter Møller Jensen and Ivan Mortimer-Schutts. Harish Natarajan provided overall guidance to the team. The team appreciates comments from the reviewers of the paper: Alexander Berg, Biagio Bossone, Jean Lobet, José Antonio García Luna, Georgiana Pop, (all World Bank). This report would not have been possible without the generous support of the Ministry of Foreign Affairs of the Kingdom of the Netherlands through the Financial Inclusion Support Framework program. CCP Counterparty Clearing House CPMI Committee on Payments and Market Infrastructures CSD Central Securities Depository EIG Economic Interest Group FMI financial market infrastructure GPSS Global Payment System Survey IRPS Important Retail Payment System IOSCO International Organization of Securities Commissions MDR Merchant Discount Rate NETS Network for Electronic Transfers NPCI National Payments Corporation of India OECD Organization for Economic Co-operation and Development ORPS Other Retail Payment System PFMI Principles for Financial Market Infrastructures PSR Payment System Regulator RBA Reserve Bank of Australia RBI Reserve Bank of India SIC Swiss Interbank Clearing As innovation in retail payments continues and the Public authorities have different tools at their systems evolve, effective governance of them disposal for influencing governance arrangements becomes more complicated and increases in through the governance framework. The interest importance. Within expanding digital and data- of public authorities as indicated include, ensuring driven markets, existing retail payments systems that payment systems facilitate and promote are under pressure to adapt, and new ones are comprehensive and active participation by all emerging. Retail payment systems are essential stakeholders, including those excluded from for the economy to function efficiently, and more financial services. The governance arrangements and more, they are something on which all need to ensure that the overall objectives as set by individuals rely on in order to participate in the public authorities are also met, beyond the economic life. As a scalable element of financial interests of the direct stakeholders. services networks, they are also increasingly of strategic importance for economic development Governance calls for focused attention, and retail and are attracting both domestic and international payment systems deserve and require distinct and private-sector interest. specific guidance regarding governance. This is because issues related to retail payment system Effective governance arrangements of retail governance go beyond the typical corporate payment systems are critical not just for the issues, precisely because of the underlying public stability, reliability, and efficiency of the financial interest and the broader public policy objectives system but also for its capacity to manage and of safety and efficiency. The CPMI-IOSCO respond to the changing policy and market principles for financial market infrastructure environment. While many different factors provide a detailed framework and sound contribute to the overall stability, reliability, and guidance, but they apply directly only to those efficiency of the financial system, governance of retail payment systems that are deemed retail payment systems and payment service systemically important. Moreover, the specific providers is one essential factor that brings these circumstances of and practical challenges faced by relevant elements together. Governance sets the retail payment systems warrant further guidance. tone and direction for a payment system and creates the arrangements for decision-making and Policy makers and authorities with responsibility coordination among the many participants and for regulation and oversight are under pressure to stakeholders necessary for the effective and adapt frameworks and adjust to the new demands efficient functioning of a retail payment system. of the digital economy, where governance becomes increasingly important. They often need Governance arrangements of a system also help to make balanced and dynamic trade-offs authorities achieve the system’s policy objectives between different and sometimes disparate and interests. The primary public policy objectives objectives. The owners, operators, participants, for retail payment systems are to “promote safety and other stakeholders in retail payment systems and efficiency” and “support the stability of the also face new challenges on how to balance broader financial system.” Beyond the core access, innovation, safety, and competition, with objectives of safety, reliability, and efficiency, emerging services on the one hand and the governance also helps (i) enhance competition commercial role/objectives of a payment system and stimulate innovation, (ii) foster market in a competitive sector of the economy on the integration, (iii) expand access and usage, also in other. Governance plays a key role in shaping the the context of financial inclusion and particularly incentives and mandates of owners and how the in developing and emerging markets, and (iv) different stakeholders work together in the balance competition and cooperation to create (or context of the broader public interests. preserve) a level playing field and ensure market contestability. As the pace of change and innovation has accelerated, regulatory and supervisory frameworks have been stretched. The sector is under pressure to accommodate and support Consideration 2: Governance arrangements more competition and innovation. The should be reviewed regularly internationalization of both the real economy and Governance should remain a living topic. financial services has highlighted Governance arrangements should be regularly interdependencies and deficiencies that some reviewed especially in the context of structural incumbent payment systems have been slow to changes to the market, to policy or the address. Governance frameworks and institutional environment as well to respond to arrangements need to ensure that these can be industry innovation. managed in a way that balances competing public policy and private interests. Consideration 3: Appropriate public interests should be acknowledged, clearly defined and This paper provides context and considerations addressed regarding the governance of retail payment The governance arrangements of a retail payment systems within this changing environment. It system shall recognize and support “public- provides examples of approaches specific to the interest considerations.” Public interest governance of retail payment systems and the considerations is a broad and evolving concept different factors that influence and guide them. It that policy makers and authorities must strive to refers to related legal frameworks, principles, and define, adapt, and clearly communicate, in reference materials that may be useful in accordance with their own policy and market conducting reviews. And it draws on and shares context and as part of the governance framework examples of the challenges, frameworks, and which need to be properly reflected within the arrangements of specific countries and systems. governance arrangements of a retail payment The paper provides specific guidance for practical system. matters, such as the regular assessment and revision of governance arrangements, the Consideration 4: Stakeholder involvement is of importance of acknowledging public interest, key importance maintaining access rules that are in line with Effective involvement of relevant stakeholders is market needs and developments, achieving and an essential element of a retail payment system’s maintaining a high degree of transparency governance. The involvement of different regarding governance, and in ensuring that the stakeholders can be achieved through a variety of board and management have the right skills and mechanisms, dependent on the context. knowledge. Consideration 5: Access rules should evolve with The paper concludes with several themes for the market consideration that would help authorities and The access, membership, and participation rules other relevant stakeholders navigate the topic of of a retail payment system should be regularly governance for retail payment systems. They are evaluated and aligned with changes in policy and summarized below. market context. Such evaluations shall be guided by the development needs of the economy, the Consideration 1: There is no one-size-fits-all retail payments market, the role of new types of blueprint for governance arrangements. payment service providers, and with respect to The governance arrangements of different retail the other policy objectives and considerations for payment system should be context specific and preserving the safety and integrity of systems. will inevitably differ. Governance arrangements must be specific to the market, policy, and institutional context of each given retail payment Consideration 6: Anticipate changes to skills and system. They should help to address public policy qualifications required by the board and senior interests relevant to the country, the market and management political context while balancing these with the In a context of increasing change in retail interests of users, owners, operators, and payments, it is important to ensure that the board participants. and management possess the skills, qualifications, and experience necessary to fulfil their roles. The board of directors is responsible for ensuring that The scope of application of the governance its members’ skills and qualifications are up to framework and its alignment with governance date and aligned with the emerging challenges arrangements should be assessed regularly. and structure of retail payments. Attention should be paid to changes in the market that may require amendments to existing Consideration 7: Potential conflicts of interest regulations. should be identified and addressed Governance arrangements need to acknowledge Consideration 10: The different roles of public and pay specific attention to potential conflicts of authorities should be acknowledged and interest. Retail payment system governance addressed arrangements should take account of the full Public authorities have different and often scope of potential conflicts of interest across the changing roles and responsibilities in the entire set of stakeholder groups and their governance of retail payment systems. The role(s) interactions and mitigate them in a transparent of public authorities, including central banks, in manner. the governance arrangements of retail payment systems have to be considered and clearly Consideration 8: Governance arrangements must defined. be transparent Transparency is a hallmark of good governance Consideration 11: Attention should be paid to the and an important and effective mechanism to critical role of the central bank promote it. As a minimum, transparency requires The oversight activities of a central bank play a that information regarding current governance critical role in ensuring effective and appropriate arrangements of a retail payment system shall be governance of retail payment systems. The central published. bank might also need to play a role as a market catalyst. Consideration 9: Application and effectiveness of the governance framework should be regularly assessed. Retail payment systems are essential and of objectives of the company are set, and the means increasing strategic importance for the economy. of attaining those objectives and monitoring Within expanding digital and data driven markets, performance are determined.”2 The OECD has existing retail payments systems are under published OECD Corporate Governance Factbook pressure to adapt and new ones are emerging. 2019, which provides a comprehensive global Digital payments are now, even if not “essential”, overview regarding corporate governance. In the certainly tending towards becoming something on context of financial market infrastructures, the which all individuals rely on to participate in Bank of International Settlements (BIS) somewhat economic life. The pace of change and innovation extends this notion by underlining the scope of has accelerated, while the scope of its impact on stakeholders that can be concerned. In the PFMI it payments has also widened. Regulatory and defines governance as “the set of relationships supervisory frameworks for payments and related between an FMI’s owners, board of directors (or financial services have also evolved, in general equivalent), management, and other relevant enabling more competition and innovation into parties, including participants, authorities, and the market. The internationalization of both the other stakeholders (such as participants’ real economy and financial services has customers, other interdependent FMIs, and the highlighted interdependencies and deficiencies broader market).”. In a broader sense, governance that some incumbent payment systems have been can also often refer to the rules, institutions, and slow to address. industry structures that shape the economics of the market and firms’ behavior within it. Such Governance creates the structures within which a aspects regarding governance are external to a retail payment system operates. At its core, specific entity or system itself but set the “rule of governance relates to the ownership and the the game”, the incentives and structures within management of the operations of a retail payment which it operates. system and the processes which govern it. The market context shapes the policy environment Governance plays a role in furthering the aims of and sets the framework within which governance relevant stakeholders, especially policy makers, operates. Governance is important for all types of that market forces alone may not be relied upon organizations but given the central role that a to address. Governance will be critical for ensuring retail payment system plays in the economy and the stability and safety of a retail payment system. the need for the public to be able to use them, Setting technical and operating rules, controlling their position within the structure of financial entry, or assigning some operating elements of a markets, governance of them needs to reflect a payment system to a public body may help to variety of public policy as well as private interests. ensure that high standards are met. Elements of governance may be designed to enhance the The term “governance” is used in different ways, efficiency of and access to payment systems, covers a broad set of topics, and has relevance to mandating for instance provision to under-served retail payment systems in different contexts. In users, setting pricing controls or expanding the the broader economic literature, governance can array of firms that can have access to a system. refer to a range of notions, from economic policy, And governance arrangements may need to play a through market structure to corporate level role in facilitating competition and innovation, matters1. In one sense it refers to “corporate helping to make the market more contestable and governance”, the internal arrangements that dynamic, for instance via changes to ownership govern a company and its operations. The OECD rules, forced divestments or licensing frameworks; Principles refers to corporate governance as “a set or governance arrangements may lead to or allow of relationships between a company’s for direct public investments that introduce management, its board, its shareholders and innovations. other stakeholders. Corporate governance also provides the structure through which the The different aims of stakeholders may not always new types of payment service providers and align. The aims of preserving stability may not be platforms to enter the market. Sub-activities have entirely compatible with those of competition. been more finely defined and, in some cases, They also may vary from a timeframe perspective, governments have mandated the unbundling of with for instance competition concerns for short- services, such as through the legal separation of run gains in consumer welfare also needing to be systems operators from schemes. New entrants balanced against longer term effects on stability. have sought access to and participation in existing Given the complex interplay of different policy systems. Technology innovation has also aims, it is essential that regulators and prompted public authorities directly, or indirectly competition authorities liaise and coordinate their via industry, to create new payment platforms and actions and respective influence or interests in the services; there have been changes in the structure governance arrangements of systems3. of supervision; and competition concerns have led to some direct interventions in the strategy, Effective governance should help to balance and pricing, and access rules of payments systems. All manage these different aims and objectives while such examples of changes have had substantial responding to changes in policy and market influence on the mandates, constraints, rules, and environments. There are many different and structures of governance. sometimes conflicting aims that owners, users and other stakeholders seek to address. But all parties The dominance of retail payment systems owned are essential to their operation and play different by a central bank or the banking community has roles. Governance is the essential structure that waned, but the rise of new entrants has also brings all the relevant elements together, shapes prompted them into renewed action. Just as the the boundary conditions, sets the tone and the role of privately owned systems has risen and direction for the payment system and creates the many legacy systems have enhanced the role of arrangements for decision-making and private investors, in many countries, public coordination among the many participants and authorities have themselves led a new wave of stakeholders necessary for the effective and innovations, establishing new systems or efficient functioning of a retail payment system. prompting bank-governed organizations to introduce new systems and services. As both retail The market context in which retail payment payments markets and payment systems undergo systems operate has changed in many countries. changes, governance arrangements will also often This also alters the challenges that governance need to adapt to provide effective support for may need to help manage. Technology and overriding policy objectives. business model innovations have created greater potential for economies of scale and efficiency New entrants in the financial system and changes gains as well as demand for new services. in the demand prompted by the digital economy Innovation outside of systems has demonstrated have demonstrated that incumbent systems have the inefficiencies embedded within incumbent not always been well positioned to either lead or systems and arrangements. New entrants and respond to innovation. Retail payment systems do international expansion have highlighted barriers not operate in a fully competitive market. They are to competition that existing governance network services that enjoy increasing returns to structures create or sustain. New entrants’ efforts scale. They encompass distinct vertically linked have often led to the creation of parallel and and historically often integrated functions closed networks. This has in turn raised issues of undertaken by different actors – issuers, inter-operability, the role of different ownership processors, acquirers for instance. And by design structures and how to align governance and (and with good reason), regulation often limits regulation across different systems. entry to the market and access to its services. Faced with these market “imperfections” and Governance and policy pertaining to retail public interventions, retail payment systems payments have also evolved in recent years. cannot be expected to, alone through the Regulatory reforms to the licensing framework influence of market forces, strike the right balance and regulation of payment services have enabled between various competing interests. The challenges are today more acute, as markets central bank; others are not for profit experience rapid innovation and change in both organizations owned by members of the banking supply and demand. Hence policy and regulation community, but often with representation of the interventions must (and do) play a role, as do central bank at some level; increasingly the governance of the market and the retail payment broader “infrastructure” is actually composed of systems that operate in it. separate legal entities with different owners and economic structures. And in many instances retail In this context, questions arise about the relative payment systems are owned by an independent merits of different ownership structures. Retail non-bank third party operator, some of which are payment systems can be - and are - operated publicly listed entities. Over the past decades, under very different ownership structures, with many systems have gone through multiple corresponding variations in governance. Some are changes in structure, ownership, and governance under the full ownership and operation of a (refer to Figure 6 for examples). Both the ownership structures and the legal structures of retail payments systems differ widely and encompass several dimensions. The payment system itself is often a collection of separate legal entities; sector and corporate governance as well as scheme and membership rules shape how such legal entities interact with each other. The economic owners of the individual legal entities within a system may be distinct, and different, from those that exercise strategic and managerial control of the system overall. In line with market evolution, many systems have proactively or through the influence of policy makers become more “unbundled” or less vertically-integrated. Specific roles or activities, such as acquiring, marketing or processing services, or the “scheme” itself, have been split off from a core entity. Accordingly, ownership models may defy simple classification. Figure 6 provides an overview of the evolution of ownership and corporate structure for a selection of 7 systems (in Denmark, Germany, UK, India, Malaysia, Morocco and Turkey). A cursory look at this figure highlights how much variety, change and evolution there is, even across a diverse array of markets. A few stylized examples of ownerships structures follow. ▪ Owned by the Central Bank: in this context, the system may or may not be a separate legal entity. If the system is not a separate legal entity, the central bank can be required to put in place specific internal structures and procedures to manage it. ▪ Partially owned by the Central Bank: the system may be an independent company, incorporated as for or a not-for profit, with the central bank, as well as local banks as shareholders ▪ Industry-owned private company: this is a common structure in which a group of participants and members of the system are also its owners. The Central Bank may have a seat on the Board as an Observer or with a ‘golden share’ ▪ Private or publicly listed company: A payment service may be operated by a for profit company, which may or may not own the scheme; a closed loop scheme is often owned by the operator; in 4 party card networks the scheme may be legally distinct. Together they constitute the overall system. The payment scheme may be incorporated in a legal entity that is separate from the company that operates the technical infrastructure. The former may be not for profit, and owned by its participants or members; whereas the company operating the infrastructure may be a for profit, independent commercial entity. There is no linear evolution in ownership and legal structures. Central banks have often played a pivotal role in creating new payment systems and ensuring that banks coordinate and cooperate within them. But once they reach a certain level of maturity, central banks have often reduced or at least adjusted their role in them, sometimes relinquishing ownership and control. In recent years, with the advent for instance of faster payment systems, central banks have once again been called upon frequently, to play a critical role as catalysts, e.g. to encourage or force through changes and new investments that require coordination and collaboration. Further discussion of ownership and control is provided in section 4.1. Each type of ownership model can be effective in of the system. A Board of Directors or some supporting broader objective aims, but similar decision-making body oversees the governance must make up for market payment system as a whole and sets the imperfections. The implications of each ownership objectives for and the terms under which the model, the way in which the retail payment management operates. Governance system functions under them, should be taken arrangements are the glue that supports and into consideration. The market context in which a holds a payment system together, also over particular model operates will also influence time. broader policy outcomes. For instance, privately owned for-profit systems may support the policy Internal governance arrangements are aims of innovation and efficiency. But if operating shaped, influenced and constrained by the in markets with high barriers to entry and few, if external governance framework. This includes any, competing systems, governance may need to external elements beyond the control of retail support universal access and competitive pricing. payment systems, but which substantially On the other hand, in the context of a system impact them. They include policy aims, owned by the central bank or a limited pool of mandates, institutions, instruments, and member banks, aims of inclusiveness and pricing mechanisms as well as the actual laws, may be well embedded in its mandate; but regulations (and subsidiary instruments of governance arrangements may need to find ways regulation), and oversight framework under to compensate for a lack of market contestability which they operate. The governance and incentives for innovation. framework can also include direct or indirect policy interventions, such as via competition Central Banks play a fundamental role in ensuring authorities, or, for instance, the central bank that governance balances these different interests taking an active role in shaping the market and aligns a payment system’s strategy, structure and broader systems operating in operations and conduct with public policy the payments ecosystem. The wider objectives. This involves balancing competing governance framework may also be interests of stakeholders, including those of influenced by other structures, such as a private stakeholders and helping, through national payment council. Together they governance – as one among other measures - to constitute an external governance address market imperfections. But within that “framework” in which they operate and the scope, the central banks can and does play a wide context in which internal governance variety of roles. The central bank can be the owner “arrangements” are defined and apply to a and/or operator of a retail payment system. It is specific system. usually but not always also its regulator and overseer. Central banks may have a seat on the Together and in combination, the external and Board, with or without formal voting powers. And internal components shape the system’s structure at the last resort, the central bank will have and aim and constrain its behaviour and actions. powers of persuasion over a system’s members, They determine the scope and form as well as the participants and operators as either their level of autonomy left to systems to govern their regulator or as a key authority within the overall affairs and their interaction with the broader array financial system. of stakeholders in retail payments. These structures can be more, or less, stringent and The governance of retail payment systems prescriptive from one jurisdiction to another. The encompasses both internal arrangements and the various elements are interdependent and must be external framework within which they operate: considered as such when undertaking reviews of or designing reforms to governance. The internal arrangements include its mandate, its executive and management Because of their interdependency, it is important bodies, and the rules under which they to assess and design governance as a whole and operate as well as the actual terms of with reference to the market context. The incorporation, operations, and development effectiveness and relevance of specific requirements with regards to access, ownership arrangements are only one among other “tools” or structures or licensing frameworks, is difficult to instruments available to shape market outcomes assess when looked at in isolation. Their and the behavior of firms. Governance should not effectiveness and appropriateness depend on the be expected to or regarded as a tool to address all market circumstance, relative important of policy public policy and market issues. Direct regulation aims, competitive dynamics as well as other of systems and participants is also important. elements of governance in place. Regulation and governance should work alongside each other to complement private market forces. In considering the effectiveness of governance, it should also be remembered that such Source: World Bank In Bossone and Cirasino’s 2001 paper on revisit governance arrangements for retail governance and oversight, they explain how payment systems. governance arrangements should support the broader policy objectives of ensuring the safe and Governance calls for focused attention and retail efficient provision of payment services. To the payment systems deserve and require distinct and extent that governance supports the exercise of specific considerations regarding governance. The oversight, they should help over the longer term CPMI-IOSCO principles for financial market “to make sure that the payment system optimizes infrastructure provide a framework and sound its provision of services to the economy as this guidance, but they only apply directly to those develops over time.”4 It is also important to retail payment systems that are deemed “exploit the complementarity between the public systemically important. The specific circumstances and the private sector and use incentives to induce of and practical challenges faced by retail payment agents to internalize prudence and honesty in systems warrant further guidance. Policy makers their long-term business strategy.”5 These and authorities with responsibility for regulation objectives and the principles guiding them have or oversight are under pressure to adapt remained very robust to changing market frameworks and adjust to the new demands of the conditions. In this context, it is also important to digital economy. They often need to make balanced and dynamic tradeoffs between different and sometimes disparate objectives. The of the operations of a retail payment system. The owners, operators and participants and other paper will address the main relevant themes in stakeholders of retail payment systems also face relation to governance of retail payment systems new challenges on how to balance access, where some will be discussed in detail while innovation, safety and competition with emerging others will solely be taken into account to provide services on the one hand with their commercial context. role of a payment system in a competitive sector of the economy on the other. Governance plays a Possible avenues for further research key role in shaping the incentives and mandates of As governance arrangements are highly context owners and how the different stakeholders work specific, it is appropriate to consider areas of together in the context of the broader public further research that may provide more specific interests. guidance. Governance frameworks and arrangements will need to adapt to different In the context of both the governance framework market circumstances, which themselves can and and the governance arrangements, this paper should be expected to change over time. provides specific considerations and guidance regarding retail payment system governance. It Particular areas for consideration regarding provides examples of approaches specific to the further research: governance of retail payment systems and the different factors which influence and guide them. • How should the objectives and It refers to related legal frameworks, principles arrangements of governance vary with the level of access to services, or to the and reference materials that may be useful in level of sophistication of the financial conducting reviews. And it draws on and shares markets in which they operate? examples of challenges, frameworks and arrangements of specific countries and systems. • What are the impacts on governance of The paper addresses the topic of governance in the increasingly international scope of relation to the individual retail payment systems payment services? What implications are and not the national payment system as a whole there for (i) the governance of systems which may be comprised of several individual and operators active in multiple markets, payment systems. The term national payment or (ii) for systems that operate across system is often used to describe the entire borders? payment infrastructure of a particular country. • How do governance arrangement influence incentive for development of The purpose of the paper is not to promote faster payments systems and what issues particular governance or ownership models. Retail should governance of such new systems payment systems are diverse in relation to the address? ownership model applicable ranging from full • How will open banking arrangements public ownership to public listings which equally influence the context for governance? In affects the governance arrangements of the particular, as open banking should in individual payment systems. The particular principle provide more control to end governance or ownership model chosen will be, users of payment systems, will and must be, guided by the needs and competitive pressures be strengthened, circumstances of the particular market and the thereby enhancing the role of market particular payment system and will likely change discipline regarding governance? over time. Nevertheless, some aspects and • The implications of CBDCs on governance principles regarding governance remain relevant arrangements of retail payment system? across the different ownership models. Retail Payment Systems and governance The paper is not intended to cover every aspect A payment system is a set of instruments, and every topic of relevance to governance. The procedures, and rules, including legal general topic of governance is very wide and arrangements, for the transfer of funds between touches upon and affects many different aspects or among participants. The system includes the participants and the entity operating the there may be competing processing services for arrangement, its access, and its operating or the same type of scheme; some functions may be “scheme” rules. Payment systems are typically fulfilled by companies with separate legal status based on an agreement between or among and their own governance arrangements. (See participants and the operator of the arrangement, figure 2 for an overview of the elements of a retail and the transfer of funds is affected using an payment system.) In some countries, there has agreed-upon operational infrastructure.6 been a trend toward establishing national payments companies that undertake a number of A payment system is generally categorized as functions in relation to retail payment systems.9 either a retail payment system or a large-value payment system. A retail payment system is a For purposes of alignment with oversight funds-transfer system that typically handles a responsibilities, payment systems may be large volume of relatively low-value payments in classified in different ways. In the European Union, such forms as checks, credit transfers, direct payment systems have been classified as debits, and e-money and card payment Systemically Important, Prominently Important, or transactions.7 Retail payment systems may be Other retail payment systems.10 The system operated by either the private or public sector, designation determines the oversight approach using different settlement arrangements, and requirements, which are typically based on a including multilateral deferred net settlement or a subset of the PFMI.11 In India, the Reserve Bank of real-time gross settlement mechanism. A large- India (RBI) has indicated in its new oversight value payment system, handling large-value and framework that it would classify some systems as high-priority payments, is more often owned and systemically important payment systems and operated by a central bank using a real-time gross apply oversight to them in accordance with the settlement mechanism or equivalent. PFMI.12 Other retail systems would not be subject to assessment against the entirety of PFMI. In Retail payment systems differ widely in terms of reference to other retail payment systems, the composition and scope of legal and however, the RBI notes that “some of the PFMIs operational entities they encompass. Some are so fundamental that they should also be payment systems consist of a single entity that observed by” other retail payment systems. “For provides all services; in others, the infrastructure the purpose, the RBI will be classifying such RPSs may be managed by separate scheme owners and [retail payment systems] as Important Retail system operators, or by both a scheme and an Payment Systems (IRPS) and Other Retail Payment operator company.8 Separate companies may Systems (ORPS).” support different scheme or instrument types, and Source: World Bank. Actors and Stakeholders in Governance to ownership. The schemes, systems, and operators of systems may all be separate legal The governance framework and arrangements of entities with different owners, and there may retail payment systems must take account of the be material differences to the economic and roles and interests of several stakeholder groups. legal ownership rights that owners can Beyond the board of directors and the exercise, in particular where there is collective management charged with the actual day-to-day ownership of a payment system by many of its operations, there are other stakeholder groups to participants. consider. (See figure 3.)  Participants have traditionally been licensed deposit-taking and credit institutions, but  Public authorities: This includes primarily the increasingly among them there are now also central bank and other financial-sector non-bank payment service providers that may authorities with responsibility for oversight or be direct or indirect participants. Many retail regulation of payment systems, but it can also payment systems have made changes to their encompass other authorities with rules to expand access and the types of access responsibility for competition or consumer to new kinds of participants and give them an protection, national security, and market appropriate voice in governance. integrity and conduct. The international growth  End users also have a vital interest in the of payment services and payment providers governance of retail payment systems. They can make coordination with other include not just consumers and merchants but stakeholders, including foreign authorities, also other business and government users. relevant. Where there are underserved communities  The owners of payment systems are central to and low rates of digital payments adoption, the design and exercise of governance of their governance objectives and arrangements must systems. But in considering governance, it also consider the interests of “non-users”—for should be noted that there are many nuances example, as potential or prospective users. Source: World Bank Principles for Financial Market have governance arrangements that are clear and Infrastructures transparent, promote the safety and efficiency of the FMI, and support the stability of the broader The Committee on Payment Market financial system, other relevant public interest Infrastructures13 and International Organization of considerations, and the objectives of relevant Securities Commissions developed the PFMI. stakeholders.” This principle was formulated in These principles, which apply to a range of FMIs, the 2012 publication with the interests of stability including systemically important payment and risk foremost in mind, noting that “if not systems, provide a starting point and robust properly managed, they [payment systems] can structure around which to extend guidance more pose significant risks to the financial system and specifically to the governance of retail payment be a potential source of contagion.” Governance is systems. In addition to Principle 2 (see below and further described within the PFMI as the process in appendix A), other elements of the PFMI also by which a payment system (i) defines objectives, pertain to governance frameworks and (ii) ensures the overall means and ways in which arrangements. to achieve those objectives, and (iii) monitors the ongoing achievements and compliance against The PFMI set out key aims for governance. them. Principle 2 of the PFMI states:14 “An FMI should Source: World Bank The PFMI apply to FMIs, including those owned by their business on the stability of the broader the private sector. This is significant in the context financial system and to support other public- of governance in that it sets a precedent for the interest considerations. Principle 2, in other owners and the board of directors of privately words, instructs all private-sector FMIs to combine owned retail payment systems to incorporate (and balance) the “public” interest with their public-interest considerations as one of their main private objectives. objectives. It requires a payment system not just to pursue profits but to consider the effects of Retail payment system governance should also be the interests of its participants. Governance guided by the general principles for corporate arrangements provide a structure around which to governance. These focus on the governance of set the institution’s mandate and to coordinate publicly traded companies but are also used as and address these different interests and roles of best practices for other companies. The OECD its stakeholders. Principles of Corporate Governance provide a benchmark for corporate governance around the The ongoing evolution of the market and of policy world and are used by the Financial Stability Board objectives and context requires that governance is for Sound Financial Systems Key Standards. They reassessed and recalibrated periodically. As are also used by the World Bank for assessments markets change and mature, retail payment regarding corporate governance matters of banks systems also need to evolve. The governance and other financial institutions. arrangements of a retail payment system should facilitate change but may not always be Recognizing the unique role of the central banks, sufficiently flexible or up to date to accommodate the PFMI provide for some exceptional cases change in an orderly manner and in alignment where the principles are applied differently to with changes in policy. The need to facilitate FMIs operated by central banks due to innovation has also become a more prominent requirements in relevant law, regulation, or element of a regulator’s objectives. In the United policy. Similarly, for retail payment Kingdom, for instance, the Payment Systems systems/infrastructure, the central banks may Regulator has explicit objectives that emphasize have public policy objectives and responsibilities these additional goals, stating that one of its roles such as financial inclusion. The central banks is to support “competition, innovation and the should not be constrained in the composition of interests of service-users.”15 the central bank’s governing body or that body’s roles and responsibilities. New systems are emerging or being established, for which appropriate governance arrangements Why Is Retail Payment System Governance need to be defined and established. Technology in Important? particular has facilitated the emergence of new retail payment systems and instruments. Some Governance is important in the context of retail have been established as new interbank systems, payment systems because retail payments led by central banks or by industry while others systems involve and affect a wide range of have been established by new entrants such as stakeholders, the interests of which do not always internet platforms. Ongoing initiatives by align automatically with the broader public authorities to develop central bank digital interest. There is a legitimate public interest in currencies are likely to change the payments ensuring that retail payment systems serve the landscape further and have important needs of the economy in an efficient and safe implications for governance, too. While many manner. While in other types of markets, the emerging players may remain small in size, a competitive pressures may act to discipline firms number of them have grown at an unprecedented and create appropriate incentives for governance, pace, at times outside the focus or remit of the retail payment markets are both highly regulated regulators. Nevertheless, a number of and subject to network effects that can also lead considerations and requirements regarding to market failures. Payment system governance governance should be applied to all retail payment therefore needs to help achieve a balance systems. between competition and coordination among participants to serve the needs of users as well as Public authorities for • Helps authorities ensure that systems operate safely and efficiently and provide • Oversight affordable, convenient payment services • Supervision • Ensures that legal, regulatory, and institutional frameworks provide for (i) clear • Regulation16 divisions of responsibility, (ii) appropriate powers and resources to be available to (among others17) authorities to fulfil their duties, and (iii) effective means of cooperation • Protects and facilitates the exercise of shareholders’ rights and influence and ensures the equitable treatment of shareholders Owners • Ensures that public interests and interests of stakeholders are recognized and reflected • Ensures clear understanding of their obligations to support public interests and their role in ensuring that systems are safe, efficient, affordable, and convenient Provides a clear mandate and principles and rules for the board in regard to (i) its role, (ii) aims and strategy of the system, (iii) responsibilities of the board, and (iv) Board of directors their accountability Enables and clarifies the powers of management and their role(s) in regard to (i) corporate strategy and operations, (ii) financial sustainability and performance, (iii) Management business and operational performance, (iv) legal and regulatory compliance, (v) accountability, and (vi) user satisfaction Ensures clear, objective, competitive, and inclusive pricing, service-offering and Participants access rules, and eligibility criteria • Helps ensure provision of safe, reliable, efficient, affordable, and convenient End users payment services (payers and payees) • Ensures appropriate protections for users and a competitive market Source: World Bank The notion of the external governance framework the OECD18 and the Principles for Financial Market refers to the rules, institutions and market Infrastructures (PFMI)19. structures that shape and delimit the internal governance and operations of a given retail The PFMI define the general issues and principles payment system. The external governance pertinent to these governance arrangements for framework is generally not something that the FMIs, including systemically important payment owners or managers of a payment system can systems. They emphasize the need for authorities alter themselves, but which must, to some extent, to clearly define the criteria for infrastructures to be taken as given, ‘external constraints’. Where a be subject to regulation, supervision, and central bank is itself an owner of, or has a role in, oversight and to ensure that authorities have the the governance of a specific payment system, they capacity and powers to exercise these roles. may be able to influence those external factors, Additionally, the PFMI recommend that but must do so in a manner that addresses the authorities disclose their policies and ensure potentially different mandates they fulfil in sufficient cooperation with and among different respect to sector regulation and oversight on the authorities. The PFMI also set out principles in one hand and their duties to that particular retail regard to the objectives of an FMI, and access to payment system on the other hand. and participation in them. The PFMI are applicable to retail payment systems that have been deemed Different policy, legal and regulatory instruments systemically important by the relevant authority. contribute to the external governance In other instances, a subset of the PFMI is also arrangements. Regulations can significantly shape applied by some public authorities to other retail the contours of payment services and affect the payment systems— in the context of oversight. role of actors in them—for instance, defining licensing conditions and controlling market entry. The PMFI are relevant to the governance of more Policy makers set government objectives for retail than just systemically important retail payment payments and may take an active role in systems. Systemically important retail payment developing relevant elements of governance systems play a critical role in maintaining and frameworks. Policy makers also determine the protecting economic activity. Other retail structure and powers accorded to various payment systems that are not deemed authorities through which the more detailed and systemically important may be somewhat smaller operational elements of a governance framework in terms of their overall transaction volumes but are defined, implemented, and overseen. nevertheless may still be of importance to broader economic activity or public trust. They may be The external governance arrangements relevant essential for the economic activities of individuals for retail payment systems are also shaped by and businesses where few alternatives are sector-specific policies and regulations and by the available. Disruptions to such systems can also oversight framework applicable to national have direct impacts on the economy but may payment systems. The governance framework is equally erode the public’s confidence in digital further guided by the general legal framework and payments overall and diminish demand for non- corporate governance standards applicable to the cash means of payment and the transition away broader economy. This includes the set of general from cash. The considerations of the PFMI in as well as sector-specific policies, laws, relation to governance arrangements that support regulations, institutions, and international safety and efficiency and in promoting relevant standards and best practices established by public-interest considerations are also relevant to authorities, within which systems are established other retail payment systems in terms of and operate. Important examples of international preventing or mitigating potential disruptions and standards and standard setting bodies are the in maintaining confidence in retail payment Principles of Corporate Governance established by systems. The PFMI can thus often be used as the applicable external framework also regarding governance as part of a wider oversight part of the general powers granted under a framework which covers non-systemically Central Bank Act. A central bank may also be able important payment systems. to impose requirements regarding governance as part of the licensing process for a retail payment Governance framework requirements also need system or through the applicable oversight to take into account and reflect changes in market arrangements. structure and dynamics. Market changes will have an impact on how public policy objectives can be 3.1 Public Policy Objectives and achieved through an appropriate balance of Governance Challenges private- and public-sector action. The authorities should “not seek to do by themselves what the Public policy objectives and interests can and market can do better.”20 At the same time, the should play a pivotal role in shaping the authorities should help the market to do what it governance arrangements of a system. Public can do better, ensuring that the public interest is policy aims are usually formulated in a strategy for safeguarded and promoted in the process. Market payment-sector development and further developments have also altered the opportunities transposed through the mandate and powers and incentives faced by users, participants, and accorded to authorities. Policy makers generally operators of retail payment systems. The adhere to the PFMI in support of the primary pertinent questions for policy makers and market objectives for retail payment systems to “promote authorities that increasingly need to be addressed safety and efficiency” and “support the stability of within governance frameworks and arrangements the broader financial system.” These high-level are, aims require further elaboration and (i) What concrete changes to the governance contextualization in order to inform and shape and regulatory framework need to be governance arrangements. The governance considered? framework will need to evolve in tandem with (ii) How should governance reflect and adapt to policy and market development. the interests of end users and other stakeholders? and, Defining the overall policy objectives may be part (iii) How, with increasing service specialization of a broader strategic plan such as a national and qualitative differences in payment payments systems strategy. This will articulate the services, should the key policy aim of short- to medium-term strategy of a given country efficiency and safety be defined and for retail payments and include or affect the monitored? strategic initiatives regarding national retail payment systems.21 In addition to the general Direct or indirect public-sector interventions in policy objectives, such plans may also directly set FMIs can also significantly shape the governance out specific conditions, requirements, or other framework. Public authorities, most often the terms regarding governance, such as ownership, central bank, may create, own, or operate a retail licensing, access, competition, and stakeholder payment system. They can play a critical role as involvement. A national payments system strategy convenors or catalysts, to encourage or enforce can be developed in cooperation with a national coordination among payment system participants payments council or similar body comprised of and set guidelines or mandates for a system. relevant stakeholders, including both users and Competition-related interventions by government providers of payment services. It is always authorities may also shape the market and important that overall policy objectives are clearly governance arrangements—for example, via price articulated and provide sufficient detail to guide controls or access policies in which a given retail operational decisions. They inform the different payment system operates. steps that need to be taken from a technical and practical perspective in order to meet the Central banks require specific powers to regulate identified objectives. retail payment systems. Central banks will often have the direct powers to regulate or demand Beyond core aims of safety and efficiency, specific requirements regarding governance as governance should help to support other important objectives. These include (I) enhancing warrant emphasis. A payment system may have competition and stimulating innovation, (ii) efficient mechanisms in place to integrate and fostering market integration, (iii) expanding access respect the interests of participants and users. But and usage, also in the context of financial inclusion that does not mean that it has mechanisms to and particularly in developing and emerging reflect and accommodate the interests of those markets, and (iv) balancing competition and excluded from or on the margins of formal banking cooperation to create (or preserve) a level playing and payment systems. For markets with significant field and ensure market contestability. The latter gaps in the population served by existing services, objective can be important if the ownership and government-led policy needs to represent the distribution of market power among incumbent interests of these “non-users” and the broader and new firms change. interest in ensuring more universal, convenient, and affordable payment services. Financial inclusion has important and specific implications for governance arrangements that The Reserve Bank of Australia’s (RBA) approach to payment systems regulation highlights the way in which the authorities influence the governance of retail payment systems in Australia. Consistent with international norms, the RBA defines three main objectives: (i) to control risk in the financial system, (ii) to promote efficiency of the system, and (iii) to promote competition in services. Its primary regulatory intervention takes the form of an access regime. In general, the RBA seeks to minimize interventions and enable the industry to operate under self- regulation wherever possible, leaving significant autonomy to the industry. Within the European Union, the broader policy objective of forging an integrated market has had multiple implications for the governance of retail payment systems. It has led, for example, to the creation of European Union–wide payment schemes and instruments such as Single Euro Payment Area credit transfers and the TARGET Instant Payment Settlement service operated by the European Central Bank, reformed regulations to expand access to and participation in payments systems by new classes of institutions (for example, payment institutions) and through newly defined activities, and through Regulation 2015/751, which mandated the separation of payment card scheme and processing entities. The Bank of Ghana has issued a National Payment Systems Strategy setting out a high-level list of responsibilities, including the need for a clear and comprehensive regulatory and governance framework that helps to achieve the different aims of promoting systems that are competitive, safe, and efficient and contribute to the aims of financial inclusion. The strategic vision of the of South African Reserve Bank emphasizes the need for a collaborative approach between industry stakeholders in order to achieve improvements and modernizations. The vision notes the importance of having a clear and transparent regulatory framework for all actors and commits the reserve bank to maintaining a level playing field, applying similar rules to similar payment activities and services. The United Kingdom’s Competition and Markets Authority introduced a coordinated set of policy actions to address constraints on competition in retail banking and payments and to broaden access to the clearing system. For example, the authority accepted undertakings proposed by Bacs Payment Schemes to address these issues, including undertakings to reform the corporate governance of the account-switching service, specifically to expand the membership of the management committee, to ensure that “independent non -bank or building society members and representatives of relevant consumer groups and intermediaries” were represented, had scope to voice their views, and, where appropriate, also had voting rights.a The State Bank of Pakistan’s national payment systems strategy highlights the role that the regulatory framework needs to play in creating an enabling environment for inclusive payments. It noted that not all actors were covered by the oversight of the state bank and that its scope would need to be extended to cover all systems, instruments, and services. To help guide the market, it also recommended the formation of a National Payments Council. In Switzerland, the SNB has decided to facilitate direct access by fintechs to central payment systems. To fulfil its mandate to facilitate and protect non-cash payments systems policy, the SNB can operate Giro accounts and decide upon criteria for accessing such accounts used for clearing and settlement within the Swiss Interbank Clearing (SIC) System operated by SIX for wholesale and retail payments. In a statement from September 2019, the SNB expanded access to regulated fintechs, thereby using its mandate to influence the framework in which the SIC operates. The Reserve Bank of India (RBI) has articulated a Vision 2021 strategy around four core principles: Competition, Confidence, Cost, and Convenience. In Vision 2021, the RBI indicates its intent to promote the establishment of a self-regulatory organization for the payment systems in India. The organization should work toward establishing minimum benchmarks and standards and help discipline rogue behaviour. In that document the RBI also highlights its role in helping to expand access to payments infrastructure. a. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/9069 81/retail-banking-investigation-final-bacs-undertakings.pdf 3.2 Recent Challenges for Retail oversight authorities to embrace change and Payment System Governance implement new services and models of operations. This has included measures to amend Frameworks legislation and regulation as well as the Governance has often been outpaced by market application of soft power or moral suasion to the developments and has sometimes struggled to banking and payments community. In some manage the consequences of them. It has been a instances, changes to the governance framework challenge for governance frameworks and have come about through the intervention of a arrangements to navigate and align different competition authority. stakeholders’ interests to encourage systems to adapt to the digital economy and embrace The rise of important new actors in the payments innovations that would be in the interests of the sector has also created governance challenges. broader public. Multidimensional changes to This includes new account-holding institutions, policy and regulations—such as licensing new such as those operating under e-money regimes, types of payment services or service providers and and new payment service providers as well as new “open banking” infrastructure, as well as changes payment networks operated by e-commerce, to access rules—have reshaped the governance telecommunications, or other non-financial framework. In parallel, but not always in companies. Effective integration of these alignment, the governance arrangements of companies within the existing participation incumbent and new systems have changed. frameworks, access and schemes rules, and Governance has not led but followed the evolution ownership structures of interbank or card of retail payment systems and, in some instances, networks has been limited. More often, these new has contributed to a less dynamic environment actors have created new services and even new than witnessed in other parts of the digital complete retail payment systems alongside economy that are less heavily regulated. incumbent systems and with limited dependence on their operational or governance arrangements. Under systems’ existing governance Yet, as new and alternative systems, they have not arrangements, it has not been easy for always been formally subject to existing principles incumbents to achieve a new balance between or standards for retail payment systems members’ incentives and the broader public governance. interest in efficiency. It has not always been possible within existing governance arrangements The added challenge for governance relates to to resolve tensions between the interests of new competition and the level playing field. With a entrants and incumbents.22 Some systems multiplicity of systems in a market, and with required encouragement or direct intervention by multiple network effects operating, the practical interpretation of key notions of efficiency, fair and prompted changes to governance arrangements, equal access, and the public interest becomes with intent to enhance incentives for innovation. more complex. The contours of market power and dominance are changing, with implications for In many instances, policy makers are confronted rules on access to central infrastructure and forms with trade-offs between different objectives. The of participation. The scope of retail payment design of governance frameworks and systems to which such rules as well as more arrangements will need to consider to what extent general governance principles should apply is different policies and arrangements are changing. compatible or incompatible with each other. There is no evidence of a single dominant model Given these challenges, the role of government, regarding governance; some policy choices will be primarily through the central bank, is also more compatible with each other than others, evolving. Public authorities are usually the and, for some, the compatibility will change over highest-level actor within the governance time as the market evolves. For illustrative framework upon which responsibility will rest to purposes, box 2 provides an overview of some of intervene if existing arrangements are deficient. the main policy objectives and trade-offs. But most authorities heed the advice that they should “not seek to do by themselves what the 3.2.1 Promoting Efficiency market can do better” and hence are rightly reluctant to take on full and permanent control of Efficiency is listed as both a general objective and retail payment systems; this is in part to avoid a key consideration that is noted throughout crowding out the market and in part to enable and several elements of the PFMI. Efficiency should be encourage innovation and development from the considered on two specific levels: (i) at the level of private market. But at the same time, the market an individual system and (ii) with regard to the often requires an enabling structure that unlocks economy-wide structure of payment systems and competition from new actors, protects the notion of “dynamic efficiency.” Efficiency also contestability, or helps provide access to basic needs to be regarded in the context of safety. The infrastructures. Public authorities face a complex PFMI highlight safety and efficiency in challenge of trying to limit interventions and combination; thus, promoting efficiency should be minimize market distortions while still facilitating guided by relevant considerations regarding targeted changes in the market that promote safety. innovation, protect contestability, and broaden affordable or more universal access. The topic of efficiency is addressed in further detail in Principle 21, which states, “an FMI should It should be noted that innovation in technology be efficient and effective in meeting the can also provide new or better solutions to requirements of its participants and the market it balancing conflicting objectives. In some cases, serves.” In the explanatory note to Principle 21, it technology has extended the efficiency frontier is further highlighted that the primary and made it easier to balance broader access with responsibility for promoting the efficiency and the need to control for risk. Governance structures effectiveness of an FMI belongs to the owners and have not always facilitated or provided incentives operators of the FMI. This further emphasizes the to benefit from such innovations; they have often link to governance. Furthermore, Principle 21 links created opportunities and pressure for new or efficiency to the practicality and cost of an FMI to alternative payment systems to emerge outside of its participants and users. In addition, it is required existing systems. Many stakeholders, including that mechanisms are put in place to ensure regular policy makers, payment system members, reviews regarding efficiency and effectiveness. participants, and competition authorities, have Historically there have been two main types of retail payment system: card schemes and interbank networks. They tend to operate as either open multi-party or closed, private networks (see ). Some systems originated as private networks run by a single bank. Others, especially for interbank transfers, were designed from the start as networks of different banks, to facilitate payments between their account holders. Many open network systems have emerged through the alliances or mergers between private networks. Both types of system have structural features that can inhibit competition. Payment systems operate as multi-sided platforms within a highly regulated network industry. Governance arrangements are, on the one hand, often designed in part, to address the associated market “imperfections”, but on the other hand, governance arrangements can themselves also constitute hurdles to competition and innovation. Governance and market structures are interdependent and the effect of a system’s specific governance arrangements on competition will depend on the external governance framework and other features of the overall market structure. As multi-sided platforms, payment systems need to attract different types of users in appropriate proportions. The value of adhering to a specific system depends upon the number and variety of other parties on the platform with whom they can transact. System operators face a “chicken-and-egg” challenge to which “zig-zag” user recruitment, cross-subsidies and incentive strategies are used to gain scale. New third-party entrants may use incumbent networks to enable or service one side. As network services, they also exhibit increasing returns to scale. The benefits to affiliated merchants, consumers and other users as well as participants grows as new members join. Larger incumbent networks benefit from barriers to entry and reduced competition. Additionally, where there are competing services and systems, incumbent banks (with a stake in existing systems) may be able to induce or discourage their account holders from joining them. The essence of payment systems is to achieve coordination, via a network, between its participants, service providers and end-users. This coordination is usually achieved through some form of vertical integration. This can be via direct, end-to-end ownership and control of all functions, or it can be achieved through a looser network binding independent firms via common rules, standards, and operations. Systems that are fully integrated, legally and operationally, can achieve high levels of reliability, safety and a better user experience. But end-to-end ownership can be difficult to scale indefinitely. However, some vertically integrated systems can become so powerful that policy interests or market forces curtail their growth. Vertically integrated systems can have both incentives and means to engage in exclusionary conduct, especially when service providers are integrated with infrastructure to which their competitors may need access. Open payment networks on the other hand achieve coordination between independent actors who are often also competitors through more distributed governance arrangements and alignment of incentives. Participants and providers agree voluntarily to adhere to rules, standards and conventions. Through governance arrangements they can have some influence on their design and evolution. Open networks provide “synthetic scale” without needing a single owner. But when markets and systems are exposed to structural change and need to innovate, the governance arrangements that enhances coordination among many can be that which curtails the speed and agility with which the system is able to react. Standardization and unbundling of services within payment systems have enhanced market contestability. With growing market maturity, systems have loosened the ties of vertical integration. Demutualization, de-coupling of systems from central banks and industry bodies, and consolidation at the international level have been encouraged as means to facilitate innovation. System functions, conventions, operations and technology have become more standardized and easier to coordinate without having direct control over the entire system (see ,). Services of specialized firms have become more easily inter-changeable. This has made it easier to introduce and bolt-on innovations within specific elements of the overall payment system, especially at end-nodes of the network. Governance frameworks have had to be accommodating. Regulators have refined the categorization of and introduce new licensed activities and service providers, thereby enhancing competition. But as innovation has expanded from end-nodes to core and the power of new stakeholders has strengthened, further governance challenges have emerged, particularly where more radical changes to central systems have financial repercussions for all participants. Even if the management of a payment system acknowledges the need for new investments, the overall governance structure may not provide the necessary powers and incentives to enact change. Overall, market context and internal and external governance are inter-dependent. There is no simple, dominant set of governance arrangements that optimizes policy defined outcomes; rather there may be multiple combinations that can help to pursue those aims, making trade-offs between them and varying on the market context, its evolution and its impact on the relative importance of specific policy aims. Governance may be designed to mitigate the effects of weak competition, but governance itself can also curtail market contestability. In assessing its contribution to welfare-enhancing competition, governance must be reviewed and designed, drawing on examples, in combination with market structure. ▪ Internal governance arrangements of industry-owned systems have not always made for sufficient incentivizes to innovate or capacity to lead changes. But in many cases, the external governance frameworks have provided policy makers or the central bank with sufficient levers to overcome such barriers and still prompt changes deemed to be in the public interest. In one example, a payment system with a balanced structure of shareholders found itself in circumstances whereby, after a period of market consolidation, within the existing governance rules, a single bank became a majority shareholder in the system. This unbalanced the organisation in a way that was detrimental to further developments of importance for efficiency, inclusion, and innovation. The central bank had to step in, invoking less formal powers within the broader governance framework, to restore balance in the ownership. ▪ Bank-owned systems have left underserved spaces that non-bank owned networks and new service providers have addressed, but not without some challenges to governance. New providers often have more autonomy to make investments and try new arrangements. In some cases, regulators have been pro-active in authorizing the entry of new systems (like mobile payment networks) and third parties (like e-commerce payment providers); in others they have been less interventionist, allowing new entrants to emerge without first setting new regulations or governance rules (see ). Governance has shaped the ease with which new providers interconnect with existing networks, and debate on interoperability. In an example in Germany, Sofort AG was accused by the banking association of transgressing a systems’ rules by inciting clients to share login data to generate credit transfers via online banking. The association eventually lost the case, with competition authority determining certain restrictions anti-competitive. ▪ Governance has also influenced if and how new systems become interoperable with existing systems. As they have grown, new systems and individual payment providers have sought access to central settlement infrastructure. Rules and standards have often kept them out and sometimes encouraged them to create new clearing systems. But in other markets, like Switzerland, the existing governance framework has allowed for new types of institutions to access central bank clearing and settlement systems (see ). Governance, alongside other measures, needs to help compensate for the lack of discipline that normal market competition would otherwise impose on the operators of payments systems. The external framework and internal arrangements of governance need to take into account and adapt to the complex and still evolving national and international market structures of retail payment systems. And policy makers need to proactively manage the interactions between governance arrangements and competition in order to strike a balance between private interests and key public interests in safety, reliability, efficiency and access. For a specific payment system, efficiency With regards to “dynamic efficiency,” the considerations should guide the design of challenge is that a given framework and set of governance arrangements and the decision- governance arrangements may help promote making framework. These should aim to ensure efficient outcomes in one set of market that the focus of the board and management circumstances but not necessarily enable ensures that the payment system itself utilizes its efficiency in a future state of the market.23 If resources efficiently. These considerations pertain exogenous factors change—such as through to governance arrangements discussed in section technology or business models, shifts in the 4 of this paper. structure of demand or supply, or through international trade—the set of efficiency- Secondly, efficiency concerns the extent to which maximizing solutions may also change. For payment systems collectively and individually example, while an incumbent interbank retail contribute to an efficient use and allocation of system might be operating efficiently from a resources from an economy-wide perspective. financial perspective, reducing fees and improving Policy makers need to make increasingly complex security, it may hinder competition or innovation decisions about how to design the governance in a way that creates hurdles to taking advantage framework in such a manner that it sets incentives of or responding to exogenous changes to and rules that help this broader aim of efficiency technology or the needs of consumers. This can to be achieved. This is becoming more complex for often be evidenced by the rise of new competing two reasons: (a) It requires taking into account not actors and services outside the system. On the just the costs incurred within the systems other hand, the fact that alternative systems can themselves but also the related income and emerge is a good sign of market contestability. expenses incurred by participants and users, Governance arrangements that remain effective including fees levied on end users, in the course of and robust in the face of such market changes are conducting transactions. (b) It is also particularly rare. Hence, policy makers need to be ready to complex because of rapid innovation and changes review the governance framework and make in market structure and the array and usage of adjustments to it. payment services and systems. Short-term efficiency gains or savings may forestall more Promoting efficiency will have a different meaning important innovations in the future; conversely, depending on the concrete circumstances. In the the net gains from investments in new platforms Global Payment System Survey 2018, increasing will be difficult to predict reliably. the overall efficiency of the payment system is quoted as the main driver for reforming the national payment system. While efficiency may be a less tangible concept, the practical meaning of competition are minimized and are appropriately achieving efficiencies should always be spelled out recognized, recorded, and addressed. in more concrete terms in policy objectives or as part of a wider national retail payments strategy. Active involvement of the relevant authorities may be required to ensure that the payment 3.2.2 Cooperation and Competition systems and markets remain competitive and contestable. Some central banks and payment The governance framework needs to articulate regulators have specific competition-law how and to what extent the governance responsibilities within their remit, while in other arrangements of a given system will balance the countries, this responsibility rests solely with the needs for cooperation and competition. Achieving competition authority. Both shared or divided efficiencies in a payment market or across responsibilities regarding payment services and different payment markets will often require competition-law compliance require active cooperation between different payment service cooperation between the different regulators and providers. These entities are also likely to compete authorities. It may also require some level of with each other in the provision of specific mutual training and information exchange to payment or ancillary services, while being ensure that all relevant policy objectives are supported by shared, common, or linked understood and met. infrastructures. This may potentially trigger different issues regarding competition law compliance in relation to, for example, standards, 3.2.3 Cooperation among Public pricing, or access where the fact that entities that Authorities Regarding Competition are also competitors are agreeing to rules or Matters principles that apply across a market may trigger an antitrust investigation.24 This particular aspect As technology has advanced and the role of non- requires careful consideration of both governance bank actors in payments has increased, issues and ownership arrangements in general and also regarding competition, contestability, and market of any board or management decisions regarding power have grown in significance. In many aspects such as access and pricing. countries, the sector regulator in charge of payment systems and the financial sector also has The decision-making process of a payment system the primary role in ensuring compliance with should be based on an acknowledgement of the competition issues, ensuring fair and contestable potential existence of conflicts regarding markets. Technological and business model cooperation and competition. The composition of advances have made greater efficiency gains the board, the transparency of the decision- possible while also exposing issues related to making process, the transparency of market power. Market trends have highlighted the documentation, and stakeholder involvement are roles that non-banks can play but also exposed the important components of a process that can ways in which regulation and the governance of ensure that the potential conflicts between incumbent systems can create barriers to entry. ensuring both effective cooperation and effective Governance arrangements may also be shaped by as by minimizing the influence in it of certain users the role of the competition authority or or by mandating broader involvement of users in agreements it has with the overseer of the its governance.25 payment system. Some competition authorities have underwritten memorandums of 3.3 Examples of Mandates and understanding with central banks. (See box 3.) In Strategies some countries, competition authorities have intervened directly or indirectly in market i. Oversight structures. Interventions may include mandating Most retail payment systems will be subject to changes to the actual governance arrangements, regulation and oversight by a central bank. The ownership, or practices of a payment system, such motivation for this is generally to protect systems against risks that may have effects on the wider can lead to interventions that shape the economy. Oversight will touch on various aspects governance framework—for instance, in of governance based on broader principles and modifying access criteria, setting requirements for standards that give the overseer the ability and interoperability, or, in some cases, strengthening flexibility to focus more directly on the different the role or voice of new participants in the relevant components and effects of governance governance of existing systems. and the tools to address any inefficiencies and shortfalls.26 iii. Stance on Intervention Governments take different approaches toward ii. Competition the role of the state versus private enterprise in Some oversight authorities also have an explicit shaping the evolution of the payments sector. In responsibility for promoting fair and open some markets, such as Australia, the stated competition. They need to balance the aims of approach is to minimize public-sector intervention stability and safety with the need to promote and to put the onus on the private sector to come efficiency. The competition mandate may be up with ways to help support the broader policy bestowed upon a competition authority alone or aims for the payment sector and systems. In other in the context of mobile money e.g. to a telecom markets, market failures or development regulator; most often mandates are concurrent challenges may motivate public authorities to be with each other and require coordination, e.g. in more interventionist—for instance, to take a lead the form of an MOU. To facilitate more innovation role in setting up or governing retail payment and competition, policy makers are frequently systems. Hence, the policy approach will be an strengthening the mandate of (or encouraging important factor shaping the market context in oversight and) competition authorities to enhance which the governance of a given retail payment access and market contestability. These interests system is designed and operated. Memorandums of Understanding between Central Banks and Competition Authorities: In Brazil, the Administrative Council for Economic Defence and Banco Centrale do Brasil agreed to a memorandum of understanding in 2018 undertaking to coordinate and give greater predictability to merger controls of institutions in the financial sector and to foster exchange of information. It also confirms that the administrative council will be responsible for the control of anticompetitive conduct involving companies in the financial sector. During the analysis, the administrative council will use data provided by the central bank through information exchange to increase the technical consistency and articulation of its decisions. In Australia, the Reserve Bank of Australia (RBA) and Australian Competition and Consumer Commission have a memorandum of understanding in place in which both parties recognize the importance of competition in the payments system and financial services more broadly. It confirms that, under the Payment Systems (Regulation) Act of 1998, the RBA may designate a payment system as being subject to the RBA ’s powers. The reserve bank may then “impose an access regime on the participants and/or determine standards for that system.” The memorandum also confirms that, where the reserve bank has taken such initiatives, members of that system will not be at risk under the Competition and Consumer Act of 2010. Coordination between Authorities Embedded in Law: In some legal systems, such as in Morocco and France, the law on credit institutions sets out requirements for competition authorities and the central bank or other financial-sector regulators to mutually inform each other of actions and opinions relevant to mergers and acquisitions in the sector. Interventions by Competition Authorities: In Turkey, the Turkish Competition Authority recently intervened in the market, revoking an exemption it had issued to the BKMa for its express payment scheme. The authority stated that its main concern was the possible restriction of competition through the unique integration between the BKM and its member banks. Such interventions alter the market governance framework within which the BKM operates, to address potential conflicts of interest. The Israeli Antitrust Authority has played a role in the market structure and governance arrangements of the local clearing company SHVA. To address potential market-entry barriers, in 2017, in coordination with the Bank of Israel, it demanded that SHVA publish and legally separate the communication protocol used and put it into a not-for-profit association comprised of users, including incumbents as well as new entrants.b Intervention by Competent Authorities: The intervention by the Reserve Bank of India and the government: The reserve bank has intervened, and rationalized charges levied on customers for transactions at ATMs and the merchant discount rate (MDR) on debit cards, which was applicable across financial institutions and operators. To promote digital payments, the government waived the MDR charged to merchants for transaction up to Rs 2,000 by compensating the banks for the same. However, effective January 1, 2020, as per government announcement, there is no MDR on transactions done using RuPay cards and for payments made via the Unified Payments Interface. However, the banks could continue to charge the MDR for transactions affiliated to other card schemes. This distorts the level playing field. a. The Bankalararası Kart Merkezi (BKM), or Interbank Card Center, provides domestic clearing and settlement of card transactions. The participating banks in the BKM are members of Visa or Mastercard. The transactions with non-member banks or with banks outside Turkey are processed outside Turkey by Visa or Mastercard or via correspondent banking arrangements. b. https://one.oecd.org/document/DAF/COMP/AR(2018)9/en/pdf 3.4 Legal and Regulatory Framework services. They can impose restrictions or conditions for operations, such as a divestment of Authorities shape laws, regulations, and licensing other activities or rules on pricing arrangements or regimes and may intervene in other ways that interoperability. Not all countries operate a formal directly or indirectly shape the governance licensing regime, but entry controls may be framework for retail payment systems. Licensing needed to support the pursuit of general policy frameworks may set requirements that systems objectives when operating a payment system. need to fulfil or mandate the use of a specific legal form as the basis for a retail payment system. The licensing requirements or conditions for a Regulations may intervene directly in governance payment system may impose specific mandates. arrangements, such as by stipulating They may pertain to the composition and requirements for interoperability, setting price qualifications of the board(s) in combination with controls, or detailing expectations for access and separate fit-and-proper requirements for the participation. board and senior management. The licensing rules may also impose specific requirements regarding 3.4.1 Licensing Frameworks the establishment of board committees, such as a Licensing conditions have a direct impact on the separate risk committee, and specific obligations governance arrangements of a retail payment for the operations and procedures of such committees, which will affect the general system. A retail payment system may be required to obtain a license from the relevant regulator in governance arrangements. Licensing order to commence operations.27 Licensing is an requirements may also specify or limit the type of important means for policy makers and regulators legal entity or vehicles that may be used to to control entry and shape the contours of the operate a payment system. This will in itself affect market, thereby indirectly influencing the and/or impose specific requirements regarding objectives and mandate. A regulator might set out governance on the payment system licensee. authorization criteria, but not automatically grant licenses to all operators that meet them, 3.4.2 Legal Structures depending on their approach to market entry as The legal form under which a payment system is an instrument of competition or other policy in the incorporated forms a cornerstone of its sector. Policy makers and regulators can influence governance arrangements. As noted above, the the level of competition in the market or in specific legal structure may be mandated. But the choice company is for profit—for example, whether it can of legal form may instead be at the discretion of pay dividends to shareholders. Legal forms also the shareholders and/or stakeholders in charge of determine the kind of status shareholders or establishing a payment system. Company law members have in the undertaking. National legal governing the particular legal structure will forms influence who has control and how easy it is typically include general and mandated (or not) to alter the structure of power and requirements regarding the structure of the board membership. In addition, the chosen legal form that needs to be established and may in some also determines the liability of the entity and its jurisdictions include, for example, the participants. establishment of both a management board and a supervisory board. Company law will also specify Historically, most retail payment systems have the composition of the board(s) as well as general been either systems owned by central banks or requirements regarding the management of the mutual organizations owned by participating day-to-day operations of the company operating a financial institutions. Today, retail payments payment system, including any fit-and-proper systems cover a wider variety of legal forms and requirements applicable to the board(s) and to structures, including variations on publicly listed senior management. for-profit companies, private joint stock entities, cooperative-type undertakings, and membership- The legal form of a payment system will also based organizations operating on a cost-recovery usually reflect the overall aims of the undertaking basis, as well as business units of non-bank and define obligations and objectives under which conglomerates. it operates. The legal form stipulates whether a Company limited by guarantee: Many payment organizations take this form, including the CIP in Brazil, the NPCI in India, and KFTC in Korea. Although there are local variations, they are generally run by “members” and, either by legal form or through their statutes, are operated on a cost-recovery basis and cannot or do not in practice issue dividends. Economic interest group (EIG): This legal form is a not-for-profit structure, similar to the company limited by guarantee, in which parties come together to collaborate in a manner that promotes the efficiency of their existing business. It does not impose constraints on the specific modalities of management and administration, but by default, it is governed by a general assembly composed of all members of the EIG. In France and Morocco, Carte Bleue and the GP2M are established under this legal form. Joint stock company with central bank as a shareholder: In many countries, the payment organization is a private company, but the central bank is a shareholder. This is the case for PayNet in Malaysia, TransFond in Romania, BKM in Turkey, and NAPAS in Vietnam. Private limited company: Many bank-owned schemes and payment organizations are incorporated as private companies limited by shares. Generally, but not always, these are owned by banks that are also participants in the system and/or are issuers or acquirers of payment instruments. The company can generate a profit, even if often it is run more as a shared service and not strictly to maximize profits. Examples include the EKS in Germany (owned by the local banking associations), STET in France (owned by the major banks), ITMX in Thailand, and NPP in Australia. Publicly listed company: A few retail payment systems are now publicly listed for-profit entities. Most prominently, these include Mastercard and Visa. Mastercard is also the owner of some domestic systems operators (for example, Vocalink). Other companies, such as Network International, also operate payment systems and provide processing for third-party schemes. Accommodating specific requirements regarding Street Reform and Consumer Protection Act) in governance arrangements can often be the United States, states that the card issuers are undertaken without directly affecting or changing required to be affiliated with at least two card- the legal structure. The chosen or mandated legal processing networks to allow the merchant a structures will define certain general choice of network routing, effectively delinking requirements regarding the governance scheme from processing. arrangements. While specific changes regarding governance arrangements, such as changing Interoperability may take on multiple facets and ownership from public to private or going from a relate to multiple layers of services within the pure not-for-profit to a for-profit focus, may overall system. In particular as new network require changing the legal structure and manner structures, such as those led by mobile operators, of incorporation of a retail payment system, other seek to integrate with other systems, it may changes may be made while keeping the legal concern interoperability between separate mobile structure intact. Flexibility in relation to money systems, between their respective agents incorporating requirements regarding the as well between mobile and bank led payment composition of the board, voting rights, and systems. defining the objectives and strategy of the company is often provided as part of company law Ownership: Other initiatives may address the without changing the underlying legal structure. ownership of a retail payment system. As an example, the sector regulator might mandate 3.4.3 Sector Regulation and Guidance divestments to prevent a given entity from dominating the ownership of one or several retail Payment systems regulators may issue guidance payment systems. In Israel, for example, a bank or set rules or mandates that shape or specify may not have an ownership share of more than 10 elements of the governance arrangements for a percent of SHVA.29 In the United Kingdom, retail payment system.28. A few key aspects following an enquiry, the Payment Systems concern the following: Regulator found that a divestment of the four largest shareholders in Vocalink would be a Interoperability: Sector regulation may mandate remedy for increasing competition in the UK interoperability between different payment market.30 A mandate can also be in the form of systems in the market. More intrusive measures more diversified ownership by, for example, may impose specific structural requirements, such including non-banks within the ownership or the as functionally separating a payment card scheme inclusion of independent directors within the function from processing functions. Such steps board. Moreover, the ownership pattern could be were mandated by the European Union through driven by regulatory interventions. For instance, the Interchange Fee Regulation. Furthermore, the National Payments Corporation of India (NPCI) mandating the use of specific processors may be was promoted by ten banks comprising six public- prohibited by law and or supplemented with a sector banks, two private banks, and two foreign mandate to offer alternatives when processing banks. Since then, the shareholder base has been and routing transactions. As an example, the broad, with non-bank participants also becoming Durbin Amendment (part of the Dodd-Frank Wall shareholders of NPCI.31 Access: A regulator can also set guidance entities considering applying for access to a regarding access rules and how they are applied. payment system have sufficient information for Such measures will impinge on the governance making informed decisions in this regard, the arrangements of the system in the interests of general access and participation requirements and ensuring fair and open access and a proper level of conditions may have to be made publicly competition in the market.32 This set of policy aims available. Moreover, any changes may require is often inspired by the PFMI, which enshrine the regulatory approval, and regulators retain the principle of fair and open access33 in Principle 18. power to direct changes in the access rules if Access can be in the form of direct or indirect needed to support public interest. access through another participant. To ensure that Transparency: Relevant guidance can also pertain create a new payment platform and service, such to transparency. Regulators may stipulate that the as instant payments. The central bank may also governance arrangements of retail payment choose to become a shareholder or an observer on systems commit to disclosing specific information the board, hence having a direct influence on daily to the public and/or to publish specific governance. communications at predefined intervals or following particular events. This can include the Interventions can also take place to promote requirement to publish relevant proposals for specific policy objectives. The central bank may wider consultation before decisions are made as decide to engage in order to promote or mandate well as publishing the subsequent decisions made, interoperability between different payments including their motivations. systems—for example, in order to promote competition and utility. Standards are central for Stakeholder representation: Regulators can issue the development of retail payments; hence, guidance or mandates about stakeholder initiatives can centre on mandating the use of a representation in the decision-making of a particular standard as a means to facilitate access payment system. They may require that the board and interoperability. The creation of a new of directors establish specific user or stakeholder payment system to compete with the incumbents committees that need to be consulted by a can also be a means to further competition and payment system as part of the decision-making thereby expand and develop the market. Other process. Furthermore, any fees and principles for initiatives can focus on the uptake of specific charging fees should be made publicly available technology, such as chip and pin or contactless together with a description of the services payments to enhance systemwide security and provided (as per Principle 24 regarding measures to combat fraud. transparency). The requirement to publish all fees can also be combined with the requirement that The regulator of a payment system can directly all fees and fee changes are to be approved by the influence its governance arrangements as well as central bank before adoption. its strategy. The regulator can intervene in different ways, including by mandating specific 3.5 Public-Sector Interventions changes in governance in order to facilitate certain outcomes or minimize or prevent certain effects in Beyond regulation and oversight, public the market. In this regard, the Payment Systems authorities, most often central banks, often play a Regulator in the United Kingdom describes its direct role in retail payment systems. They not remit and focus regarding governance of retail only may influence the governance arrangements payments systems in the following manner: of specific institutions but also may be a part of them through a role in their creation, financing, The PSR is opening up the governance ownership, and operation. Their actions may also and control of payment systems to influence the dynamics of the broader market and ensure that operators become more the behaviours of competing systems, if any such transparent and their decisions take exist. into account the interests of the businesses and people that use A central bank or other authority may decide to payment services. take an active role in reforming an existing or We do this by requiring interbank establishing a new payments infrastructure. This system operators to: (i) address specific can be done in many ways, but in all cases, the conflicts of interest of decision-makers, pivotal role of the central bank inevitably shapes (ii) improve service user representation both the governance framework and the actual in decision-making, (iii) publish their governance arrangements of the institution. The board minutes to explain their central bank may direct the industry to make decisions. changes to the governance of an existing system— for instance, to expand access to it by non-banks— In India, the Reserve Bank of India (RBI) has laid or the central bank may charge an existing body to down a governance framework for NPCI34 that mandates that neither the chair, director, nor from Bank Negara Malaysia, financial institutions, nominee director shall hold office for a period of and industry experts. The board is primarily more than five years in NPCI. Accordingly, responsible for the governance and management independent directors are appointed for a period of the business and for ensuring the financial of three years at a time (first term), and thereafter health of the company they are eligible for an extension or reappointment for a second term of two years, 3.6 The Role of the Central Bank subject to the approval of the National Register of Citizens, board, and shareholders of the company. Central banks remain at the center of the retail The Board Diversity Policy sets out the approach payments market through a range of roles and to diversity on the board of NPCI. responsibilities. They are usually in a unique position to assess, facilitate, and drive various Bank Negara Malaysia is both a regulator of and a changes in retail payment systems as well as in shareholder in the Real-time Retail Payments their governance, in which they may take on Platform. In order to avoid conflict of interest, several direct roles. A central bank is also able to the bank has put in place a robust governance facilitate cooperation and dialogue with and control. In line with the developmental objective, among different market players and the wider set PayNet’s shareholders do not receive dividends, of stakeholders, many of which will be payment and surplus profits are instead reinvested to system participants or users. This position equally ensure that the nation’s FMIs and payment requires central banks to be both focused and ecosystems are resilient, competitive, and proactive in relation to retail payments in order to accessible to all. PayNet has a seven-member leverage opportunities and ensure the proper board of directors comprising representatives development and functioning of the market. Source: Source: World Bank (Global Payments Systems Survey 2018) Central banks have often been involved in and competition authorities, have often become creating, owning, and operating retail payment more important, but the central bank is still often systems. In most countries, they are also charged the single most important actor involved in with the oversight and regulation of such systems. shaping the governance framework. As Bossone As the market has evolved, the roles of other and Cirasino note in their 2001 paper on payment authorities, including financial services regulators systems oversight: Due to their historical involvement in arrangements. The assessment will be in the form payment systems, the central banks of a formal evaluation of the proposed governance of the leading industrial countries structure in the context of the licensing conditions have been the main actors in moving and requirements, but it may also include, for the policy debate forward and in example, more concrete assessments and taking concrete steps to improve interviews with members of the board and domestic and cross-border payment management to ensure that they possess the right system performance. qualifications. But it should be noted that in various countries, other regulators may be The central bank is often responsible for performing the role of regulator of the retail regulation and oversight of a payment system. As payments market on their own or in collaboration such, central banks, in those roles, do not just with the central bank. influence but also assess the governance Source: World Bank (Global Payments Systems Survey 2018) The task of establishing the overall governance Nevertheless, as far as retail payment systems framework of a retail payment system may initially operated by central banks are concerned, a rest with, or originate from, the central bank. The separate governance framework can be central bank will typically be the operator of one established in line with the requirements of or several wholesale payment systems and in most Principle 2. instances will act as both the market regulator and payment system overseer, as well as the leading The specific role of a central bank in relation to policy maker. While the PFMI recognize that the retail payment systems will likely change over principles shall be applicable to FMIs operated by time. As the retail payment market changes and the private-sector and central banks, different matures, a central bank may take, and may have considerations may have to be applied to FMIs to take on, a very active and central role in operated by central banks. The Committee on establishing, owning, and operating a retail Payment Market Infrastructures has issued payment system. The central bank often takes an separate guidance in this regard that deals with active role initially, to facilitate and control the the application of the PFMI to central bank FMIs.35 development of the payment system and of the As far as governance is concerned, the guidance market. Active involvement by the central bank highlights that the key considerations regarding can also be required to overcome coordination the board in Principle 2 are not intended to failures or inertia that could harm innovation and constrain the central banks’ governing body. competition. Changes in arrangements as notified between the Global Payment Systems Survey in 2010 and in 2017: Board membership: From the surveys, only 11 (2010) and 10 (2017) central banks reported having a seat on a board of payment systems. This small net difference masks changes of a slightly larger order: Four central banks that report being a member of a board now were not a member in 2017. Five central banks used to have a board membership in 2010 but no longer do. There will be various pros and cons regarding the involvement of the central bank. As a market While a central bank will have different roles matures, the involvement of the central bank in relevant to governance arrangements of retail the ownership or operation and governance of the payment system, this does not necessarily entail payment systems may be phased out and that a central bank de facto has to take on a transferred to the banking community or the prominent role in the actual governance of a wider community of users. This could take place, payment system. The actual role of the central for instance, through the establishment of a bank in governance will be influenced by whether national payments company to which the it acts as the owner, sole or in part, or as the ownership is transferred either wholly, in part, or operator of a retail payment system. It also in stages. National payments companies have depends on whether, without taking on such roles, been established, for instance, in Jordan, India, the central bank has the mandate to play a Vietnam, and Saudi Arabia with the purpose of legitimate central role in governance—for further developing the national retail payments instance, by appointing (a number of) board market. The phasing out of central bank members or by having the right to appoint the ownership can be part of a clearly defined exit board chair or the chair of particular board strategy that is incorporated into the governance committee. arrangements. A central bank has other means at their disposal As the market develops, the continued for shaping or mandating specific governance involvement of the central bank can also create arrangements. A central bank can influence and conflicts of policy and interests. A central bank shape governance arrangements indirectly may be required to take an active role in the through articulating expectations and governance arrangements of a retail payment requirements regarding e.g. access to or system initially, but once intersystem competition stakeholder involvement in a retail payment increases, an active role by a central bank in the system, leaving it to the Board of a payment governance arrangements of a specific payment system itself to determine how to accommodate system may be incompatible with its other roles such requirements within its governance and responsibilities. arrangements. In many instances it will not be required to impose specific governance or Central banks may also take an active role in corporate arrangements to achieve the desired facilitating the uptake of new payment features policy outcome. Alternatively, a central bank may and methods. For example, central banks have opt for more direct intervention by mandating taken the lead in introducing instant payments. In specific arrangements or requirements regarding the majority of cases, they have initially been both governance for particular retail payment systems the owner and operator of these payment in order to achieve specific policy objectives. systems. A central bank may continue to be Whether to opt for an indirect or direct approach actively involved in the governance arrangements regarding governance will depend on the of retail payment systems in order to pursue particular market and particular mandates. specific objectives in terms of direction and growth or to minimize conflicts of interests. The governance arrangements provide the governance arrangements of retail payment structure for the internal decision-making systems will need to focus attention on issues and processes, set the tone, and shape the culture of a considerations that are different from those of retail payment system. While these features may high-value systems. seem intangible, they lie at the core of the entity’s objectives and define the relationships between a The governance arrangements shall also ensure company’s management, its board, its that the individuals serving as board members and shareholders, and other stakeholders. The actual as part of senior management continue to have governance arrangements of a retail payment the qualifications required to fulfill their roles. The system, however, will be determined by a number governance framework also provides the tools for of different factors, some of which are compulsory the board to oversee the operations of senior and some of which are optional. They include the management, to minimize and reconcile any governance arrangements of the entity or entities conflicts of interest, and, not least, to ensure the responsible for operating a payment system.36 general transparency of the operations of a retail This section outlines what the key aims, payment system, including its governance mechanisms, and challenges are in setting up and structure, to the outside world. managing governance arrangements for retail payment systems. Deficient or out-of-date governance arrangements can have serious negative impacts. Within individual systems, the governance Arrangements that were effective under a given arrangements are manifest in a variety of legal and state of affairs may not be robust enough to discretionary arrangements. Set out in general by continue to operate effectively when market the controlling owners or stakeholders, key structures change. Poor governance elements of governance arrangements include (i) arrangements will harm the operations of the the legal structure and mandate of the payment payment system and may expose its operations to institution or company, (ii) the powers of the inappropriate and excessive risks. They can board, management, and committees appointed hamper the development of the retail payments to oversee the business of the system, and (iii) the market overall and may ultimately undermine rules governing the admission, rights, and financial stability. At the same time, proper and obligations of shareholders, members, or up-to-date governance arrangements are critical participants specific to retail payment systems, its to building or maintaining the trust and scheme, and access rules. confidence of the end users of retail payment services. Trust in this regard can be difficult to gain The governance arrangements of retail payment but vanish easily. systems will differ from those of large-value payment systems. A key difference, as highlighted 4.1 Ownership and Control in the PFMI, is that large-value payment systems are mainly operated by central banks and are Ownership and control are central aspects of limited to specific types of users and participants. governance. In the case of retail payment systems, Retail payment systems are more diverse and especially given their collaborative nature and the develop at a different pace than large-value fact that owners or members37 of the systems are payment systems. They differ in the way that they often also the main users of the service provided are set up and operate, in their primary functions, by those systems, these arrangements can be and in the direct participants and types of quite complex and different from other private- payments that they support. The policy objectives sector companies, posing different challenges. of a retail payment system will be wider; the risk One considerable difference is that the of conflicts of interest will be higher due to the responsibilities of the owners of a retail payment roles of the users; and the relevant stakeholder system transcend their interests as owners and groups to consider will be more diverse. Hence, shareholders, as they are also required to consider the interest of other stakeholders as part of the governance arrangements. Depending on the Decision-making bodies: Companies have legal structure (see section 3.4.2), actual different levels and types of decision-making ownership and control may be exercised by bodies. These also depend on the legal structure. shareholders, members, participants, or observers Private companies usually have a board of (for example, the central bank). directors or an administrative council that oversees governance. The shareholders usually Typically, the owner or owners of a retail payment elect the members of board. But other legal forms system have the right to appoint members to the akin to associations or groupements d'intérêt board of directors in proportion to their économique may have a general assembly, to shareholdings or transaction volume. But in many which all members have rights to attend and vote. retail payment systems, alternative governance arrangements often ensure that board Voting rights: The powers of members or owners representation is more broadly based, giving to appoint or elect representatives to decision- stronger rights to smaller shareholders and making bodies also vary. Often algorithms define different kinds of members. The individual board voting rights that diverge from a simple “one members primarily have various duties toward the organization, one vote” system, usually the aim of company itself. Nevertheless, the influence of the which is to balance control between different owners through the appointment of individual kinds of shareholders or members. It should also board members, which are also often executives be noted that in many retail payment system employed by the owner, can carry a considerable companies, even if the central bank (or weight in the decision-making and direction of a equivalent) is not a shareholder, it is often retail payment system. accorded observer or full voting rights in the main decision-making body. Payment systems display a wide variety of rules and structures that determine the kinds of parties Restrictions on transfer of shares: Given that that may have control and the scope and extent of payment schemes are instruments of cooperation, such powers. Although the “owners” of a system there are also often restrictions on the rights of will generally exercise most control, the status of shareholders to transfer their shares. In many members or owners and their voting rights may institutions, shareholders have pre-emption rights vary significantly. Some examples follow. they can exercise in the event that another existing shareholder wishes to transfer their Eligibility: The statutes of the company may shares or if, through another corporate action define criteria that a company or other such as a merger or acquisition, they are to be organization needs to fulfil in order to be eligible acquired by another institution. to become a shareholder, member, or participant, with some governance rights. Many payment Ownership and control roles and rights accorded system companies allow only licensed financial to non-bank participants and stakeholders: From institutions or, more specifically, deposit-taking a level-playing-field perspective, non-bank institutions to become full members. Others participants may be given the same ownership define different categories of membership, with rights and equal governance rights as banks. In different rights or roles apportioned to members cases where new participants have the right of in order to maintain a balance between different access but not a share of the ownership, specific stakeholders. In some instances, members’ rights provisions may have to be made in relation to are linked to their market share, ensuring that governance to ensure that the interests of non- actors with higher transaction volumes also bank participants are observed and reflected in exercise more control. the governance arrangements. Cámara Interbancária de Pagamentos (CIP), Brazil: The CIP is a not-for-profit company in which “associates” have shares. As part of their eligibility criteria, associates must be institutions that have a “Bank Reserves” account at the Banco Centrale do Brasil. CIP is governed by a board of directors composed of a maximum of nine members, with at least one but no more than two independent directors. Associates can participate in the election of members to the board of directors in accordance with their shareholding, as follows: Associates with a shareholding of 8.32 percent or more can elect one member and alternate; the group of associates holding each between 8.31 percent and 0.78 percent of the shares can collectively elect one member; and the group of associates holding less than 0.77 percent of shares can also collectively elect one member. All members of the board must comply with certain basic conditions and reside in the country. Centre d'Echange et de Compensation (CEC), Belgium: The company statutes of the CEC define two main types of participant: direct and indirect. The statutes further distinguish between ordinary indirect participants and those that have direct technical access. Voting rights are accorded to direct participants/members proportionate to the volume of their transactions, excluding those of indirect members with direct technical access. General assemblies require that a minimum of 50 percent of the participants present are “direct,” and for some matters, a higher threshold must be met. Both direct and indirect members can sit on the client committee. AusPayNet (APN), Australia: APN defines three types of members within its constitution. Appointing members must be a participant in three or more Recognised Australian Payment Systems (APS) from different “payment streams”; they must also have a market share (as defined in the constitution) of more than 5 percent. Appointing members may appoint a director and may vote at the general meeting. Electing members must be participants in at least one Recognised APS. They have the right to participate in the election of directors and to vote at the general meeting. Operator members are operators or administrators of either (a) a Recognised APS or (b) another facility that relates to the payment or circulation of money in Australia. They may not participate in the appointment or election of directors, and they may not vote, but they may attend and participate in the general meeting. A payment system wholly owned by its term market developments that have less clear or users/members may be closely tied to the market immediate financial returns. but less willing to grant access to new types of potential users. Its owners may be reluctant to A payment system entirely owned by private support and process payments provided by equity or other private investors may be able to entities that can be regarded as competitors. This grow the overall volume of a payment system in particular type of user/member ownership may the short to medium term. But a pure for-profit potentially attract the attention of regulators focus needs to be balanced with a vision for the under applicable competition law given that the medium- to longer-term needs and developments owners are both users and also competitors at the of a market, fostering innovations and expanding same time. This may also trigger behaviors that access to and usage by lower-income users and can be regarded as anticompetitive. smaller enterprises. The ownership structure may change over time, often driven by the needs of the Systems owned by a public entity may be market, the broader objectives of the owners, and appropriate in situations where structural change regulatory requirements. Some systems have is required but may be less well equipped to drive moved from cooperative user/membership-based incremental change. Publicly owned systems are organizations to publicly listed companies. In often well equipped to maintain the ongoing other cases, private-sector companies have come operations of the payment system but may be less under greater public-sector control. well positioned to respond and adapt to the market’s more commercial and service-level As an illustration, both Mastercard and Visa went demands for new products and service. But they from member-owned and member-governed may indeed be better placed to undertake longer- organizations to publicly listed companies. Mastercard became listed on New York Stock Exchange in 2006, Visa in 2008. However, while Alternatively, the processing and operating Visa Inc. went public, the European Visa business functions may be divided into separate functions, remained member owned and governed from such as scheme and processor units, sometimes in 2008 to 2016 through Visa Europe, partly due to combination with a separate operating unit. These considerations regarding retaining a level of local functions can further be set up as entirely control over the European retail payment separate legal entities. A particular scheme can be activities.38 relying on one or several technical infrastructures (processors) for providing its services. In Malaysia and Vietnam, to advance the development of new payment systems, mergers The scheme rules will typically be agreed upon by were orchestrated between systems owned by the board or by the management under specific banks and the central bank. In Malaysia, the bank- delegation from the board, depending on the led ATM network MEPS was brought together with topic. The scheme rules will be subject to the legal Myclear, the payment network owned by the and regulatory requirements regarding payments, central bank, to create a single new private/public payment services and systems, and competition entity called PayNet. In Vietnam, a similar merger law, depending on the type of retail payment was orchestrated between Smartlink, a payment system and the market in which it operates. switch owned by a private bank, and BanknetVN, Within the European Union, both Payment a payment service owned by the central bank and Services Directive 2 and the Interchange Fee state-owned banks. Regulation impose requirements and restrictions in relation to access, separation of scheme and Network for Electronic Transfers (NETS) A/S processor, and particular aspects of acceptance, provides another example of governance such as a ban on the so-called “honour-all-cards transformation. This company has changed hands rule,” or in relation to surcharging. In India, the several times in recent years. It went from full RBI, under the Payment and Settlement Systems ownership by the banking community to a public Act, is empowered to direct the payment system listing, followed by a delisting and full ownership operator and issue regulations in the interest of by investment funds within less than five years. management or operation of any payment system Singapore’s leading payment solutions provider, or in public interest. The RBI has accordingly been NETS manages and operates the clearing and issuing regulations on providing access to the payment infrastructure for the Singapore Clearing payment systems to non-banks. For example, the House Association and owns Banking Computer Master Direction on Issuance and Operation of Services Private Limited, which operates the Prepaid Payment Instruments and subsequent funds-transfer service FAST. notification39 made mandatory for PPI issuers to give the holders of full-KYC PPIs (KYC-compliant 4.2 Scheme Rules PPIs) interoperability through authorised card networks (for PPIs in the form of cards) and Scheme rules, practices, and standards govern the Unified Payments Interface (UPI) (for PPIs in the interactions between a retail payment system form of electronic wallets). Interoperability has operator and the system’s (direct and indirect) been made mandatory on the acceptance side and participants and, in some ways, also the has to be enabled by March 31, 2022. Apart from interactions between participants and the end interoperability, the RBI has in public interest users. They are key components of the overall issued directions on “Harmonisation of Turn governance arrangements and have a direct Around Time (TAT) and Customer Compensation operational impact on the overall aims of owners, for Failed Transactions Using Authorised Payment stakeholders, and policy makers. Systems” to build customer confidence and bring uniformity to the processing of the failed A retail payment system can consist of both the transactions. technical infrastructure and the different functions associated with operating it. Together, The scheme rules also define other basic but the operation and control of these may be fully important principles. These include the rules integrated within the same legal entity. governing direct or indirect access to the payment system, cut-off times, clearing and settlement, development, the general policy objective of fair collateral, pricing, exception handling, and liability and open access to retail payment systems. It may for any failures. The scheme rules may also specify not be efficient to allow retail payment systems to requirements for particular payment products and have full autonomy in defining their access criteria payment instruments, security requirements, and rules, and at the very least, the policy makers brand and acceptance rules. and oversight authorities may want to impose certain transparency and disclosure criteria, in line 4.3 Access and Participation with the recommendations of the PFMI. The regulators will also need to balance their views on As the role of a retail payment system is to access with their concerns and powers as well as facilitate transfers between different actors in the the abilities of the operator to manage risk. economy, the rules governing which actors have access to it—and the way(s) they can access it— Access is also influenced by competition policy and are fundamental to its operations and a central law. Ensuring fair and open access on a non- aspect of its governance. Principle 18 of the PFMI discriminatory basis is also further facilitated requires that FMIs should apply principles that through applicable competition law. The allow fair and open access through objective, risk- principles regarding access, as part of the based, and publicly disclosed criteria for governance arrangements, will thus have to be participation. Retail payment systems should applied in a manner that prevents arbitrary or adhere to these objectives and develop an misguided decisions. The extremes would be appropriate set of policies and governance possible collusion or abuse of dominance by arrangements, including access criteria and denying or limiting access of prospective conditions, to ensure that such commitments are participants. Some retail payment systems have respected. While the objectives of access policy the possibility under their governance should be articulated within the governance arrangements of prohibiting the access of framework, it will also lead to commitments otherwise eligible candidates by deeming them a within governance arrangements, which should be competitor; such a prohibition can create specific designed to help ensure that the policy objectives issues under competition law. are respected by the board of directors and management of a retail payment system. Governance arrangements will be the means by which access policies—to the extent they exist— The principle of fair and open access assists in are implemented and applied. Foremost among facilitating a transparent and level playing field. such arrangements are the access rules and The aim is to support competition in the market by principles that directly define participation types providing access (direct or indirect) to the services and eligibility criteria for the actual use of a retail facilitated by a payment system, especially where payment system. Sometimes the criteria for the payment system may have monopoly or near- access can also operate in an indirect manner. A monopoly status and in situations where an precondition for (direct) access to a payment applicant whose request for access is rejected will system can be that the participant must have a have no viable alternatives. Under the oversight of settlement account with the central bank. the board, the governance arrangements of a Eligibility for a settlement account with a central retail payment system must recognize and bank may be limited to licensed credit institutions, safeguard that the principles regarding fair and thereby indirectly limiting access to banks (as open access are respected and applied in practice. opposed to payment service providers).40 In some countries, notably Switzerland and the United The governance framework for retail payment Kingdom, non-bank entities have recently been systems needs to articulate what the policy permitted to obtain settlement accounts, thereby objectives and requirements are for access and facilitating their direct access to and participation participation, and to what extent they apply to a in a specific payment system. For many key retail given system. Within the broader policy payment systems, these are clearly documented framework, a national strategy may articulate, as and disclosed. In the United Kingdom, Pay.UK part of its objectives for payment systems operates a web portal dedicated to accessing the management, and between board members and UK retail payment systems operated by Pay.UK.41 other stakeholders of the company. Authorities need to decide whether to extend Conflicts of interests can arise through a variety of access rules or guidance to closed loop and other circumstances and objectives. These may include proprietary retail payment systems. The PFMI the direct competition between specific users, the apply to a limited scope of retail payment systems, interest of larger-market players versus smaller- and some retail payment systems may also be market players, where the larger players may not outside the scope of licensing and oversight be willing to carry the proportional economic requirements. As the coverage and usage of burden of developing the market, or where alternative systems grow, their relevance to smaller players may not be willing to contribute public-interest objectives also rises. Hence, it may financially due to lower returns on payment be more important to extend guidance on access services. Conflicts of interest can also arise when rules and disclosure to such payment systems. allowing new market players to access the payment system or when facilitating Access rules are also important because they are interoperability with new or different payment often linked to the role that participants may play means. Conflicts may also arise when managing a (and the voting rights they have) in the for-profit objective versus other objectives, such governance of the payment system. Many as security or ensuring the wider efficiencies of the system’s charters accord voting rights in system. accordance to a participant’s access status (for example, direct versus indirect participant) and Conflicts of interest on a board, if not uncovered, the volume of their transactions relative to total disclosed, and managed properly, can give rise to system volume. faulty and inefficient decision-making and distract from achieving the objectives of the company. The Rules and safeguards also need to be in place to types of payments that are managed by the suspend or terminate access. This is an important payment system, the different users of the additional part of the governance framework that system, the owners, the broader stakeholder may be needed—for instance, to enable community, and the policy objectives of a retail management and owners to address objectively a payment system are diverse. This diversity also participant’s material breach of rules or provides the potential basis for conflicts of procedures, or to terminate their access following interest. The board as a collective, as well as the an evaluation of risk associated with allowing individual board members, need to acknowledge continued access. and be able to navigate the different interests and objectives of a payment system. These include (i) 4.4 Managing Conflicts of Interest the purpose, the policy, and other objectives set for the retail payment system, recorded as part of Conflicts of interest can and will arise in any the governance arrangements, (ii) the applicable organization, on the board of directors as well as legal and regulatory requirements, and, where within management. Conflicts of interest can company law may specify, (iii) the specific distort the decision-making of a company, obligations and fiduciary duties of a board potentially biasing decisions toward interests member to act, for example, in the best interest of other than those that support the objectives of the the company itself, toward shareholders, and company. Conflicts of interests arise when a board toward other stakeholders. member acts on the basis of self-interest or in the interest of the company that the person The board of a retail payment system will represents, rather than in the interests of the comprise representatives of different types of company to which the person is appointed as a institutions. Traditionally, this includes banks that member of the board. Conflicts of interest can have a share in the ownership of a retail payment arise in relation to individual board members, system and are also the direct users of the between board members, between the board and payment system. This by itself can give rise to a number of potential conflicts of interest, where the same entities cooperate while operating the a retail payment system, combined with retail payment system and, at the same time, transparency of the decision-making process and compete while providing users with different insight into the actual decisions made, will in itself types of services that are facilitated by the retail limit the risk of conflicts of interest and can also payment system. provide the basis for addressing and, if required, rectifying decisions made ex post. A regulator may take proactive steps to prevent certain conflicts of interest and issue general or 4.5 Responsibility and Accountability of specific guidance to the market. The Payment the Board of Directors Systems Regulator in the United Kingdom recently decided “to retain the fundamental obligation for The board of directors remains the focal point for regulated interbank payment system operators to the governance arrangements of a retail payment take all reasonable steps to ensure that none of system. The board will be responsible for agreeing their directors also act as a director of a central to and administering the arrangements by which infrastructure provider to their payment system” the payment system will make decisions and through the issuing of a direction.42 The Reserve operate. Depending on the circumstances, some Bank of Australia has issued guidance on managing functions to be undertaken by the board of the potential conflicts of interest that may arise directors may be delegated to a different body, from the different roles of the reserve bank and its such as a board committee or payments council, commercial activities, including its participation in effectively replacing the board in specific matters. payment systems.43 Clear and transparent rules and procedures shall guide the operations of the board of directors at The potential conflicts of interest that may arise in all times, as a general and encompassing mandate. a for-profit organization will also differ from those in a not-for-profit organization. Mechanisms need The responsibilities of the board or other to be in place to deal with such conflicts where, for governance body will be defined by the articles of example, the interests of users/owners involved at association, by the articles of incorporation, or, the board level in a for-profit retail payment potentially, by law. Therein will be defined the system clash with the for-profit motive in such different roles, responsibilities, and matters as pricing or pricing principles. In addition, accountabilities of the board and management. further emphasis on user and stakeholder These will include the following: involvement will be required in a for-profit organization. The rules governing the appointment of members to the board: These will detail the Acknowledging and preparing for potential number of board members, the board’s conflicts of interest will ensure that conflicts of configuration, the length of appointments to the interest are identified and dealt with as early as board, and the possibility of reappointments. The possible. Therefore, the governance rules can also describe the possible right of certain arrangements should clearly recognize and reflect stakeholders and non-owners to appoint board the possibility of conflicts of interest at the board members or the right to appoint certain level and include procedures for declaring, committee chairs directly. The appointment of identifying, and managing different conflicts of non-executive board directors, including interest. Board members may be required to sign independent directors, is regarded as an integral formal declarations attesting to not having any part of proper governance under the PFMI, and conflicts of interest—for example, at each board this aspect should be considered as part of meeting—or having to formally declare any establishing the governance arrangements. conflicts of interest. The procedures for dealing with conflicts of interest may be spelled out The responsibilities and accountabilities of the further as part of the risk-management board: The operations of the board shall be clearly framework, which shall also ensure that any actual documented to reflect the unique circumstances conflicts of interest are recorded properly. and requirements of the retail payment system, Transparency of the governance arrangements of and they should be assessed in terms of their appropriateness and effectiveness on a regular management should be clear, unambiguous, and basis. transparent. The board will also be responsible for monitoring the performance of senior The responsibility for the overall strategic management. objectives: The board will also define the strategic objectives and guide the management of company Committees with specific roles need to be operations. These objectives must be formulated established by the board as part of the governance in a manner that takes into account the defined framework. Most prominently, this will include a public-policy objectives, objectives regarding committee to oversee the risk-management safety and efficiency, and public-interest framework and an audit committee. These considerations. committees need to be equipped with their own clear and transparent governance framework, The responsibility for appointing senior defining the interactions between the board and management: At a minimum, the board will the committees as well as their specific appoint the CEO, but it may also play a role in the integration, remit, responsibility, and appointment of senior management. Ultimately, accountability. the board is also responsible for terminating the employment of senior management. Additional committees operating under the delegated authority of the board may be required. The board will be responsible for defining and They may include consultative committees that agreeing on the framework governing the have no formal powers as such but have to be relationships between the board and consulted as part of the decision-making process management regarding the day-to-day of the board. Such committees can comprise operations. The board of directors will define the board members, management, and/or framework within which the management will representatives of the wider stakeholder operate and manage the operations of a payment community in order to fulfill the wider policy system, and especially its objectives, strategy, and objectives of efficiency and transparency. Box 7 risk management. The board will define the provides a comparison of governance framework for the ongoing interactions between arrangement in securities market that provides a the board and management; the reporting lines lead on the options of governance for retail and any delegated authority from the board to payment systems. Central securities depositories (CSDs) and counterparty clearing houses (CCPs) face governance issues similar to those faced by retail payment systems. They have gone through waves of change similar to those being experienced in retail payments. Hence, it may be useful to compare arrangements for their governance with those of retail payment systems. Like for retail payment systems, the governance arrangements of CSDs and CCPs should address not only the interests of their owners but also the needs and interests of their stakeholders and users as well as the broader national or international interest in minimizing risks. In Europe in the late 1990s and early 2000s, innovation, consolidation, and internationalization also led to changes in the governance of these infrastructures. In the European Union, the aim of promoting the single market also played a role in the consolidation and governance considerations. In a 2004 occasional paper published by the European Central Bank,a the authors outline different mechanisms to address the interests of customers (that is, users) of CSDs. These were (i) the user-ownership model, also prevalent in retail payment systems; (ii) the establishment of board-composition requirements, (iii) the use of advisory committees; and (iv) the obligation for board directors to solicit and take account of the view of customers—for example, through formal consultations. Similarly, the report also outlined some of the mechanisms in use to ensure that such infrastructures also address the public interest. Many of these mechanisms can be useful for retail payment systems. They include (i) licensing regimes and requirements regarding company form, fit-and-proper requirements, or control of shareholding; board-composition requirements are also noted as potential mechanisms to be used in promoting the public interest. Transparency is considered an important pillar of governance arrangements for CSDs and CCPs. But the 2004 report also noted that disclosure practices varied widely among institutions. Competition is also a concern in this field of financial infrastructure. And as with retail payment systems, a common practice to address such concerns is to put in place rules that allow for (more) open access to the infrastructure. a. D. Russo, T. Hart, M. C. Malaguti, and C. Papathanassiou, Governance of Securities Clearing and Settlement Systems, European Central Bank Occasional Paper Series No. 21 (October 2004). 4.6 Qualifications of Board Members fulfill the relevant roles appropriately. For senior and Senior Management management, there may also be separate fit-and- proper requirements that stem from company law It is essential that both the board and or separate licensing requirements in combination management have appropriate qualifications and with a formal approval process by the relevant relevant experience. These should be clearly regulator. Risk management should be a particular defined with reference to the particular focus when assessing the qualifications of senior responsibilities associated with their roles in the management. As a payment system evolves, the management and operations of a payment specific requirements regarding the qualifications system. of senior management will change. It is the responsibility of the board to ensure that The members of the board of directors must management continues to be fit for the purpose, possess the distinct qualifications required for and the board will be required to undertake fulfilling their roles as members of the board of the assessments of the general performance of senior particular retail payment system. This may include management in an ongoing basis. Ultimately, the possessing appropriate and sufficient business board will also be responsible for terminating the knowledge from a user/provider/operator’s employment of individual members of senior perspective and knowledge of risk management, management. regulatory aspects, and/or other relevant specialist information. Each board member should be proposed for appointment and assessed 4.7 Involvement of Relevant against these concrete criteria before being Stakeholders formally appointed to the board. Once appointed, A retail payment system is of direct importance to there should be periodic assessments of the stakeholders beyond its immediate participants performance of the board collectively, and of the and users. Retail payment systems fulfill a purpose board members individually. that is different from many other private-sector entities. In their role of facilitating payments Applicable legal and regulatory requirements may between different parties in the economy, they set separate fit-and-proper requirements for the are important to other parties in the broader board. Fulfillment of them, possibly requiring economy. This is reflected, among other things, in background checks, may be a prerequisite for the considerations regarding promoting efficiency approval by the regulator of any proposed and supporting the stability of the wider financial appointments to the board. system, as spelled out in Principle 2. A payment system can generate both positive and negative The board of directors is responsible for network effects with implications for the wider appointing senior management and defining the society. In some economies, retail payments are qualifications required for senior management to increasingly regarded as a utility-type service, implying, for example, universal access and appropriately reflected and addressed. interoperability. Given these wide policy Stakeholder involvement can also include the objectives and the potential reach of retail requirement that certain types of decisions have payments, a retail payment system is obliged to to be made public for a wider consultation as part consider and assess the implications of its of the decision-making process. decision-making for relevant stakeholders and to seek the input of relevant stakeholders as Stakeholder involvement should not be a static appropriate. process. The board shall assess the processes for stakeholder involvement on a regular basis, A retail payment system needs to recognize and including by seeking the views of the relevant address the interests of all relevant stakeholders stakeholders and making changes to the in its setup and in the manner in which it operates. composition of consultative committees as It needs to ensure the involvement of relevant appropriate, or by seeking other means of stakeholders in governance arrangements and ensuring the involvement of relevant ensure that they are reflected therein. In practice, stakeholders. stakeholder involvement can be in the form of establishing a special consultative body or a It is important that arrangements for stakeholder consultative committee representing the interests involvement are transparent. Clear and open of the wider user base that has to be consulted on disclosure about stakeholders’ role in decision- a regular basis or in relation to particular board making within a retail payment system will be an decisions. Dedicated committees can also be set important minimum first step toward proper up to consult on, for example, new products or involvement, even without a formal stakeholder- pricing. This shall be combined with mechanisms involvement process. that ensure that any differing views are Governance arrangements may formally define mechanisms to ensure that systems engage in proper consultation with non-shareholders or members. Ultimately, it is the regulator or overseer that can require appropriate engagement with and accommodation of these stakeholders’ interests. Most often, this takes place through informal and consensual methods. A few examples of arrangements and mechanisms include the following: At the BKM in Turkey, service provider members have been included in specific committees to inform market and product proposals. The BKM has separate committees —for instance, for market development, security, product development, and operations and technology. The Australian Payments Council and the Payment Systems Board of the Reserve Bank of Australia have a memorandum of understanding that sets out a framework of engagement to support the broader strategy objectives of payment systems. It states that engagement may include regular meetings between the institutions and liaison between the chair of the council and the deputy chair of the board. The CEC in Belgium operates a client committee that includes indirect participants and is mandated to address issues specific to relationships between different kinds of participants. 4.8 The Role of Independent Directors The appointment of independent directors or non-executive independent directors to a board is a common and widely used approach to help ensure effective and neutral decision-making.44 It can assist in minimizing the occurrence of conflicts of interest in the decision-making process of a board and in the operations of a company and facilitate that the individual board members, and the board as a collective, exercise their roles and defined obligations and responsibilities with a high degree of independence and objectivity. The exact definition of an independent director responsible for the establishment, application, will depend on the relevant legal and regulatory and revision of the risk-management framework. framework. Various definitions exist. The International Finance Corporation has created an The governance arrangements should clearly indicative definition of an independent director: articulate the specific roles, responsibilities, and “‘Independent Director’ means a Director who has accountabilities of the board and management no direct or indirect material relationship with the regarding risk management. This should include Company other than membership on the Board.” the procedures that need to be followed and the This definition is combined with a number of very tasks that need to be undertaken. In addition, the detailed criteria that spell out the meaning of governance arrangements shall mandate and independence in concrete terms. (See appendix support the creation of specific risk-management C.) functions and structures, such as a risk committee (as a committee of the board) as well as Subject to applicable law, a retail payment system independent day-to-day risk-management and will have to define the meaning of independence45 audit functions. The day-to-day risk-management and the manner in which it is to be applied through function should be sufficiently equipped and have its governance arrangements and make the direct access to the board and/or the board’s risk definition publicly available. In addition, it should committee. be disclosed which members of the board are regarded as independent directors.46 Independent The board shall ultimately be responsible for directors could (i) be persons who are ensuring that the risk-management framework is independent, both from the owners and the effective, up to date, and appropriately management of a company, (ii) constitute either a implemented. It shall therefore ensure that the minority or majority of the board, (iii) be risk-management framework is assessed on a appointed by the shareholders of a company (but regular basis and revised as appropriate. PFMI not always), and (iv) be non-executive members Principle 2 specify that; “The board should within the board. establish a clear, documented risk-management framework that includes the FMI’s risk-tolerance 4.9 Risk-Management Framework policy, assigns responsibilities and accountability for risk decisions, and addresses decision making Together with efficiency, safety is a primary policy in crises and emergencies. Governance objective of a retail payment system. It should be arrangements should ensure that the risk- supported and promoted by the governance management and internal control functions have arrangements. The governance arrangements sufficient authority, independence, resources, and shall include the creation and facilitation of a access to the board”. detailed and comprehensive risk-management framework. 4.10 Transparency, Disclosure and Managing and mitigating different types of risks is Clarity the most integral and prominent part of the The PFMI emphasize the importance of the clarity operations of any payment system. Risk and transparency of objectives and arrangements. management includes liquidity and credit risk, This is part of Principle 2. cyber risk, operational risk, settlement risk, legal risks, and, increasingly, reputational risk. A Attention should be paid to ensure that the comprehensive risk-management framework documentation of governance arrangements is needs to be put in place and kept up to date in clear and transparent. They should be drafted in a order to manage the different types of risks clear and comprehensive manner to ensure that appropriately. The board of directors is ultimately the objectives, responsibilities, accountabilities and risks within a retail payment system are known, understood, and recognized not just by board meetings or by publishing general updates the parties directly concerned but also by the on a regular basis. wider stakeholder community. Transparency also means that the governance arrangements should Transparency is separately highlighted in Principle be disclosed not just to the users of the payment 18 regarding fair and open access, which requires system but also to all relevant stakeholders, and that the criteria for participation to be publicly where relevant, they should also be made disclosed. In addition, Principle 23 of the PFMI sets available or published to the benefit of the wider wider requirements for the transparency and public, as further specified in Principle 23. clarity of information about fees and costs that users and participants of a payment system will The organizations and individuals in charge of need to understand and assess the requirements, drafting and agreeing to the governance obligations, and risks that their participation framework shall ensure not only clarity of entails or will entail. While the general language and context but also transparency. information needs to be provided to the users and Transparency needs to remain a guiding principle participants of the payment system, some regarding the governance of a retail payment information about governance also needs to be system. The strategy and decisions made should made available to the wider public or to be be communicated widely in a clear manner, published regularly. Retail payment systems may possibly by publishing minutes or a summary of also be required to publish particular information as set out in Principle 23 of the PFMI. The following themes are designed for interests relevant to the country, the market and consideration when making decisions about the political context while balancing these with the setup, or reform, of the governance framework interests of users, owners, operators and and governance arrangements of a retail payment participants. system. Governance should be acknowledged as a as an important policy tool and while the actual The governance arrangements of a retail payment governance arrangements of a retail payment system should reflect the concrete circumstances system always have to be defined in the context of of the particular payment system and the market the concrete needs and circumstances of a in which it operates. Consequently, they should market, the PFMI provide essential guidance either be robust enough to accommodate changes regarding the different requirements, objectives, or evolve as the market itself changes. While best and considerations for governance. These can be practices and examples can be used as used as a starting point while taking into account precedents, there is no one-size-fits-all model additional guidance of relevance specifically to regarding governance. retail payment systems. It is important to recognize that the governance These considerations are based on and anchored arrangements of a retail payment system concern in the PFMI and the key considerations. The many more specific issues than those covered by guidance is centered around Principle 2 of the general corporate governance principles. The PFMI and its associated key considerations, but considerations of relevance to retail payment also a number of the other PFMI Principles which systems also go beyond those incorporated within link to Principle 2 or which elaborate particular general company law. They include broader aspects considered in Principle 2. It is intended to considerations of the public interest, efficiency, highlight the specific contexts and considerations the overall functioning of the markets, and in applying the PFMI regarding the governance of stakeholder focus. retail payment system in relation to both the governance arrangements and the governance Governance should adapt around a system’s legal framework. The considerations are targeted at the form. The legal structure of retail payment various stakeholders involved in defining or systems will mandate and guide aspects of the exercising the governance of retail payments formal governance arrangements but shall not systems, including those that may not be formally preclude achieving relevant policy objectives. covered by the PFMI. The guidance is of relevance Specific requirements for the policy objectives both in relation to the governance arrangements that guide a retail payment system can often also and the governance framework. be included within the governance arrangements irrespective of a particular structure. Public Each consideration is, where relevant, linked to authorities can mandate or encourage the the relevant PFMI, the key considerations and inclusion of specific policy objectives to promote explanatory notes. efficiency or public interests as part of the governance arrangements, including specific 5.1 There is no one-size-fits-all policy objectives regarding financial inclusion. The owners may be limited in share of ownership or blueprint for governance the number of board seats they may control. arrangements Protections may be introduced for minority The governance arrangements of different retail owners or for stakeholders other than the owners. payment system should be context specific and In addition, requirements can be introduced for will inevitably differ. Governance arrangements the inclusion of non-executive directors or must be specific to the market, policy and independent directors within the board. institutional context of each given retail payment system. They should help to address public policy In the explanatory note 3.2.3 of Principle 2 it is assessments of the performance of the board and stated; “No single set of governance management, and in such cases the reviews arrangements is appropriate for all FMIs and all should be coordinated. market jurisdictions. Arrangements may differ significantly because of national law, ownership The ownership model may need to be assessed as structure, or organizational form.” part of a review. Ownership is a key aspect of the governance arrangements and should never be 5.2 Governance arrangements should static. The particular ownership model chosen for a retail payment system is central to its be reviewed regularly governance arrangements and the particular Governance should remain a living topic. The ownership model chosen should be regarded in governance arrangements should be regularly the context of the market it serves. As and when reviewed especially in the context of structural circumstances change, the ownership model changes to the market, to policy or the should be assessed in terms of its continued institutional environment as well as industry appropriateness for supporting the particular innovation. policy objectives and conditions of the market. Periodic or event-driven reviews may need to be External events may also prompt a review. For mandated. The obligation to undertake regular instance, a review could be called for, if and when governance reviews may be formally embedded there is a material change in legislation, both in the governance arrangements and as part regulation, or market structure. These should be of governance framework. An appropriate conducted in cooperation with other authorities authority, most often the payments oversight with pertinent policy interest or authority over authority, should be required to initiate period retail payments systems or services. reviews and where the PFMI are directly applicable, a governance review in line with The review process, findings and outcomes shall Principle 2 will be undertaken as part of the be properly documented and transparent. The oversight process. The payments oversight process for reviewing the governance authority should also be expected to play an active arrangements should be set out as part of the role in rectifying any shortcomings. governance arrangements to ensure transparency and familiarity. This should include the period The boards of directors of payment systems shall within which the regular governance reviews be responsible for conducting the reviews— should be undertaken, topics of the review, ideally, at least once every two years—of a dissemination of the results and the follow-up. system’s own governance arrangements, including a review of the board’s own Principle 2 defines the main components which performance. Since the governance arrangements need to be accommodated with the governance depend upon the governance framework in which arrangements on an on-going basis: “An FMI they operate, any review of the arrangements should have governance arrangements that are should also take place in coordination with any clear and transparent, promote the safety and changes of the governance framework. In efficiency of the FMI, and support the stability of particular, the review will need to take stock of the broader financial system, other relevant public any relevant changes to laws, regulations, or the interest considerations, and the objectives of mandates of authorities under which the system relevant stakeholders”. operates. The review process should be guided by an assessment of the effectiveness of the existing Key consideration 2 further states that: “The governance arrangements combined with a board should review both its overall performance forward-looking evaluation of expected and the performance of its individual board requirements. It should be noted that applicable members regularly”. company law, rules regarding corporate governance, or requirements stemming from licensing or oversight may also require regular 5.3 Appropriate public interests should effective governance arrangements can provide be acknowledged, clearly defined the framework within which they can be articulated and addressed. and addressed The governance arrangements of a retail payment The relevant public interests should be clearly system shall recognize and support “public- defined as part of the governance arrangements interest considerations.” Public interest and published and amended as appropriate. considerations is a broad and evolving concept Mechanisms shall be in place to record and that policy makers and authorities must strive to reconcile possible conflicts that may arise due to define, adapt, and clearly communicate, in different objectives and public interests. accordance with their own policy and market context and as part of the governance framework Support of the relevant public interest which need to be properly reflected within the consideration is included within Principle 2: “An governance arrangements of a retail payment FMI should have governance arrangements that system. are clear and transparent, promote the safety and efficiency of the FMI, and support the Public interests shall include but extend beyond stability of the broader financial system, other safety and efficiency, as stated in the PFMI. The relevant public interest considerations, and the governance of retail payment systems should also objectives of relevant stakeholders”. consider and elaborate the more specific public interests and their implications for its specific Key consideration 1 further states that: “An FMI arrangements. This means taking into account the should have objectives that place a high priority interests of the broader stakeholder community in on the safety and efficiency of the FMI and particular. The principle of efficiency can be explicitly support financial stability and other further specified in its implications for rules on relevant public interest considerations”. access, interoperability or standardization. With regard to retail payment systems, the public 5.4 Stakeholder Involvement is of key interest could also include the objective of importance financial inclusion—that is, ensuring that payment systems facilitate, indeed, promote, Effective involvement of relevant stakeholders is comprehensive and active participation by all an essential element of a retail payment system’s population groups, including those at the margins governance. Mechanisms should be in place of or excluded from banking services. In the within the governance arrangements to support context of market developments e.g. in relation to the involvement of stakeholders. In close open banking, the topic of data protection combination with transparency mechanisms, regarding user data will likely become more stakeholder involvement can help to ensure that prominent as a topic to also be considered within the board is aware of, and appropriately the perspective of public interests. considers, the interests and input from relevant stakeholders in its decision-making. Governance should help to resolve and where necessary play a role in optimising trade-offs Stakeholders will comprise a broad array of between the objectives and interests of different different parties. They include constituents stakeholders including “public interests”. The beyond just the direct or indirect users and success and utility of retail payments ultimately participants of a retail payment system. In involve reconciling the objectives and interests of particular, they will include those who are directly the different stakeholders as well as the public- or indirectly affected by the payment system’s interest considerations. Retail payment systems actions and decisions, such as the end users of involve the interests of many different types of different payment services supported by the stakeholders, directly and indirectly, and will also payment system. As markets evolve, the user have both social and economic impacts. While community may change, and new types of users there will always be some tensions or conflicts who are neither members nor owners may between the different objectives, appropriate and appear. stakeholders to be consulted, a definition of the The involvement of the direct users is required. types of decisions to be sent out for consultation, The users of a retail payment system can range and the process by which stakeholders actually from owners to pure customers. In retail payment engage, including how to record and reconcile systems where the users are also the owners, the different views appropriately. immediate user involvement is easier to achieve but attention may have to be given to the Transparency into the operations and decision- involvement of smaller vs. larger owners. making of a retail payment system can be an Nevertheless, especially in the case of owner/user important means for enhancing the involvement governance, particular attention should be given of various stakeholders. Transparency measures to how the wider stakeholder community is will create the opportunity for stakeholders to involved. Conversely, in a retail payment system follow and remain informed about the decisions which is not user owned and governed specific made and the directions taken. Nevertheless, considerations need to be given to also making the stakeholder engagement goes beyond the formal direct users part of the stakeholder involvement. requirements for transparency and requires taking steps to actively seek input from relevant The involvement of different stakeholders can be stakeholders. achieved through a variety of mechanisms, depending on the context. The board may e.g. Supporting the objectives of relevant stakeholders establish dedicated committees on which the is specified in Principle 2: “An FMI should have stakeholders are present or represented. The governance arrangements that are clear and board may then be required to seek input from transparent, promote the safety and efficiency of these committees as part of its decision-making the FMI, and support the stability of the broader process. The views of the individual committee(s) financial system, other relevant public interest may carry different weight, ranging from purely considerations, and the objectives of relevant consultative to having to be considered and stakeholders”. reflected in the actual decision-making. Key consideration 7 further states that: “The The emergence of new types of users may give rise board should ensure that the FMI’s design, rules, to the need for new ways or means to involve overall strategy, and major decisions reflect users. They could ultimately be granted appropriately the legitimate interests of its direct representation rights similar to the incumbent and indirect participants and other relevant users. But other models can be developed in stakeholders. Major decisions should be clearly which, for instance, users collectively have the disclosed to relevant stakeholders and, where right to appoint members to the board of directors there is a broad market impact, the public”. or whereby some users with a certain volume of transactions have such rights. Often it will be 5.5 Access rules should evolve with the important that stakeholders with similar functions or business models have organizations that market represent their interests collectively, rather than The access, membership, and participation rules individually. For instance, with the rise of fintech of a retail payment system should be regularly service providers in payments, it has been helpful evaluated and aligned with changes in the policy for such companies to form and articulate their and market contexts. Such evaluations shall be interests through fintech industry associations guided by the development needs of the that can be given a collective right of economy, the retail payments market, the role of representation. new types of payment service providers, and with respect to the other policy objectives and In all cases, the board should agree on the formal considerations for preserving the safety and commitment and process for stakeholder integrity of systems. engagement. This may require making the following items integral parts of the governance As a guiding principle, the rules governing access arrangements: a clear definition of the types of to a retail payment system should be based on transparent, clear, and objective criteria. They are now better alternatives, or redundant. If such should be focused on promoting fair and open material changes do occur, a review of access rules competition and maintaining a level playing field. should be required as elements of the governance Ensuring fair and open access is also an important arrangements, and whether they still strike an step in facilitating market access for new entrants; appropriate balance within the mandate of the however, ownership or representation of new system, or in reference to the broader public- entrants in a retail payment system is another interest objectives, should be considered. relevant factor which can be considered in addition to formal access criteria. As part of the Principle 18 covers the principles regarding access: considerations regarding access, the core “An FMI should have objective, risk-based, and governance arrangements, including the publicly disclosed criteria for participation, which composition of the board, may require permit fair and open access”. adjustments to ensure that the decision-making reflects and balances the interests and The key considerations of Principle 18 further requirements of all users, old as well as new. state that: 1. “An FMI should allow for fair and open Access and participation rules should be designed access to its services, including by direct to strike an appropriate balance between and, where relevant, indirect participants sometimes conflicting objectives. These are and other FMIs, based on reasonable risk- primarily (i) promoting more convenient and related participation requirements. efficient usage, and (ii) the need to protect the 2. An FMI’s participation requirements should integrity and safety of a system, both for direct be justified in terms of the safety and users and with regard to a system’s potential efficiency of the FMI and the markets it impact on the broader payments ecosystem. But serves, be tailored to and commensurate as the market evolves, so may the context of these with the FMI’s specific risks and be publicly aims as well as the mechanisms available to disclosed. Subject to maintaining acceptable address them. risk control standards, an FMI should endeavor to set requirements that have the As more payment systems operate in parallel and least-restrictive impact on access that the market evolves, authorities should evaluate circumstances permit. the relative importance of having access to a given 3. An FMI should monitor compliance with its system. The role and prominence of a payment participation requirements on an ongoing system may evolve over time. Its importance could basis and have clearly defined and publicly increase or diminish, and with it, the private and disclosed procedures for facilitating the public interest of having access to it. The access suspension and orderly exit of a participant rules of systems that become (or remain) more that breaches, or no longer meets, the critical and central than others to the financial participation requirements”. system may warrant greater scrutiny, to ensure broader participation in the interest of greater In the explanatory note 3.2.2 of Principle 2 it is efficiencies, inclusion, or convenience or, indeed, further stated that: “For all types of FMIs, to address possible issues deriving from market governance arrangements should provide for fair power in one market being used to enhance a and open access (see Principle 18 on access and position in another—for example, through cross- participation requirements) and for effective subsidization. Other systems may become less implementation of recovery or wind-down plans, “essential” in the sense used by competition or resolution”. authorities and hence warrant less stringent guidance or rules governing access criteria. 5.6 Anticipate changes to skills and qualifications of the board and Risk-management mechanisms and arrangements are also evolving. Technology improvements may senior management have rendered some access restrictions designed In the context of the often constant and increasing to protect safety either inefficient, because there change in retail payments, it is important to ensure that both the board and senior clear and direct lines of responsibility and management possess the skills, qualifications, and accountability. These arrangements experience necessary to fulfil their roles. The should be disclosed to owners, relevant board of directors is the focal point of the authorities, participants, and, at a more governance arrangements of a retail payment general level, the public. system. It is responsible for setting objectives, 3. The roles and responsibilities of an FMI’s establishing the risk-management framework, board of directors (or equivalent) should monitoring performance, and hiring senior be clearly specified, and there should be management and must as a collective possess the documented procedures for its relevant skills and qualifications for being able to functioning, including procedures to undertake the different and changing identify, address, and manage member responsibilities. conflicts of interest. The board should review both its overall performance and The board of directors is responsible for ensuring the performance of its individual board that its members’ skills and qualifications are up to members regularly. date and aligned with the emerging challenges 4. The board should contain suitable and structure of retail payments. This means that, members with the appropriate skills and for instance, given the growing relevance of incentives to fulfil its multiple roles. This technology, individual board members as well as typically requires the inclusion of non- the board as a collective will need to pay special executive board member(s). attention to their qualifications in areas such as 5. The roles and responsibilities of technology, security, and risk management. It may management should be clearly specified. also be necessary to make more frequent An FMI’s management should have the recalibrations to the board composition. Regular appropriate experience, a mix of skills, reviews should be undertaken of the performance and the integrity necessary to discharge of the board which should include an assessment their responsibilities for the operation of the individual skills and qualifications of the and risk management of the FMI. board members. 6. …. The board is also responsible for making sure that 5.7 Potential conflicts of interest senior management continues to have the should be identified and addressed appropriate skills and experience for conducting its different roles and responsibilities. Maintaining Governance arrangements need to acknowledge the right skills and qualifications of senior and pay specific attention to potential conflicts of management as the retail payment market and interest. Retail payment systems are more prone technology develop should be a goal when hiring to conflicts of interest than other corporate senior management and evaluating their structures. This is primarily because of the nature performance. of the business and its potential impact on society more widely, as well as the diverse types of users Specific considerations should be given to involved in a retail payment system. including non-executive directors on the board of directors, as a minimum. Further consideration Retail payment system governance arrangements should also be given to including independent should take account of the full scope of potential directors on the board who could take on specific conflicts of interest across the entire set of roles as chairs of selected board committees. stakeholder groups and their interactions. Conflicts of interest can arise at, or between, The key considerations 2-5 of Principle 2 set out multiple different levels of the governance requirements for board and management. arrangements, including the board, management, users, and wider stakeholder community. Some 1. ….. conflicts of interest will be explicit, while others 2. An FMI should have documented may be less transparent. The ownership structure governance arrangements that provide of a retail payment system will often comprise entities that are competitors; among them, the 5.8 Governance arrangements must be focus should be on both facilitating cooperation transparent and maintaining competition in the market. This may require governance arrangements that are Transparency is a hallmark of good governance different from other companies—for example, in and an important and effective mechanism to relation to managing conflicts of interest. It may promote it. Transparency stands out as a core also require a particular focus on the composition principle common to all guidance on corporate of the board and on the voting rights of the governance, and it is specifically highlighted in individual board members as well as wider Principle 2 of the PFMI and supplemented with considerations of balancing the interests of big additional requirements for the disclosure of and smaller users and other stakeholders. specific information in Principle 23. In general, transparency should be used widely and All conflicts of interest shall be declared or strengthened where possible.47 identified, recorded, and mitigated in a transparent manner. Special focus should be given The use of appropriate disclosure standards and to decision-making by the board of directors and arrangements has many dimensions and confers by management and the users/owners. The board practical benefits by the following means: and also management should be given be given special obligations for exposing and declaring (i) Ensuring an appropriate level of transparency relevant conflicts of interest e.g. through specific into the governance arrangements of a retail declarations as part of the decision making payment system will warrant a basic process. understanding of the operations and purpose of the payment system, who owns and controls the Independent directors can play a central role in payment system, who can access the payment reducing and addressing conflicts of interest. system, and how the decision-making process Including independent directors on the board, in functions. This can help stakeholders to identify addition to non-executive directors, should be potential deficiencies or shortcomings and considered carefully, as they can assist in reducing subsequently makes it more likely that issues are the risks of conflicts of interest, ensuring addressed. Transparency can thereby enhance independence, and maintaining the relevant focus stakeholder coordination and involvement and in the decision-making process. strengthen the clarity of arrangements and the roles and rights of payment systems members, Key consideration 3 of Principle 2 covers conflicts participants, and other stakeholders. of interest: “The roles and responsibilities of an FMI’s board of directors (or equivalent) should be (ii) Providing insight into the decision-making of clearly specified, and there should be documented the board of directors—for instance, by making procedures for its functioning, including relevant board decisions or regular updates procedures to identify, address, and manage available or publicizing them—will assist in making member conflicts of interest”. This is further the actual workings and outcomes of the clarified in the explanatory note 3.2.5” Depending governance arrangements transparent. on its ownership structure and organizational form, an FMI may need to focus particular (iii) Ensuring that users have access to all rules and attention on certain aspects of its governance procedures regarding rights and obligations and arrangements. An FMI that is part of a larger fees associated with joining and interacting with organization, for example, should place particular the retail payment system will help users assess emphasis on the clarity of its governance the risks associated with using the payment arrangements, including in relation to any system, as specified in Principle 23 of the PFMI. conflicts of interests and outsourcing issues that Overall, through these different effects, may arise because of the parent or other affiliated transparency can support wider policy objectives organization’s structure”. related to efficiency and other public interests. As a minimum, transparency requires that legitimate interests of its direct and information regarding the current governance indirect participants and other relevant arrangements of a retail payment system shall be stakeholders. Major decisions should be published. Through the use of technology, the clearly disclosed to relevant stakeholders burden of publishing the relevant information will and, where there is a broad market be negligible. Transparency of the governance impact, the public”. arrangements shall include information about the following: Principle 23 further states: “An FMI should have • Ownership and individual share(s) of clear and comprehensive rules and procedures ownership and should provide sufficient information to • Bylaws or equivalent articles of enable participants to have an accurate association or incorporation understanding of the risks, fees, and other • Composition of the board, including material costs they incur by participating in the information regarding executive directors, FMI. All relevant rules and key procedures should non-executive directors, and independent be publicly disclosed”. directors, and the criteria and methods for their selection, election, or appointment 5.9 Application and effectiveness of the • Rules and procedures of the board of Governance Framework should be directors regularly assessed • Board committees, their composition, and remit The scope of application of the governance • Details regarding the decision-making framework and its alignment with governance process, including obligations to seek arrangements should be assessed regularly. It is input through consultations important to ensure that, where necessary, legal • Access and participation forms and powers and mandates appropriately empower criteria, including any conditions authorities to intervene in governance and that regarding access they have the appropriate capacity to do so in an • Scheme rules and procedures for the effective manner. In a rapidly changing market for interaction between payment system retail payments and related financial services, the users required authority and capacity may change. • Pricing, including the pricing principles Hence, authorities should regularly assess whether elements of the governance framework Principle 2 highlights transparency: “An FMI for retail payments—existing legislation, oversight should have governance arrangements that are arrangements, and regulation—are aligned with, clear and transparent, promote the safety and and appropriate in scope to, the activities, risks, efficiency of the FMI, and support the stability of and usage of various retail payment services for the broader financial system, other relevant public which governance principles are applicable. interest considerations, and the objectives of relevant stakeholders”. Attention should be paid to changes in the market that may require amendments to existing Key consideration 2 and 7 further state: regulations. This may often occur through required changes in licensing requirements or 2. “An FMI should have documented access mandates. As new types of payment service governance arrangements that provide providers emerge, regulatory requirements clear and direct lines of responsibility and regarding access to payment systems may have to accountability. These arrangements be reinterpreted or the rules regarding access may should be disclosed to owners, relevant have to be clarified or amended through authorities, participants, and, at a more regulation. Changes in licensing may also usher in general level, the public. whole new payment systems and prompt 7. The board should ensure that the FMI’s considerations about the application of rules or design, rules, overall strategy, and major policies intended to maintain or establish a level decisions reflect appropriately the playing field. Responsibility A, B, and C of the PFMI address The governance framework principles should be regulation, the powers required by central banks applied to different retail payment systems in a and market regulators and disclosure of policies. consistent and transparent manner. These may include new and less traditional systems, as well Responsibility A: FMIs should be subject to as incumbent or legacy systems. A new retail appropriate and effective regulation, supervision, payment system may not automatically be subject and oversight by a central bank, market regulator, to the existing governance framework or elements or other relevant authority. thereof. Hence, new retail payment systems may not initially be subject to existing licensing or Responsibility B: Central banks, market oversight requirements. Nevertheless, basic regulators, and other relevant authorities should considerations regarding such matters as have the powers and resources to carry out representation, user involvement, and effectively their responsibilities in regulating, consultation should be included in the governance supervising, and overseeing FMIs. of retail payment systems from the outset. Responsibility C: Central banks, market The PFMI are directly applicable only to regulators, and other relevant authorities should systemically important retail payment systems but clearly define and disclose their regulatory, are often used as the basis for developing specific supervisory, and oversight policies with respect to oversight activities for non-systemically important FMIs. retail payment systems as well. Policy makers and authorities should carefully define to what extent 5.10 The different roles of public the PFMI or alternative principles are also authorities should be “relevant” to the broad range of other retail payment systems; they should consider what acknowledged and addressed “relevance” means in their specific market context Public authorities have different and often and then determine the criteria for designating to changing roles and responsibilities in the which systems (some, all, or adapted) principles governance of retail payment systems. These may should apply. Authorities may thus need to range from owner and operator to regulator, redefine the different types of retail payment overseer, settlement agent, and, of course, user. systems for which some or all elements of the While the roles as regulator and overseer will be governance principles or recommendations are long term in nature, the relevance of the other applicable or binding. A key consideration should roles may likely evolve and change over time and be to ensure a fair application of the principles as as markets change. In particular, public ownership part of facilitating a level playing field between and operation may change over time. The role(s) different retail payment systems. of public authorities, including central banks, in the governance arrangements of retail payment Authorities should also ensure that their powers systems have to be considered and defined of action and enforcement are consistent with clearly. More likely than not, such roles will need their role in the governance framework. They to evolve over time and should be reassessed and should ensure that they are consistent with the redefined as appropriate. intended scope of activities, service providers, and systems for which governance arrangements Governments, or public authorities, may be called recommendations or obligations are to apply. The upon to play an essential role as catalysts, field of action of regulators and overseers should conveners, and coordinators. This is in addition to also be considered to include more nuanced their roles in policy making, legislation, and powers and mandates to intervene in a enforcement. The cooperation that payment consultative or advisory role in governance—for systems require between private market instance, to facilitate relevant market participants is not always easy to achieve and developments through non-legislative means. maintain without some outside influence or incentives. Public authorities, notably the central bank, can be critical, for instance, in the start-up phase of a payment system, in taking an active role Responsibility C: Central banks, market as the owner and operator of the payment system, regulators, and other relevant authorities should and in such cases may also be called upon to clearly define and disclose their regulatory, provide initial funding and capital for investments supervisory, and oversight policies with respect to and operations. Public ownership, however, is not FMIs. a substitute for having carefully crafted governance arrangements.48 Generally, a publicly 5.11 Attention should be paid to the owned payment system should be set up as a critical role of the central bank separate legal entity with its own separate and distinct governance. The oversight activities of a central bank play a critical role in ensuring effective and appropriate The role of central banks in governance may governance of retail payment systems. As an transition from active to more arm’s length as the overseer, the central bank should ensure that market evolves. Over time and as systems mature, governance arrangements and the conduct of a the operator and ownership role of a central bank payment system’s governing bodies are consistent can be phased out gradually or be handed over to with oversight objectives. The central bank may a separate entity, such as a national payments also need to make specific interventions to company. In such phases of transition, particular promote access to the system and the interests of focus should remain on the required changes to financial inclusion, by representing those the governance framework in terms of ownership, stakeholders outside of, or poorly served by, the board composition, and appropriate stakeholder financial system and a given payment system. involvement. As part of the transition of the involvement of a central bank at the board level, The central bank might also need to play a role as the central bank may require that its seat on the a market catalyst. The aims of safety and efficiency board be taken by independent directors to are integral to the role of the central bank as an further strengthen the governance arrangements. overseer and/or regulator of payment systems. While the role of a central bank may change in But the mandate of some central banks may not relation to serving as the sole operator and owner explicitly state their role as a catalyst, to influence of a retail payment system, its role as a catalyst and shape the governance arrangements of retail will remain. This role will also remain important, in payment systems. This may be increasingly order to address possible governance issues, necessary, however, and hence should be unblock situations that may arise in relation to considered when reviewing the overall role of the stakeholder involvement, or, for instance, if central bank within the broader governance market consolidation (for example, mergers) framework for retail payment systems. reapportions control between shareholder banks in a manner that upsets the balance of interests The central bank is still uniquely placed to play a between participants. pivotal role in retail payments systems and hence must take on a proactive and responsible stance Responsibilities A, B and C of the PFMI address toward governance. In all activities regarding retail regulation, the powers required by central banks payments and retail payments systems, a central and market regulators and disclosure of policies. bank shall consider relevant aspects of the governance framework and governance Responsibility A: FMIs should be subject to arrangements. The central bank should ensure appropriate and effective regulation, supervision, that governance remains a live issue and continue and oversight by a central bank, market regulator, to influence developments both directly and or other relevant authority. indirectly. The central bank/overseer should make public the reasoning and rationale for its Responsibility B: Central banks, market interventions in the governance arrangements of regulators, and other relevant authorities should retail payment systems. have the powers and resources to carry out effectively their responsibilities in regulating, supervising, and overseeing FMIs. Responsibility A, B and C of the PFMI address have the powers and resources to carry out regulation, the powers required by central banks effectively their responsibilities in regulating, and market regulators and disclosure of policies. supervising, and overseeing FMIs. Responsibility A: FMIs should be subject to Responsibility C: Central banks, market appropriate and effective regulation, supervision, regulators, and other relevant authorities should and oversight by a central bank, market regulator, clearly define and disclose their regulatory, or other relevant authority. supervisory, and oversight policies with respect to FMIs”. Responsibility B: Central banks, market regulators, and other relevant authorities should AUS EFTPOS Letter from the Reserve Bank of Australia designating 12/06/2012 EFTPOS as a payment system pursuant to section 11(1) of the Payment Systems Act 1998 AUS AusPayNet Constitution 30/05/2002 AUS EFTPOS Board Charter 22/03/2017 AUS EFTPOS Constitution 29/11/2017 AUS RBA & ACCC Memorandum of Understanding between the ACCC and the 11/12/2018 RBA AUS NPP Constitution 17/10/2019 AUS Reserve Bank of NPP Functionality and Access Consultation: Conclusions 06/2019 Australia (RBA) Paper AUS RBA & Australian Memorandum of Understanding—the Payment Systems 21/08/2015 Payments Council Board and the Australian Payments Council BE National Bank of The Bank’s role in oversight and prudential supervision of n.a. Belgium (NBB) financial market infrastructures, custodians, payment service providers and other market infrastructures and critical service providers BE CEC Statuts du Centre d’Échange et de Compensation (CEC) 24/04/2020 BE CEC Cadre Tarifaire CEC 01/01/2020 BE CEC Annual Report 2018 2018 BR Conselho Memorandum of Understanding between CADE and the 28/02/2018 Administrativo de Central Bank of Brazil Defesa Economica (CADE) & BCB BR CADE Cadernos do Cade—Mercado de Instrumentos de 10/2019 Pagamento BR CIP By-Laws of Camara Interbancaria de Pagamentos 04/30/2020 BR BCB Regulation on Open Banking, Joint Resolution no 1 of May 4 th 04/05/2020 2020 BR CIP Regulamento Operacional—Sistema de Liquidacao diferida 17/12/2019 das Transferenicas interbancarias de ordens de credito— SILOC DE EURO Annual Report 2006 31/12/2006 Kartensysteme (EKS) DE EURO Annual Report 2019 31/12/2019 Kartensysteme (EKS) DK Dankort Dankort Assessment by the Danmarks Nationalbank 17/05/2017 EU European Council REGULATION (EU) 2015/751 on interchange fees for card- 29/04/2015 based payment transactions EU ECB Eurosystem oversight policy framework 07/2016 EU ECB Revised Oversight Framework for Retail Payment Systems 02/2016 EU ECB Revised assessment methodology for payment systems 06/2018 EU ECB Revision of the Regulation on oversight requirements for 11/2020 systemically important payment systems (the SIPS Regulation) EU ECB Oversight Framework for Direct Debit Schemes 10/2010 EU ECB Oversight Framework For Card Payment Schemes – 01/2008 Standards EU ECB Revised oversight framework for retail payment systems 02/2016 FR Cartes Bancaires European Commission Decision Relating to Proceedings 17/10/2007 (CB) Pursuant to Article 81 of the EC Treaty in Case of Groupement des Cartes Bancaires FR CORE List of participants in CORE (FR) 05/06/2020 FR CORE Criteria for Access FR BdF Chapter 10: Les systèmes de paiement de détail 17/12/2018 FR STET Modification of the article 17.2 of the statues of STET with 28/11/2019 regards to its designation as a systemically important payment system FR STET Statuts—Articles of Association 28/11/2019 FR STET Extract from the official registry of commerce and companies 03/07/2020 stating the names of directors of STET FR STET Disclosure Framework 2015 for Financial Market 08/2015 Infrastructures FR STET Rules of Governance 10/2018 GH Bank of Ghana Payments Systems Strategy (2019–2024) IN NPCI Shareholding pattern as on 15th June 2020 15/06/2020 IN NPCI Terms of Reference for (i) Audit Committee, (ii) Business n.a. Strategy Committee, (iii) Committee of Independent Directors, (iv) Corporate Social Responsibility Committee, (v) HR Committee, (vi) Management Committee, (vi) Nomination and Remuneration Committee, (vii) Risk Management Committee, (viii) Technology and Project Management Committee IN RBI Oversight Framework for Financial Market Infrastructures 06/2020 (FMIs) and Retail Payment Systems (RPSs) MY BNM Central Bank of Malaysia Act 2009 19/08/2009 MY BNM Financial Services Act 2013 22/03/2013 MY BNM and Malaysia Memorandum of Understanding between Bank Negara 05/06/2014 Competition Malaysia and the Malaysia Competition Commission Commission MY PayNet Guidelines for Assessment of Compliance to Participation 03/06/2019 Rules and Operational Procedures for PayNet’s Services MY BNM Financial Services (Designated Payment Instruments) Order 2013 2013 MY Systemwide WB & IMF Assessment of Observance of the CPSS-IOSCO 02/2013 Principles for Financial Market Infrastructures MY Paynet Paynet Malaysia Committees n.a. PK State Bank of National Payment Systems Strategy 1/11/2019 Pakistan RO TransFonD SENT system rules version 21 10/12/2018 RO TransFonD Annual Report 2017 2017 RSA BankServ Bankservafrica Principles For Financial Market 2019/2020 Infrastructures Disclosure Framework RSA South African The National Payment System Framework and Strategy Reserve Bank Vision 2025 TR BKM Exemption order issued by the Turkish Competition 23/09/2016 Authority UEMOA GIM Protocole d’accord entre les banques et établissements n.a. financiers de l’UEMOA pour la mise en place d’un système monétique interbancaire-régional : retrait d’espèces et paiement par carte interbancaire. UEMOA GIM Règlement intérieur de GIM-UEMOA n.a. UK BACS BACS Payment Schemes Ltd.—Articles of Association n.a. UK FPS FPS Payments Scheme Ltd.—Articles of Association 4/10/2018 UK PSR and CMA Memorandum of Understanding between the Competition 12/2015 and Markets Authority and the Payment Systems Regulator—Concurrent Competition Powers UK Vocalink Articles of Association 04/12/2019 ACCC = Australian Competition and Consumer Commission; BACS = Bankers’ Automated Clearing System; BCB = Banco Centrale do Brasil; BdF = Banque de France; BKM = Bankalararası Kart Merkezi; BNM = Bank Negara Malaysia; CADE = Conselho Administrativo de Defesa Econômica; CB = Cartes Bancaires; CEC = Centre d’Echange et de Compensation; CIP = Cámara Interbancária de Pagamentos; CMA = Competition and Markets Authority; ECB = European Central Bank; EKS = EURO Kartensysteme; FPS = Faster Payments Systems; GIM = Groupement Interbancaire Monétique; NBB = National Bank of Belgium; NPCI = National Payments Corporation of India; NPP = New Payments Platform; PSR = Payment Systems Regulator; RBA = Reserve Bank of Australia; RBI = Reserve Bank of India. n.a. = not available. An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public-interest considerations, and the objectives of relevant stakeholders. Key considerations: 1. An FMI should have objectives that place a high priority on the safety and efficiency of the FMI and explicitly support financial stability and other relevant public-interest considerations. 2. An FMI should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, relevant authorities, participants, and, at a more general level, the public. 3. The roles and responsibilities of an FMI’s board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The board should review both its overall performance and the performance of its individual board members regularly. 4. The board should contain suitable members with the appropriate skills and incentives to fulfill its multiple roles. This typically requires the inclusion of non- executive board member(s). 5. The roles and responsibilities of management should be clearly specified. An FMI’s management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge their responsibilities for the operation and risk management of the FMI. 6. The board should establish a clear, documented risk-management framework that includes the FMI’s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the risk- management and internal control functions have sufficient authority, independence, resources, and access to the board. 7. The board should ensure that the FMI’s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public. “Independent director” means a director who has no direct or indirect material relationship with the company other than membership on the board and who: (a) Is not, and has not been in the past five (5) years, employed by the company or its affiliates; (b) Does not have, and has not had in the past five (5) years, a business relationship with the company or its affiliates (either directly or as a partner, shareholder [other than to the extent to which shares are held by such director pursuant to a requirement of applicable law in the country relating to directors generally], and is not a director, officer, or senior employee of a person that has or had such a relationship); (c) Is not affiliated with any non-profit organization that receives significant funding from the company or its affiliates; (d) Does not receive and has not received in the past five (5) years, any additional remuneration from the company or its affiliates other than his or her director’s fee and such director’s fee does not constitute a significant portion of his or her annual income; (e) Does not participate in any share option [scheme]/[plan] or pension [scheme]/[plan] of the company or any of its affiliates; (f) Is not employed as an executive officer of another company where any of the company’s executives serve on that company’s board of directors; g) Is not, nor has been at any time during the past five (5) years, affiliated with or employed by a present or former auditor of the company or any of its affiliates; (h) Does not hold a material interest in the company or its affiliates (either directly or as a partner, shareholder, director, officer, or senior employee of a person that holds such an interest); (i) Is not a member of the immediate family (and is not the executor, administrator, or personal representative of any such person who is deceased or legally incompetent) of any individual who would not meet any of the tests set out in (a) to (h) (were he or she a director of the company); (j) Is identified in the annual report of the company distributed to the shareholders of the company as an independent director; and (k) Has not served on the board for more than ten years. For purposes of this definition, “material interest” shall mean a direct or indirect ownership of voting shares representing at least two (2) percent of the outstanding voting power or equity of the company or any of its affiliates. Independent directors shall be persons who are independent, both from the owners and the management of a company. Independent directors will therefore be neutral and not be influenced by the interests of one owner or several owners of the company, or by management, and will thereby be better equipped and motivated solely by the purpose and objectives of the company in exercising the role and responsibilities as a member of the board. The independent directors, who can constitute either a minority or a majority of the board, can further take on specific roles within the board, such as being the board chair.49 Independent directors may also serve as the chair of a specific committee, such as the risk committee, or the committee responsible for appointing and deciding the remuneration of company management. As with other members of a board, independent directors will typically, but not always, be appointed by the shareholders of a company. The criteria, selection, and appointment process may be defined in the bylaws of the organization and/or could accord rights to an external body such as the oversight authority. Independent directors can also potentially be appointed directly to the board by defined stakeholders other than the owners of a retail payment system. A central bank, for example, could replace having a direct seat on the board with the right to appoint independent directors to the board in order to distance itself from the governance arrangements and remain at arm’s length in relation to its obligations as regulator or overseer. The PFMI specifically highlight that ensuring the independence of the board from management will typically entail including non-executive members on the board. The PFMI also include considerations about including independent directors on the board, as appropriate. As a minimum, the board of a retail payment system should thus include non-executive board members; however, including independent directors should be considered as a possible prerequisite to ensure that the board is able to conduct its business with sufficient independence and objectivity, also where the PFMI are not directly applicable. The retail payment system shall disclose publicly which members of the board are regarded as independent directors. The composition of the board should change as the market evolves. A smaller board comprised of non- executive and executive directors may suffice at the initial stages of the development of a retail payment system, while with growth and increased complexity of the business, the role of an independent director, as a means to help maintain objectivity and independence, will become more essential. The board will be required to assess and review the performance of the board as a whole and of individual board members, and through such regular reviews, the need or requirement for changing the composition of the board and including independent directors can be uncovered. Equally, the need for changing the composition of the board can become apparent through individual or recurring conflicts of interest encountered by the board in its decision-making. System System/ MOU w/ Competition Legal Form Board / Management / Membership country Overseer Shareholders operator Schemes Authority? Profit / not for profit - selected public information - Reserve Bank of Owned by NPPA, a public ltd co. RBA is Yes: NPP is a public company Representation is for Members; Members must apply Australia NPP .. Australia a shareholder of NPPA along with 12 RBA-ACCC -can pay dividends and subscribe to shares in the company (RBA) local financial institutions Banco Central Representation of shareholders on the Board dependent Yes CIP is a not for profit Brazil CIP SILOC Do Brasil Owned by domestic banks on level of shareholding, arranged in three tiers, with BCB-CADE civil association (BCB) bigger shareholders having more weight Egyptian Central Bank of Egypt, Ministry of Board is chaired by representative of the CBE; the Board 123 debt; Central Bank of Technically can make Egypt Banking Co. No Finance (MOF), and national and has 1 extra seat for CBE, 1 for the MOF, 2 for two state EG-ACH Egypt (CBE) profit S.A.E commercial banks owned banks and 2 seats for commercial banks CORE-FR STET is a public limited STET owned by 6 major local banks and Banque de France Private company – internal management not disclosed France STET No1 company (S.A.) the Carte Bleue GIE that runs local STET-SEPA (BdF) CORE-FR has 10 direct and 177 indirect participants for profit card scheme EKS is a Limited liability EKS owned by 3 main banking assoc. Governance overseen by shareholding banking assocs. Deutsche Germany EKS Giro No company Girocard scheme owned by DK, which is EKS mgt focuses on 4 areas Business Dev. for girocard, Bundesbank for profit owned by 5 banking assoc. in Germany marketing, payment card security and Licensing. Reserve Bank of NPCI is a not for profit 48 shareholders including locally The current NPCI Board structure includes an RBI UPI, IMPS, India NPCI India No company under Sect 25 authorised private and state owned director, 4 independents, 6 directors for “promoter Rupay (RBI) of Companies Act banks banks” and a nominee director for shareholder banks BoD consists of 11 members, they can be shareholders JoMoPay, Central Bank of 45% owned by the Central Bank of Private Shareholding or non-shareholders. The CBJ is entitled to assign 3 Jordan JoPACC ACH, ECC, Jordan n.a. Jordan, and 55% shared between the Company members to it, as long as the CBJ is a shareholder. The eFAWATEERco (CBJ) 24 banks operating in Jordan elected board serves for a term of 3 years... Kcash, Board of Directors is composed of the president and Bank of Korea KFTC is a not for profit Owned by bank members, which are Korea KFTC CDNetwork, No deputy of KFTC and 8 non-permanent directors including (BoK) incorporated assoc local banks in Korea IFT a VP of BoK and 6 Members and 1 assoc. Member Bank Negara PayNet is a Limited Owned jointly by BNM and 11 local Main governance bodies are the Nomination & Jompay, Yes Malaysia PayNet Malaysia company (Sdn Bhd) not banks. BNM is the single largest Remuneration, Audit, Rules and Group Management MEPS,Duit, BNM-MCC (BNM) for profit shareholder Committees; Chair of rules committee is from BNM Banco de Mexico Coordination with CCEN is owned by CECOBAN, which in Mexico CCEN TEF n.a. .. (BdeM) Cofece in law turn owned by local banks System System/ MOU w/ Competition Legal Form Board / Management / Membership country Overseer Shareholders operator Schemes Authority? Profit / not for profit - selected public information - Bank Switch licensed under conditions set by The GP2M is run by an Administrative Council composed CMI HPS-switch is private Morocco HPS Switch Al-Maghrib No the BAM; CMI is run by banks; GP2M is a of 12 members, 7 from banks and 5 from payment GP2M Gp2M is a GIE* (BAM) separate legal entity with members institutions; Administrators proposed by their assoc. 1Link 1IBFT State Bank of Guarantee limited Owned by a consortium of 11 local The Board is composed of 11 directors from the Pakistan n.a. Ltd BPS Pakistan company banks shareholding banks and a CEO Director Krajowa Izba 11 locally incorporated banks Overseen by management and supervisory board. Narodowy Bank Poland Rozliczeniowa Elixir n.a.. Private for profit (including foreign banks) and the Supervisory board has representatives of the 11 private Polski (NBP) S.A.(KIR) National Bank of Poland (34,44%) shareholder banks and is chaired by rep of the NBP The shareholders appoint and elect, every 4 years, a TransFond Banca Naţională a 19 locally operating banks and the the Romania SENT n.a. Private for profit Board of Directors of 9 members - individuals who S.A. României (BNR) National Bank of Romania represent each and all shareholders of the company South African None yet with owned by 4 major local banks (equal Shareholders with 5% or more entitled to nominate one South Bankserv EFT, Reserve Bank the Comp Com Private company shares totaling 92.5%) remaining 7.5% Director. The Board can appoint further 5 Independent Africa Pty Ltd RTC (SARB) (still pending) held by Dandyshelf (consortium) Non-Exec Directors and up to 4 Executive Directors. LankaClear 26 locally registered financial Chairman appointed by Governor of the Central Bank of Central Bank of Private limited liability Sri Lanka (Private) SLIP n.a.. institutions plus the Central Bank of Sri Sri Lanka; of 7 Directors,2 represent the Central Bank, 2 Sri Lanka company Limited Lanka, which holds 19.34% of shares the 2 main state owned banks, 3 by bankers association Schweizer private company SIX Group Ltd; shareholders of SIX Joint governance by SNB and SIX; SNB is the system Comco has sole cost-recovery (approp. Switzerland SIC Ltd SIC Nationalbank Group are primarily (96.9%) local and manager, determines participants, accounts, settlement responsibility return on cost of capital . (SNB) locally operating foreign banks and processing; SIX provides the technical services ITMX is a private ITMX is a company of the Thai Bankers Association. It is Bank of Thailand Thailand ITMX Promptpay No company without Jointly owned by 10 domestic banks managed by a board of directors and through audit, risk (BoT) advisory board and management committees Central Bank of BKM governance defines Partners, Members and Service BKM-Express, BKM is a not for profit Joint ownership by 10 domestic banks Turkey BKM Republic of Turkey No Providers; 6 committees exist in addition to the Board, Visa, MC Joint Stock Company and the central bank (TCMB) covering Operations, Marked Dev. and Business Dev. Groupement Members are credit institutions and There are full Members and affiliate Members. Each GIM, Groupement d’Intérêt UEMOA Interbancaire BCEAO n.a.a other financial institutions in the zone, member has a vote in the General Assembly. It is run by IMonetique Visa, MC Economique (GIE) including also the BCEAO a Conseil d’Admin; each member state also has rep. Payment Systems Vocalink is a private Vocalink is no longer a membership based organisation; United FPS, Bacs, Yes Owned by Mastercard Inc; Schemes are VocaLink Regulator company limited by articles of association for Faster Payments and BACS do Kingdom Paym PSR-CMA separately owned by Pay.Uk (PSR) shares not specify criteria for membership eligibility. *GIE = Groupement d’Interêt Economique, a non-profit company structure run by members with no fixed capital. 1 Van Kersbergn and Van Waarden, “Governance as a bridge between disciplines: Cross -disciplinary inspiration regarding shifts in governance and problems of governability, accountability and legitimacy” Eu ropean Journal of Political Research 43 (2004). There the authors provide an overview of the different contexts in which governance is used and how it related to market and economic policy aims. 2 G20/OECD Principles of Corporate Governance, 2015. The OECD has published OECD Corporate Governance Factbook 2019, which provides a comprehensive global overview regarding corporate governance. 3 See for instance Ahrend, R., J. Arnold and F Murtin (2009), “Prudential Regulation and Competition in Financial Markets” OECD Economics Department Working Papers, No. 735 4 Biagio Bossone and Massimo Cirasino, The Oversight of the Payments Systems: A Framework for the Development and Governance of Payment Systems in Emerging Economies , Payment and Securities Clearance and Settlement Systems Research Series No. 1 (CEMLA and the World Bank, 2001), https://www.cemla.org/forodepagos/pdf/estudiosydocumentos/Oversight.pdf). 5 Bossone and Cirasino, Oversight of Payments Systems. 6 Under the PFMI, a payment system is covered by the following definition: “A payment system is a set of instruments, procedures, and rules for the transfer of funds between or among participants; the system includes the participants and the entity operating the arrangement. Payment systems are typically based on an agreement between or among participants and the operator of the arrangement, and the transfer of funds is affected using an agreed-upon operational infrastructure. A payment system is generally categorized as either a retail payment system or a large-value payment system. A retail payment system is a funds transfer system which typically handle a large volume of relatively low value in such forms as cheques, credit transfers, direct debits and payment card transactions. Retail payment systems may be operated either by the private sector or public sector, using a deferred net settlement mechanism or a real-time gross settlement mechanism.” 7 Retail payments are typically low-value transactions between consumers, businesses, and public authorities conducted by checks, payment cards, direct debit, and cash. The focus of this paper is on the retail payment systems that support electronic retail payments. E-money can include store-of-value cards issued by banks or non-banks and would include most “mobile money” schemes. 8 Within the European Union, a functional separation between a scheme and a processor is mandated under the Interchange Fee Regulation. 9 National payments companies have been established in Jordan, India, and Saudi Arabia, for example. 10 In the recent announcement of changes to the Regulation on Oversight for Systemically Important Payment Systems, the European Central Bank noted, “In the light of fast-moving technological trends and changing consumer preferences which may fundamentally change the way payments are made, it is considered important to ensure that all relevant factors can be taken into account when assessing the systemic importance of a payment system.” 11 The Eurosystem is proposing amendments to the existing oversight standards for payment instruments. The amendments would include “payment arrangements” in addition to payment schemes. A payment arrangement provides functionalities that support the end users of multiple payment service providers in the use of electronic payment instruments. It is managed by a governance body that issues the relevant rules or terms and conditions. A subset of the PFMI will apply to payment arrangements and payment schemes, including governance. Eurosystem Oversight Framework for Electronic Payments Instruments, Schemes and Arrangements: Draft for Public Consultation , October 2020 (European Central Bank). 12 Oversight Framework for Financial Market Infrastructures (FMIs) and Retail Payment Systems (RPSs). 13 Erstwhile known as the Committee on Payment and Settlement Systems. 14 While the PFMI are applicable to systemically important payment systems, some of the principles are also applied to retail payment systems. The European Central Bank, Bank of Canada, and the RBI, among other central banks, have used a subset of the PFMI for the oversight of retail payment systems. In the rest of the paper, the abbreviation FMI (financial market infrastructure) is used to indicate a payment system. 15 “Ownership and governance of the Operators ultimately determines how control is exercised over the payment systems in terms of their operation, access and development. We must be sure that appropriate governance measures are in place so that the extent and manner in which control is exercised over the Operators of payment systems does not adversely impact on our ability to further our objectives of competition, innovation and the interests of service-users.” Payment Systems Regulator. 16 Chapter 4.0 of the PFMI sets out the responsibilities of central banks, market regulators, and other relevant authorities for FMIs. 17 Including those responsible for market conduct, consumer protection, and national security. 18 Organization for Economic Co-operation and Development (OECD) 19 Committee on Payment Market Infrastructures and International Organization of Securities Commissions (CPMI) 20 Bossone and Cirasino, Oversight of Payments Systems. 21 The World Bank has issued guidelines for “developing a comprehensive national payments strategy” in which it is stated: “While there are a number of issues that are responsible for the persistence of inefficiencies in retail payment markets, the lack of a coherent, holistic strategy for the development of retail payment systems is among the most common.” 22 For instance, through the role of oversight authorities, policy makers recently played a pivotal role in creating and shaping the governance frameworks for new “faster payment” systems. In Australia, for example, the Reserve Bank of Australia led engagement and consultations with stakeholders on the creation of the New Payments Platform. Since its launch, the reserve bank has also reviewed key elements of governance, including the access regime and functionality. (See https://www.rba.gov.au/payments-and-infrastructure/new-payments-platform/functionality-and- access-report/introduction.html.) There have also been debates about whether or how mobile money providers should be able to have interoperability arrangements with bank-owned ATM networks, such as in Kenya. 23 In an article on efficiency, the Australian Competition and Consumer Commission states: “Dynamic efficiency reflects the need for industries to make timely changes to technology and products in response to changes in consumer tastes and in productive opportunities. Competition in markets for goods and services provides incentives to undertake research and development, effect innovation.” (See https://www.accc.gov.au/system/files/Network%20March%202017.pdf.) 24 This has been the case in a number of instances in relation to interchange fees within the European Union. 25 Payment Systems Regulator, Ownership, Governance and Control of Payment Systems, Supporting Paper 3 (Financial Conduct Authority, 2014). 26 “Based on the knowledge of its own country, the overseer should define a payment system governance structure that supports the greatest involvement of the private sector in decisions of common interest and systemic relevance (for example, infrastructural standards and risk-management features), while protecting the competition or contestability of the domestic market for payment services.” Bossone and Cirasino, Oversight of Payments Systems. 27 According to data from the Global Payment Systems Survey, of the 120 countries included in the survey, 32 percent of the jurisdictions did not require a license for international card payment networks operating in the country, and 26 percent of the jurisdictions did not require a license for entities operating a domestic card payment network. Seventeen percent of the jurisdictions included in the survey did not require an entity operating an ACH to obtain a license. 28 The Payment Systems Regulator in the United Kingdom has issued directives regarding various aspects of governance and access to payment systems. 29 Banking Market Law, 5777–2017. Both Visa and Mastercard have been granted the right to own shares of 10 percent. 30 Payment Systems Regulator, “Market Review into the Ownership and Competitiveness of Infrastructure Provision,” 2016. 31 The RBI has laid down a governance framework for NPCI. The governance framework for central counterparties also illustrates the ability of public authorities to shape governance framework for FMIs. In Directions for Central Counterparties (CCPs), it prescribes: “The shares of an authorised CCP shall be held by persons who are users of the authorised CCP. If a person ceases to be a user, the CCP shall ensure that the person’s shares are divested,” and “no person shall transfer/divest/sell/buy equity shares of an authorised CCP without prior approval of RBI” if the shares are equal to or more than 5 percent or where the acquisition would increase the cumulative shareholding to 5 percent or more. 32 In 2005, Bank of Mexico opened access to SPEI (Sistema de Pagos Electrónicos Interbancarios) to non-banks. 33 The right of access should also be looked at in the context of the obligation of a payment system to monitor the adherence to the rules of participation on an ongoing basis. 34 https://www.npci.org.in/who-we-are/corporate-governance/appointment-of-directors 35 https://www.bis.org/cpmi/publ/d130.pdf 36 The European Central Bank uses the general term Governance Authority in this regard. 37 In some payment systems, the owners of a retail payment system are referred to as members. The terms are used interchangeably. 38 Visa Europe was acquired by Visa Inc. in 2016. 39 Prepaid Payment Instruments (PPIs) – (i) Mandating Interoperability; (ii) Increasing the Limit to ₹2 lakh for Full-KYC PPIs; and (iii) Permitting Cash Withdrawal from Full-KYC PPIs of Non-Bank PPI Issuers https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=12094&fn=9&Mode=0 40 In some countries, notably Switzerland and the United Kingdom, non-bank entities have recently been permitted to obtain settlement accounts, thereby facilitating their direct access to and participation in a specific payment system. 41 https://www.accesstopaymentsystems.co.uk/about-us 42 https://www.psr.org.uk/sites/default/files/media/PDF/PSR%20General%20Direction%205%20March%202020.pdf 43 https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/conflict-of-interest.html 44 The board of NPCI in India has four independent directors out of a total of 12 board members. At EFTPOS in Australia, two of its 12 board members are independent directors. 45 The PFMI indicate that independence means excluding parties with significant business relationships with the FMI, cross-directorships, or controlling shareholding as well as employees of the organization. 46 https://www.npci.org.in/board-of-directors 47 Transparency will need to be regarded in the context of the applicable regulatory requirements, and certain information may not be disclosed—for example, due to competition-law requirements. 48 https://www.bis.org/cpmi/publ/d130.pdf 49 The role as board chair at Benefit EFT in Bahrain is reserved for an independent director. While the central bank of Bahrain is the single biggest shareholder, it has only observer status on the board. https://www.benefit.bh/About/boardofdirectors/https://www.benefit.bh/About/boardofdirectors/