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Payment System
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As technological development moves on, the operation of modern financial systems relies more and more on the safety and efficiency of payment systems.  This evolution has in turn displaced the use of traditional means of payment such as cash and checks, giving way to instruments that require a technological infrastructure of advanced and automated processes for their operation and liquidation.
The Central Bank, being aware of the tasks and challenges that the country is to overcome in order to improve the transaction systems currently used as a basis to carry out production and investment activities as the means to promote competitiveness improvement, defined a set of actions in 2002 destined to promote modernization of payment systems.
 

A strategy for the modernization of El Salvador payment system was implemented on this basis. Its architecture will contribute to consolidate safety and stability of the financial system.  On this context, the execution of projects and concrete actions have been performed to coordinate efforts among the Central Bank, control organisms and financial institutions.

Strategy for Payment systems modernization

The definition of the strategy for the payment systems modernization takes as starting point the establishment of a vision or model sought for payment systems of El Salvador.  The fundamental areas on which it is based comprise an organized and logic series of actions that will lead to achieve, at mid term, the vision planned for the system.

Vision of a Modern Payment System for El Salvador

Considering as a basis an analysis of the main features from international experiences, the system model of payments proposed comprises a high-value electronic system of gross liquidation in real time (LBTR), that is usually carried out in an inter-banks environment.  This central system is operated by the Central Bank through deposit accounts held by the banks in the same and in which  converge four main payment subsystems:  a) operations with values; b) clearing house for checks; c) automated clearing house for electronic transactions (ACH); and d) international transactions.  

Since the transactions linked to payment processes represent an important portion of the flows of operations carried out by banks, any strengthening and modernization of the payment systems in the country will lead to an efficient and solid financial system.  

In that sense, the Central Bank will continue analyzing every payment subsystem in order to offer computer and operative designs, as well as standards fit for the specific conditions of our economy, thus minimizing the risks involved in compensation and liquidation processes as a result of the use of various means of payment.      

Components of the Payment System Strategy

The components or pillars on which the modernization strategy of payment systems is based upon comprises three general areas:  a) building of infrastructure; b) prevention of risks; and c) introduction of new payment systems and instruments.

The component of infrastructure includes aspects such as role definition for the Central Bank, that both empiric evidence and international principles define as that of regulation and operation of liquidation processes of high value or final payments, strengthening of coordination with supervising entities such as the Financial System Superintendency and Securities Superintendency, and advocating reforms to the regulatory framework (laws, regulations and instructions) and the creation of instances or forums to discuss reform proposals among its participants. This is known as National Committee of Payments in other countries, this may be integrated by representatives of the Central Bank and the financial sector.

Modernization Project

Some reforms to the normative framework were promoted during the year 2002, as part of the objectives and goals of the action plan associated with the strategy of payment system modernization, in order to foster the use of electronic means to carry out transactions in the bank system, said provisions were incorporated in the reforms made to the Banking Law.  Likewise, the project of check-clearance modernization was implemented, which constituted a step forward within the payment systems modernization framework, especially because by that the financial system is able to step into a culture of electronic-bank operations.

After a diagnosis made on the check-compensation system, it has been possible to deliver consolidated information of checks to be compensated by a private communication electronic channel between the local banks and the Central Bank.

The strategy of payment systems modernization  of the Central Bank also comprises support the efforts the private sector develops in that field, whose objective is to improve local payment infrastructure. This includes the processes in areas such as liquidation of securities operations, electronic transactions ordered by individuals or businesses, and operations of overseas transfers.  

The Central Bank expects to modernize existing inter-bank transfer infrastructure of high value funds, so that the same may be channeled and executed from an electronic platform operated by the Central Bank, thus improving the services that are currently provided to the financial system and to the Government in their financial transactions.

Payment System Components

System of gross liquidation in real time (LBTR in Spanish)

This is the first and most important of the components that must be comprised in a Modern Payment System, by giving support to the inter-bank market liquidation operations, it constitutes an arterial system of the country’s economy. Horii and Summer (1994)/ 1 consider that both safety and efficient operation of the money and capital market mainly relies on the smooth running of said liquidation systems. Therefore, the implementation of basic capacities to operate an LBTR system becomes a priority for developing countries, to be used as a pillar to support development of the various subsystems comprised in a Modern Payment System and which are used to liquidate: operations made within the stock market, processes of check compensation, Automated Clearing Houses (ACH’s), and also the financial and real operations with other countries.

Securities Liquidation System  

This subsystem channels high-value payments derived from the process of securities negotiation (securities, stocks, funds, etc.) that are carried out either through a stock exchange or directly by the central banks, in their various markets (primary, secondary and report market). Operation on an LBTR system infrastructure has been eased in countries like Colombia and Spain where the liquidation of values is made in a delivery against payment framework (DVP/ 2), i.e., securities are granted only if the payment has been made simultaneously. At the same time, the processes of liquidation are also highly linked to the custody and registration of securities activity, in fact, in international markets custody institutions are generally entrusted to execute the liquidation processes derived from negotiations in several markets and even monitoring and execution of payments of coupons related to the issues registered under their custody/ 3.  

Check Clearing Houses  

The compensation of checks is a process by which, as mutually agreed and undersigned in a contract, the participants exchange checks and data for their further compensation and liquidation, usually carried out in the central banks. Although there is a growing tendency of electronic payments in some countries, checks are still important instruments of payment, mainly to make payments of small amounts/ 4, therefore, within a system of modern payments, there is still the need for check clearing houses just like any other important subsystem of the payment system.  

ACH’s are other subsystems to consider within a modern payment system, given the variety of potential means of payment that may arise as a product of technological developments. In that sense, ACH’s process the compensation and liquidation of operations among Banks derived from retail payments with credit and debit cards, and also those originated from direct instructions debits and credits.

Overseas Payments

Finally, a Modern Payment System should have a channel to make payments from and to Parties overseas, this element guarantees insertion of the country in global economy and markets. To this respect, it is important to assess the degree of interaction and commercial relationships held by financial systems and local companies with financial institutions and foreign companies. This implies the use of an international bank infrastructure to liquidate the transactions. It is also vital to link operations from the public sector with overseas parties, these are mainly associated with getting financing by loans and undersigning debt instruments, and later to execute said obligations. One mechanism that is widely used to order transfers among accounts from several financial institutions in the international market is SWIFT/5, which in many countries constitutes the basic courier service platform by which instructions of payment to overseas parties are transmitted, both for private sector transactions and those of the public sector. 
 
 
1/ International Monetary Fund (IMF), "The Payment System: Design, Management and Supervision", Editado por Bruce J. Summers, 1994; Large-Value Transfer Systems" por Akinari Horii y Bruce J. Summers. 

2/ Delivery Versus Payment. 

3/ Clearstream y Euroclear are international enterprises dedicated to securities management and also  provide custody and clearing sevices for investment in securities.

4/ In the United States is usual to send personal checks to pay bills for public services.  Nowadays this practice had been changed for Internet payment services.. 

5/ Society for Worldwide Interbank Financial Telecommunication  It's an institution created and managed by  banks operating a net to facilitate payments and other financial messages within financial institutions (including securities intermediates and firms) around the world.  A payment message S.W.I.F.T. is an instruction to tranfer funds; though, clearing funds is produced by a payment system or through a relationship with corresponsal  banks. 
 

 
Banco Central de Reserva de El Salvador
República de El Salvador, C. A
Alameda Juan Pablo II, entre 15 y 17 Av. Norte. Apartado Postal (106), San Salvador, El Salvador.
Tels. (503) 2281-8000; Fax. (503) 2281-8011.    E-mail: info@bcr.gob.sv