A payment system is a set of instruments, bank procedures and, usually, interbank fund transfer systems that guarantee the circulation of money.
Payment systems are traditionally classified as either high value or low value.
There is widespread consensus that high-value payment systems should be settled on a same-day basis, and, as a general rule, as soon as possible. Originally, these systems were developed to settle: 1) transactions in the financial markets, 2) obligations originating in other payment systems, and, 3) financial intermediaries´ obligations. The average payment amount was very high. Recent technological and financial advances have made it possible for financial intermediaries to offer the services to their clients at low cost.
On the other hand, a great number of payments are settled on deferred settlement systems, which are low-value payment systems. Firms use these systems to make commercial payments, to meet payroll obligations, and to make non-urgent payments or payments that can be previously scheduled. On average, the payment amount is low.
Payment systems in Mexico
The high-value payment systems are:
- SPEI®. The main system banks use to settle transactions among themselves and on behalf of their customers.
- DALÍ. The securities deposit, administration and settlement system, where securities market operations are settled.
- SIAC. Manages the accounts commercial banks maintain at the central bank. The central bank uses SIAC to provide liquidity to the banks, although it works as a payment system as well.
Banco de México runs SIAC and SPEI®. Indeval S.A. runs DALÍ.
Low-value payment systems in Mexico are those related to checks, low-value electronic funds transfers, direct debit transfers, and bank cards.
- All these transactions, except bank card transactions, are cleared at the Cámara de Compensación Electrónica, an automated clearing house run by Cecoban S.A. de C.V., and are settled by the central bank via SIAC.
- Checks. The Cámara de Compensación Electrónica clears the checks presented by banks, making it possible for bank customers to deposit checks from other banks into their own accounts.
- Electronic funds transfers. These are scheduled transfers of funds among bank account holders from different banks. This system is used mainly to meet payroll obligations and to make payments to suppliers.
- Direct debits. These are deferred funds transfers made by banks on behalf of firms. Charges, previously authorized by a client, are made to a client account in another bank.
- Credit and debit cards. In the case of a credit card, the client has a credit account at the bank issuing the card. In the case of a debit card, the client has a debit account. In both cases, the card holder uses the card as a means of payment at point-of-sale terminals, as well as for balance inquiries and withdrawals at ATMs. There are two firms that process card operations, PROSA and E-Global. These companies are interconnected. Clearing is done by PROSA, S.A. de C.V., and settlement is done through a commercial bank.
The role of the central bank
Banco de México plays three roles vis-à-vis the payment systems:
- It operates the SIAC and SPEI® systems.
- It is a payment systems user. It uses the payment systems to implement monetary policy, provide liquidity to the financial system, receive collateral from banks, provide services such as Directo a México (remittances transfer from abroad), pay its own payroll, and pay suppliers.
- It is both the supervisor and regulator of the systems.
The law governing Banco de México establishes that one of the central bank objectives is to foster the optimal functioning of the payment systems. To meet this goal, in January 2001 the Board of Governors adopted the Core Principles for the Systemically Important Payment Systems, a document provided by the Committee on Payment and Settlement Systems (CPSS), consisting of representatives from G-10 central banks. This document compiles best practices for designing and operating payment systems important to the stability of financial markets (or, systemically important systems).
The Payment Systems Law provides a strong legal foundation for systemically important systems and provides the central bank with more specific authority to regulate those systems. The law establishes the definition of a systemically important system, identifying those systems under the law’s jurisdiction. At the beginning of every year, Banco de México publishes a list of systems which are systemically important according to the established criteria.
The Law of Transparency and Order for Financial Services empowers the central bank to regulate the means of payment and the payment services banks provide to their customers, and the fees they charge each other.
Risks in the payment systems
Banco de México seeks to ensure secure and efficient payment systems. An important task is therefore to identify and mitigate risks. The main risks faced by payment systems participants are:
- Liquidity risk. The risk that a participant will not settle an obligation for full value when due. This risk does not imply that the participant is insolvent. The participant may be able to settle the required debit obligations at an unspecified later date.
- Credit risk. The possibility that a participant will not settle an obligation for full value at any time.
- Principal risk. The possibility that a participant who is in a securities or exchange market operation delivers the securities or currency but does not receive payment, or vice versa. In this case, the participant can potentially lose the full transaction value.
- Legal risk. The possibility of loss due to the unexpected application of a law or regulation or because a contract cannot be enforced.
- Operational risk. The possibility of loss due to deficiencies in information systems internal controls.
- Systemic risk. The possibility that a failure to meet obligations by one participant in a transfer system (or in financial markets in general) causes other participants or financial institutions to be unable to meet their own obligations when due. Such a failure may cause significant liquidity or credit problems and might threaten the stability of financial markets.