The Payment System: Structure, Efficiency, Innovation and Regulation

It is easy to under-estimate the importance of the payment system and its contribution to the economy because it is largely out of sight. In some countries the costs of the payment system can amount to 3 per cent of GDP (Humphrey et al., 1997, p. 33). The costs of making payments can differ across countries by an order of ten, which could have a major impact on the development of the financial system and the ability to respond rapidly to new challenges and opportunities. This is particularly true for the exploitation of cross-border transactions in the EU. These issues could readily merit a book on their own. However, these aspects of financial ‘plumbing’ tend to be regarded as dull compared with banking and monetary policy. In this chapter, after a short introduction summarising the nature of the payment system and its structure, we consider just three main issues that affect the likely future development of the system: its efficiency in various countries round the world and the scope for improvement by moving to best practice; the nature of innovation in the industry and the potential for new more efficient systems both within and between countries; the role of regulators in shaping the future.