Getting funds to those in need and enabling access to money during COVID-19, part 1: COVID-19 and the national payments system
Governments and economists are now focused on the macroeconomic policies that can support economies during the Covid-19 pandemic. Yet, for policies to be effective and economies to function, payment and settlement systems and services – collectively referred to as the National Payments System (NPS) – must operate efficiently and securely. The recommended actions in this area are discussed in this three-part post, very much supported by the World Bank Group, and add to the recent important contributions to policy making at the time of the Covid-19 pandemic hosted by VoxEU (see Baldwin and Weder di Mauro 2020). In particular, they are critical to enable economies to deliver immediate response to people and businesses in need during times of emergency (Furman 2020).
The NPS underpins the functioning of the economy by enabling large-value transactions among financial institutions and corporates, as well as the smaller payments and money transfers between people, businesses, and government agencies.
Although the effects of Covid-19 on the NPS continue to unfold, the lessons learned from the Ebola and previous humanitarian and financial crises suggest that public authorities should be proactive in mitigating risks to payment systems to support economic activity and help people.1
Over the course of our analytical work and engagement with clients, we have observed some measures governments can take to keep payment systems functioning. The impacts affect two broad areas: the availability of payment and settlement systems, and the availability and smooth provision of payment services including cash.
Links in the chain–how payment and settlement systems can be disrupted
Systemically important payment systems and other financial market infrastructures, as well as retail payment systems, could all be affected.2 The most likely disruptions stem from the materialisation of operational and financial risks.
Figure 1 What are the impacts
Operational disruptions can cause the unavailability or limited availability of critical payment systems, which can disrupt broader financial stability. For instance, this spill over can happen if money market participants cannot settle transactions, or if liquidity cannot be redistributed across the financial system. The inability to transfer funds could interrupt commerce. Also, restricted access to cash could affect individuals that rely on remittances as a source of income. Likewise, governments could be unable to make critical social cash transfers in a timely manner.
Illness, social distancing, or government-mandated restrictions on movement could impede financial sector workers from carrying out normal operations of critical systems. Moreover, even if a system does not suffer from staff shortages, its normal operations could still become affected if an interdependent financial services provider or a critical provider, such as a telecom network operator, experiences staff disruptions.
The domino effect
Credit or liquidity problems in one firm can spread across the entire system. For example, a default of one participant in the payments system could create unexpected losses or liquidity shortages for others, potentially causing more defaults due to a ‘domino effect’.
Likewise, panic sales of assets could cause significant reduction in the value of collateral pledged by financial system participants, triggering mandatory provision of additional collateral and further affecting the liquidity of participants.3 These risk events can also manifest in the form of volatility in financial and foreign exchange markets, which has a direct link with pricing of remittances and other cross-border payments.4
Effects on payment services offered to individuals, firms, and governments
When payment services are impaired, people may have trouble receiving salaries, pensions, and other transfers, or from making bill payments and debt/loan repayments, or payments for transportation services or food and groceries to merchants. Most at risk during a health epidemic are operations or transactions which require manual intervention or physical presence and interaction, such as those involving cash, which is still the primary means of payments in developing economies.
Many beneficiaries of social protection programs and recipients of remittances could be heavily impacted when cash runs short. This can happen when agents are classified as ‘non-essential’ or due to localised idiosyncratic behaviour of law enforcement agencies.5 In contrast, digital payment services may even see increased usage, provided the underlying IT systems and processes are not impacted.
Impacts on non-cash payment services depend on the extent to which each service involves interaction with people, as well as how widespread each service is in use – something which varies by region, and degree of urbanisation. For example, physical cheque payments are likely to decline, and credit, debit, and prepaid cards used at the physical point-of-sale (POS) may be seen as exposing users to risk of Covid-19 contagion, since they often require interaction with clerks or POS machines. Contactless card payments and e-commerce payments may get a boost.6
Mobile money may be a convenient way to make and receive payments without physical contact. But, in many countries, these payments still need to be assisted by the agent or a merchant and who may not be available. Also, digital payment services may expose their users – especially first-time users – to cybersecurity risks. These could be heightened, due to any relaxation of some risk management measures in the emergency context.
What can we do to keep payment systems operating?
The emergency policy response should start by classifying critical payment services as ‘essential services’.7 Then, policymakers should think about measures to encourage the shift to digital payments, plans for continuity of critical payment systems and service providers, and support to the liquidity needs of systems and their participants. The choice of specific policy responses varies, depending on which aspects of a country’s NPS are more at risk.
Figure 2 Public sector responses
Central banks, in their capacity as overseers of the NPS, should review the effectiveness of crisis decision-making and communication protocols, in cooperation with other national and international authorities. They must ensure that systems have adequate business continuity plans to guarantee critical elements of operations during lockdowns and social distancing.8
Central banks may need to solicit cooperation from providers of such critical services as network and electricity, and consider cyber-risks arising from operations of systems in contingency mode. This could be achieved by introducing additional and more robust controls for remote access and IT security briefings.
Central banks should assess the robustness of the tools used to manage credit and liquidity risks in payment systems and to address the liquidity needs of critical payment system participants.9
Importantly, central banks should discuss with other relevant authorities the options for keeping in operation at least some of the agent locations whose main line of business is deemed ‘non-essential’. Other important actions include:
- Providing real-time data to the general public on the location of branches, ATMs, and agents, together with information on whether they continue to provide cash withdrawal/cash-out services
- Recommending or mandating a temporary reduction of fees for accessing cash at ATMs or through agents – including for ‘off-us’ cash withdrawals at ATMs10
- Temporarily increasing cash withdrawal limits that may apply to certain accounts or payment products, especially those that are used by population more vulnerable to Covid-19 related impacts
- Putting in place communication strategies and campaigns to inform about all these matters11
Mitigating negative impacts on non-cash payment services
Central banks should review whether transaction processing systems, such as cards and mobile money related payment systems, and Automated Clearing Houses (ACH), have sufficient capacity to meet increased demand and that critical non-cash payment services remain fully functional during emergencies. Supportive actions should involve:
- Recommending or mandating a temporary reduction of customer fees on critical payment services
- Temporarily increasing transaction and balance limits, especially for those payment products that are used by population more vulnerable to Covid-19 (provided that the new limits do not raise concerns relating to money laundering and financial terrorism)12
- Supporting reduction or elimination of data and other telecom related charges applied to mobile money transactions
- Requiring businesses offering essential services (e.g. pharmacies, hospitals, grocery shops) to accept digital payments irrespective of the purchase amount and without customer surcharge
- Promoting immediate enrolment of new merchants that will accept digital payments, including by simplifying onboarding requirements for merchants that will be accepting digital payments (e.g. simplified customer due diligence procedures, use of special contingency accounts that enable merchants to receive digital payments immediately)
- Expanding interoperability of existing cash-transfer closed-loop payment cards and mobile money solutions.
Part II of this column will focus on the provision of essential services such as Government-to-Person payment and international remittances.
Authors’ Note: This article is part one of two looking at how the pandemic affects national payment systems and how policymakers can avoid disruptions. Part I builds on contributions from World Bank Group experts: Guillermo Galicia, Jose Antonio Garcia, Oya Ardic, Fredes Montes, and Mahesh Uttamchandani.
Baldwin, R and B Weder di Mauro (2020), Economics in the Time of COVID-19, a VoxEU.org eBook, CEPR Press, 6 March.
Furman, J (2020), “Protecting people now, helping the economy rebound later”, VoxEU.org, 31 May.
ILO (2006), Freedom of association – Digest of decisions and principles of the Freedom of Association Committee of the Governing Body of the ILO, International Labour Organization Fifth (revised) edition.
1 In essence, a ‘payment system’ is the mechanism through which transactions are settled between banks, payment service providers, and other financial entities, and include funds transfers from their respective accountholders. ‘Payment services’ refers to the tools, instruments, and means that banks and other payment service providers offer to their customers so that the latter may access their funds (i.e. withdraw cash, pay at merchant locations, transfer funds, etc.).
2 FMIs are critically important systems that provide clearing, settlement and recording of monetary and other financial transactions typically initiated by financial institutions. SIPs are a type of FMIs, and in practice are represented mainly by Real-Time Gross Settlement (RTGS) systems which are the backbone of a country’s financial infrastructure. In RPS, transactions are typically initiated by the customers of banks or other PSPs, and include payment card systems, fast payment systems, automated clearing houses for electronic funds transfers (sometimes including mobile money transfers), and cheque clearing houses for the purposes of processing retail payments.
3 Post the 2008 global crisis, international standards for payment and settlement systems have been significantly strengthened, larger EMDEs have adopted these standards but gaps remain in many middle-income and low-income countries.
4 Interviews with market participants indicate, thus far, that the participants are absorbing the exchange rate risks and some countries like Mexico have stepped into to stabilise the foreign exchange markets. The G7 central banks have established swap arrangements to ensure adequate liquidity in their respective currencies; this arrangement has been extended to a few non-G7 countries.
5 In many emerging and developing economies, agents are the preferred option for accessing cash by many citizens. Agents include mobile money agents, agents servicing government cash transfers programs, agents providing cashback services to cardholders, etc. Large retailer chains as well as small family shops can act as agents. Notably, the physical premises of many small remittance agents that operate mainly on a cash basis (e.g. exchange bureaus) have been shut down in some sending countries (e.g. Malaysia, France, Italy, Spain) and also in receiving countries (e.g. India).
6 This refers to e-commerce payments made via the Internet, mobile banking, or apps, but not to other forms e-commerce payments like ‘cash on delivery’ or paying the transaction in cash at agents. These forms of payment are very often used by individuals who do not hold a credit card or a transaction account, or whose account does not allow them to make e-commerce payments digitally. Also, most emerging and developing economies have not developed contactless acceptance devices.
7 The International Labour Organization identifies a list of essential services. These services are those that, if not provided, would endanger life, personal safety, and health of the whole or part of the population: food; medicine and healthcare; electricity; water and telecommunication services; banking services; public safety (police, firefighters, armed forces, prison services); basic transportation services; postal services; and garbage collection services. (ILO 2006).
8 Examples include hardware, software, network, participant interfaces, transaction monitoring, physical, and logical security.
9 Examples include collateral arrangements, limits, participant default arrangements, etc.
10 ‘Off-us’ withdrawals refer to withdrawals that are made at an ATM belonging to an entity different from the one that issued the card that is being used in the transaction.
11 Among other key features, communication strategies should aim at countering fake news that may lead to panic or irrational behaviour from the population.
12 In most cases these limits apply to accounts opened through simplified customer due diligence (CDD) procedures.