Think twice about copying Russia’s national payments strategy

National services will find it hard to complete with established players

When Russia invaded Ukraine, the full weight of the international community’s sanctions was brought to bear to starve Moscow’s war machine. Businesses from across the economy began withdrawing their services from Russia. The payments industry was no exception. International payments firms, including Visa, MasterCard, American Express, Apple Pay, Google Pay and PayPal, have all suspended operations in the country.

This could have been a crippling blow. When civil unrest struck Kazakhstan earlier this year, the digital payments system went down and the country’s cash network was unable to cope with the increased strain. Though the outage was brief, the suspension of digital payments was devastating to the lives of the citizens affected.

Russia, however, has been able to continue to process domestic (though not international) digital payments, thanks to its national payments system (NSPK), which keeps the nation’s card payments running. The system was set up in 2014 when an earlier round of sanctions prevented Russian banks from using international payments systems.

Russia’s ability to continue to process domestic payments throughout the war will not go unnoticed. This war, perhaps more than any other, has demonstrated the degree to which private financial infrastructure can be pressed into the service of western foreign policy objectives. Accordingly, any nation that thinks it is probable that these tools may be turned on it is likely to be considering Russia’s example and exploring the possibility of establishing its own national payments system.

But the possibility of sanctions and service withdrawal is not the only consideration a central bank faces when deciding between national and international payments services.

Consistency and predictability are key qualities for a payments system of systemic importance. The bar for resilience has been set by international payments systems, which, because they are less tied to a single country’s infrastructure, are less likely to be affected by local crises.

Running a domestic payments system places the operator in competition with established players in the industry, who regularly add new features to enhance security or functionality.

This means that the standard of service a national payments system is expected to provide is a moving target. Threats of fraud and cyberattack grow by the day. The means employed and the tools required to detect them grow more and more sophisticated. With thin operating margins, countries may struggle to keep up with the standards required to ensure security and prevent and mitigate fraud.

It is worth highlighting that availability of funds is not the only challenge to expanding functionality. Expanding the reach and scope of a payments system requires a broad variety of stakeholders with different and potentially conflicting interests to co-operate.

Users are also expecting more from their payment services: interoperability with other payment platforms, rigorous data protection, and cheap and seamless cross-border transfers. In the latter aspect in particular, national payments schemes are at an obvious disadvantage to international systems since they often find it difficult to obtain the broad acceptance necessary for efficient cross-border transfers.

The economic growth of many countries depends on keeping the cost of cross-border payments down. The expanding importance of online commerce is a key avenue for development and prosperity. Being able to process payments across borders cheaply and efficiently is vital to ensure new businesses can compete in an international marketplace.

Similarly, a modern fraud prevention architecture is desirable for both individuals and businesses. The threat of fraud represents a significant cost, but it can also act as a deterrent for companies looking to establish operations in a particular jurisdiction.

Remaining competitive in a market going through a period of such rapid development as payments is an enormous challenge, and one that countries may find difficult to achieve and expensive to attempt.

And national payments systems must fund a project able to meet these standards on thin operating margins. The set-up is likely to be even more costly since developing an NPS from scratch requires significant capital expenditure.

As well as building the system’s technical capacity, policy-makers establishing an NPS also have to invest in public awareness to promote adoption.

Even Russia’s fairly well-used domestic card network has been swamped with additional demand since the sanctions, reflecting the difficulty of getting the general public to adopt a system when others are available. The alternative is to use regulatory incentives to encourage adoption. However, this necessarily entails the hindering of market competition, negating the role of the private sector as a driver of innovation.

There is a complex web of interconnected costs and benefits that policy-makers must evaluate before taking the decision to launch a national payments system. OMFIF, in partnership with MasterCard, is producing a report exploring this topic in depth, featuring detailed interviews with central banks with experience of national payment systems. The report will be launched with a virtual event on September 20. Click here for more details and to sign up.

Lewis McLellan is Editor of OMFIF’s Digital Monetary Institute.

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