The Bank of Korea "Needs to Review Establishing a Real-Time Total Amount Payment Small Payment System"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea stated on the 3rd that there is a need to consider operating a small-value payment system using the real-time gross settlement (RTGS) method by the central bank.

In a report titled 'Background and Implications of the U.S. Federal Reserve's (Fed) RTGS-based Small-Value Payment System (FedNow) Implementation,' the Bank of Korea explained the background of the Fed's introduction of FedNow and stated that operating such a system directly in Korea could yield positive effects.

The Bank of Korea explained, "If the central bank directly builds and operates such a system, it is expected to have positive effects in Korea, such as reducing net settlement risk, easing collateral burdens on financial institutions, and enabling linkage with cross-border payment systems."

In addition to the 'improvement of efficiency and safety' cited by the Fed, additional positive impacts are expected.

The RTGS-based small-value payment system is a method where final fund settlements between banks and other financial institutions are made in real-time on a transaction-by-transaction basis, distinguished from deferred net settlement where final settlement occurs on the next business day.

In August last year, the Fed decided to directly build FedNow between 2023 and 2024. Accordingly, the Fed's role as an operator of small-value payment systems is expected to expand. Although private institutions already operate similar systems in the U.S., the decision to build the system directly will expand the Fed's role as a small-value payment system operator.

Currently, Korea's small-value payment system is mainly processed through a net settlement method via the Korea Financial Telecommunications and Clearings Institute.

The Bank of Korea stated, "Introducing an RTGS-based small-value payment system can enhance efficiency by promoting competition, reducing service usage fees, improving service quality, and accelerating innovation," adding, "It can also increase stability by preparing for risks associated with privately operated standalone systems." It also positively evaluated that "accessibility of financial institutions to the RTGS-based small-value payment system can be expanded."

Recently, countries such as Sweden, Mexico, Australia, Europe, and Hong Kong have also introduced RTGS-based small-value payment systems besides the U.S.

It is expected that the RTGS system operated by the central bank will also help address issues related to linking cross-border payment systems currently under discussion. This issue has attracted attention recently in connection with Facebook's Libra issuance plans.

The Bank of Korea added, "Discussions are underway at institutions such as the Bank for International Settlements to strengthen the linkage between central bank payment systems of various countries to improve the high cost and low efficiency structure of cross-border remittance services," and "To this end, it is necessary for central banks to operate payment systems 24/7."

This content was produced with the assistance of AI translation services.