The Evolution of Payments in Europe, Japan, and the United States: Lessons for Emerging Market Economies

Abstract

Lessons from the evolution of payment systems in Europe, Japan, and the United States provide a useful guide for emerging market economies in improving their own payment arrangements to foster economic growth. Some payment arrangements are more efficient than others in promoting economic growth in a market-based economy. The payment experience of industrial countries is diverse enough to identify those payment arrangements that provide the infrastructure for sustained growth and the emergence of market-based enterprise.

Based on the historical experiences of Europe, Japan, and the United States, a number of country attributes have led to the intensive use of different payment instruments and, in some cases, a different mix of private and public ownership and participation in the payment system. Such attributes include country size, population density, banking structure, legal framework, safety, and payment instrument pricing. These attributes explain why Japan relies heavily on cash at the point of sale but uses electronic payments for bill payments and business transactions. They also are the reason Europe relies on credit-transfer giro payments for all types of transactions and the United States instead relies on checks. Finally, the fact that consumer payment needs were not met within the banking system led to the establishment of postal giros in Europe, while untimely business payments led to central bank involvement in payment processing in the United States.

Unmet user needs, inefficient payment arrangements, differences in payment instrument costs, and improper pricing of payment services will determine the future structure of payment systems in emerging market economies just as they have determined the evolution of payment systems in industrial countries. The authors discuss these issues and apply the lessons learned to payment arrangements in emerging market economies. Although the evolution of payments has taken decades in industrial countries, emerging market economies hope to complete the process in just a few years, and so will benefit by having a better roadmap for transforming their payment systems.

This paper - a product of the Financial Sector Development Department - is part of a larger effort in the department to promote the development of financial sector infrastructure to support banking and capital market activities.