Faster, safer, sleeker: A giant leap in the age of the digitalisation of money

Barnabás Virág

Deputy Governor (Monetary Policy and Financial Stability), Magyar Nemzeti Bank

It is no coincidence that the above title mirrors the motto of the modern Olympic movement attributed to Pierre de Coubertin: ‘faster, higher, stronger’. Taking and maintaining the lead can only be achieved through continuously improving performance. A ten-year-old world record may not even qualify one for the finals. We can only stay in the game if we are able to surpass ourselves and all of our earlier attainments. The instant payment system was introduced in precisely this spirit. It has merely been a few years since intraday credit transfers were laid at the proposal of the Magyar Nemzeti Bank. This was a huge breakthrough back then, and it seemed to be enough for the years to come. However, competition did not stop, expectations increased and technology developed. Hungary needed an even bigger innovation to get to the top once again. This is what sparked the ambitious idea of instant payments, which went live in the spring of 2020, at the best possible time in some respects, thanks to the exemplary cooperation between state actors and market participants.

The introduction of the system of instant credit transfers reflects the change in how the MNB sees its own role. Prior to the financial crisis, the widespread view had been that central banks should interpret their mandate fairly narrowly and remain more or less passive observers of economic developments. The term coined for such narrowing of state engagement was ‘night-watchman state’, and with regard to central banks the most frequently used expression was ‘ivory tower’. However, the financial crisis showed how flawed this notion was, how dangerous it was to leave the economy to its own devices,

and also that any intervention in the complex system of the economy can and should only be made with a more holistic approach. Some central banks had responded earlier and the MNB joined them in 2013, after the monetary policy turnaround, all the more quickly and firmly.

The introduction of the instant payment system is part of the series of MNB initiatives launched to boost the economy. The first significant step was the beginning of the Funding for Growth Scheme in 2013, followed by the Self-Financing Programme, and the forint conversion of foreign currency loans was also a historic milestone. The programmes also included the introduction of the Certified Consumer-Friendly Housing Loans and the Bond Funding for Growth Scheme. These are similar to the instant payment system because they were launched with the cooperation of the central bank and the banking system, as well as the government in the case of the forint conversion. The vision, the tools, the technology, the funds and the regulatory instruments were in different hands, but efficient cooperation helped in coordinating them, to be benefit of the Hungarian economy and society.

Also part of the wider engagement is that the MNB uses all available means to improve the competitiveness of the Hungarian economy. Economic competitiveness and long-term sustainable growth are key in enhancing the quality of life. To enable Hungary to harness its untapped potential, the MNB uses its economic analysis tools to prepare assessments and proposals for the economy as a whole. What is even more important, however, is that the central bank should do everything in its power to reinforce competitiveness in the areas where it has direct (or indirect) influence. Such measures include the introduction of the instant payment system, which strengthens the competitiveness of the entire economy and helps maintain the speed of economic convergence to more advanced European countries. We can be especially proud of the fact that Hungary was among the first to introduce the system of instant credit transfers, therefore it does not simply follow international best practices but shapes them.

Why can we say that in certain respects the instant payment system was launched at the best time? Because it coincided with the onset of the restrictions introduced due to the coronavirus pandemic. These restrictions were practically unprecedented for most of the generations living today in Hungary. They demanded adjustments in all walks of life, including payments. While cash and card payments declined in shops, online card payments surged, just like the number of credit transfers thanks to the new options. In my personal experience, most of the restaurants that switched to home delivery found it much easier if the necessary amount was transferred in advance, together with the order. This way, they did not have to offer online card payment and no POS terminal had to be provided with

the home delivery. But this is not the only reason why I believe that the new technology, by facilitating contactless payments, helped in the successful management of the first wave of the pandemic.

From an IT perspective, enabling the instant execution of credit transfers was an enormous challenge. Of course, there had already been IT developments that required the cooperation of the MNB and the actors in the financial intermediary system. Out of these, I would like to point out the establishment of the technical conditions necessary for launching the Funding for Growth Scheme. This required the successful management of intensive IT projects from both the MNB and commercial banks to ensure prudent collateral valuation. In this sense, the instant payment endeavour was not unprecedented, some of the experiences from earlier projects could be used. At the same time, the instant payment system requires large amounts of information to flow in real time between the systems of financial institutions, GIRO Zrt. and the MNB, which produced challenges of a whole new dimension compared to earlier projects. Thus the implementation of the project called for tremendous efforts from all participants. At the same time, it has to be underlined that during the implementation all participating institutions, including the MNB, built a knowledge base that will serve as a firm footing for other ambitious projects in the future.

The introduction of the new payment system also shows the complexity of the modern financial infrastructure. At first sight, the introduction of the instant payment system may seem like an IT project in essence, but it became clear early on during the planning that certain elements of the monetary policy and financial stability toolkit had to be modified so that the MNB could perform its duties without any disruptions. In connection with the rollout of the instant payment system, the system of minimum reserves, a key monetary policy instrument, was overhauled to boost liquidity security and support the uninterrupted flow of payments. According to earlier rules, the participants in the instant payment system would not have been allowed to use the liquidity serving as collateral for the instant transactions for meeting the minimum reserve requirement. Maintaining this regulation would have raised the costs of banks’ liquidity management after the introduction of instant credit transfers, entailing a rise in the fees for financial services on account of the deterioration in commercial banks’ cost-effectiveness. To prevent this, the MNB allowed banks to use the liquidity set apart for instant payments for meeting the minimum reserve requirement. The success of this new reserve option is attested by the fact that from March 2020 credit institutions allocated around HUF 130 billion for instant payments on average, three-quarters of which were used for minimum reserves. The importance of careful preparation is confirmed by the fact that even though the introduction of instant payments coincided with the start of the crisis caused by the coronavirus pandemic, there

were no signs of liquidity strains, and the liquidity necessary for clearing was available to banks all the time, without interruptions.

I believe that the introduction of the instant payment system is already among the MNB’s immensely successful projects, and it is an endeavour that we can be proud of when looking back on it years or even decades later. However, the project is not finished yet. Building on the new technology, a series of new related projects have already begun and will begin in the state and the private sector, which will continue to raise the quality of financial services, support the elimination of cash payments and help in the digital transformation of the Hungarian economy. There will definitely be considerable challenges on the road ahead, but we can draw on our achievements and press ahead with confidence.