The development of the Norwegian payment system in the period 1945-2010, with particular focus on the role of Norges Bank.

• Author: Haare, Harald
• Position: Report

1. General trends

   Developments in the payment systems field from World War II until 2010 were influenced not only by the technological developments and the strategies and relationships of the main agents, but also by macroeconomic developments and, not least, the financial sector policies of the authorities. Until around 1960, the Norwegian payment system underwent relatively minor changes. For consumers, cash was the predominant means of payment, while postal giros (3) were used to pay bills. In the business sector, cash was also used, but the use of bills of exchange and cheques was more common. Firms which had a bank account had the option of using bank giros.

   The introduction of personal cheque accounts in the 1960s led to increased use of cheques as an instrument of payment by private persons. The use of payment cards remained limited to the Bokreditt retailer's card and international credit cards until the end of the 1970s. From 1960 onwards, the use of electronic data processing (EDP) technology increased, which helped, not least, to make clearing and settlement systems more efficient. The new technology laid the foundation for the technical solutions introduced during the 1970s, which were needed in order to handle the increasing transaction volume and to cut costs. Both the financial industry and the authorities made some attempts to introduce a joint giro system for banks and Postgiro (Postal Giro), and later a joint card system and a common fee policy. However, the commercial banks and savings banks often disagreed about the choice of solutions, as did the banks and Postal Giro/Postal Savings Bank of Norway. The authorities therefore saw a need for some direction and coordination of the process over and above industry self-regulation. In May 1979, the broad-based Payment Systems Committee presented a comprehensive report which discussed, among other things, principles for the pricing of payment services and closer coordination of the different payment systems.

   Partly due to the introduction of fees the use of cheques passed its peak in 1984, while the use of cards increased. The new Norges Bank Act of 1985 gave Norges Bank clear statutory authority to promote an efficient payment system in Norway and from Norway to other countries. Norges Bank subsequently gave priority to exercising this authority in accordance with the intentions of the Act. However, until the end of the 1980s, cards issued by savings banks were equipped with a magnetic strip which could be read by point-of-sale terminals and cash points, while cards issued by commercial banks were fitted with a microprocessor, or chip technology. The card technology of commercial banks was more expensive than that of savings banks, and this cost was only partly compensated for by simpler and cheaper security and control systems. Throughout the 1980s, efforts to establish cooperation between the banks and the Postal giro/Post Savings Bank of Norway and to merge the bank giro and postal giro systems were unsuccessful.

   The 1990s were the decade in which the Norwegian payment system made its greatest leap forward in terms of cooperation between participants, technological solutions and services for the public. In 1991 the banks introduced the BankAxept card solution, and in the mid-1990s, the banks and the Postal Giro agreed on a system that coordinated the parties' giro and account-card systems. The use of cheques had dropped significantly, and in the second half of the 1990s, cheaper electronic payment services like payment cards and online banking accounted for an increasing share of the payments market.

   The Norwegian bank problems in the period 1988-93 prompted greater focus on risks in the payment system. In cooperation with the banks, Norges Bank launched a project to develop a more robust and efficient clearing and settlement system. Since November 1999, Norges Bank has had a fully-functional real-time settlement system in place. The Payment Systems Act, which entered into force in 2000, gave Norges Bank overall responsibility for the oversight of the interbank systems, while the Financial Supervisory Authority of Norway (FSA) (4) was given overall responsibility for payment service systems.

   The period 2000-2010 was characterised by less changes, although substantial technological improvements were made to systems during this period. One of Norges Bank's main tasks was to fulfil its statutory role by making the central bank's settlement function more efficient. Many of the developments which occurred in the area of payment systems involved using and further developing/formalising the changes made during the 1990s. Internet banking was launched in 1996, but it was only after 2000 that people really began to use the solution. Card payments replaced a large proportion of cheque and cash transactions, and the transition to chip cards towards the end of the decade helped to improve efficiency and security. In addition, the international focus on the importance of robust and efficient infrastructure for payment transfers to other countries and on the incorporation of international recommendations into the Norwegian regulatory framework intensified.

   For the period 1945-2010 as a whole, the banks (and, until around 1995, the Postal Giro/The Postal Bank of Norway), played a key role in the development of the payment systems and in putting in place the framework of agreements that ties the systems together. At the same time, Norges Bank has played an important part, particularly in the past 25 years, in the monitoring, supervision and development of the Norwegian payment system, and has used its supervisory authority to supplement the industry's own regulation of the systems. The Norwegian payment system proved to be robust and efficient during both the Norwegian banking crisis of 1990-1992 and the international financial crisis of 2007-2009. In many ways the Norwegian payment services system has become more coordinated and efficient than the systems of most comparable countries. The close cooperation between the banking industry, the FSA and Norges Bank has been important in this regard. Through its annual reports on the payment system, Norges Bank has since the mid-eighties built up an extensive database of payment statistics that provides a solid basis for documenting and advising on key issues and developments in the payment systems area.

2. Norges Bank's position and role in the payment systems area

   Legislation and framework conditions

   In the period 1945-1985, Norges Bank's role and functions were set out in the Act of 23 April 1892. In the payment systems field, Norges Bank's tasks were limited to administering the central bank's statutory monopoly on issuing bank notes and undertaking operational tasks such as clearing and settlement for the banks and Postal Giro, and performing operational tasks in its capacity as the state's bank. As the Act gradually became inconsistent with modern central bank legislation, a monetary and banking committee was appointed in 1950, which presented a report proposing an act relating to the monetary system and Norges Bank in 1953. The proposal was not implemented due to disagreement about its contents.

   Samarbeidsnemnda (the Cooperation Board), which was a forum for public authorities and the financial industry to discuss strategic credit policy and financial issues, was established in 1951 and discontinued in 1965. Payment system questions were also a topic at some of the meetings. The Governor of Norges Bank chaired the Cooperation Board. In 1970, Kredittpolitisk Rad (The Credit Policy Council) was founded, with the Minister of Finance as its chair. Norges Bank was a member of the Council, but the discontinuation of the Cooperation Board reduced Norges Bank's role in this work.

   In 1973, a broad-based committee was appointed to evaluate the Norwegian payment system. The committee's main task was to draw up principles for the development of the payment system, not least in view of the payment technology perspectives which arose in connection with the introduction of EDP. The committee was the first body to discuss the question of separate Norwegian statutory regulation of payment systems. The committee presented its main report, Official Norwegian Report 1979:16--"Payment transfer systems", in May 1979 (5).

   Many of the proposals were the subject of disagreement. The committee chair and Norges Bank's representative supported most of the majority proposals, while particularly the representatives of the Postal Services Norway/ Postal Giro along with the committee member from the LO (Norwegian Confederation of Trade Unions), dissented regarding a number of points. The representatives from the financial industry, the Ministry of Consumer Affairs and Government Administration and Norges Handelsstands Forbund (a Norwegian business association), also made various diverging proposals. The committee agreed that there was no need for a separate act dealing with payment systems. Nevertheless, the majority proposed the establishment of a payment system council, chaired by Norges Bank. The minority, consisting of Postal Giro/the postal service and LO's representatives, was of the opinion that such a council might limit competition in the payment systems area, and complicate the decision-making processes of the banks and the postal service. If a broad-based council were established, its leadership and secretariat should be assigned to the Ministry of Finance. The Payment Systems Committee's thorough reviews of and advice concerning consumer-related payment system issues such as the cheque system, the wage account scheme (6), debit and credit cards, postal giros and bank giros, cost and revenue conditions and the pricing of payment services played an important role in the further development of the Norwegian payment system throughout the 1980s.

   In 1968, the Ministry of Finance appointed a committee with a mandate to...