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Fresh Perspectives and New Technologies Shaping Innovation in Payments: a Closer Look at the U.S., Australia and Europe Viewed 5007 times
The free online EPC Newsletter, published quarterly by the European Payments Council (EPC), regularly reports on emerging trends expected to further promote innovation in payments. This blog summarises latest developments in the United States (U.S.), Australia and the European Union (EU) and highlights new payment technologies discussed in depth in the EPC Newsletter editions published in January and April 2015.
The links to the EPC Newsletter articles cited in this blog and sources providing background information are included in the ‘related links’ below.
Readers are invited to share their views and to vote in this EPC poll: “Future of payments: in your view, which of the following factors is most likely to trigger the next wave of innovation in the European payments market?” (Take a look to the left.)
Federal Reserve publishes strategies for improving the U.S. payment system
On 26 January 2015, the U.S.’ Federal Reserve System released ‘Strategies for Improving the U.S. Payment System’, a paper highlighting a multi-faceted plan to enhance the speed, safety and efficiency of the U.S. payment system. In the April 2015 edition of the EPC Newsletter, Connie Theien, vice president of payments industry relations for the Federal Reserve System, introduces the paper’s contents. It communicates desired outcomes for the payment system and outlines the strategies and tactics the Federal Reserve will pursue, in collaboration with stakeholders, to help achieve these. The desired outcomes are:
- Speed: a ubiquitous, safe, faster electronic solution(s) for making a broad variety of business and personal payments, supported by a flexible and cost-effective means for payment clearing and settlement groups to settle their positions rapidly and with finality.
- Security: U.S. payment system security that remains very strong, with public confidence that remains high, and protections and incident response that keep pace with the rapidly evolving and expanding threat environment.
- Efficiency: greater proportion of payments originated and received electronically to reduce the average end-to-end (societal) costs of payment transactions and enable innovative payment services that deliver improved value to consumers and businesses.
- International: better choices for U.S. consumers and businesses to send and receive convenient, cost-effective and timely cross-border payments.
- Collaboration: needed payment system improvements are collectively identified and embraced by a broad array of payment participants, with material progress in implementing them.
Esther L. George, President of the Federal Reserve Bank of Kansas City and Executive Sponsor of the initiative, said: “This plan reflects the contributions and commitment of thousands of payment system participants who have shared their expertise and perspectives. Consequently, we believe the strategies and tactics in the plan have broad support and strong prospects for success.”
Australia’s New Payments Platform: Down Under gets ready for the digital economy of the future
In 2012, the Reserve Bank of Australia (RBA) issued a public challenge to the Australian payments community: can you deliver faster payments, 24/7/365 service availability, richer data flowing with the payment (to enable straight through processing) and simpler addressing (so you don’t need to know someone’s account number to pay them)? By 2017 Australia will have all that; but the payments community’s response has much greater ambitions. Australia’s New Payments Platform (NPP) will deliver ‘modern’ payments - fast, data rich, 24/7/365 payments with simpler addressing - using a unique ‘layered’ architecture designed to ensure extreme flexibility to deal with the unknown needs of future users. In the April 2015 edition of the EPC Newsletter, Chris Hamilton, CEO of the Australian Payments Clearing Association, explains why he sees this as the payments system of the digital future. He clarifies: “A new and wider range of customer expectations means existing payment networks must adapt. We need to create a marketplace where new payment solutions can be designed and implemented at low marginal cost as unexpected customer needs emerge.”
The NPP is a multi-million dollar collaboration of 12 leading Australian payments organisations including the RBA itself representing 98 percent of domestic low value activity. The key elements are:
- A domestic messaging network connecting all Australian account-keeping institutions, set up and operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
- Use of ISO 20022 messaging to ensure maximum flexibility and extensibility.
- A new fast settlement service operated by the RBA, which will settle each payment in real time on a line by line basis.
- An addressing database which associates proxies – such as mobile phone numbers or email addresses – with account numbers, so that payers do not need to know payee account numbers.
- A provision for ‘overlay services’ that will use the basic network described above to meet specialised customer expectations – anything from a person-to-person mobile payment service to a real estate conveyancing service. These services can be set up and operated commercially by anyone who can generate sufficient customer interest.
But the real potential of the system, Chris Hamilton notes, “lies in the layering of multiple overlay services over a single ubiquitous basic network. This is an attempt to ‘future proof’ the system against the unknown long-term needs of users.”
Instant payments – a winning bet?
Many actors are paying more attention to instant payments and often cooperative initiatives are emerging in different regions of the world. In Europe, both the industry and public authorities are involved in discussions and projects to deliver instant payment solutions in euro at pan-European level. Without pretending to be exhaustive, in the April 2015 edition of the EPC Newsletter, Emanuela Cerrato and Francisco Tur Hartmann of the European Central Bank (ECB) look at instant payments from multiple angles, aiming to set ‘instant’ into the wider context of the future of retail payments. The authors point out that no solution for instant payments in euro has actually been deployed at Europe-wide level. Work is now progressing towards the goal of at least one such solution, as advocated by the Euro Retail Payments Board (ERPB) – a high-level entity chaired by the ECB and bringing together the supply and the demand side of the industry to address strategic questions concerned with retail payments. The aim is to take a European perspective from the beginning and act before new ‘silo’ solutions emerge which would renew, for innovations, the fragmentation overcome in the Single Euro Payments Area, in particular for credit transfers and direct debits.
The authors state:
- Instant payments are gaining momentum: debate and initiatives are developing in a number of regions around the globe, including Europe. In December 2014 the ERPB set out to address instant payments in euro. The debate within the wider industry was facilitated by a meeting on the clearing of instant payments held by the ECB on 4 March 2015 and is progressing in various discussion fora and task forces.
- There is a case for instant payments: the assumption is that instant payments are beneficial to users and that the business case for providers is ‘absorbed’ by the expectation from users. However, there seems to be indeed an economic rationale for providers to offer instant payment solutions to both consumers and businesses, especially as a factor of customer retention and cross-selling.
- Is there also a case for global instant payments? Global retail payments are often inefficient and costly. Instant payment solutions may have the potential to grow globally and contribute to remedying this situation. As the technological advances make geographical borders ever less relevant and challenge the traditional way of doing business, the ECB is playing an active role to improve the payment system.
The authors conclude: “Whether Facebook, Google, Apple, Alipay, Bitcoin or Ripple will redesign the way we make payments remains to be seen. In any case, the ECB is conscious of the gaps and attentive to the innovations in the field of retail payments, and will continue actively participating in the European and global fora where such issues are addressed.”
European Commission invited exchange of views at its conference on emerging challenges in retail finance and consumer policy
The European Commission provided an opportunity to forge ahead of actual events at its ‘Conference on emerging challenges in retail finance and consumer policy’, held in Brussels on 18 November 2014. Topics discussed included ‘Payments: improving users’ experience and looking into the future’. The Commission called for “fresh thinking” on emerging payment methods as well as new players in the industry (and their impact on incumbents). Participants were invited to reflect about potential developments in the next 5 to 10 years and “what would need to happen in the market and among regulators to make sure the evolution is positive, for all parties”. In the January 2015 edition of the EPC Newsletter, this author, who participated in the conference panel on payments, offered for discussion a methodology of scenario building which allows designing adequate forward-looking strategies in a fast moving environment. He also reported on preliminary conclusions on the future of payments reached at the conference. The Commission summarised the “three main ideas” shared by most of the participants as follows:
- Mobile payments: “many saw the future of payments in mobile payments, however not only related to mobile phones. There was a general feeling that in Europe mobile payments had still not taken up due to the fact that it was not yet considered safe, common standards were still lacking and solutions were too often confined to the national level.” Addressing consumers’ key concerns regarding security and data protection were cited as the main goals to be achieved through convenient but safe payment solutions.
- Instant payments: “should spread, on a peer-to-peer [P2P] (mobile) level but also in the context of traditional bank transfers, with (almost) real time ability to use the funds. While some progress is being made (on P2P notably in Scandinavia) and on instant payments (with faster payments in the UK), it was deplored that solutions were in most cases confined to the domestic level.” (This author thinks that, even though the idea is certainly attractive, it is not yet clear how to foster market solutions in the absence of well-defined concepts and requirements, an educated estimation of how much the marginal improvement would cost to society and an agreed allocation of tasks to carry out and costs to bear amongst all stakeholders.)
- Regulation: most participants felt “that a good mix between regulation, standards and market forces was needed to move the European payments market one step further in the future. Achieving a Single Market in new evolving payment methods should be a priority. Others warned against overregulation and called for a right balance between cooperation and competition. Regular consultations were crucial as well as time to measure the effects of regulation.”
The European Commission indicated that “these conclusions will be followed-up by further policy considerations” in the first part of 2015. Considering also the plethora of EU regulatory initiatives impacting euro payments already in the pipeline, this author would like to stress: regulation – now and in the future – should strive to achieve legal certainty, balance, technology neutrality and a level playing field amongst all players.
The (global) impact of new payment technologies
An article, entitled “Bitcoin: How its core technology will change the world”, published in New Scientist in 2014, outlined that “beyond creating the web’s first native currency, the true innovation of Bitcoin’s mysterious designer, Satoshi Nakamoto, is its underlying technology, the ‘blockchain’. (…) It is a ledger of transactions that keeps Bitcoin secure and allows all users to agree on exactly who owns how many bitcoins. Each new block requires a record of recent transactions along with a string of letters and numbers, known as a hash, which is based on the previous block and produced using a cryptographic algorithm.” In the April 2015 edition of the EPC Newsletter, Roberto Garcia outlines the possible applications of blockchain technology by the banking industry and how it could trigger the next breakthrough in terms of efficiency. He argues: “Technology facilitates the design of digital products and services that are more efficient and cheaper thanks to the automation of processes and the removal of intermediaries. One example is the blockchain technology. It could trigger the next breakthrough in terms of efficiency. This would entail replacing current inter-banking infrastructures based on bricks and mortar models with those based on central nodes in charge of operations such as authorisation, clearing, fraud prevention, dispute resolution and execution of payments and contracts.”
Also in the April 2015 edition of the EPC Newsletter, Welly Sculley and Ryan Zagone report on Ripple, an open-standard, internet protocol based technology for payment service providers (PSPs) to clear and settle transactions in real-time via a distributed network. By collaborating on a common settlement layer, they say, PSPs can flatten the core costs and risks of payments and focus competition on products and services. They conclude: “Improving and connecting existing payment systems is necessary to support the increasingly global and dynamic economy. This requires a collective effort within and between economies.”
- EPC Newsletter (April 2015): Federal Reserve Publishes Strategies for Improving the U.S. Payment System
- United States’ Federal Reserve System: Strategies for Improving the U.S. Payment System [PDF]
- FedPayments Improvement Website
- EPC Newsletter (April 2015): Australia's New Payments Platform: Down Under Gets Ready for the Digital Economy of the Future
- Reserve Bank of Australia: Strategic Review of Innovation in the Payments System: Conclusions
- Reserve Bank of Australia: Strategic Review of Innovation in the Payments System (news release)
- Reserve Bank of Australia: Submissions on Strategic Review of Innovation in the Payments System: Conclusions
- Strategic Review of Innovation in the Payments System: Real-Time Payments Committee Proposed Way Forward
- EPC Newsletter (April 2015): Instant Payments – a Winning Bet?
- Euro Retail Payments Board (ERPB) Issues Note: “Pan-European instant payments in euro: definition, vision and way forward”
- Statement Following the Second Meeting of the ERPB of 1 December 2014
- Press Release Following the Second Meeting of the ERPB of 1 December 2014
- EACHA Study on the “Interoperability of Immediate Payment Systems”, January 2015
- EPC Newsletter (January 2015): The Future of Payments: European Commission Invited Exchange of Views at its Conference on Emerging Challenges in Retail Finance and Consumer Policy
- European Commission Final Report: Emerging Challenges in Retail Finance and Consumer Policy. Conference, 18 November 2014, Brussels
- EPC Newsletter (April 2015): How to Use Blockchain Technology to Develop Faster and Cheaper Inter-banking Infrastructures
- New Scientist: Bitcoin: How its Core Technology Will Change the World
- Investopedia Explains Blockchain
- EPC Newsletter (April 2015): Ripple: an Internet Protocol for Inter-bank Payments
- EPC Newsletter (January 2015): Virtual Currencies: a House of Cards or a Mass Market Trend? The Answer to that Question Remains Pending. A commentary on the latest developments in the emerging virtual currencies landscape
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10.07.15Update on outcomes following the Euro Retail Payments Board’s third meeting: Instant Payments in Euro, Person-to-Person Mobile Payments, Technical Standards Related to Payment Cards and E-invoicing Payment Issues