43624362In order to obtain an overview of payments innovation globally, the Committee on Payment and Settlement Systems (CPSS), established the Working Group on Innovations in Retail Payments (the Working Group), which recently published the report ‘Innovations in Retail Payments' (see ‘related links' below). The report contains a number of elements geared to assessing what an innovation-friendly environment should look like. The Working Group, focused on fact-finding, in order to define the most relevant developments and to identify the major factors driving and hampering innovation.
Technological developments necessary, but not sufficient
Technological developments are the basis for new or improved services in payments. Examples are the chip technology used in payment cards, the use of mobile phones - or more sophisticated smartphones - as a tool to access internet or mobile channels, and the proliferation of internet infrastructure. Currently, huge expectations have arisen with regard to contactless payments, utilising Near Field Communication (NFC) technology. One thing is clear however; technology is only an enabling factor for innovation and is of no help if there is no user demand. Payment users will only switch to a new service or a new product if it better serves their personal needs when compared to existing solutions. Convenience, cost, speed, security and availability are among the most important factors determining the consumer's choice of payment services.
Regulation - not just a European issue
From discussions in Europe, it might sometimes be concluded that regulation in the area of payments is very much a European peculiarity, or to put it more bluntly, a misadventure. The report clearly demonstrates however, that regulation has become an important topic of focus in a number of CPSS countries. Although concrete approaches differ depending on the regulatory frameworks in the various countries, some general trends can be discerned. Firstly, in a number of countries, the entry barriers to the payments market were lowered to spur competition and innovation. Secondly, in several countries regulation was adopted with a view to increasing the transparency of fees or intervening by redistributing costs and revenues between different stakeholders, i.e. through multilateral interchange fees. Thirdly, governments might also promote innovative payment services, for example, by setting an appropriate legal framework for supporting innovative solutions, or by relaxing requirements on certain low-cost payment accounts in order to promote financial inclusion. Irrespective of whether regulators take an ex ante or ex post approach towards regulation, the speed of innovation is a major challenge here as it renders the payments market a moving target.
Cooperation and standardisation - key factors for successful innovation
Cooperation has always been key to the payments industry, as innovations often entail high fixed investment costs. In view of the fact that the payments business is a network industry, cooperation helps to make innovative products or services available to a high number of potential customers. Cooperation is also the response to a higher degree of complexity in the value chain of innovative payment solutions, as evidenced by mobile payments. Consequently, more than half of the innovations reported in the findings involve some kind of cooperation between the different parties involved. Cooperation between banks and non-banks is the most prominent model, with a strong focus on internet payments, mobile payments and Electronic Bill Presentment and Payment (EBPP) solutions. Not very surprisingly, cooperation between non-banks does not play a significant role. Roughly 40 percent of all innovations however, do not imply any form of cooperation. Recent discussions in Europe have shown that cooperation in the field of payments is an especially challenging task because it has to comply with the relevant competition-related legislation. It can be concluded from the CPSS report that an innovation-friendly environment requires a proper balance between competition and cooperation of market players. Thus, it is of utmost importance that legislators give clear guidance on how cooperation can be achieved without provoking fears of anti-trust investigations.
In the same manner, the report concludes that standardisation is an important factor behind innovation. It helps to achieve a critical mass and avoids any proliferation of incompatible, smaller-scale systems which lack the necessary acceptance. It can also create a solid foundation for new players wishing to enter a new market. Moreover, standardisation avoids the costs and risks attached to overcoming the absence of standards. At the same time, standardisation could hamper innovation, for example if the standard-setting process has the disadvantage of restricting participation to incumbent players, or if standards become obsolete but are still widely used. Different payment models and different standards have developed into incompatible solutions, often limited to market niches and hardly viable over the longer term. In this respect, widespread standardisation should ensure that innovation is not locked up in market niches. One remarkable development in the payments industry is the greater reliance on the International Organization for Standardization (ISO).
The report also analysed the impact of pricing structure and security considerations on innovation in payments. For details on these aspects, refer to the article by this author in the current edition of the Newsletter (see ‘related links' below). The findings of the report are broadly consistent with the specific developments in Europe and with the outcome of the European Central Bank's e- survey. In many cases, there are also links with the issues taken up by the European Commission in its Green Paper ‘Towards an Integrated European Market for Card, Internet and Mobile Payments' (see ‘related links' below).
- There is no indication that Europe is facing an efficiency gap or fall-back in terms of global competition. By contrast, in some areas - such as the decision to migrate to ISO 20022 - Europe is considered a role model. Even so, this does not mean that Europe is at the forefront of innovation.
- Innovative card payments and internet payments play a more prominent role in Europe than at the global level. This is partly a reflection of its well-developed communication and payments infrastructure. For this reason, it is also less likely that new entrants will be able to succeed in setting up, for example, mobile payment schemes based on e-money.
- The issue of integration is a very Europe-specific factor at present. Creating a conflict between integration and innovation however, is not a particularly compelling scenario. Instead, these two aims should complement one another.
- There has been a lot of discussion at a global level concerning the definition of appropriate governance in order to foster innovation - not just in Europe. Recent developments in Australia and the UK show a trend towards setting strategic objectives through an appropriate public body and by broadening the membership of the respective industry bodies in order to better represent the interests of all stakeholders. Both approaches regard the industry as being best placed to implement the recommendations. Only if expectations are not met will further action be considered (e.g. in the form of regulation or, as in Australia, through the provision of services by the central bank itself).
The question remains: how will the payment landscape develop?
In Europe, it is likely that developments will be evolutionary rather than revolutionary: the infrastructure is already well developed; many innovations are, therefore, incremental improvements of well-established products and banks are still benefiting from the trust of customers. But that is by no means a certainty or eternal truth. Specifically, demographic changes or new non-bank competitors might lead to more profound changes. In such a situation, it is of utmost importance that European regulators set up a clear, transparent and reliable framework for future developments in the field of payments. Last but not least, it should guarantee a level playing field between all payment service providers, whether within or outside the banking area, and should strike a balance between competition and cooperation as well as between economic freedom and consumer protection.
Dirk Schrade is Deputy Head of the Department Payment and Settlements Systems at the Deutsche Bundesbank (German national central bank) and chaired the CPSS Working Group on Innovations in Retail Payments. The views expressed in this text are those of the author and do not necessarily reflect the views of the CPSS or the Deutsche Bundesbank.
- EPC Newsletter: Committee on Payment and Settlement Systems' Working Group Publishes Report ‘Innovations in Retail Payments'
- Committee on Payment and Settlement Systems. Innovations in Retail Payments. Report of the Working Group on Innovations in Retail Payments
- EPC Blog: What Drives Innovation in Payments? EPC Invites European Authorities to Take the Market Perspective into Consideration
- EPC Blog: More EU Action Impacting Payments in the Pipeline? EPC Responds to the European Commission Green Paper on Card, Internet and Mobile Payments
- EPC Newsletter: What Happens Next? European Authorities to Communicate Their Vision for SEPA 2.0 by End 2012
- EPC Newsletter: ‘Towards an Integrated European Market for Card, Internet and Mobile Payments': Striking the Balance - Interoperability and the Access Dilemma. European Commission publishes feedback report on its Green Paper
- EPC Newsletter: The Economy of Standards: the ‘Pros' and ‘Cons' of Standards Competition. An introduction to a comprehensive qualitative efficiency comparison using the example of payment cards
- European Commission Green Paper ‘Towards an Integrated European Market for Card, Internet and Mobile Payments'
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