World Payments Report 2010

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WorldPayments

REPORT 2010


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TABLE OF CONTENTS 3 Preface

4 SummaryofKeyFindings

Section 1: World Non-Cash Payments Markets and Trends

7 Highlights

8 Non-CashPaymentsMaintainHealthyGrowth

16 AlternativePaymentServiceProviders

20 PayPal

Section 2: Payments-Related Regulatory Update

23 Highlights

24 SEPAandPSDImplementationProgress

30 IncreasingFinancialSystemRegulation

Section 3: The Transformation of the Payments

Value Chain Is Accelerating

34 Highlights

35 Introduction

36 HowthePaymentsIndustryIsEvolving

40 IntheFast-ShiftingLandscape,BanksNeedtoDecideto

WhatExtentPaymentsAreCoretoTheirStrategies

43 PartnershipsandSourcingAreBothEnablingStrategies

45 IsPaymentsOutsourcingJustaMatterofTime?

46 FullPaymentsOutsourcing

47 ThePaymentsHub:AchievingMorewithLess

50 RationalisingtheProductPortfoliobeforeEmbarking

onaHubImplementation

52 Conclusion

53 WhatLiesAhead

54 Methodology

56 Glossary


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Now in its sixth year, the World Payments Reportfrom Capgemini, The Royal Bank of Scotland (RBS),and the European f inancial marketing association (Efma) looks at the payments business as it faceschallenges from economic and competitive conditions, technology advances, increased regulatorypressure and customer demands.

Payments and other transaction banking services proved resilient during the economic crisis, but therapidly changing external environment wil l require banks to decide to what extent payments are core to

their business strategies.

The World Payments Report 2010looks at global trends in payments volumes, describes progress inimportant payments-related initiatives, such as the Single Euro Payments Area (SEPA) and thePayment Services Directive (PSD), and looks at how new regulations are creating additional pressure onthe payments landscape.

We include an overview on the Basel III framework, which will require strong management attention,and we spotlight its more stringent liquidity requirements, as they will increase costs and could requirerepositioning for some banks.

We explore how new technologies and competition are making the payments universe more complex

and expansive and why, as a consequence, banks will need to dedicate more strategic attention to theirpayments value propositions.

We describe how banks will need to consider their options carefully for optimising their paymentsbusinesses, as the transformation of the payments value chain is accelerating.

We then focus on how banks wil l need to employ an intense parallel strategy, comprising revenue-focussed and cost-focussed initiatives, leverage sourcing strategies and consider mechanisms such asPayments Hubs to make these paral lel strategies feasible and allow banks to achieve more with less.

We hope this years report provides useful insights.

Preface

BertrandLavayssire

ManagingDirector

GlobalFinancialServices

Capgemini

BrianStevenson

ChiefExecutive

GlobalTransactionServices

The Royal Bank of Scotland

PatrickDesmars

SecretaryGeneral

European financial

marketing association

3


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Summary of Key Findings

4

Banksareusedtoongoingshiftsinthepaymentslandscape,butawaveofnew

challenges,drivenbyeconomicandcompetitiveconditions,technology

advances,regulatorypressureandcustomerrequirements,isacceleratingthetransformationofthepaymentsvaluechain,andbankswillneedtodecidehow

besttorespond.TheWorld Payments Report 2010looksatthetrendsin

paymentsvolumesandinstrumentsusage,keypayments-relatedregulatory

initiatives,andtheconsequentstrategicchallengesandoptionsforbanks.

Thekeyfindingsofthisreportincludethefollowing:

The payments business has withstood the financial crisis well. Only time

will tell the ultimate impact,butinitialdatasuggestpaymentsvolumes

continuedtoexpandin2009:

The global use of non-cash payment instruments continued to grow in2008, despite the financial crisis.Theoverallgrowthinvolumesaccelerated

to9%in2008from7%in2007,andpreliminarydatasuggestpayments

continuedtogrowin2009.Volumesin2008grewonlymodestlyindeveloped

marketsandregisteredthelargestincreaseincertaindevelopingeconomies

suchasChina(up29%),SouthAfrica(up25%)andRussia(up66%).

Globally, cards remain the preferred non-cash payment instrument,accountingformorethan40%ofpaymentsinmostmarketsandabove

58%globally.Initialdatashowthatcardtransactionvolumescontinued

togrowin2009.

Alternative payment service providers (PSPs) have made significantstrides in m-payments and e-payments,eventhoughtheystillaccountfor

asmallpercentageoftotalworldwidetransactionvolumes.

Cash-in-circulation in the Eurozone maintained a steady growth of about11% per year since 2002, representing a significant cost for global

economies(theEuropeanPaymentsCouncilestimatesthatthecostofcash

paymentsforEuropeanUnioneconomiesis50billionto75billionayear).


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WRD PAENTS REPRT 2010

Several developments have taken place in the last year towards SEPA and PSD in Europe:

Nearly all European Economic Area (EEA) Member States had transposed the Payment ServicesDirective (PSD) into national law by August 2010.However,certaininconsistenciesininterpretationstill

remain,andtheseambiguitieswillneedtoberesolvedtohelpensureSEPAcanprogressasplanned.

Banks are compliant with SEPA Credit Transfers (SCTs), but volumes remain low. SEPA Direct Debit(SDD) was launched as planned in November 2009 forbothconsumers(SDDCore)andcorporates

(SDDB2B)andevenifthereachabilityrateishigh(70%),usageatthisstageisstillverylow.Regarding

SEPA for cards, the vision of any card at any terminal is still far from a reality. However,European

cardinitiatives(EAPS,MonnetandPayFair),designedtorivaltheestablishedduopolyofVisaand

MasterCard,haveeachmadeprogress.

Nearly all stakeholders now agree that full SEPA migration will lag unless forced by regulation.InJune2010,theEuropeanCommission(EC)announcedthatself-regulatoryeffortswerenotsufficient

ontheirowntodriveconcertedmigrationtoSEPAanditwasintendingtodraftbindinglegislationon

migrationenddates.

Regulatory pressures continue to affect the payments industry worldwide:

Industry-wide global regulations areexpandinginresponsetothecrisis,creatingintensepressureontheindustry.ImplementingtheBasel III framework,inparticular,willrequiremanagementattentionand

investment.Themore stringent liquidity requirementswillincreasecostsandcouldrequirestrategic

repositioningforbanks.

Anti-Money Laundering (AML) and Anti-Terrorist Financing (ATF) requirements arelikelytoincrease

thecostsofprocessingpaymentorders,reducingefficiencyandslowingtherateofstraight-throughprocessing(STP).

New technology and competition are making the payments universe more complex and expansive and,

together with the effects of the economic crisis, new regulatory initiatives are acting as catalysts to

the further evolution of the industry:

New entrants, enabled by customer-friendly regulations and fast-emerging technologies, are gainingground in the more open Business to Business (B2B), Business to Consumer (B2C) and Consumer to

Consumer (C2C) payments spaces.Inrecentyears,thepaymentsindustryhasseenmanynewentrants,

andmanyofthemofferstate-of-the-art,highlyhonedandcomprehensivevaluepropositionsforcertainclients.

Thetraditionalpaymentsvaluechainistransformingasplayersadaptthemselvestothenewlandscape.

The transformation of the value chain will accelerate. Client-facing and processing segments of thevalue chain will transform more rapidly.Thefirstwillbemainlyaffectedbycompetitionfromnewentrants

andtheprogrammesbankswilldedicatetoaccessclientvaluechains,aloneorwithpartners;thesecondwill

beaffectedbytheinsourcing/outsourcingsolutionsadoptedandotherimprovementsoftheoperatingmodel.

Sourcing strategies will increasingly play a decisive role in banking strategies.Revenue-focussedinitiativeswillrequireskills,expertiseinpartnershipsandanabilitytomeasureresults.Cost-focussed

initiativeswillbepossiblemainlythroughoutsourcingorinsourcingvolumestoreducecostsorachievescale.

Payments Hubs can allow banks to achieve more with less.Effectivelydesignedprocessesandarchitectureswillallowabankdedicatedtothepaymentsbusinesstoexecutebothrevenue-andcost-

focussedinitiativesinparallel,andwillstrengthenproductinnovationandoperationalexcellence.

5WRD PAENTS REPRT 2010

SAR KE INDINS


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6


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SECTIN TITE 1SECTIN TITE 2


HIGHLIGHTS The global use of non-cash payment instruments (direct debits, credittransfers, cards and cheques) continued to grow in 2008, despite the

financial crisis.Thegrowthinvolumesacceleratedto9%in2008from7%in

2007.Globaltransactionvolumestotalled269billionin2008,aftersustained

averagegrowthof8.4%ayearsince2001growththathasoutpacedthe

expansioninglobalgrossdomesticproduct(GDP).

The largest increase in non-cash payments volumes was found in certaindeveloping economies, such as China (up 29%), South Africa (up 25%) and

Russia (up 66%), in which economic activity was relatively more robust.

Volumesgrewmodestlyindevelopedmarkets,buttheoutrighttotalsinNorth

AmericaandthematureeconomiesofEuropeandAsiastillovershadowedthosein

emergingmarkets,andaccountedfor77%ofglobalvolumesin2008.

Globally, cards (credit and debit) remain the preferred means of non-cashpayment, accounting for more than 40% of payments in most markets and

above 58% globally.Globally,card-transactionvolumeswereup15%in2008,

andtheirvaluewasup6.6%.ManyEuropeancountriessawadropintheaverage

valuepercardtransaction,inlinewithpasttrends,suggestingmanyindividualsare

increasinglyusingnon-cashmeansevenforlow-valuetransactions.

The payments business has withstood the financial crisis well. Only time

will tell the ultimate impact, but initial data suggest payments volumescontinued to expand in 2009.Worldexportswerecertainlyhitbythecrisis,

thoughdatahaveyettoshowtheexactimpactondemandfortradefinance.

Thecrisisisalsothoughttobeundermininggrowthinworkersremittances,

whichhaveclearlyslowedsincethelastquarterof2008andareexpectedto

showanoutrightdeclinein2010.

Since 2002, cash-in-circulation in the Eurozone has grown about 11% peryear.Thewaroncashisstillfarfromwonandthecontinuingexpansionofcash

andthehighassociatedexpenses(useofcashcostsEUeconomiesanestimated

50billionto75billionayear)shouldencourageadditionaleffortsbyall

stakeholderstoreducetheuseofcashforpayments.

Non-bank payment service providers (PSPs) have made significant strides ine-payments and m-paymentsevenindevelopedmarkets,wherebankshavea

long-standingrelationshipwithbothconsumersandmerchants.Butnon-bank

PSPsstillaccountforasmallpercentage(0.6%)oftotalworldwidenon-cash

transactionvolumes.

World Non-Cash Payments

Markets and Trends


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8

Behind the aggregate increase in 2008 non-cashpayments volumes, there were notable trends in themix and use of individual instruments (see igure 1.2for 2001 vs. 2008 payments mix). Those trendsincluded the following:

Cards (credit and debit) remained the preferredmeans of non-cash payments globally, accountingfor more than 40% of non-cash volumes in mostmarkets and above 58% globally. lobally, card-transaction volumes were up 15% from 2007, andtheir value was up 6.6%.

lobally both debit and credit card volumes rose at

a similar pace although regional differences wereapparent.

Credit-transfer volumes rose 7%. Direct debits,which also showed a 7% volume increase, areespecially gaining popularity in Europe and the .S.

Cheque volumes continued to decline (by 6%),largely reflecting the increasing popularity ofonline bill payment and efforts by banks andgovernments to reduce usage.

GLOBAL USE OF NON-CASH PAYMENTS GREWAGAIN IN 2008, DESPITE THE CRISIS

The growth in global non-cash payments volumesaccelerated to 9% in 2008 from 7% in 2007, despitethe continued financial crisis. Volumes totalled 269billion in 2008 (see igure 1.1), after sustainedgrowth of 8.4% a year since 2001growth that hasfar outpaced the expansion in global DP.

The outright volume of non-cash payments remainedheavily concentrated in developed markets. In fact,while volumes grew only modestly (56%) in North

America and the mature economies of Europe andAsia-Pacific,1 those segments still accounted for acombined 77% of non-cash payments volumes in2008. The top ten2 payments markets accounted for91% of all global volumes in 2008.

Still, the rate of growth in non-cash payments volumeswas faster in developing economies, especially theBRIC (Brazil, Russia, India, China) nations, in whicheconomic activity remained robust relative to moredeveloped nations. or example, the year-on-yeargrowth in transaction volumes was particularly strong

(29%) in China in 2008. Emerging markets also havefar more limited banking infrastructures thandeveloped markets, and these constraints are spawninga significant number of payments innovations, whichshould be an important source of growth in paymentsvolumes in the years ahead.

1 NorthAmericacomprisesCanadaandtheU.S.;matureEuropeincludestheentireEurozone;andmatureAsia-PacificcomprisesAustralia,

Japan,SingaporeandSouthKorea

2 Thetoptennon-cashpaymentsmarkets,inorderofsize,aretheU.S.,Eurozone,China, theU.K.,Canada,Brazil,SouthKorea,Japan,Russia

andAustralia

CHAPTER 1

Non-Cash Payments Maintain Healthy Growth


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SECTIN 1NNCASH PAENTS AINTAIN HEATH RWTH

Figure 1.1 Number of Worldwide Non-Cash Transactions by Region (Billions), 2001 vs. 2008

20082001

0

50

100

150

200

250

300

81

112

74

21

46

655

51

89

221

154

269

CAGR

Global

Rest of Asia

Latin America

CEMEA

BRIC

Mature Asia-Pacic

Europe (including Eurozone)

North America (U.S. and Canada)

DevelopingEconomies

MatureEconomies

Non-Cash

Transactions(Billions)

8%

16%

18%

24%

26%

16%

6%

5%

9%

16%

14%

16%

28%

12%

6%

4%

(0108 ) (0708 )

Note:CEMEA(CentralEurope,MiddleEastandAfrica)doesnotincludeRussia;matureAsia-PacificincludesJapan,Australia,SouthKoreaandSingapore;

LatinAmericadoesnotincludeBrazil

Source:ECBDWH2008figures,releasedNov.2009;BankforInternationalSettlements,RedBook,2008figures,releasedMarch2010;Capgeminianalysis,2010

Figure 1.2 Comparison of Non-Cash Transactions by Region and Change in Payments Mix, 2001 vs. 2008

0

40

80

120

BRIC

2008

BRIC

2001

Mature

APAC

2008

Mature

APAC

2001

North

America

2008

North

America

2001

Europe

2008

Europe

2001

Non-CashTransactions

(Billions)

51

7481

8

219

46

112CAGR6%

CAGR

5%

CAGR

16%

CAGR

26%

100%

75%

50%

25%

0%

PaymentInstrumentMix

(2001vs.

2008)

27%

27%

38% 38%

58%51%

67%

42%

80%

8%

2%17%

15%5%

10%

4%4%6%

24%

31%

27%

17%8%

8%

8%

38%

9%

52%7%

25%20%

24%

Cards Direct Debits Credit Transfers Cheques

Note:Datanotavailable:forChinaforchequesin2001,forSouthKoreaforcardsin2001,forJapanandChinafordirectdebitsforallyears;sothegrowthratesshownmight

besomewhatsmallerfortheseregionsforthosepaymentinstruments

Source:ECBDWH2008figures,releasedNov.2009;BankforInternationalSettlements,RedBook,2008figures,releasedMarch2010;IMFdatabase;

centralbanksources;Capgeminianalysis,2010


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10

WITHIN THE LARGEST MARKETS, USAGE

TRENDS CONTINUE TO EVOLVE

While overall payments volumes are rising, thereare clearly ongoing shifts in usage patterns. In the.S., for example, non-cash payments volumes rose4% in 2008 to 102.5 billion, leaving the .S. to

account for more than 38% of the worlds volumes.

In Europe, non-cash payments are certainlyincreasing steadily enough to warrant investment bybanks in new payment technologies, especially asregulation is likely to drive or restructure non-payments usage, either through far-reachingpayments initiatives such as SEPA (see Section 2) orthe efforts of individual countries to replaceoutmoded instruments. or example, the .K.Payments Council National Plan has set a strategy tophase out cheque usage in reat Britain by 2018.

At present, the largest non-cash payments markets inEurope are stil l ermany, rance and the .K., whilePoland and Sweden showed the highest year-on-yeargrowth rates in 2008. However, the maturity ofnon-cash usage stil l varies considerably by country(see igures 1.3 and 1.4). or example:

inland and Sweden lead Europe in terms ofusage per inhabitant. In fact, the innish peopleare the heaviest users of non-cash paymentinstruments, even ahead of the Americans. Theusage in Nordic countries has been driven by the

concerted effort of governments and banks, andthe willingness of residents to adopt newelectronic payment technologies.

ermans still like to use cash frequently, and cardsare used less frequently than in other countriesmainly for cost reasons. verall, though, thecountry has sophisticated payment technologies,and the aggregate volume of non-cash transactionsis second only to rance in the Eurozone,3 amid

heavy use of direct debits and credit transfers. In reece, Italy and Poland non-cash usage per

inhabitant is still minimal (less than 60 transactionsper year). The Polish government is actively tryingto encourage non-cash transactions, starting withlegislative amendments that will remove some ofthe barriers to developing non-cash payments,fuelling the uptrend in transaction volumes that hasalready become evident.

3 Inthischapter,paymentsdataontheEurozonecoversthe13countries thatweremembersoftheEurozonein2007:Austria,Belgium,

Finland,France,Germany,Greece,Ireland,Italy,Luxembourg,Netherlands,Portugal,SloveniaandSpain.(CyprusandMaltajoinedin2008

andSlovakiain2009.)Alsoseethemethodologysection


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Figure 1.3 Number of Non-Cash Transactions in Europe (Millions), 20012008

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Poland

Denm

ark

Sweden

United

Kingd

om

Slove

nia

Luxembo

urg

Greece

Ireland

Portu

gal

Finland

Aus

tria

Belgium

I

taly

Netherlands

Sp

ain

Germany

France

Eurozone Non-Eurozone

5%

4%

4%

4%

6%

18%

7%

Non-CashTransactions(Millions)

6%

1%

3%

6%

5%

4%

12%

9%

11%

6%

5%

11%

13%

4%

11%

7%

17%

0%

6%

2%

5%

16%

12%

6%

8%

15%

17%

Growth rate

(0708 )

CAGR 0108 2001 2003 2005 2007 2008

Notes:(1)The17-countrysampleincludesthe13countriesthatweremembersoftheEurozonein2007(Austria,Belgium,Finland,France,Germany,Greece,Ireland,Italy,

Luxembourg,Portugal,Netherlands,Slovenia,andSpain),plusfournon-Eurozonecountries(theU.K.,Denmark,SwedenandPoland);(2)a2007changeinGermanys

methodologyforcollectingcertainpaymentsdatacausesabreakinthetimeseries,andmeans2007and2008dataarenotdirectlycomparablewithpreviousyears;

forGermany,2001and2008datahavebeenconsideredandthegrowthhasbeenaveragedout;(3)onlyodd-yearsdatahavebeenshowninthegraphupto2007for

bettervisualisationofthechart



Figure 1.4 Evolution of Non-Cash Transactions per Inhabitant per Country in Europe and the U.S., 20012008

0

50

100

150

200

250

300

350

400

20082007200620052004200320022001

CAGR

0108 0708

4%

10%

5%

4%

4%

11%

4%11%

5%

16%

5%

2%

17%

11%

7%

11%

5%

15%

3%

2%

4%

2%

4%

14%

6%0%

8%

4%

9%

0%

14%

2%

(4%)

0%

(1%)

5%

Non-CashTransactionsperInhabitant

U.S.

Finland

Netherlands

Luxembourg

France

United Kingdom

Sweden

Germany

Belgium

Ireland

Portugal

Slovenia

Spain

Italy

Poland

Greece

Denmark

Austria


centralbanksources;Capgeminianalysis,2010;NBPAnnualReport2008



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12

DISPARIT REAINS BETWEEN CNTRIES NPREERRED PAENT EANS

Different non-cash payment instruments are stil lfavoured more in some countries than others.or example:

Cardusagerosearoundtheworld,butisdisparateamongindividualcountries. In Europe overall,the average value per card transaction droppedslightly in 2008, to 56 from 59 in 2007 (seeigure 1.5). This decline is in line with trendsreported in the2009 WPR, suggesting manyindividuals are increasingly using non-cash meanseven for low-value transactions.

In North America, the average value of cardtransactions also dropped in 2008, to 41 from 45..S. consumers transacted less on credit cards in2008 as they sought to reduce spending andborrowing amid the economic slowdown. At thesame time, though, debit card usage rosewith.S. volumes up 13%at least in part becauseconsumers were trying to use more pay nowstrategies, especially seeking to shift everydaypurchases from credit cards.

Residents of mature Asia-Pacific continued to havethe highest average value per card transaction in2008little changed at 71. In much of Asia, cashremains the preferred means of payment forlower-value payments.

DirectdebitsareusedmoreofteninEuropethanin

othermarkets,andtheaveragevalueperdirectdebittransactionrosetherein2008 to 785 from722. Direct debits are increasing in popularity, withmore corporates and small- and medium-sizedenterprises starting to use them. Direct debits aremore effective for the payees, as the reconciliationprocess is easier, and fewer balances go unpaid. Directdebits will never totally replace credit transfers, whichare more useful for one-off payments, for example,and which tend to be preferred for higher-valueautomated payments. Credit transfers are especiallypopular in certain countries, such as the .K. andermany. The average value per credit transfer in

Europe in 2008 was 11,069, though that was downfrom 13,376 in 2007.4 Direct debits are, however,likely to take an increasing share of the paymentsonce made via cheques.

Chequeusagehasdeclined as a percentage of totalnon-cash transactions in Europefrom 11% in2005 to 8% in 2008. Concerted action fromregulators and banks has helped to reduce chequeusage in countries like the Netherlands andBelgium, but cheques are still a mainstay in bothrance and the .K. The .K. Payments CouncilNational Plan, meanwhile, is seeking to close

cheque clearing in 2018, an ambitious plan that

requires a comprehensive understanding of chequeusage, and subsequent action to migrate users toappropriate alternatives. In the .S. the volume ofcheques used dropped another 6% in 2008 as bankscontinued to encourage alternative non-cash means.In mature Asia-Pacific markets, the average value

of cheque payments is far higher (2,479 in 2008)than in either Europe or North America, but that islargely because cheques there are used mainly forlegal and government-related transactions, whichtend to be of a higher value.

THE ECNIC CRISIS IS IKE T AECTEPRT PAENTS AND REITTANCES

The economic crisis did not start to take its fu ll tolluntil the latter half of 2008 and it is already clear thatworld exports declined initially, probably underminingthe demand for trade finance. In fact, export rates in

the first quarter of 2009 showed the largest year-on-year decline in the last decade, before starting to trendback up in the latter half of the year (see igure 1.6).

The crisis is also thought to be undermining growthin workers remittances, which have certainly slowedsince the last quarter of 2008 and are expected toshow an outright decline in 2010 (see igure 1.7).

India continues to be the leading recipient of migrantremittances in the world (S$52 billion in 2008),since many of the population relocate to developed

countries to work and then remit earnings home.

Figure 1.5 Average Value per Card Transaction (),20072008

0 20 40 60 80

North

America

Europe

Mature

Asia-Pacic

CAGR

1%

()

(5%)

(9%)

70

71

59

56

45

41

(0708 )

2007 2008

Source:ECBDWH2008figures,releasedNov.2009;BankforInternational

Settlements,RedBook,2008figures,releasedMarch2010;IMFdatabase;


4 ThehighaveragevaluepercredittransfercomparedtootherinstrumentsreflectsitscommonusageinB2BpaymentsacrossEuropeand

especiallyintheU.K.


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Figure 1.7 Worldwide Workers Remittances Market Evolution, Receiving Regions ($ Billions), 20002010F

Total

Asia

Latin America

Africa

EuropeWorkersRem

ittances($Billions)

19%

21%

16%

16%

21%

20%

36%

3%

12%

15%

(3%)

(1%)

(5%)

(5%)

(8%)

CAGR

(0008) (0708) (0810F)

0

50

100

150

200

250

300

350

400

2010F2009E200820072006200520042003200220012000

Notes:EandFrepresentestimatedandforecastrespectively

Source:WorldBankMigrationandRemittancesFactbook2009;Capgeminiresearchandanalysis,2010

Figure 1.6 Quarterly World Exports ($ Billions), 20052009

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Q409Q309Q209Q109Q408Q308Q208Q108Q407Q307Q207Q107Q406Q306Q206Q106Q405Q305Q205Q105

CAGR (0508) 15%

Exports($

Billions)

(0809) (23%) (Q1Q4 09) 31%

Source:WorldTradeOrganisationSecretariat;Capgeminiresearchandanalysis,2010



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14

ER CASHINCIRCATIN IS STIEPANDIN

Euro cash-in-circulation has sustained averagegrowth of about 11% per year, almost doubling sincethe euro was introduced in 2002 (see igure 1.8),even when excluding the 500 and 200 notes that

are the most hoarded (in the Eurozone and inneighbouring Eastern European countries). In 2008,the year-on-year expansion in cash-in-circulation wasmuch higher than the increase in non-cashtransactions per inhabitant (11% vs. 4%).

According to estimates from the European PaymentsCouncil (EPC5),cash payments cost the E economiesbetween 50 billion and 75 billion per yearexpensesthat should motivate all stakeholders to take moredetermined action to discourage cash payments.

Within the Eurozone, different countries are at

different stages of the cash-substitution process. Ingeneral, cards have yet to replace cash largely becauseconsumers favour cash for low-value transactions, andmerchants see card processing as slower and morecostly than cash for smaller amounts. As a result,even though the number of non-cash transactions perinhabitant is likely to keep rising, cash-in-circulationwil l also continue to rise unless merchants andconsumers are incentivised to switch.

INITIAL DATA SUGGEST RESILIENCE IN

PAYMENTS FLOWS CONTINUED IN 2009

While final data on 2009 payments volumes are notyet avai lable, initial data suggest payments f lowsremained strong in emerging markets into 2009. Thepayments markets in mature Europe and the .S.

remained resilient, as evidenced by the followingfindings from data produced by central banks andother payments-industry bodies:

In the .S. the volume of retail payments continuedto grow, though the mix changed. or example:

There was a small decline in the volume of creditcard payments (down 4%), due in part to atightening of credit standards by banks, but thedecline was more than offset by an increase in theuse of debit cards and prepaid cards (up 13%).6

The number of transactions processed as

automated clearing house (ACH) payments grew2%,7 largely due to ongoing efforts to replaceinefficient instruments such as cheques.

Figure 1.8 Comparison of Cash-in-Circulation vs. Non-Cash Transactions per Inhabitant in theEurozone, 20022008

INon-cash transactions per inhabitant

(Volumes)

ICash-in-circulation not including 200 and 500 banknotes

( Billions)

2008200720062005200420032002

CAGR 4%

CAGR 11%

129

263

304335

367

406438

485

136 143148 154

161 168



5 AnnualReport2009,EuropeanPaymentsCouncil(http://www.europeanpaymentscouncil.eu)

6 www.creditcards.com

7 www.nacha.org


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In Europe, the use of cards and other retailpayment instruments also grew. or example, acrossthe .K., rance, Italy and Spain (which accountfor 60% of European payments):

The retail payments market continued to grow ata 2%-to-6% rate, with the increased use of cards,

direct debits and credit transfers more thanoffsetting any decline in cheque usage.

There was signif icant growth in cards usage,while the average va lue of card transactionscontinued to decline, reflecting greater use ofcards for low-value cash transactions, and possiblysome crisis-related belt-tightening by consumers.

While retail payments f lows reportedly remainedstrong in 2009, there was a decline in the number andvalue of high-value payments as a direct consequenceof the liquidity crisis. or example, data show:

The number of payments cleared through the.K.s Clearing House Automated PaymentsSystem (CHAPS) dropped 10.8% and their valueby 20%.8

Target 2 payments dropped 6.5% in volume and19.3% in value.9

The value of .S. dollar large-value paymentsprocessed on the central bank edwire fell 29.5%.10

verall though, there is no evidence in early data tosuggest there was any decline in global payments

volumes in 2009or even in early 2010.

CONCLUSION

The global use of non-cash payment instrumentscontinued to grow in 2008, showing resilience to thefinancial crisis. The volume of non-cash paymentsremained concentrated in developed markets even ifthe increase of volumes was modest in those marketsand it was far faster in developing economies.

Admittedly, there is a significant lag in globalpayments data, so it is premature to conclude whateffect the crisis will ultimately have had on paymentsflows. But we know already that there has been nosignificant impact on emerging-market paymentsflows in 2009, and that the mature markets of Europe

and the .S. continued to grow overall, though themix of payment instruments may be changing.

In fact, we expect data to show that the size of the.S. and European payments markets increasedslightly in 2009 in terms of the number oftransactions and the aggregate value of thosepayments f lows. oreover, interim data from the.K. and other developed economies suggest there isevery reason to believe payments were still growing asof mid-2010. This resilience in payments furtherdemonstrates why retail payments remain a critical

source of stable revenues for many banks.

ptimising the payments business, however, isbecoming increasingly difficult as regulatorycompliance becomes more onerous (see Section 2).oreover, banks are likely to see a growing challengefrom non-bank PSPs, which have proved willing toinnovate on technology and business models tomigrate existing and new customers to their paymentsservices (see Alternative Payment Service Providers).

8 AnnualSummaryofPaymentClearingStatistics2009,PaymentsCouncil(http://www.ukpayments.org.uk)

9 EuropeanCentralBank(www.ecb.int)

10TheFederalReserve(http://www.federalreserve.gov)



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Innovationintechnologyhaschangedthewayindividualsinteractandhashelpedtopave

thewayforgreatercompetitionfromnon-bankPSPs.Consumers,drivenbyconvenience

andprice,areincreasinglyleveragingmobileandinternettechnologiestobuyandsellvia

onlineauctions,interactviagamingandsocialnetworkingsites,purchasegoodsand

servicesviatheinternetforhomedeliveryandmakeperson-to-person(P2P)payments.

Weestimateglobale-payments11andm-paymentscollectivelyaccountedfor

approximately20.3billiontransactionsvaluedatsome832billionin2009.Ofthose

payments,almost8.6%ofthevolumewasconductedviaalternative(non-bank)providers

andchannels,ratherthantraditionalbankingproviders.Withcardpaymentsrepresenting

some158billiontransactions,anothersizeableproportionofthesewerecapturedby

alternativeproviders.

Therearewideregionalvariationsintheuseofe-paymentandm-paymentproducts

acrosstheworld,withtransactionsrangingfromsmallvaluestosubstantialsums,

conductedviaarangeofpaymentmethods,anddrivenbydifferentbusinessmodels

andplayersalongacomplexvaluechain.

Fundamentally,thedevelopmentofe-paymentsandm-paymentsisdrivenbycountry-

specificeconomic,technologicalandsocialfactorswhichshapethelevelofpenetration

andthepropensityofuserstoembraceorrejectdifferentpaymentmeans(seeFigure1.9).

Accordingly,eachpaymentsmarketisdrivenbyadifferentmixofcriticalsuccessfactors.

Inemergingmarkets,forexample,traditionalbankingservicesareunavailableorunaffordable

forlargesegmentsofthepopulation,whilemobilephonepenetrationratesarehigh.Asa

result,mobilepaymentshavegainedsignificanttraction,withlimitedinvolvementbyfinancial

institutions.InSouthEastAsia,forinstance,ourresearchshowsm-paymenttransactions

havereachedthebillionmark,withmobilechannelsmostfrequentlyusedforshopping,travel

reservationsandpayments,productresearch(byWebsurfing)andbankingtransactions.

Indevelopedcountries,m-paymentsservicesareinamoreformativestage,with

commercialadoptionlimitedbyamultiplicityofdifferentstandards,unclearbusiness

modelsandthereluctanceoftelecomoperators,banksandotherstakeholderstoresolve

theirconflictinginterestsandintegratevaluechains.Nevertheless,theoutlookfor

m-paymentsremainsoptimisticforthenextthreetofiveyears.

Developedmarketswithawell-establishedbankinginfrastructureandhighinternetpenetrationrepresentaprolificecosystemfore-paymentsplayers,whichisalready

contributingtopaymentsgrowth.InEurope,forinstance,therearethreetimesasmany

mobile-phonesubscribers(86%ofinhabitantsaged16andup12)asmobile-internetusers

(21%ofthat86%13),indicatingEuropeanmobile-paymentsadoptionhasroom

toexpandsignificantly.

Aspartoftheemerginge-paymentstrend,merchantsareincreasinglybecomingmulti-

channelandmulti-devicemarketers,andbanksarealsostartingtoprovidenewmethods

forconsumerstomanagetheirfinancesinrealtime.Thusincomingyears,whiledebitand

creditcardswillcontinuetodominateonlinepayments,alternativeoptionswillcertainly

developtocomplementcardusage.

SPOTLIGHT

Alternative Payment Service Providers

11Inthisspotlight,e-paymentsrefersonlytoonlinepaymentsfore-commercetransactions12RealitiesofMobileCommerceinEurope,ForresterResearch,July15,2009

13Ibid

16


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2009, accounting for 5% of all m-payments (seeigure 1.11). That amounts to 0.05% of all non-cashpayments transacted in 2009, a share expected to riseto 0.17% by 2012, which would equate to 8% of them-payments market at that time.

We expect m-payments usage in emerging markets togrow much faster than in developed economies, becausethe unbanked population is so large. As a result,emerging markets are expected to account for 59.6% ofthe total m-payments market in 2012 (vs. 51.3% in

2010), after sustained growth of 60.6% in 20082012.

MOBILE PAYMENTS ARE GROWING,

BUT ARE SO FAR USED MOSTLY FOR

LOW-VALUE TRANSACTIONS

We estimate the value of global m-payments at 41.5billion for 2009, and expect that number to grow to140 billion by 2012 (see igure 1.10), led byremittances and retail purchases in emerging markets.

Based on our estimates, m-payment schemes drivenby alternative providersespecially telecom

providersconducted 156 mill ion transactions in

Figure 1.9 Developed Markets Are Better Positioned for E-Payments; Emerging Markets AreRipe for M-Payments

Source:Capgeminianalysis,2010

DEVELOPED EMERGING

FACTOR ValueImpacton

M-Payments

Impacton

E-PaymentsValue

Impacton

M-Payments

Impacton

E-Payments

Banking

InfrastructureDeveloped

+Low

Penetration

+ InternetPenetration

High + Low + Mobile

PenetrationHigh + High +

Computer

LiteracyHigh + + Low

Payment

PreferenceLegacyCards + Cash +

Emigration Low High + +DevelopedRegions EmergingRegions

ATERNATIVE PAENT SERVICE PRVIDERS

Figure 1.10 Global Mobile Payments Market Volume( Billions), 20082012F

PaymentsVolume(Billions)

CAGR

(0812F)

0

30

60

90

120

150

2012F

2011F

2010F

2009

2008

Total

Developed Markets

Emerging Markets

48.6%

36.8%

60.6%

12.520.6

30.3

49.0

83.4

16.1

20.9

28.7

40.4

56.6

28.7

41.5

59.1

89.5

140.0

Notes:(1)Developedmarketsform-paymentsconsistofWesternEurope,

NorthAmerica,Japan,SouthKoreaandAustralia;(2)emergingmarketsfor

m-paymentsconsistofEasternEurope,LatinAmerica,AfricaandRestofAsia;

(3)Frepresentsforecast

Source:Capgeminianalysis,2010;figuresmaynotaddduetorounding

Figure 1.11 Global Mobile Payments Number ofTransactions (Millions), 20082012F

0

2,000

4,000

6,000

8,000

10,000

2012F

2011F

2010F

2009

2008

NumberofTransactions(Millions)

2,1512,964

4,126

6,040

9,043

786

455

263

156

902,241

3,120

4,389

6,495

9,830

CAGR

(0812F)

Total

Non-Bank Providers

Bank Providers

44.7%

72.1%

43.2%

Note:(1)Non-bankprovidersnumbersincludemobile-operator-ledpaymentschemes;

(2)Frepresentsforecast



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18

or now, m-payments are largely used for relativelylow-value transactions (although the actual amountsvary widely by country), and the underlying usagepatterns are generally different in emerging marketsthan in developed ones.

In developed economies, m-payments are mainly tiedto mobile digital content purchases (ringtones,pictures and entertainment information), and to anextent to mobile ticketing (tickets at terminals orretrieved on-site). In emerging markets, m-paymentsare mainly used in P2P payments and remittances(domestic and cross-border P2P fund transfers),resulting in a higher average transaction value.14

As m-payments expand in developed markets, theywill (in the coming three to five years) complementrather than substitute for existing payment instruments

and provide an alternative to cash payments. obileproximity purchases and airtime top-ups are expectedto drive mainstream adoption of mobile purchasing.Near-field communication (NC) technologies, inparticular, offer a clear improvement over someexisting payment methods, being simpler and fasterthan network-based short-message service (SS;text-messaging) technologies, and even moreconvenient than using cash. However, proximity-payments usage cannot expand significantly untilmerchant infrastructures and mobile phones are moreextensively NC-enabled, probably sometime after2011. Currently, to compensate for the lack of NC

infrastructure and enabled handsets, attention hasmoved from hardware to software, and from traditionaltelecom operators to new entrants offering solutionsthat allow consumers to pay with existing methods.

In emerging markets, mobile payments represent acost-effective and sufficiently secure medium forvarious types and sizes of cashless paymenttransactions. However, workers remittances, includingcross-border remittances, are likely to be the strongestdriver of growth in m-payment transaction volumes,given the substantial number of migrant workers

seeking to return funds to their home countries asefficiently and cheaply as possibleand to recipientsthat may or may not have bank accounts.

In general, the m-payments market has signif icantpotential in the medium to long term, but allstakeholders (mobile operators, banks, payment-cardnetworks, merchants, and mobile devicemanufacturers) will need to co-operate to manage theeconomics of m-payments business models, managethe risks of each party, and deal with issues rangingfrom security concerns and know-your-customer

(KC) protocols15

to customer preferences.

E-PAYMENTS ARE GAINING MOMENTUM, WITH

MANY ALTERNATIVE PROVIDERS

SUCCESSFULLY FINDING A NICHE

We estimate the va lue of worldwide e-payments was790.1 billion in 2009 and expect sustained growthof 19.6% per year in 20082012 to reach 1,382.3

billion in 2012 (see igure 1.12). Alternativeproviders, leveraging economic and competitiveopportunities in the payments space, are gainingmomentum and are expected to increase their shareof e-payments values from 9.3% in 2009 to 12.4% in2012, potentially capturing revenues that wouldotherwise have gone to banks.

We estimate alternative providers processed around1.6 billion transactions in 2009, which translates to0.55% of the total non-cash payments market (seeigure 1.13). They are expected to process around 3.7

billion e-payment transactions in 2012, which wouldbe 1.02% of the total. While this percentage remainssmall, alternative providers are expected to grow theirshare of e-payments volumes (in billions) at asustained rate of 29.3% a year in 20082012.

Notably, alternative providers are addressing specif icmarket needs that are not served or are currentlyunderserved by existing systems. erchants, forexample, are realising that by offering a lternativepayment options, they can lower their overalltransaction costs, increase conversions and create newrevenue streamswhile reducing charge-backs andfraudulent activity. At the same time, consumerswant merchants to accept their preferred paymentmethods, including those that are not currentlycovered by traditional payment methods.

PayPal and Bill e ater are prominent examples ofthe success of non-traditional payment systems thathave emerged to usurp both revenue and marketpresence from financial institutions and associatednetwork brands (see PayPal case study). PayPal evenacquired a European banking licence, aiming to buildon its success and prominence as an alternative

payment option and reap the full benefits of providingtraditional banking services to already loyalcustomers. New hybrids such as oogle Checkout andan array of products and platforms from Amazon (forexample) present an additional challenge to financialinstitutions, given their widespread adoption.

ore than 30% of Europeans have used an onlinepayments service for online purchases, and three-quarters of .S. online buyers have an alternativepayments accountof which 70% are active and usedto make online purchases. In Asia-Pacific, countries

with developed banking systems still tend to be highly

14USMobilePayments,ForresterResearch,June3,2008

15KYCprotocolscomprisethesystemsandproceduresneededtoproperlyidentifycustomerstocontrolfraud,

moneylaunderingandotherillicitactivity


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dependent on cards (at least 75% of online customers

in Japan and South Korea use a credit card,16 forexample), although PayPal has a substantial presencein Australia. In mainland China, two-thirds of onlineconsumers pay for their purchases using Alipay, theleading alternative payment system in the country.17

CONCLUSION

Banks have been well-positioned as trusted providersto both merchants and consumers, especially indeveloped markets where they typically have long-standing transaction- and account-based relationships.However, alternative providers have made significant

strides in e-payments and m-payments. This showsthere is significant opportunity for non-bankcompetitors, particularly when they demonstrate moreflexibility, lower costs or more savvy applications thantraditional bank providers.

Thus far, alternative providers still account for asmall percentage of total worldwide non-cashtransaction volumes (0.6%) and revenues, but theirrate of growth is significant. The m-paymentssegment is a prime example of the competition forbanks: mobile operators are in a better position toleverage emerging technologies, e.g. proximity

payments, and the mobile-device lifetime is fairly short

(about two years). ser-friendly mobile paymentsapplications are widely available for smartphones(iPhone, BlackBerry, etc.), and are already enablinginternet and phone-to-phone payments with little orno need for infrastructure upgrades or changes.

As a result, mobile operators and their partners can gainrelatively rapid and cheap access to large customer bases,which can potentially be migrated to m-payments,starting first with low-value amounts. Alternativeproviders may also be able to extend their reach to targetoffline P2P and consumer-to-business payments

presenting banks with stronger competition.

Alternative providers face their own challenges infinding viable business models to monetise e-paymentsand m-payments on a broad scale. As they do so, banksshould be formulating their own strategies for proximityand other e-paymentsprobably focussing f irst onmobile internet payments, since mobile broadbandpenetration, data application services and smartphonedevices are all expanding rapidly. However, any playerhoping to develop online P2P payments will need to beable to launch services quickly, navigate regulations andcater to an often fickle but tech-savvy user base.

16UnderstandingOnlinePaymentPreferencesinInternationalMarkets,ForresterResearch,March18,2010

17Ibid

Figure 1.12 Global Electronic Payments Market Volume( Billions), 20082012F

0

300

600

900

1,200

1,500

2012F

2011F

2010F

2009

2008

PaymentsVolume(Billions)

614.1716.7

851.1

1,013.9

1,211.5

73.4

170.9

128.6

96.9

61.1

675.3

790.1

948.1

1,142.4

1,382.3

CAGR

(0812F)

Total

Non-Bank Providers

Bank Providers

19.6%

29.3%

18.5%

Note:Frepresentsforecast


Figure 1.13 Global Electronic Payments Number ofTransactions (Billions), 20082012F

0

5

10

15

20

25

30

35

2012F

2011F

2010F

2009

2008

NumberofTransactions(Billions)

13.415.6

18.5

22.1

26.41.3

14.7 1.6

17.22.1

20.62.8

24.9

3.7

30.1

CAGR

(0812F)

Total

Non-Bank Providers

Bank Providers

19.6%

29.9%

18.5%



ATERNATIVE PAENT SERVICE PRVIDERS


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20

PayPalhasestablisheditselfasaglobalpaymentsprocessor,facilitating51.3billion

intotalpaymentsvolume(TPV)in2009 18(seeFigure1.14)andmakingittheworlds

largestonlinePSP.In2009infact,PayPalaccountedforalmost6%ofallglobalonline

paymenttransactions(and7.5%ofonlinepaymentsintheU.S.),capturingasignificant

shareofrevenuesthatcouldhavegonetothebankingindustry.Alongwithits

internationalexpansion,theproportionofrevenuesderivedsolelyfromeBayhas

declinedasapercentageoftotalrevenuesto42%attheendof2009.In2009,

PayPalrevenueswerearound1.89billion,nearlyone-thirdofwhichwasderivedfrom

U.S.sellersandnearly40%fromcross-bordertransactions.19

PayPalhad81millionactiveusersasofDecember2009,aftersustainingannual

growthof18%in20062009, 20andisextremelypopularamongitsusers,becauseitis

perceivedtooffer:

An easy-to-use service.Accountstakelessthanfiveminutestosetupandrequireminimalinformation;itsplatformisdesignedexclusivelyforfacilitatinge-commerce.

A simple and cost-effective integrated payments solutioncomparedtotraditionalmerchantaccountsandgatewaysespeciallyforsmallermerchantsthat

lackscale,cannotmeetmerchantcreditstandards,orprefernottoopenadedicated

merchantaccountoruseagatewayserviceprovider.

Figure 1.14 Total PayPal Transaction Volume ( Billions) vs.Number of Transactions (Millions), 20082012F

0

20

40

60

80

100

120

2012F

2011F

2010F

2009

2008

0

500

1,000

1,500

2,000

2,500

3,000

Paymen

tsVolu

me

(Billions

)

Num

bero

fTransac

tions

(Millions

)

43.1

887

1,117

1,446

1,814

2,250

51.3

66.9

84.8

105.9

Number of Transactions Payments Volume


Source:eBayquarterlyearningsreports

18CapgeminianalysisofeBayinvestorrelations,quarterlyearningsreports

19Capgeminianalysisbasedonpubliclyavailabledata

20eBayquarterlyearningsreports

CaseStudyPayPal


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21

WRD PAENTS REPRT 2010PAPA

Flexible payment options.Userscanchoosetofundtheiraccountsthroughcreditcards,bankaccountsorPayPalbalances.

Simple but effective fraud prevention.Buyerdetails(e.g.accountnumbers)arenotdisclosedtosellersanddualfactorauthenticationrequiresausernameand

password,sothesystemislessvulnerablethanacreditcardifaccount

informationisstolen.

Straightforward procedures for fraud and liability claimsforbuyersandsellers,e.g.hassle-freerefundsandcharge-backsincasesofunauthorisedpayments

ormissingpurchases.

ThemostdistinctiveelementofthePayPalbusinessmodel,though,isitsabilityto

drawonvariousfundingsourceswithverydifferentcosts.In2009,paymentswere

funded50%bycreditanddebitcards,31%byACH(e.g.bankaccounts)and19%

directlyfromPayPalaccountbalances. 21

PaymentslinkedtocreditcardscostPayPalthemost,whilepaymentsfundedfromausersPayPalaccountcostvirtuallynothing,soPayPalactivelyseekstoshiftusers

intofundingsourcesthatarecheapertoprocess,andthereforebyemployingan

appropriatepricingpolicygeneratehighermargins.

AnotherintegralelementofthePayPalbusinessmodelismaintaininglowaverageloss

rates(0.25%ofTPVin2009),whichitdoesbykeepingdowndisputerates(theyare

fourtosixtimeslowerthanaveragecard-not-presentdisputerates)andbuyerlosses

(60%to70%lower).22

PAYPAL HAS FURTHER GROWTH AND INNOVATION POTENTIAL

PayPalhasarguablyprettymuchtappedoutthepotentialinU.S.eBaypenetration,

buttherearestillopportunitiesforgrowth,including:

Geographic expansion,especiallyintolocationswheretheonlineauctionbusinessisstillmaturing.

Customer-segment expansion, in particular through Bill Me Later.AcquiredbyPayPalin2008,BillMeLaterprovidesonlinecreditapprovalsforspecific

transactionstoofferconvenienceforcustomerswithhigher-qualitycredit.

Customer-base expansion by opening up the service platform.Sinceopeningitsplatformtothird-partysoftwaredevelopersinNovember2009,newapplications

havealreadybeendeveloped,includingPayvment,whichallowsindividualsto

integrateashoppingcartwitharetailstorefrontontheirFacebookpage,and

Rentalic,amarketplacethatenablesP2Prentingofservicesandrealestate. 23

Mobile initiatives.PayPalhasseenlimitedsuccesswithitsSMS-basedservice(PayPalText2Buy)andhassincelaunchedaWAP-basedcheckoutservice(Mobile

Checkout),butmostcompellingistherapidgrowthinapplicationsforsmartphone

platformsliketheiPhone,AndroidandBlackBerry.

TheseandotherinitiativescouldhelpPayPaltogrowquicklyandcosteffectively

furtherchallengingtraditionalmarketboundaries.

21Capgeminianalysisbasedonpubliclyavailabledata

22Ibid

23Thesetypesofopenapplicationshadalreadytransactedmorethan22millioninpaymentsvolumesasofMarch2010


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22


23/60

SECTIN TITE 1SECTIN TITE 2


Payments-Related Regulatory

UpdateHIGHLIGHTS IntheEuropeanEconomicArea(EEA 24)SEPAandPSDcombinelegalenforcement,

governmentregulationandself-regulationbymarketparticipantsinpursuitofthepoliticalgoal

ofprovidingaunifiedpaymentsareaforEEAcountries.Majordevelopmentsandupdates

sincelastyearsWPRincludethefollowing:

The majority of EEA countries had transposed the PSD into national law by August 2010andatthetimeofwriting,onlytwocountriesPolandandIcelandstillhavetoundertaketheir

transpositions.Atthispoint,certaininconsistenciesininterpretationremain,andthese

ambiguitieswillneedtoberesolved,notleasttohelpensureSEPAcanprogressasplanned.

SDD was launched in November 2009 for consumers (SDD Core) and corporates (SDDB2B).AsofApril2010,nearly60%ofEuropeanbanksrepresentingabout70%ofSEPA

paymentsvolumescanbereachedforSDDinbothvariants,albeitusageatthisstageisstill

low.Atthesametime,usage of SCTs has continued to grow, but still lags expectations.

Nearly all stakeholders now agree that full SEPA migration will lag unless reinforcedby regulation.InJune2010,theECannounceditsconclusionthatself-regulatoryefforts

wereinsufficientontheirowntodriveconcertedmigrationtoSEPA(oneitherthesupplyor

demandsides)andthatitwasintendingtodraftbindinglegislation,potentiallyintheformof

anEUregulation,onmigrationenddatesforbothcredittransfersanddirectdebits.Work

nowcontinuestopreparethisdraftlegislation.

The SEPA vision of any card at any terminal is still far from a reality.Atthemoment,onlytheEuropay-MasterCard-Visa(EMV)standardiswell-accepted,whileotherstandards

suchasISO20022arenotyetuniversallywelcomedacrossthecardsbusiness.However,

three European cards initiatives (EAPS, Monnet and PayFair), designed to rival the

established duopoly of Visa and MasterCard, have each made progress.

Regulators and antitrust authorities are also continuing to monitor particular elementsof the cards business model,especiallythelevelofinterchangefees,whichtheyarguecould

inflatethecostofcardacceptancebyretailerswithoutleadingtoprovenefficiencies.

Regulatorsaretakingamultiprongedapproachtoensuringtheongoingresilienceoftheglobal

financialsystem,basedonlessonslearnedfromthecrisis.Theirpost-crisisprioritiesand

generaldesiretoensurethesafetyandintegrityofthefinancialsystemhavesignificant

consequencesforkeyelementsofthepaymentsbusinessmodel:

The Basel Committee on Banking Supervision has proposed measures (informallyknown as Basel III)tostrengthenglobalcapital,reduceleverageandbolsterliquidityina

bidtopromoteamoreresilientbankingsector.The liquidity provisions could increase

funding costsandintradayliquidityissueswillpresentadditionalchallenges.Giventhe

growingregulatoryfocusonliquidity,first-rateliquiditymanagementcapabilitiescouldgive

financialinstitutionsaregulatory,reputationalandfinancialedge.

Global regulation related to Anti-Money Laundering (AML) and Anti-TerroristFinancing (ATF) is likely to increase the costs of processing payment orders.These

regulationsputtheonusonPSPstomonitor,documentandvalidatepaymentsflowsa

burdenthatinevitablyreducesefficiency,slowstherateofstraight-throughprocessing(STP)

andraisesthecostofpaymentsprocessing.

24TheEEAcomprisesthe27EuropeanUnion(EU)MemberStatesplusthreenon-EUcountries(Iceland,LiechtensteinandNorway)


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24

nly 15 of the 30 EEA countries completed nationalimplementations by the November deadline.Implementation delays continued into 2010, and theEC announced in early June enforcement actionagainst six E ember StatesCyprus, reece,Poland, Romania, Spain and Swedenadvising thatall would receive reasoned opinions requestingthem to fully implement the PSD.

By August 2010, however, the vast majority of EEAcountries had transposed the PSD into their nationallaw, and only two countriesPoland and Iceland

still had to undertake this task.

REAININ PSD ABIITIES NEED ATTENTIN

While the PSD has been broadly implemented, someambiguities and contradictions are apparent in themarket in a range of operational and contractualissuesincluding product specifics such asavailability-of-funds provisions, usage and meaning ofcertain charging options, point-in-time of receipt, andexecution timelines/business days in certain situations.

ne example is the implementation of the PSDs

sharing principle, under which the payers andpayees of a payment should be charged separately andindividually by the originator bank and beneficiarybank to ensure each customer pays his or her ownbank. While this principle is quite clear,implementation has in some instances beeninconsistentfor example, in cases where the nationallegal interpretation of the PSD in a small number ofcountries has been used by banks from thosecommunities to justify continued use of the alternativeR charging option to their corporate clients.

The various types of inconsistencies, including

variations in the way the PSD has been implementedat an individual-country level, have resulted indisparities between countries continuing for the timebeing. This reduces the level of harmonisation acrossEurope and the potential for banks to capture region-wide economies of scale by standardising andindustrialising processes and systems.

To support full SEPA implementation, stakeholderswil l need to continue to work together to iron out anyambiguities and define how to handle paymentproducts that are not yet covered by the scope of PSD

transposition in some ember States.

24

INTRODUCTIONSEPA implementation is progressing, but theprocess of turning this ambitious concept intoreality continues to be challenging. SEPA is thebanking industrys response to implement the Eauthorities vision for an integrated euro paymentslandscape. As such, it touches all economicstakeholderscustomers (consumers, corporatesand public authorities [PAs]), PSPs andregulatorsand it needs to navigate those variedinterests. At times, SEPAs overarching objectivesseem to run counter to the efforts and needs of some

stakeholders. This friction is to be expected, butremains a hurdle to speedy progress.

In the last year or so, global financial and economicchallenges have also distracted attention from SEPAsprogress, with some banks and end users becomingmore hesitantor simply less ableto make thesignificant investments needed to speed SEPAmigration while they focus on navigating the crisisand its after-effects.

The EC has reminded stakeholders that SEPA couldpotentially deliver exactly the kind of efficiency gains

and cost savings they need during economicallychallenging times. And the European Central Bank(ECB) has launched a project to offer greater insightinto the cost efficiency of different paymentinstruments, and is partnering with the Eurosystem25to study in detail the costs of retail payments.

In this chapter, we highlight some of the pivotalSEPA developments since last years WPR and notesome of the key issues that remain unresolved.

PSD, CRITICAL TO SEPA, HAS NOW BEEN

IMPLEMENTED INTO NATIONAL LAW IN NEARLYALL COUNTRIES, THOUGH SOME MEMBER

STATES MISSED THE TRANSPOSITION DEADLINE

The PSD is intended to have a wide set of impacts onthe payments market in the E/EEA. Among theseis its role as a critical building block for fu ll SEPAimplementation, because it aims to provide aconsistent legal framework across the EEA onaspects such as refund rights and payment executiontimes. The transposition of the PSD into thenational laws of EEA members was scheduled forNovember 1, 2009, and has long been seen as a

critical interim milestone for SEPA implementation.

25TheEurosystemcomprisestheEuropeanCentralBank(ECB)andthenationalcentralbanks(NCBs)ofthosecountriesthathaveadoptedtheeuro

CHAPTER 1

SEPA and PSD Implementation Progress


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SECTIN 2SEPA AND PSD IPEENTATIN PRRESS

Against this backdrop, the banking industrys PSDExpert roup published in June 2010 an addendumto its uidance for the Implementation of thePayment Services Directive. As well as reiteratingand elaborating on existing market best practice withregard to various PSD-related topics, this new

document contains an overview of derogation usageand examples of national variations in transpositionat an individual ember State level.

EW BANKS HAVE S AR SEEN PSD AS ATRANSRATIN DRIVER

As is sometimes the case with regulatory change, theinitial focus for many has been on ticking the boxesof PSD compliance rather than pursuing strategicbenefits. Ironically, therefore, while many Europeanbanks have already incurred significant PSD-implementation costs, and lost margins and revenues

to value-dating changes and f loat reductions, fewhave actively sought to capture the potential benefitsof the PSD paradigm.

oreover, many European banks have investedheavily in information technology (IT) to achievePSD compliance for soon-to-be obsolete legacyinstruments, rather than being able to focus ITbudgets and effort on revamping IT systems tohandle incoming SEPA products.

SDD WAS LAUNCHED AS PLANNED IN NOVEMBER

2009: MANY BANKS OFFER THE SERVICE, BUT AS

YET THERE IS VERY LITTLE DEMAND

n November 2, 2009, both variants of the SDDscheme were launchedthe SDD Core and SDDB2Bwhile a new EC regulation (924/2009/EC ofSeptember 16, 2009) confirmed mandatoryreachability26 for debtor banks in the EEA for SDDCore by November 1, 2010, in the Eurozone and byNovember 2014 in other SEPA-area banks. Somecountries, however, decided not to launch SDDproducts and services in the f irst wave of SDDimplementation, because neither banks nor corporates

were ready (rance, for example, has said it plans tolaunch SDD in November 2010).

EC Regulation 924/2009/EC also sets the maximummultilateral interchange fee (I) for a cross-borderSDD at 0.088 during a transitional period that endsNovember 1, 2012though the parties to amultilateral agreement are free to agree a lower or zeroI. Existing national Is for direct debits can bekept until November 1, 2012, if they were in place asof November 1, 2009. The aim is for providers to usethe transitional period to develop a long-term businessmodel for SDD that fully al lays competition concerns.

As of April 2010, nearly 2,600 banks representingabout 70% of SEPA payments volumes can be reachedfor SDD Core and B2B collections, but the above-mentioned regulation has been necessary to ensure thefull reach, which is needed from the payees perspective.

Some governments and public authorities (PAs) arestarting to demonstrate a stronger commitment tomigrating to SDD (payee side). ost corporates stillclearly favour national direct debit products for now,partly because national schemes are more familiar totheir customers, but also because they are waiting forfull reach (see above). Continuing to promote andbuild corporate buy-in remains a key action to ensureSEPAs success.

The EPC also continues to consider requests forfurther modifications and enhancements to SDD

from customer representatives, banking communitiesand others, and it has started a public consultationon change requests that could potentially beincorporated into the November 2011 SEPA DirectDebit Rulebooks.

MOST MANDATE ISSUES ARE RESOLVED

ost ember States that have not yet addressedmandate-migration issues but required a legal solutiontook the opportunity to write provisions into theirnational laws in parallel with the PSD transpositionprocess. This ensured the continued legal validity of

existing direct debit mandates under SEPA andavoided the need for customers of legacy mandates toagree to brand-new mandates (re-sign) to use SDDs.

However, the position for ermanyin which almost50% of all non-cash payments take place via directdebitis still not entirely resolved. Due to the hugenumber of mandates, the erman banking industryand the Bundesbank have proposed that collectionmandates be automatically converted to SEPAmandates unless a customer objects within twomonths. However, the proposal has yet to be

confirmed by legislation.

ore fundamentally, discussions continue to addressthe needs of some stakeholders that do not favour theCreditor andate low (C) modeland considerthe Debtor andate low (D) model to be moresafe and reliable both for payers and payees since thepayers bank (the debtor bank) holds the mandate andauthorises payment. Consumers in countries that areswitching mandate models may need assurances thatthe SDD offers them at least the same level ofguarantees and protection previously enjoyed.E-andates, an optional service, will offer credible

26ReachabilityreferstotheneedforpaymentstotravelsuccessfullyfromanyoriginatingbanktoanybeneficiarybankinSEPAinatimelymanner

withoutanydelaysorhurdles;accordingly,anybankthatoffersSEPAservicesmustbeabletoreachanyotherSEPA-compliantbankintheEU,

EEAandSwitzerland


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solutions to some of the needs of payers accustomedto D, but there has been little investment ine-andates so far.

Notably, the EPC will potentially deliver anotheroptional servicethe Advanced andate

Informationinto the SDD Scheme Rulebooksbeing published in November 2010. Thisfunctionality provides an extended timeline for theoptional verification of mandate information by thepayers bank (debtor bank), thus increasing its abilityto widen its mandate management for customers.This feature could also serve as a basis for banks andcommunities of banks to develop further additionaloptional services (AS) to facilitate the migrationfrom legacy direct debit instruments to SDD.

In a related development, the Italian banking

community has, for example, already proposed aspecific AS in this area. SEPA-compliant ElectronicDatabase Alignment (SEDA) aims to align the SDDmandate databases of creditor and debtor banks duringthe lifecycle of the SEPA mandate, using IS 20022Payments andate messaging to confirm mandatedata (e.g. eligibility of account, account-holder details)before the first collection, and amend or cancel themandate thereafter.

SEDA potentially benefits both corporates andbanks, because it reduces the financial-risk exposureassociated with the use of direct debit instruments byensuring financial and commercial f lows are moreclosely synchronised and reconciled, reducing thepotential for errors and unauthorised payments. Itsfunctionality also provides the type of mandateassurances potentially sought by countriesaccustomed to the D model.

It should be remembered, though, that the use ofAS carries risksin the sense that it is importantto employ AS in a way that promotes migration toSEPA and competition without introducing toomuch fragmentation or running the risk of triggering

a mini-SEPA outcome.

SCT USAGE LAGGED EXPECTATIONS IN 2009

AND WHILE ADDITIONAL GROWTH IS

EXPECTED, IT IS VERY LIKELY TO REMAIN

SUB-SCALE PENDING THE CONFIRMATION OF A

MIGRATION END DATE

As of July 2010, SCTs were available through PSPsrepresenting 95% of all payments volumes in the E27, but migration rates have continued to lagexpectations. In ay 2010, SCT transactionsaccounted for only 8.1% of all eligible credit-transfer

transactions (i.e. including legacy credit transfers[CTs]), though that was up from 3.9% in ay 2009.27

oreover, SCT usage varies considerably by country(see igure 2.1).

SCT migration in 2009 was slowed by a

combination of:1. The effects of the financial crisis, which kept

many banks and corporates focussed on otherbusiness activities.

2. ack of a compelling business case for users toadopt SCT in the short term.

As is the case with SDDs, some of the obstacles toadoption could potentially be addressed through theuse of AS. Indeed, some AS are already beingdeployed to satisfy various corporate concernsregarding reconciliations between incoming CTs and

account receivables.

European end users are also requesting additionalservices related, for example, to information handlingand bank identifier codes, so as with SDD, thechallenge will be def ining a coherent AS regimeacross countriesone that does not contribute tomarket f ragmentation.

There are some signs that volumes are picking up in2010, partly thanks to specific initiatives in variouscountries (Belgium, for example, has said it will

migrate all PA payments to SCTs by the end of 2010and rance will do the same by end 2011) and bysome key PAs, which account for a significant shareof all credit transfers.

As a result, the EPC estimates 20% of Europeancredit transfers may be made using SCTs by the endof 2010, and 30% by the end of 2011. The question iswhether 30% is suff icient to create the scale ofpayments required to make it economically attractiveto decommission legacy instruments. That seems veryunlikely and hence it is clear that confirmation of a

binding end date to phase out legacy products isneeded to trigger significant acceleration in thegrowth in SCT usage.

THE NEED FOR A BINDING END DATE MUST TOP

THE AGENDA IF SEPA IS TO FLOURISH

A compelling driver for migration would be aregulatory push at the E level endorsing mandatoryend dates for the use of legacy instruments,supported by stakeholders promoting the use ofSEPA instruments.

27http://www.ecb.int/paym/sepa/html/index.en.html


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A strong consensus has emerged among variousstakeholders, with al l now stressing the need inprinciple to set deadlines for the abolition of currentdomestic schemes for credit transfers and directdebits. Recent discussions have focussed on settingpotential mandatory deadl ines of end 2012 and end2013/2014 for SCT and SDD, respectively.

The EC published in early June 2010 the WorkingPaper on SEPA migration end-date for consultation.It contains proposals on specif ic issues that wouldneed to be addressed in drafting binding legislation:

Reachability of PSPs for CT transactions andinteroperability of payment systems.

Different end dates for credit transfers and

direct debits.Waivers for niche products that are not suitablefor migrating to SEPA (and which do not accountfor more than 10% of the market share ofnational transactions).

A mixed approach to setting end dates, withcommon standards def ined for the industry,(e.g. message formats between PSPs) and generalessential requirements (e.g. for CT, the IBANof the payers and payees account).

These essential requirements would be the

minimum required of both PSPs and customers forcredit transfer and direct debit transactions.

However, according to the EPCs response to the ECconsultation, this essential requirements approachcarries the risk of legacy schemes also achievingcompliance and so not triggering the full migrationof SEPA-eligible domestic credit transfers and directdebits to the SCT and SDD schemesthusjeopardising the realisation of the ful l eff iciency andcompetition benefits being sought.

SEPA FOR CARDS IS PROGRESSING, BUT SOME

CHALLENGES STILL LIE AHEAD

In 2009, the SEPA Cards ramework (SC) wasupdated to incorporate the payment institutions (PIs)defined by the PSD, and to enlarge the level playingfield by including the three-party schemes.

According to the ECB, as of the first quarter of2010, almost 71% of cards, 77% of PS terminalsand 93% of ATs in the E 27 were EV-compliant, although differences per country exist.However, EV migration is stil l insuff icient toachieve the SEPA original vision of any card at anyterminal. EV migration is one of the requirementsof SEPA for cards.

Figure 2.1 SCT Adoption Rates in Most EEA Countries as of April 2010

Note:AllSEPA-eligibleCTsincludecredittransfersineuro,domesticandcross-bordertowardEEAcountries.

CountriesingreyarenotEEAcountriesortheyareEEAcountrieswithnoofficialdataavailable.

Source:ECBdataofApril2010;Capgeminianalysis,2010

Percentage =

Number of SCTs

Number of all SEPA-eligiblecredit transfers

>0% and 2% and 10% and 20% and 40% and 70%

Euro Countries Non-Euro Countries

>0% and 2% and 10% and 20% and 40% and 70%



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Another ingredient is standardisation across the cardspayments value chain. After the publication inDecember 2009 of version 4.0 of the EPC CardsStandardisation Volume-Book of Requirements, theEPC is working with the Cards Stakeholders roup(CS) to lay out a possible implementation path for

the standards. The CS, established in 2009,includes representatives from retai l and vendorsectors, the card transaction processing sector, cardschemes and the banking industry. Although goodprogress is being made, two key issues need to beaddressed: card and terminal SEPA securityrequirements and a certif ication framework(architecture and functional requirements).

The industry is addressing potent ial fraud incard-not-present (CNP) transactions, commonlyused in e-commerce, through solutions such as 3D

Secure (around 50% of card fraud originates fromabout 5% of all card transactions, namely cross-border CNP transactions).

It is important not to underestimate the impact ofSEPA cards on the European payments landscapegiven the importance of cards as a paymentinstrument and evidence that the cards arena is oneof the f irst to see competition from new entrants.

THE DEBATE ABT PAENT CARD ISTI NEEDS T BE RESVED

Is have long been a contested issue in theEuropean cards arena, and the ECB continues tourge stakeholders to negotiate a mutually workableresolution. Interchange fees are interbank fees thatform a large part of the merchant service charge(SC) that is charged to merchants for transactionsmade by cardholders using credit and debit cards.The EC has sought to argue that the construction ofthese fees may violate EC Treaty rules on restrictivebusiness practices. or instance, the Commissionconcluded that asterCards I, a charge levied oneach payment at a retail outlet when the payment isprocessed, inflated the cost of card acceptance byretailers without leading to proven efficiencies.asterCard has appealed that decision.

or now, the EC has arranged interim I dealswith asterCard and Visa for cross-bordertransactions, but the debate continues.

Notably, pressure from regulators and antitrustauthorities on the level of interchange fees is notlimited to Europe. In the .S., for example, aprotracted debate on interchange fees for debit cardsculminated in a provision in the Dodd-rank Act 28that empowers a new ederal Reserve agency to study

debit card interchange fees charged by the largestcard issuers and cap these fees at levels that arereasonable and proportional to the cost incurred bythe issuer with respect to the transaction.

EERIN ERPEAN CARD SCHEES AREAKIN PRRESS

The Eurosystem strongly favours the concept of aEuropean cards initiative to rival the establishednetworks of Visa and asterCard. Three initiatives arecurrently underwayEAPS, onnet and Payairthough each has its strengths and weaknesses.

EAPS(EuroAllianceofPaymentSchemes)links together different card schemes from Italy,ermany, Spain, Portugal and the .K., as well asthe EISERV interbank network of savingsbanks. EAPS took an important step in August2009 by linking together the AT networks inItaly and ermany, allowing cardholders to makecross-border withdrawals. As of July 2010, holdersof erman debit cards were able to withdraw cashfrom ATs across the .K. via EAPS.

Monnet, launched by major rench and erman

commercial banks in 2008, reached an importantmilestone in ay 2010 when banks from more thanten countries agreed to extend the project acrossEurope. Details of the initiative remainunpublished, but the schemes stated aim is tosatisfy as many stakeholders as possible (providinginnovation, efficiency and high-level services) whiledesigning an economically feasible business modelwith transparent pricing.

PayFair, a retailer-driven initiative, launched a pilotin November 2009 with one of the largest retailers inits original target market of Belgium. Another

partnership, with ermanys largest acquiringprocessor and network provider (Easycash), takeseffect sometime in 2010. Payairs business model isorganised around a SEPA- and PSD-compliantcentral infrastructure for processing payments, and itclaims a flat and transparent fee model withoutIs or cardholder fees.

28TheDodd-FrankWallStreetReformandConsumerProtectionAct,whichmakeschangestothesystemoffinancialregulation,wassignedon

July21,2010,byU.S.PresidentBarackObama


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E-SEPA IS EDGING AHEAD, BUILDING A SOLID

BASE FOR VIABLE BUSINESS MODELS

E-SEPA refers in its broadest sense to harmonisedelectronic (e) solutions designed to streamlineinteractions between buyers and sel lers along theentire supply chain. This includes e-payments,

mobile (m) payments and e-invoicing. Variousinitiatives are underway to develop the prerequisitetechnical standards, infrastructures, etc. to enable thedevelopment of viable e-SEPA business models.Among the latest developments:

M-payments. Numerous business models exist inm-payments. Some are established and successful,especially in Asia and in under-banked countries.In Europe, m-payments are sti ll embryonic andstakeholders are keen to see a commoninteroperability standard before committing to theinfrastructure investments needed to initiate and

receive mobile SEPA payments. The EPC launcheda Roadmap for obile Payments after extensivestakeholder consultations. The Roadmap prioritisesmobile contactless payments (also known as NCor proximity payments), while highlightingmobile remote payments such as P2P, B2B andperson-to-business (P2B) spaces, fully utilisingSCT and the SC. The EPC continues to workwith the S Association (lobal System forobile Communications trade body) to define theroles and responsibilities of entities involved incontactless mobile payments. urthermore, in June

2010, the EPC published a white paper designed tofacilitate the implementation and interoperability ofuser-friendly mobile payment solutions.

E-payments. The EPC will develop an E-Paymentsramework to facilitate online retail payments so aconsumer can pay any merchant in the Eurozonefrom his or her local bank account. The long-termgoal of the framework is full reach for consumers,but that goal will only be achieved if providers electto enrol in the framework and consequently committo becoming technically and commerciallyinteroperable. The framework is due to be finalised

in 2010 after legal reviews and consultations withbanking communities.

E-invoicing. ember States have embracede-invoicing to differing degrees but 90%95% ofinvoices in some sectors are still paper-based.29E-invoicingwhich can encompass the electronictransfer of billing and payment informationisexpected to grow rapidly due to potential costsavings and efficiency benefits. E-invoicing iscomplementary to SEPA, albeit the business case

has still to be fu lly defined, and the EC has notyet at tempted to harmonise standards, taxacceptation and other provisions that are vital tothe success of e-invoicing. Nevertheless, withinfive to eight years, structured e-invoicing isexpected to become the predominant invoicing

method in Europe.30

Public sector organisationscontinue to be a key constituency as e-orderingand e-invoicing are increasingly being integratedinto public procurement processes. argecorporates have been slower to migrate toe-invoicing as they tend to use Electronic DataInterchange (EDI), although EDI is a cornerstoneof e-invoicing, to manage invoicing throughoutthe extended supply chain. The ECs Expertroup on e-Invoicing has continued to work onidentifying and removing barriers to massadoption of e-invoicing, although that groupsmandate ended on December 31, 2009.

CONCLUSION

The implementation of SEPA is an intricate processthat touches on multiple stakeholders, who mustagree on a wide range of issues and manage theoperational challenges of execution. As a result, it isnot surprising that the progress of SEPA has beenslower than anticipated, and if SEPA is to be fu llyimplementedand deliver on its promiseit seemsclear that a regulatory driver is needed to tip thebalance towards adoption.

any end users, especially corporates, are not yetready to invest in SEPA products and want to be surethat there will not be a diminution of the servicesprovided under legacy regimes. The Payment SystemEnd-sers Committee (EC) argues end usersactually need incentives to migrate promptly.

In the longer term, though, corporate end usersgenerally recognise the benefits SEPA promisesto bring:

Reduced complexity and costs (e.g. throughend-to-end STP of payments).

Enablement of centralised treasury, payments andcollection factories and international billing centres.

reater efficiency in working capital management.

The shorter-term challenge is conv incing all endusers that such benefits can indeed be real ised bymigrating to SEPA products, and that they areworth the signif icant investment of time and moneythat is required.

29EPCNewsletter,January2010

30FinalReportoftheExpertGroupone-Invoicing,EuropeanCommission,November2009;EuropeanBankingFederationInputtotheECFinal

Reportone-Invoicing,EBF,February2010



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INTRODUCTIONSince the start of the global financial crisis,regulators have been studying the causes andexploring remedial actions. In particular, the crisishas revealed how complex and interrelated marketsand risks have become, speeding the rate of contagionthroughout the market and making institutions moreaware of exposure than previously realised tocounterparties and risk concentrations. oreover,risk has a domino effectwith credit risks, forinstance, turning into market risks, which soonbecome liquidity risks.

Regulation did little to reduce these exposuresormandate that financial institutions be properlypositioned for such scenariosand regulators arekeen to address this. The overhaul of the BaselAccord on capital standards is an integral part ofthat reform, but broad global moves are alsounderway to make the system stronger and more ableto withstand systemic shock. As a result, thebanking system will be less profitable, there will besmaller profits but less risks, it will be more securebut less speculative, says the President of theinancial Stability Board (SB).31

A top priority for financial institutions in comingyears will be achieving prof itable and stable growth.But first, supervisory authorities, regulators andbanks need to work together to regain credibility andrestore trust in the financial system.

The priorities of global regulators, as laid out by theSB in its April 2008 Report on Enhancing arketand Institutional Resil ience, are:

Strengthening capital, liquidity and risk

management in the financial system. Enhancing transparency.

Strengthening the authorities responsivenessto risks.

Putting in place robust arrangements for dealingwith stress in the f inancial system.

Besides the ongoing proposals to reform Basel II, otherregulations, such as A and AT provisions, alsoaimed at preserving financial system integrity andsafety, are also having an impact on PSPs.

n the other hand, standardisation could help to al laysome of the compliance-related costs by improvingend-to-end STP rates, streamlining processes andpotentially providing a competitive edge to someproviders while reducing costs for end users.

BASEL III AND THE NEW LIQUIDITY

FRAMEWORK

The Basel Committee on Banking Supervision is inthe process of updating the Basel II capital frameworkand intends to add formal standards for liquidity riskmanagement and measurement. The Basel III

proposals32 aim to address systemic risks exposed bythe financial crisis and specific weaknesses revealed inthe Basel II framework itself. Basel III has undergoneits consultation phase, and the committee will finalisethe details before the end of 2010.

The crisis prompted regulators to focus on howsystemically important banks that were failingcould be wound down in a way that did not causemassive disruption to the international system as awhole. Absent of any developments to create cross-border insolvency laws, regulators have concluded

that cross-border liquidity risk needs to be addressedwithin the regulatory framework.

Specifical ly, Basel III introduces a new iquidityRisk ramework that seeks to ensure banks preservesufficient liquid assets to survive short-term crisesand have stable longer-term funding. nly certainassets are considered to be suitably liquid and banksshould not rely too heavily, for example, on short-term wholesale funding to cover long-termcommitments. The framework has two mainpurposes: to require an adequate amount of liquidityfor a bank to be s

Documents

World Payments Report 2010