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Innovations and non-banks in retail

payments

Carlos Conesa

Member of Secretariat, CPMI

ICCI conference. Sofia, 24 October 2014

* Views expressed are those of the author and not necessarily those of the BIS.

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Agenda

1. What is the CPMI and what is its role?

2. Recent work of the CPMI in the field of retail

Innovations in retail payments (what?)

Non-banks in retail payments (who?)

3. Some conclusions and future outlook

Potential second round effects (“faster” payment systems?)

And what about virtual currencies?

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What is the CPMI and what is its role?

Committee on Payments and Market Infrastructures : focused

on standard-setting activities related to payment and settlement

systems and monitoring and analysing developments in domestic

payment, settlement and clearing systems as well as in cross-

border and multicurrency systems.

Formerly CPSS (until 1 September 2014)

Hosted by the BIS in Basel

Global Committee with 25 member Central Banks

Standard setting body – PFMIs

Monitor developments

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CPMI work on retail payments:

Description and statistics on payment and settlement systems – Red Book

(not only retail)

Guidelines, principles, best practices

General Principles for international remittance services (January 2007)

Policy and analytical reports:

Retail payment systems in selected countries: a comparative study

(September 1999)

Clearing and settlement arrangements for retail payments in selected

countries (September 2000)

Policy issues for central banks in retail payments (March 2003)

Innovations in retail payments (May 2012)

Non-banks in retail payments (September 2014)

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What is the CPMI and what is its role?

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Recent CPMI work in retail: Innovations in retail payments

In the last years, many innovations are changing the way in which retail

payments are made: communication channels, choice of payment

instruments, payment processing…

To assess those changes and evaluate the implications for central banks,

the CPMI carried out an in depth study on the issue: Innovations in retail

payments (published May 2012)

Based on a comprehensive survey (122 innovations reported by 30

central banks)

Objectives: In view of the characteristics of the retail payment market,

Classify innovations

Identify drivers and barriers for innovation

Current trends, future outlook

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Recent CPMI work in retail: Innovations in retail payments

Drivers and

barriers for

innovation

Current

trends

Retail payment’s

ecosystem

Endogenous factors:

• Cooperation among

stakeholders (horizontal /

vertical)

• Standardization

• Pricing

• Security

Exogenous factors:

New technologies

User behaviour

Public transport

Financial inclusion

Regulation

Special characteristics of the retail payment markets (economies

of scale & scope, network effects, two sided markets…)

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Recent CPMI work in retail: Innovations in retail payments

Drivers and

barriers for

innovation

Current

trends

Trends:

• Dynamic market, but few innovations have had

significant market impact (so far)

• Innovations are usually domestic (but similar

innovations have appeared in many markets)

• Speed is becoming an important factor in retail

payments processing

• Financial inclusion is one of the driving forces for

innovation

• The role of non-banks is significantly increasing

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Non-banks in retail payments:

Follow-up to the report on innovations in order to explore in

detail the growing influence of non-banks in retail payments and

analyse the potential implications: Non-banks in retail payments

(published September 2014)

Objectives:

Framework for the analysis: Definition and classification

Factors influencing the increasing presence of non-banks

Implications for efficiency and risk

Regulatory framework

Implications for central bank and other authorities

Recent CPMI work in retail: Non-banks in retail payments

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Definition and

classification

Regulatory

framework

Efficiency and

risk

Clearing & settlement

arrangementPayer’s bank Payee’s bank

Payer PayeeGoods or services

d. Non-bank

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Functional definition: “any entity involved in the

provision of retail payment services whose main

business is not related to taking deposits from the

public and using these deposits to make loans”

a. Non-bank

a. Non-bank

a. Front-end providers

b. Back-end providers

c. Operators of retail infrastructures

d. End-to end providers

b. Non-bank b. Non-bank

c. Non-bank

Recent CPMI work in retail: Non-banks in retail payments

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Definition and

classification

Regulatory

framework

Efficiency and

risk

Recent CPMI work in retail: Non-banks in retail payments

• Non-banks are very diverse: this diversity is reflected in

the range of authorities that can potentially deal with

them

• Regulatory approaches: Very diverse…

• Banking licence

• Specific licence

• Registration

• Central bank’s oversight

• Indirectly subject to regulation through outsourcing

agreements

• No specific regulation or oversight

• Observations:

• Level playing field?

• Need for an increasing coordination of authorities?

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Definition and

classification

Regulatory

framework

Efficiency and

risk

Recent CPMI work in retail: Non-banks in retail payments

Efficiency:

Outsourcing might lower

costs through economies of

scale and scope

Competition between banks

and non-banks) potential…

•… to lower fees

•… to increase range of

payment methods

•… to reach new markets

or segments

Cooperation: to exploit

respective competitive

advantages to their mutual

benefit

Risk

Similar risks may arise

irrespective of whether a bank

or a non-bank is providing the

service… but potential

regulatory differences may

lead to differences in risk

mitigation measures

That being said:

•Concentration and

outsourcing can impact

operational risk

•Fraud and other risks related

to consumer protection

issues

•Potential increased

complexity in the payment

chain

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Faster or instant payment services: Potential

second-round effects of innovative services

Innovations

Non-bank

players

Traditional providers

and systems?

Faster / instant payment

services:

Eg UK (faster payments) SG

(FAST), MX (SPEI), AU (NPP)…

Conclusions and future outlook (1)

Some controversial questions… and some counter-arguments

Are innovations related mainly to non-banks?

Are changes mainly focusing in the customer-to-provider interface?

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Are innovations really changing the core mechanics of retail

payments?… what about (decentralised) virtual currencies?

Conclusions and future outlook (2)

Yes, it is true…

• Security problems

• High degree of

anonymity

• Instability

• Inherently deflationary

• “Hidden” costs

(currency conversion)

• Lack of user and

merchant adoption

But…

• A decentralised system for

peer-to-peer transfers has

been shown to work (no

intermediaries)

• Lean infrastructure

• Very dynamic sector, many

schemes in constant

evolution

• Any lesson to be learned?

Your views?

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Thank you ...

… questions?

Information and publications at:

www.bis.org

Innovations in retail payments: www.bis.org/cpmi/publ/d102.htm

Non-banks in retail payments: www.bis.org/cpmi/publ/d118.htm