Retail Payments: A changing environment

Transcription

1 Retail Payments: A changing environment Francisco Tur Hartmann Regional Payment Systems Workshop Port of Spain 8-10 February 2011

2 Policy issues for central banks in retail payments (March 2003) Retail payments markets have been evolving over the past few decades and are continuing to evolve. Certain trends in the application of new technology or in business strategy in these markets are of interest to central banks in the light of their possible implications for the efficiency and safety of retail payments.

3 Policy issues for central banks in retail payments (March 2003) They emerge in the following areas: i. innovations resulting from advances in information technology, which have been or are being introduced by the providers of retail payment services at all market levels ii. developments in the market for retail payment services across national boundaries iii. changes in the structure of retail payments markets, in particular market integration and consolidation as well as countervailing trends iv. new participants in retail payments markets, in particular non-traditional providers (for example, nonbanks)

4 Agenda I. Retail payment Instruments II. Clearing and settlement arrangements III. Innovation IV. Economic concepts in the field of payments 4

5 Retail payments in the euro area Strong, continued growth of non-cash payments Use of the main payment instruments in the EU ( ) (number of transactions per year in billions, estimated) Card payments Credit transfers Direct debits Cheques Payment transactions in the euro area (billions) Source: Source: Blue ECB. Book, Payment and Securities Settlement Systems in the European Union (ECB-website)

6 Credit Transfers 3b. Settlement Transfer Settlement Agent 3a. Funds Transfer Payer s Bank/ATM Payee s Bank 2. Initiation 4. Reception Notification 1. Goods/Service Delivery, Payment Agreement, Invoice/Giro Form Payer/Consumer Payee/Merchant

7 Direct Debits 5b. Settlement transfer Settlement Agent 5a. Direct Debit Payer s Bank/ATM Payee s Bank 6. Booking Control 4. Direct Debit initiation 5c. Credit of Amount 3. Pre-Notification of Debit 2. Goods/Service Delivery 1. Signing of Mandate Payer/Consumer Payee/Merchant

8 The importance of payment cards Before you leave on a trip, you check whether you carry with you: a) Passport b) Mobile phone c)?

9 The importance of payment cards What makes a payment card so essential? Efficient Secure Widely-accepted Key task for ECB / Eurosystem: promoting the smooth operation of payment systems (safe, efficient, reliable). Card payments are potentially a very efficient and safe payment instrument at the POS.

10 Taking a close look on the card Name of cardholder Name of bank Name of scheme Who are these two?

11 Card transactions: parties involved On the scene: Cardholder Issuing entity = bank/payment service provider that provides its customer with a card Card scheme Merchant, equipped with a POS-terminal Acquiring entity = bank/payment service provider that provides its customer (merchant) with the card accepting service

12 About card schemes Card Scheme: Technical and commercial arrangement set up to serve one or more particular card brands and which provides the organisation, framework rules and operations necessary for the brand to function. National and international schemes (cobranding) 4-party schemes / 3-party schemes (with or without licensees)

13 About card schemes: 4 Party Schemes 4-party schemes: cardholder, merchant, issuer and acquirer. Ownership: member banks or listed on the stock exchange. E.g. MasterCard, Visa, PIN (NL), Cartes Bancaires (FR), etc. Scheme manager Issuer Acquirer Cardholder Merchant

14 About card schemes: 3 Party Schemes 3-party schemes: cardholder, merchant and the scheme, which carries out the issuing and acquiring. Owned by a single entity, usually with a credit institution status. E.g. American Express, Diners, JCB, etc. Scheme manager Issuer Acquirer Cardholder Merchant

15 Card transactions: parties involved Behind the scene: processing or the kingdom of value-added services! Issuer processing: manufacturing of cards, card personalisation, communication with cardholders etc. Acquirer processing: manufacturing of POSterminals / ATMs, maintenance etc. Transaction processing: authorization, clearing and settlement.

16 Card payment: process flow Transaction initiation: POS or ATM Authentication of the card (magnetic stripe, chip, other) and the cardholder (signature, PIN online or PIN offline) Transaction authorization (switch) Clearing Settlement between issuer and acquirer Settlement towards merchant and cardholder according to card type and terms of contract: Card with a (immediate) debit function (debit card) Card with a delayed debit function (charge card) Card with a revolving credit function (credit card)

17 Fraud prevention Very high financial risk for card schemes, banks and ultimately merchants and cardholders. Issue of public confidence in efficient payment instrument. Sophisticated, sometimes technology-intensive, field of international organised crime. In Europe, card fraud for cross-border transactions is 20 times higher than for national transactions. Need for continued, increased fraud prevention efforts (EMV).

18 Agenda I. Retail payment Instruments II. Clearing and settlement arrangements III. Innovation IV. Economic concepts in the field of payments 18

19 Different mechanisms for clearing and settlement CSM => Clearing and Settlement Mechanism 1. Purely bilateral 2. Intra-bank/intra-bank group clearing and settlement arrangement 3. Decentralised structured bilateral or multilateral clearing and settlement system not using an Automated Clearing House 4. Automated Clearing House (ACH)

20 Different types of ACHs thin versus thick ACHs thin ACHs: focus on clearing and settlement services to banks thick ACHs: offering additional services, e.g. back office processing, notifications and booking information, additional functionalities for specific products, specific communities and specific clients, (not only banks, but also to corporates and merchants)

21 Retail payments infrastructure in the euro area Retail payments CSMs were originally created with the aim of meeting domestic requirements As a result, they were relatively diverse in nature and not necessarily suited to the needs of a single currency area The launch of the euro, technological developments, financial innovation and the creation of SEPA have all contributed to efforts to harmonise, integrate and consolidate CSMs in Europe At the end of 2009, there were 20 CSMs (ACHs and decentralised structured systems, excluding purely bilateral and intra-bank/intra-group arrangements) in the euro area

22 Retail payments infrastructure in the euro area ACHs servicing euro area ACH Finland VocaLink Eurogiro CEC STEP2 Equens RPS STEP.AT SICOI (SIBS) SNCE (Iberpay) CORE (STET) ICBPI BI-COMP SEPA IKP (Bankart) Dias SIA-SSB BI-COMP

23 Integration of retail payments infrastructure To be able to realise economies of scale, integration of retail payment infrastructure needed but may take time: market-driven process number of retail payment infrastructures expected to decrease as some reach the end of their investment cycle, provided that owners/participants might find equivalent/better solutions in the market

24 Integration of retail payments infrastructure What is the way ahead? Growth of bilateral clearing? Will thin or thick ACHs be the model for the future? What is the right number of CSMs in the euro area to realise economies of scale? => 20? => 5 (already covering 86% of payment volume in euro area)? => 1?

25 Agenda I. Retail payment Instruments II. Clearing and settlement arrangements III. Innovation IV. Economic concepts in the field of payments 25

26 Gradual Innovation (continuous improvement) Cars have not fundamentally changed in nearly 100 years 4 wheels Internal combustion engine Steering wheel Braking system Gearbox But there has been a lot of innovation Fuel injection Electronic ignition ABS brakes Pneumatic tyres Hydraulic suspension Source: Edgar Dunn & Company

27 Innovation in the communication industry An amazing invention - but who would ever want to use one? Rutherford B. Hayes, 19th US President 100 years later: communication becomes mobile

28 Innovation in the entertainment industry Music becomes mobile Change in music listening habits songs on audio cassettes Developed in less than 1 year New level of usability "1,000 songs in your pocket Steve Jobs

29 2007: Apple introduces iphone Music + Communication = Apple started neither as a producer of entertainment electronics nor mobile phones, but revolutionised both markets and gives incumbents a good scare

30 Information & Communication Technology First webpage 500m webpages 360m internet users 455m mobile subscribers 1.3bn internet users 3.5bn m-subscribers webpages worldwide

31 Best financial innovation of the past 25 years The ATM. It really helps people, it s useful. Paul A. Volcker, former Chairman of the Federal Reserve

32 Disruptive payment innovations 9000B.C. 1200B.C 640 B.C Source: Money over time Bryan Gardiner

33 Financial innovations Innovations in a network industry are especially burdensome, but as the mobile phone industry in general and the iphone in specific show not impossible Operational bankers have not the reputation to be very innovative, innovation might be driven by newcomers

34 Payment innovations Retail payments lag behind with respect to the implementation of technological developments Public authorities play an important role regarding the setting of general guidelines and standards Technical standard setting bodies can solve coordination problems and guarantee neutrality

35 Drivers of payment innovation Stakeholders should be involved in the development process: Historically large merchants have been drivers of change Consumers have had little direct influence, they often don t even know what s possible. Source: Edgar Dunn & Company

36 What is the problem (in Europe)? Part 1 61% of all cross-border e-commerce transactions fail [ ] (EC DG Health and Consumers). Online merchants are in need of readily available payment methods [ ]. Online banking based payments are a strong option [ ] (EMOTA) Sources: European Commission, EMOTA

37 What is the problem (in Europe)? Part 2 Card not present fraud has an unproportional high share of overall card fraud. Compared to the US, Europe has almost 50% more cards but 40% less e-commerce. The per capita e-commerce spending in Europe is only the half of the US one Overlay payment services piggyback on existing infrastructure.

38 Online E-Payments: the favourite Payment data Online purchase of goods/services

39 Online payments via online banking Customer s Bank Merchant s Bank 6. Credit transfer to merchant s account 4a. Customer logs in with online banking log-in data 4b. Customer authorises prefilled payment instruction with TAN 5a. Payment confirmation to the customer 1. Online shopper selects online payment via online banking and chooses his/her bank Customer 3. Customer is redirected to online banking application 6. Customer is redirected to online merchant Merchant

40 ideal Demo

41 ideal Demo

42 ideal Demo

43 ideal Demo

44 ideal Demo

45 ideal Demo

46 ideal Demo

47 ideal Demo

48 Alternative solutions (e.g. PayPayl) Customer s Bank Merchant s Bank 1. Online shopper selects payment via alternative solution Customer Merchant

49 M-Payments: the possible future Payment data Remote or Point of Sale purchase of goods

50 Categories M-Payments/Mobile payments M-Payments Proximity Payments Remote Payments Voice communication, SMS, etc. NFC Initiates card payment Initiates card payment or credit transfer

51 Number of projects is increasing Source: Innopay Mobile Payments 2010

52 Convergence of e&m Source: PayPal

53 esepa Website (

54 Agenda I. Retail payment Instruments II. Clearing and settlement arrangements III. Innovation IV. Economic concepts in the field of payments 54

55 Network effects/externalities

56 Network effects/externalities Node Link Node Network effects: the effect one user of a product has to the value of that product to other users. Positive network effects: the addition of a new user (network node) increases the value of the network for all participants.

57 Metcalfe s Law The value a communications network increases with the number of possible connections

58 Two-sided markets Markets in which a platform enables interactions between two types of users. Platform tries to get both sides on board by setting prices appropriately. These two user groups provide each other with network benefits. Merchant Card Consumer Scheme

59 Two-sided markets: Examples Software (users, producers) Internet search engine (sites, surfers) Yellow pages directories (companies, readers) Payment card systems (cardholders, merchants)

60 Two-sided markets (Cards) Payment card schemes: One side of the market: Consumers decide to join specific card scheme Depending on merchants acceptance (among other things) Other side of the market: Merchants consider number of consumers wishing to carry a specific card. Participation of a card scheme depends on expectation of network size on the opposite side of the market Network externalities depend not on consumption by agents of the same group, but on consumption by different agents of the opposite side of the market Card industry characterised by: Need to serve a two-sided market Network externalities on both sides of the market

61 Two-sided markets (Cards) How is pricing done in the cards industry? Pricing policy is crucial for proper functioning of the two-sided market: Determines participation in the market Needs to take network effects into account Decisions based on two elements: Price level (i.e. aggregate price charged by card scheme) Price structure (i.e. how to split amount between two sides) Typically, merchants pay larger share than cardholders (lower price elasticity on merchants side, due to foregone (future) sales) Setting prices, a card scheme needs to take into account both sides of the market (merchants and consumers) In many card schemes, mechanism for income redistribution between actors within the scheme (scheme owner, issuers, and acquirers): Interchange fees

62 Q&A