10 October 2012

EPC: What drives innovation in payments? Conclusions of the report 'Innovations in Retail Payments' published by CPSS

The CPSS report contains a number of elements geared to assessing what an innovation-friendly environment should look like. It focuses on fact-finding in order to define the most relevant developments and to identify the major factors driving and hampering innovation.

Technological developments are the basis for new or improved services in payments. Currently, huge expectations have arisen with regard to contactless payments, utilising Near Field Communication (NFC) technology. Payment users will only switch to a new service or a new product if it better serves their personal needs when compared to existing solutions. Convenience, cost, speed, security and availability are among the most important factors determining the consumer's choice of payment services.

From discussions in Europe, it might sometimes be concluded that regulation in the area of payments is very much a European peculiarity, or to put it more bluntly, a misadventure. The report clearly demonstrates however, that regulation has become an important topic of focus in a number of Committee on Payment and Settlement Systems (CPSS) countries.

Cooperation has always been key to the payments industry, as innovations often entail high fixed investment costs. In view of the fact that the payments business is a network industry, cooperation helps to make innovative products or services available to a high number of potential customers. Cooperation is also the response to a higher degree of complexity in the value chain of innovative payment solutions, as evidenced by mobile payments. Cooperation between banks and non-banks is the most prominent model, with a strong focus on internet payments, mobile payments and Electronic Bill Presentment and Payment (EBPP) solutions. It can be concluded from the CPSS report that an innovation-friendly environment requires a proper balance between competition and cooperation of market players. Thus, it is of utmost importance that legislators give clear guidance on how cooperation can be achieved without provoking fears of anti-trust investigations.

In the same manner, the report concludes that standardisation is an important factor behind innovation. It helps to achieve a critical mass and avoids any proliferation of incompatible, smaller-scale systems which lack the necessary acceptance. The report also analyses the impact of pricing structure and security considerations on innovation in payments.

• There is no indication that Europe is facing an efficiency gap or fall-back in terms of global competition. By contrast, in some areas - such as the decision to migrate to ISO 20022 - Europe is considered a role model. Even so, this does not mean that Europe is at the forefront of innovation.
• Innovative card payments and internet payments play a more prominent role in Europe than at the global level. This is partly a reflection of its well-developed communication and payments infrastructure. For this reason, it is also less likely that new entrants will be able to succeed in setting up, for example, mobile payment schemes based on e-money.
• The issue of integration is a very Europe-specific factor at present. Creating a conflict between integration and innovation however, is not a particularly compelling scenario. Instead, these two aims should complement one another.
• There has been a lot of discussion at a global level concerning the definition of appropriate governance in order to foster innovation - not just in Europe. Recent developments in Australia and the UK show a trend towards setting strategic objectives through an appropriate public body and by broadening the membership of the respective industry bodies in order to represent the interests of all stakeholders better. Both approaches regard the industry as being best placed to implement the recommendations. Only if expectations are not met will further action be considered (e.g. in the form of regulation or, as in Australia, through the provision of services by the central bank itself).

In Europe, it is likely that developments will be evolutionary rather than revolutionary: the infrastructure is already well developed; many innovations are, therefore incremental improvements of well-established products and banks are still benefiting from the trust of customers. But that is by no means a certainty or eternal truth. Specifically, demographic changes or new non-bank competitors might lead to more profound changes. In such a situation, it is of utmost importance that European regulators set up a clear, transparent and reliable framework for future developments in the field of payments. Last but not least, it should guarantee a level playing field between all payment service providers, whether within or outside the banking area, and should strike a balance between competition and cooperation, as well as between economic freedom and consumer protection.

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