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The safe and efficient functioning of retail payment systems and instruments is a core concern of most central banks, reflecting the key role such systems play in the financial system and the real economy. As part of its on-going work in this field, the Committee on Payments and Market Infrastructures (CPMI) highlighted the growing involvement of non-banks in retail payments in its May 2012 report on Innovations in retail payments. In a follow-up to this report, the Working Group on Non-banks in Retail Payments was set up to conduct an analytical study on this topic, including the possible implications for central banks.
For this purpose, the Working Group has defined non-banks as entities “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”. Regarding the scope of the payment services covered, this study includes all activities in the payment chain connected with widely used retail payment instruments such as credit and debit cards, credit transfers, direct debits, cheques, e-money products and remittances.
The study of the involvement of non-banks in retail payments was supported by two fact-finding exercises conducted by the Working Group. The fact-finding revealed that non-banks participate in all stages in the payment process and across all payment instruments. The Working Group categorises non-banks into four types based mainly on the stages of the payment chain in which they engage, the type of payment service provided and also their relationship with banks:
Retail payment services have a number of characteristics that may attract non-banks. Payment services may allow non-bank entities to gain economies of scale and scope and to exploit opportunities for specialisation. Specific drivers for non-bank involvement in retail payments include:
These drivers have implications for both the efficiency of retail payment systems and the related risks. As for efficiency, non-banks can use economies of scale or scope to bring down the cost of retail payments. Non-bank providers of front-end services may compete with banks to improve end users’ access to retail payments by providing a broader range of payment options including new methods such as person-to-person proximity payments in place of cash. Competition may also lead to improvements in traditional payment systems, such as faster or round-the-clock retail payment services, and to lower costs for end users. In some cases the introduction of such services has occurred with official sector encouragement, and has involved collaboration between banks and non-bank technology providers. Further, in some segments and jurisdictions, non-bank involvement in payment services has made it easier to meet financial inclusion objectives.
By providing services at various points along the payment chain, non-banks may have implications for at least some types of risk arising from retail payment systems. These implications will vary by the type of non-bank and service provided. Back-end providers may pose operational risks either through concentration – i.e., in providing a specific service that, if disrupted, could have far-reaching repercussions – or through the challenges associated with outsourcing. They may also reduce risks through specialisation in services that provide more security along the payment chain. Front-end and end-to-end providers may also impact the risk of fraud or other consumer protection-related issues. The risks posed by non-banks in retail payments probably do not differ fundamentally from those posed by banks, especially when they are providing the same type of payment services. However, even if the types of risk do not differ materially between banks or non-banks, differences in the way that they are regulated could translate into differences in risk mitigation measures (and hence in the probability that risks might materialise and the potential impact).
Although the safety and efficiency of payment systems and services is typically a prime concern of central banks, the regulatory treatment of non-banks varies greatly across CPMI jurisdictions. This is true of the regulatory framework itself, the regulatory status of non-banks (including licensing requirements), the authorities involved and the regulatory tools they use. Regulation varies across jurisdictions according to the perceived roles and risk profiles of non-banks. How far non-banks have access to national payment systems and infrastructures also varies widely depending on relevant policies or regulation.
For central banks and other authorities, a number of issues arise from the growing presence of non-banks in payment systems. Some of these relate to operational risks, level playing field issues, consumer protection aspects or the risks that might emerge if outsourcing of payment services/activities is concentrated in a single or a few non-banks. Central banks and other authorities may wish to take note and consider the implications of the issues that are analysed in this report, including risk and level-playing-field issues, and take action as appropriate in their jurisdictions.