Accelerating Innovation in Payments
Three key areas where experts (including me) think the industry can move faster.
Dateline: Armidale, 14th November 2022.
The Payments Innovation Jury, which is made up of 79 payments industry experts in 30 different markets worldwide (full disclosure: I’m one of them), conducts an annual members’ survey that serves as a rather useful barometer of sector sentiment around innovation.
To receive new posts and support my work, consider becoming a free or paid subscriber.
The results of the tenth survey from earlier this year have just been published in a report entitled “Payments Innovation: Myths and Realities” and they make for some rather interesting reading. Given that the jurors include regulators and investors as well as leaders from national payments companies, banks, fintechs and policy makers who provide anonymous input, I would expect to see a wide range of issues covered and a number of potential innovation areas, but even so I was surprised at the spectrum of trends.
John Chaplin, Chairman of the Payments Innovation Jury. Photo courtesy of European Card Payment Association (ECPA) : as presented at the ECPA / World Bank Annual Conference.
There are three areas where innovation can be accelerated that really stood out to me and, I don’t doubt, are being discussed around whiteboards in meeting rooms around the world already.
Account-to-account (A2A) payments are payments that shift money from the payer’s bank account to the payee’s bank account through instant payment networks.
These are inexpensive, push-only credit transfers that complete (for consumers and businesses) in seconds whether the underlying settlement networks are actually implemented using real-time settlement as in Australia or deferred net settlement as in the UK.
A good example of a well-established A2A scheme is iDEAL in The Netherlands. It currently handles more than 1.2 billion payments per annum safely and securely. More than two-thirds of Dutch e-commerce payments are made using the scheme and iDEAL QR codes are now a common sight on invoices, in stores and on screens.
The jury felt that the market share of this and similar A2A schemes around the world is expected to increase steadily over the next five years, but the lack of a sustainable income stream for participants calls elements of the A2A business case into question. On this point, I read with interest that the Payment System Regulator (PSR) in the UK has included in its plans for 2022/23 the removal of barriers due to the uptake of A2A retail payments, and as part of these plans it specifically intends to investigate whether the commercial incentives for banks, intermediaries and merchants are there to support greater use of A2A payments and to see what it can do to increase uptake and promote competition with cards.
In terms of which initiatives regulators should prioritise to promote innovation, the establishment of payment institution licenses with lower regulatory capital than full-service banks was seen as most effective, with sandboxes not being viewed as impactful.
I have often written about this need for regulators to recognise and exploit the difference between payments and banking. This is an obvious way to deliver more competition. If we look at the U.S. for example, it lacks a regulatory construct equivalent to Europe payment institutions and I strongly agree with the view that it needs one. The framework was battle-tested with the collapse of Wirecard following massive fraud. No customer funds were lost in the collapse of the badly-regulated non-bank because the customer funds were ring fenced in well-regulated bank and, as I will suggest later, this might be the right regulatory balance for new US regulation.
(By the way, if you haven’t watched excellent Netflix documentary about this, Skandal, you really should: “It looked like a bank but it was actually a robbery.”)
One place to develop this kind of regulatory approach might be the OCC, which previously developed the concept of the Special Purpose National Bank (SPNB) charter. This met with considerable criticism from fintechs who made it clear they would be reluctant to invest in such an OCC license unless such a licence would require the Federal Reserve to give them access to the payments system (so they will not have to depend on banks to intermediate and route money for them) because otherwise the significant cost and complexity of the licence process make it not worth pursuing.
The alternative, another kind of federal charter (i.e., a federal payment institution licence) would allow access to payment systems, but would not allow such institutions to provide credit. This would seem far more interesting to not only stablecoin issuers but almost all other fintechs and would separate the systemically risky provision of credit from the less risky provision of payment services.
Payment data is still not being utilised to its full advantage, with the exception of fraud control. I hate to be that guy, but you know that data protection regulations (such as the notorious GDPR) place restrictions on the use of personal data that leaves the field clear for Big Tech who have better technology and a different business model than conventional payment providers.
(This is not a problem specific to the payments industry, of course. A study using data on more than four million apps at the Google Play Store from 2016 to 2019 concluded that GDPR induced the exit of about a third of available apps and cut the production of apps in half. If you are wondering why this is important in economic terms, note that the report examined long-run equilibria with and without GDPR and found that it reduces consumer surplus by about a third.)
This time last year, Oliver Dowden (then the UK’s Minister for digital stuff) got a lot of criticism when he set out government plans for data in the post-Brexit world which included “reducing unnecessary barriers and burdens on international data transfers” by diverging from GDPR. The popular press variously reported on the Minister’s comments as being about ending annoying cookie popups and/or handing Briton’s personal data over to sinister multi-national technology fiends.
However, as was set out in Diane Coyle’s and Wendy Li’s excellent report on “The Data Economy: Market Size and Global Trade” from the Economic Statistics Centre of Excellence (part of the UK's National Institute of Economic and Social Research), GDPR restricts firms from repurposing data beyond its original intended use without re-obtaining consent from individuals (to safeguard privacy) and this limits data sharing among firms to the detriment of the economy and competition.
There are plenty of other issues covered in the report — including cryptocurrency and buy-now-pay-later (BNPL) payments, where the jury foresees something of a gap between promises and reality — and it is well worth your time to have a coffee and look through them. Some of you may yearn for those quiet times when payments were boring, but to be honest the incredible amount of activity in sector now is energising and I am looking forward to the 2023 survey already.