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Bank Indonesia Workshop and Seminar Innovation in Retail Payments in the EU and Central Bank Policy in the FinTech Era Day 1 – Session II and III

Dirk Schrade, Deputy Head of Department Payments and Settlement Systems, Deutsche Bundesbank *

* NOTE: Views expressed are those of the author and do not necessarily reflect official positions of Deutsche Bundesbank. The spoken word prevails.

Agenda

Slide 2

1. Introduction

3. Selected innovations in payments

4. Instant Payments

5. Challenges for innovation

6. Current policy and regulatory work in FinTech

7. Discussion of Central Banks role in the FinTech era

2. New players - FinTech / BigTech / Digital platforms

13 November 2017 Dirk Schrade, Deputy Head of Department Payments and Settlement Systems

Introduction Recent survey: Consumers distrust established players

− Annual „Trust Barometer“ of Edelmann Ergo finds high trust in the financial system in Indonesia and skepticism in Germany

− 81% of surveyed Indonesians but

only 35% of Germans trust the financial services sector

− Worldwide, 54% of surveyed persons trust the financial services sector. In comparison, 76% of people trust the technology sector

− Within financial services, trust level

differs between segments:

13 November 2017 Slide 3

Dirk Schrade, Deputy Head of Department Payments and Settlement Systems

35 45

58 60

77 81 83

0102030405060708090

Germany UK S. A. USA China Indonesia India

Percentage of citizens trusting the financial services sector :

60 59 58

53

50

44464850525456586062

Card serviceproviders

Mobile- /Internetpaymentservices

Banks Insurance Financialadvice /

Investment

Introduction Innovations driving financial industry transformation

Technology innovations were driving financial services industry transformation over the past decades …



Source: World Economic Forum (2017) „The future of financial infrastructure“

Introduction Payment statistics for Europe

Source: SDW, Payment statistics, ECB, September 2017 Slide 5 13 November 2017 Dirk Schrade, Deputy Head of Department Payments and Settlement Systems

Development of transactions per payment instrument in the EU (in million)

0

20000

40000

60000

80000

100000

120000

140000

2011 2012 2013 2014 2015 2016

credit transfers direct debits card payments e-money, cheques & others

90168 94378 98160 102108

112674 122230

0

5

10

15

20

25

DE, 2016

credit transfer direct debit cards e-money, cheques & others

in Billion

Source: SDW, Payment statistics, ECB, Sept. 2017; EHI-survey 2017, presented on 25 April 2017

30%

51%

19%

In-store / POS payments

78% of payments with cash (cash share of turnover = 51%)

Payments total Germany

ca. 90% of card payments take place at POS

Slide 6 13 November 2017 Dirk Schrade, Deputy Head of Department Payments and Settlement Systems

Introduction Payment statistics for Germany

Introduction Payment statistics for UK


Source: Payments UK, UK Payment Markets Summary 2016

42% 39%

24% 19%

9%

41% 39%

14% 19%

14%

34% 35%

15%

23%

17%

I have noneed

It's notsecureenough

I can't usethe methodeverywhere

I don'tfulfil the

necessary(technical)

criteria

I find it toocomplicated

contactless card mobile, not in-store mobile, in-store

Source: Payment behaviour in Germany in 2014, Deutsche Bundesbank * This includes respondents also familiar with it

48% 41% 41%

43% 55% 57%

9% 4% 2%

contactlesscard

mobile,not in-store

mobile,in-store

I'm familiar with it and use itI've heard of it, but I don't use it*I've never heard of it


Introduction Low penetration of innvoative payments in DE – Why?

Introduction Innovation – where does it take place in the „process chain“?


Source: CPSS (2012) „Innovations in Retail Payments“

Agenda

Slide 10

1. Introduction


4. Instant Payments




2. New players - FinTech / BigTech / Digital platforms


Source:

New players Areas of activity of German FinTech


Slide 11

Payments • P2P payments • Remittances • E-/m-commerce

payments • Account switching

service • Process optimization

Financing & credit

• Crowdfunding (donation or reward-based)

• Crowdinvesting • Crowdlending • Credit & factoring

Asset Management

• Personal finance mgmt

• Roboadvisory • Social trading • Investment &

Banking

Others • Insurance • Search engine &

comparison websites • Smart data & analytics • Cloud computing • RegTech

94

65

59 32

66

120

Payments

Crowdfunding (donation &reward-based)Crowdinvesting

Crowdlending, credit andfactoringAsset management

Others

Source: Dorfleitner et al. (2017): FinTech in Germany

N = 436

New players FinTech: Figures from Germany


Offered Service

P2P Physical POS E-Commerce xCurrency Auxiliary Institutional background

Start-up Cringle Blue Code SOFORT Skrill Revolut Internet/Telco/International Payment company

M-Pesa Apple Pay Amazon Payments PayPal PayPal

Card Schemes VISA Direct Payback Pay MasterPass / /

Bank/Bank association MobilePay Girocard contactless Paydirekt Reisebank Bank Link

Other SEQR / Paybynet / BlueCash

New players FinTech activity within payments in the EU



− Unpublished analyses within the ESCB including a survey among national Central banks (best-effort basis) found approx. 200 FinTech solutions in the area of payments

− Table presents categorisation of solutions and an example for each category category:

New players Credit as an area of FinTech activity

* Data for Brazil, Germany, Indonesia, Japan, the Netherlands and South Africa refer to all alternative finance platforms (including credit as well as equity, donations-based and rewards-based models) in 2015.

14

356

53 34

7 11 34 25

13

67

0

40

80

120

160

200

240

280

320

360

Number of FinTech credit platforms in different countries:


Source: FSB (2017) Report on FinTech credit

New players Disintermediation in the payments value chain through FinTech?

Potential disintermediation through FinTech

Payer

Processing, Clearing

& Settlement

Payee

FinTech FinTech

FinTech/ Blockchain

Source: Some concepts regarding the payments value chain taken from Capgemini, Big changes in the payments industry, 2016

“Cherry picking”, example: payments value chain

Acceptance • Technical acceptance

providers (e-/m-commerce) • PSPs, aggregators • mPOS providers

Front-end • Alternative

payments • Wallets • Money transfer

Security & Fraud

• Biometric solutions

• Risk scoring

Cross-border • P2P • Blockchain / crypto

currency based solutions

Value-added services

• Loyalty & couponing • Smart data &

analytics

Integration model


Agenda

1. Introduction


4. Instant Payments




2. New players / FinTech / BigTech platforms


Selected innovations in payments Overview of solutions for online payments

Slide 17

1. E-money based payment schemes:

2. Payment Initiation Services: 1. Overlay 2. Rerouting

3. Paying with cash on the internet:


Selected innovations in payments Example: PayDirekt

Slide 18

Dirk Schrade, Deputy Head of Department Payments and Settlement Systems, Frankfurt am Main 6 October 2015

Alternative to online payments system PayPal

Initiated by German private and cooperative banks as well saving banks

Gradual introduction starting in late 2015

Initially, the application is limited to online shopping only

From 2018 on, payments via „one click“ directly on the merchant‘s website will be available

Case study

Selected innovations in payments Mobile payment services at the POS

NFC (Near Field Communication)

QR-Code

Location-based services

PIN code

Note: overview is not conclusively Slide 19 13 November 2017 Dirk Schrade, Deputy Head of Department Payments and Settlement Systems

• Potential: possible substitute for cash

• Germany: In addition to PayPal solutions from the banking industry available now

• Savings banks: Kwitt • Cooperative banks: „Send money“-function within Onlinebanking • Additionally in the future: Paydirekt P2P functionality for all participating

banks • interoperability between different solutions of the banking industry is intended

• Many startups with own P2P-solutions

• Big internet companies like Facebook or Google consider offers in payments

• Changes in the market because of instant payments are likely

Selected innovations in payments Mobile P2P payments


Source: McKinsey „Global Payments 2016“

1 Innovative „Fintechs“ building a „bridge“ between domestic payments systems Examples: • Transferwise, earthport

− Competition − Lower fees

2 Enhanced service level and improvements by implementing „technical tools“ Examples: • Swift gpi • Ripple (bilateral messaging)

− Tracking of payments (cost savings)

− Transparency on fees − Same-day execution

3 Use of cryto technologies Examlples: • Nostro-/Vostro-reconcilitation (SWIFT PoC) • DLT Settlement Plattform (Ripple)

− Cost savings − Real time processing

„Pain points“ Correspondent payments

Selected innovations in payments Correspondent banking


Gini GmbH - Founded 2011 in Munich - Employees: ca. 25

- Products: „Gini“ technology extracts and interprets relevant data from unstructured text

documents like smartphone pictures or PDFs. Applications: − Money transfer based on a smartphone photo (relevant data like IBAN is extracted

automatically) − „Smart accounting“ − QR code based POS payments (pilot project in Berlin)

- Customer target group: Gini aims to offer its solutions both to private individuals (B2C)

and financial services firms (B2B) like Deutsche Bank, ING-DiBa, comdirect, DKB



Selected innovations in payments An example of „bridge“ technology in Germany

Case study

Basic facts − Founded in 2013, formerly known as “Number 26” − 300k customers − 60 % of customers between 18 and 34 − >200 employees − 55mn USD funding received Business model − Started as a platform that integrates services of other financial

market actors (FinTechs & Banks) − Full banking license since July 2016 − Mobile Banking − All services accessible with one app

Sources: diebank (July 2017, 28), N26 homepage

Selected innovations in payments Germany: N26 – Mobile Banking with the Smartphone


Case study

Selected innovations in payments BigTechs as digital ecosystems including payments

Ant Financial inkl. Alipay

Source: Presentations at Alibaba Group 2016 Investor Day

Alipay as a payment service is connected to

the Alibaba Ecosystem

(1) Number of users of Alipay and PayPal with one or more successful transactions in 2015. Number of accounts of Visa and MasterCard as of the fourth quarter of 2015

(2) Daily average transactions of the first quarter of 2016 (3) Daily average transactions of the fourth quarter of 2015 Source: annual reports, IR websites, research reports, public news


Case study

Agenda

1. Introduction


4. Instant Payments



7. Discussion of Central banks role in the FinTech era



Instant payments The need for speed Motivations behind supporting Instant payments

+ Real-time as a consumer expectation

+ Instant Payments as facilitator for innovation

+ Looming competition from non-banks

+ Possible cost reduction for some actors

+ Risk Mitigation

“My personal take on this is that central banks should strive to make existing payment systems more efficient and still faster than they already are – instant payments is the buzzword here. I am pretty confident that this will reduce most citizens’ interest in digital currencies.”

Jens Weidmann, President of Deutsche Bundesbank, 14 June 2017

“The Governing Council of the European Central Bank (ECB) has decided to develop a new service for the settlement of instant payments. The new service, TARGET instant payment settlement (TIPS), will enable citizens and firms to transfer money between each other in real time and will be available around the clock, 365 days a year.” ECB Press Release, 22 June 2017


Instant payments Global development


Scheme:

Instant payments A chance for incumbents?

Amount: max. 15.000 €

Source: European Payments Council (EPC)

Start:


Instant payments The European answer

The TIPS-initiative of the Eurosystem

Instant payments settlement in Central

Bank Money

Same participation criteria as for

TARGET2

24/7/365 operating hours

Operated on a full cost-recovery basis

Multi-currency technical capability

Supports participants to comply with the SCT Inst scheme


Instant payments Advantages and challenges

Slide 30

24/7/365 availability

Cost

Risk management

and regulatory framework

Challenge: business

model

- Acceleration of payment processing

- New attractivity for bank based payment services

- Investments in core banking systems?

- High requirements due to 24/7/365 availability

- Possibility of a digital cash substitute (P2P payments)

- New opportunities in e-commerce business

- In case of postponed settlement: questions regarding security and prefinancing

- Fraud and money laundering prevention


Instant payments 15 minutes of discussion



1. What is the current status regarding instant payments in your home country (Indonesia as well as other countries)?

2. What were the drivers to initiate instant payment schemes?

3. What was the reasoning not to set up instant payment schemes (yet)?

Agenda

1. Introduction


4. Instant Payments






Challenges for innovation Slow adaption of innovations

Case study from Germany: Adaption of Online Banking in 2017 still below 50% Percentage of population using Online Banking



8 11

20 23

26 30

34 34 36 37

35

44 45 44 45

0

5

10

15

20

25

30

35

40

45

50

1998 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2013 2016 2017

Source: German Banking association survey, February 2017

Case study

Challenges for innovation Established business models as barriers for innovation?

Case study from Germany: Banks have set up well-established and efficient cashless payment infrastructure Bank-run girocard debit card, for instance, well-established at the POS No urge to “change a running system” Fear of cannibalising own structures? Banks might have been less willing to invest into the establishment of new payment

solutions



Case study

Economies of scale Economies of scope

Network effects / network economies

pric

e / t

rans

actio

n

number of transactions clearing house

SEPA direct debit

SEPA card payment

cheque SEPA credit transfer

Two-sided markets

Challenges for innovation Specific features of the payments market

consumer merchant payment provider


Challenges for innovation Adoption of innovative mobile payment solutions


World Economic Forum analysis on the adoption of mobile payments: “Mobile payment solutions have not become as pervasive in the United States and Europe as in other parts of the world”

Source: World Economic Forum (2017): „Beyond Fintech: A pragmatic assessment of disruptive Potential in Financial Services“

Barriers of adoption identified: − Mobile payment solutions have not sufficiently exceeded

the functionality of preexisting card-based solutions − Customers reluctant to try new (mobile) payment methods

without a clear, demonstrated improvement − Vendors often not supporting mobile payment: the less

support, the less customers will want to adopt, which leads to less support chicken-and-egg problem

− lack of one consistent mobile payment standard: even if stores accept mobile payments, often unclear which of several solutions will work/not work

− Additional barriers?

Alipay vs. Apple Pay users (million, 2016)

lower / more transparent transaction costs

Customer friendly

handling rapid,

continuous processes

superior customer

experience

− Lack of critical mass Fragmentation

− Focus only on certain products and/or parts of the process chain high complexity for customers

− Improvements of existing infrastructures rather than setting up own ecosystems long-term success?

− Integration of different FinTech services Operational / Compliance Risks, Data security

− High switching costs for customers innovations not sufficiently material for customers to switch

Dynamic adaption to customer

needs

However, FinTechs still struggle with …



Source: World Economic Forum (2017): Beyond Fintech: A pragmatic assessment of disruptive Potential in Financial Services

Challenges for innovation Where new FinTech players succeeded and where they struggle

Agenda

1. Introduction


4. Instant Payments






Agenda




6.1 Dialogue with the market

6.2 BCBS work on FinTech

6.3 EBA’s approach to FinTech


6.4 FSB work on FinTech and financial stability

6.5 Recent regulation: a closer look at PSD2

Policy consideration What is the focus – instruments or segments?

Business-to-Business (B2B) • Payment for services • Payment for investment

goods • …

Person-to-Person (P2P) • Rent transfer • Pocket money • …

Consumer-to-Business (C2B) • Payment in e-commerce • Payment in restaurants • …

Business-to-Person (B2P) • Wage payment • Insurance payments • …

Recipient

Transmitter

Private individuals / Consumers

Companies / Public institutions

Companies / Public institutions

Private individuals / Consumers


Dialogue with the market Overview of Stakeholder fora most relevant to EU retail payments

Governing Council / General Council

European Retail Payments Board (ERPB)

Market Infrastructure and Payments

Committee (MIPC)

Market Infrastructure Board (MIB)

Advisory Group on Market Infrastructures and Payments (AMI-

Pay) European Payments Council

(EPC)

Subordinated Working Groups

Subordinated Task Forces

ESCB/Eurosystem Body Body comprising ESCB and market representatives Industry Fora Forum composed of representatives of ECB, EBA and NCAs

Advises and reports to

European Cards Stakeholders

Group (ECSG) SecuRe Pay Forum


Dialogue with the market Euro Retail Payments Board (I)

Euro Retail Payments Board (ERPB) New entity announced by the ECB in December 2013 to replace the SEPA Council Mandate: „The objective of the ERPB is to contribute to and to facilitate the further development of an integrated, innovative and competitive market for euro retail payments in the EU“ Responsibilities and tasks include • identifying and studying technical, behavioural and legal obstacles in relevant retail

payment instruments as well as in payments-related horizontal issues (e.g. issues related to standards, fraud and security)

• pursuing ways to address the identified obstacles

• fostering innovation, competition and integration in retail payments in euro in the EU


Composition of the ERPB

Chair: High-level ECB representative

Supply Side: • 4 representatives of the banking

community • 2 representatives of payment

institutions • 1 representative of e-money

institutions

Demand Side: • 2 representatives of consumers • 1 representative each of

− retailers with a physical presence

− internet retailers − businesses/corporates − SMEs − national public

administrations

NCBs: • 5 NCBs representing the Eurosystem • 1 NCB representing the non-euro area NCB community

The European Commission is invited as an observer

Represented by their European head associations

Participation on a rotational basis

Dialogue with the market Euro Retail Payments Board (II)


• The ECB provides secretariat support to the ERPB as well as the resources needed to ensure its success

• The ERPB meets at least twice a year • The ERPB may establish working groups for a limited period of time to deal with

specific work priorities. Current working groups include: • Working Group on electronic invoice/bill presentment and payment

services • Working Group on Payment Initiation Services

• The ERPB reports annually on its activities and statements adopted in the previous

year and on its objectives and deliverables for the following year

For more information, including the ERPB‘s annual reports, its mandate and meeting documentation: http://www.ecb.europa.eu/paym/retpaym/euro/html/index.en.html

Dialogue with the market Euro Retail Payments Board (III)


http://www.ecb.europa.eu/paym/retpaym/euro/html/index.en.html

Dialogue with the market Industry fora

The European Payments Council (EPC)

• The 75 members are payment service providers (mostly banks) and PSP associations – the ESCB is not involved

• Its objective is to promote the integration and development of European payments.

• It plays an important role in the development of the Single Euro Payment Area (SEPA) by devising and updating the SEPA payment schemes (rulebooks and implementation guides)

• In 2016 the EPC published the specifications for a SEPA instant payment scheme (SCT Inst)

• Further, the EPC seeks to support European harmonisation in the fields of mobile payments, e-invoicing, security and card standardisation

• To pursue its goals, the EPC seeks dialogue with stakeholders and regulators at European level

For more information: https://www.europeanpaymentscouncil.eu/about-us


https://www.europeanpaymentscouncil.eu/about-us

Dialogue with the market Industry fora

The European Cards Stakeholders Group (ECSG)

• “The European Cards Stakeholders Group is a multi-stakeholder, market self-regulated approach to European card standardisation with market-driven implementation” (self-description)

• Members comprise organisations from all sectors of the card payment chain • Objective: making it possible to pay by card throughout SEPA with the

same ease as in the home country • The ECSG maintains and develops further the SEPA Cards

Standardisation Volume, a key document for the card industry defining guidelines for cards standardisation, interoperability and security in Europe

• Although it is an industry initiative representatives of the ECB and the European Commission participate in ECSG’s work as observers

For more information: https://www.e-csg.eu/


https://www.e-csg.eu/

Agenda










BCBS report on FinTech Survey finds highest FinTech activity in the area of payments

− Basel Committee on Banking Supervision (BCBS) report on “Implications of fintech developments for banks and supervisors” (Consultative document, August 2017)

− Informal survey of BCBS members to identify significant fintech products and services:

− Highest number of fintech service providers in the payments, clearing and settlement category − Fintech firms for most services are focused on national or regional markets − For details see: https://www.bis.org/bcbs/publ/d415.htm



https://www.bis.org/bcbs/publ/d415.htm

https://www.bis.org/bcbs/publ/d415.htm

BCBS report on FinTech Recommendations for bank supervisors

• Balance between ensuring safety and soundness of the banking system with minimizing risk of inadvertently inhibiting beneficial innovation.

• Maintain same level of risk management, control standards and protections to new emerging delivery channels and services through fintech.

• Review of current regulatory, supervisory and licensing frameworks in light of new and evolving risks arising from innovative products and business models.

• Prescriptive standards and rules, developed well before many of the technologies in use today were even considered possible, could potentially create unnecessary barriers.

• Cooperation with other public authorities related to fintech (conduct authorities, data protection authorities, competition authorities and financial intelligence units).

• Cooperation on an international level, e.g. regarding cross-border fintech operations • Consider investigating and exploring the potential of new technologies to improve their methods

and processes. Information on policies and practices should be shared among supervisors. • Assessment of current staffing and training models to ensure that knowledge, skills and tools of

their staff remain effective in supervising new technologies and innovative business models. Supervisors should also consider whether additional specialised skills are needed.

• Supervisors should learn from each other’s approaches and practices, and consider whether it would be appropriate to implement similar approaches or practices.



BCBS report on FinTech Jurisdictions‘ initiatives to facilitate innovations


Dirk Schrade, Deputy Head of Department Payments and Settlement Systems Source: BCBS (2017) 31 In contrast to national hubs, the Single Supervisory Mechanism’s Fintech Hub interfaces with the 19 euro zone national hubs as a means of promoting information exchange and best practices amongst authorities. 32 UK authorities also offer the Mobilisation Route, which applies to new banks, is limited to 12 months, and deposits are capped at GBP 50,000.

BCBS report on FinTech The “regulatory sandbox”

− Regulatory sandbox: Implementation of bespoke and sometimes eased regulatory

frameworks for FinTech firms new to the market is often referred to as a „sandbox regime“ − Within the EU, two jurisdictions currently have a „sandboxing“ regime in place:

1. United Kingdom − UK Financial Conduct Authority (FCA) sees regulatory sandbox as ‘safe space’ in which

businesses can test innovative products, services, business models without immediately incurring all normal regulatory consequences of engaging in the activity

− Sandbox tools for participating firms: tailored/restricted authorisation process at lower cost, individual guidance, waivers/modifications to some rules etc.

− Sandbox unit in operation since 2016, application for “sandbox cohorts”

2. Netherlands − Dutch financial supervisors (Authority for the Financial Market (AFM) and De Nederlandsche

Bank (DNB)) aim at easing access of innovative services to the financial services market through approach named "regulatory sandbox".

− Supervisors use scope offered by law to provide FinTechs with bespoke regulatory solutions − Example: “partial authorisation” only for specific activities (vs. universal banking license

process) − Sandbox open since 2017, application on a running basis

Sources: FCA (2016): https://www.fca.org.uk/publications/documents/regulatory-sandbox DNB/AFM (2016): https://www.afm.nl/en/nieuws/2016/dec/maatwerk-innovatie



https://www.fca.org.uk/publications/documents/regulatory-sandbox



https://www.afm.nl/en/nieuws/2016/dec/maatwerk-innovatie



Agenda










Analysis of financial innovations applied − In 31% of FinTech firms the

distribution channel is online only

− Data suggests more than one financial innovation applied by each of the firms in the sample

− Most innovations applied by both regulated (EU and national) and non-regulated FinTech firms

EBA’s approach to FinTech EBA discussion paper on FinTech



European Banking Authority (EBA) carried out a mapping exercise − Survey among national competent authorities − Sample of 282 FinTech firms, unregulated firms covered on a best-effort basis


Mapping of regulatory status

finds that 31% of FinTech firms unregulated

18% are payments institutions under the PSD

Unregu-lated 31%

PSD 20%

MiFID 11%

CRD 9%

EMD 7%

National/ n. i.

regime 22%

N = 282


− FinTech policy approaches: “Regulatory sandboxes”, innovation hubs or other

regimes in place in half of member states:

Source: EBA (2017)


EBA’s approach to FinTech Risks and opportunities by FinTech for incumbents

− EBA analyzed the impacts of FinTech on incumbent credit (and partly payment) institutions

− Potential further pressure on margins and market shares − Possible need to adapt business models and/or to employ FinTech solutions − Identification of risks/threats and opportunities arising from cooperating with FinTech

firms and/or employing FinTech solutions Risks/threats − Data protection and integrity risks due to the sharing of data across a wider set of

parties with greater speed and increased automation in executing transactions following the inclusion of FinTech into processes

− Security risks arising from the use of cloud outsourcing solutions

Opportunities − cost reduction and faster provision of services due to FinTech − possible increases in customer numbers through easier access to financial services − lower regulatory compliance costs and increased reporting reliability (due to suitable

“regtech” solutions)


Agenda










Financial Stability Board (FSB) report on “Financial Stability Implications from FinTech Supervisory and Regulatory Issues that Merit Authorities’ Attention“ (27 June 2017) − Analysis of literature, discussions with academics and industry participants, stocktake of

regulatory approaches to FinTech among 26 jurisdictions − currently no financial stability risks from FinTech (small size of FinTech relative to the

financial system), can emerge quickly if left unchecked though − Three priority areas for further efforts in the area of FinTech defined:

1. Operational risks from third-party service providers (e.g. cloud computing and data services for financial institutions), of which many are unregulated

2. Cyber risks, e.g. following quick time-to-markets and a premature adoption of new technologies

3. Monitoring of macrofinancial risks that could emerge as FinTech activities increase, e.g. through greater concentration in some market segments or if funding flows on lending platforms were to become large and unstable

For details see: http://www.fsb.org/wp-content/uploads/R270617.pdf


FSB work on FinTech and financial stability Financial Stability Board defines three priority areas

http://www.fsb.org/wp-content/uploads/R270617.pdf




Agenda










Recent regulation A Closer Look at Payment Services Directive 2

• Objective of PSD1 (2007/64/EC): establishing a modern and coherent legal framework for payment services • For a Single Euro Payment Area (SEPA) • To ensure a level playing field • To promote fair competition

• PSD1 in force since Dec 2007; transitional deadline 1 Nov 2009

• Objective of PSD2 (2015/2366/EU):

• stimulate competition in the electronic payments market by promoting innovative mobile and internet payment services

• strengthen consumer rights and protection against fraud

• PSD2 in force since January 2016; transitional deadline January 2018



Major Changes (1)

• New types of payment services provider (and payment service): “Third Party Payment Service Provider “ (TPP), notably • Payment initiation service providers • Account information service providers

• Access to payment accounts for Third Party Payment Providers

• TPP has to identify itself towards account servicing payment service provider (ASPSP)

• TPP may rely on the authentication procedures provided to the payer by ASPSP (e.g. PIN, TAN)

• Access only to information necessary for the specific service provided • No contractual relationship between TPP and ASPSP necessary




Major Changes (2) • Security requirements for electronic payments

• Strong Customer Authentication (SCA) if the payer • Accesses their payment account online • Initiates an electronic payment transaction • Performs any other remote action which may imply a risk of fraud • BUT: exemptions from SCA to be specified by RTS

• Secure communication • Consumer rights

• Reduced liability for non-authorised payments from € 150 to € 50 • Unconditional refund right for direct debits in euro

• Review date of PSD2 set for 2021




Strong Customer Authentication (SCA): − Use of two elements from three different categories

− At least one of the elements should be non-reusable and non-replicable (except for inherence), and not capable of being unnoticedly stolen via the internet

− For electronic remote payment transactions, authentication includes elements which dynamically link the transaction to a specific amount and a specific payee

− European Banking Authority (EBA) shall develop regulatory technical standards to specify the requirements for SCA and communication

ownership

examples - token - smart card - mobile phone

inherence examples - fingerprint - iris-scan - voice recognition

knowledge

examples - static password - code - PIN




Envisaged Exemptions from the application of strong customer authentication

• Recurrent online account information requests (without sensitive payment data) but SCA for the first request and again after 90 days

• Contactless payments at POS of max € 50 with cumulative amount max € 150 or max 5 transactions

• Low value payments of max € 30 with a cumulative amount of max € 100 or max 5 transactions

• Payments to white list beneficiaries (trusted beneficiaries) • Payments at unattended payment terminals (transport fare or parking fees) • Recurring transactions with the same amount and same payee • Credit transfers between accounts held by the same ASPSP for the same natural

or legal person • Payments with low risk due to transaction monitoring analysis




Role of NCBs and ECB in relation to the PSD2 • Bundesbank

• Involved in legislative process in a consultative role for German government • Member and chair of several committees on national and European level that closely

observe the implementation (e.g. ERPB) • Acts as a catalyst in dialog with German Government, other regulators, financial

industry and market participants • Involved in the drafting of the RTS on SCA at EBA

• European Central Bank

• Involved in legislative process in a consultative role for European legislative bodies • Coordinates opinions of the Eurosystem (ECB and NCBs) on legislative projects • Chair/Secretariat of several committees that closely observe the implementation (e.g.

ERPB)




API and Open Banking − Clear objective of PSD2: allowing for co-existence of third party providers and banks − basis for new API based services (APIs = common technical interface for interacting

with customer’s accounts) Break down of market barriers and simplified entry of new players into the payments

market New business models: authentication services, payment initiation, account

information and access-to-account services Opportunities for incumbent banks: easier possibilities to outsource services e.g. to

FinTech firms and chance to link innovative third-party solutions to their platform Potential future developments − Increased competition − FinTech solutions might further increase since API facilitate links between new

solution providers and the incumbents. − Possibly further consolidation in the area of incumbents owing to the investment

needs (for the technical interfaces and the set-up of new business models)

Recent regulation Impact of PSD2



− PSD2 drives fintech activity e.g. in the area of API development − APIs will enable Third-Parties acting as Payment Initiation or Account Information Service

Provider to link their services to banks systems

− Figo‘s types of business according to

own assessment (refering to PSD2 terminology): − Payment Initiation Service Provider

(PISP) − Account Information Service

Provider (AISP) − Services outourcing partner for

PISPs and AISPs − Access-to-Account Service

provider for banks

− Figo acts as a Service provider for both banks and

non-bank businesses: − Figo helps financial institutions develop API

offerings − In addition, it provides a full software solution to

link businesses with associated banks, enabling businesses to offer own financial services like payment initiation or account information services

Recent regulation Figo - a Banking API FinTech



Case study

Agenda

1. Introduction


4. Instant Payments






Central banks in the FinTech era What is the way forward for incumbents?

Source: BCBS (2017): „Sound Practices: Implications of fintech developments for banks and bank supervisors” and others

− Cooperation / acquisition / „own“ FinTechs banks as digital platforms

− Winning back customers; customers appreciate bundled, digitized offers of their „home“ bank

Optimization

Frag-mentation

„Engine room“

New order

− New technologies (e.g. DLT) supersede intermediaries Dispensable

− Fin-/BigTechs become dominant financial intermediaries

− Banks set back to product-suppliers − Customer interface owned by Fin-/BigTechs

− Competition by specialized Fin-/BigTech-offers; aside of „traditional“ financial services

− Customer become less loyal and obtain single services from many different providers



Roles of central banks in ensuring an

secure and efficient payment system

Operator of payment systems (Provision of sound, efficient

and competition neutral market infrastructures)

Cooperation with FinTech firms

possible? Connection of new market

actors to central bank operated payment infrastructure?

Opportunities for FinTech in Instant Payments?

Catalyst / policy function (Contribution to enhancement

of payment systems )

Oversight (Monitoring & assessment of payment

systems and inducing change – if necessary) Regulatory sandbox? Same business = same

regulation? Efficiencies/cost reductions from use of new

technological tools (e.g. FinTech data analytics solutions) in oversight activities? (EBA 2017)

Fast market developments require even closer relationships to market actors (Pimentel/Da Sousa 2017)

Dialogue with all groups of actors (incumbents & new FinTechs) essential

Consumer protection?

(not in Germany)

Financial inclusion?

(not in Germany)

Central banks in the FinTech era The Central bank’s role - Implications from FinTech

Slide 70 13 November 2017

Payments seem to become more and more invisible for

consumers

Platform services may

tend to monopolies

Should CBs enhance consumer

education on payments?

Should CBs engage and

highlight this to competition authorities?

Finding

Possible reaction

Central banks in the FinTech era Discussion: How should the Central banks react?

Non-banks grasp a growing share of

the payments market

Should CBs enhance

monitoring and/or oversight of non-

banks?



FinTechs often use innovative technologies

Do CBs need to improve their technological knowledge?

Example PSD2

Additional providers included in regulatory regime

• Payment initiation service providers • Account information services providers

• Provisions for delivering these services • Provisions for access to accounts (X2A)

communication standards

Principles

• Same risk = same regulation • Monitoring and assessment of market

development („tipping point“) • Risk oriented evolution of the regulatory

and supervisory framework

Level playing field

Innovation Security

Central banks in the FinTech era Central banks as regulators in the FinTech era


Literature • Capgemini (2017): World FinTech Report 2017, https://www.capgemini.com/service/introducing-the-world-fintech-report-

2017/ • Committee on Payment and Settlement Systems (2012): Innovations in retail payments,

https://www.bis.org/cpmi/publ/d102.pdf • Dorfleitner, G., Hornuf, L. (2017): The FinTech market in Germany“, Final Report October 17, 2016,

http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/International_affairs/Articles/2016-12-13-study-fintech-market-in-germany.pdf?__blob=publicationFile&v=2.

• European Banking Authority (2017): “Discussion paper on the EBA’s approach to FinTech” EBA/DP/2017/02, 4 August 2017, https://www.eba.europa.eu/documents/10180/1919160/EBA+Discussion+Paper+on+Fintech+%28EBA-DP-2017-02%29.pdf

• EU Commission (2017): “Public Consultation on the role of FinTech in building a more competitive and innovative financial sector”, March 2017, https://ec.europa.eu/info/finance-consultations-2017-fintech_en

• European Parliament (2017): “Report on FinTech: the influence of technology on the future of the financial sector”, May 2017

• Financial Conduct Authority (2015): “Regulatory sandbox”, report published 10 November 2015, https://www.fca.org.uk/publications/documents/regulatory-sandbox

• Financial Stability Board (2017): “Financial Stability Implications from FinTech Supervisory and Regulatory Issues that Merit Authorities’ Attention“, 27 June 2017, http://www.fsb.org/2017/06/financial-stability-implications-from-fintech

• Financial Stability Board and Committee on the Global Financial System (2017): FinTech credit – market structure, business models and financial stability implications, http://www.fsb.org/wp-content/uploads/CGFS-FSB-Report-on-FinTech-Credit.pdf

• KPMG (2017): “The Pulse of Fintech Q2’17 – Quarterly global report on fintech investment trends” https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/07/pulse-of-fintech-q2-2017.pdf

• Pimentel, R., de Sousa, F. P. (2017) : “The central bank’s role of catalyst of the retail payments market in the context of digitisation : A focus on the Eurozone” Journal of Digital Banking, Vol. 2, 1.Operators (competition? cooperation?)

• Roland Berger (2016): „FinTechs in Europe -Challenger and Partner“, https://www.rolandberger.com/publications/publication_pdf/roland_berger_fintech.pdf

• World Economic Forum (2017): Beyond Fintech: A pragmatic assessment of disruptive Potential in Financial Services

Dirk Schrade, Deputy Head of Department Payments and Settlement Systems, Frankfurt am Main


https://www.capgemini.com/service/introducing-the-world-fintech-report-2017/

https://www.capgemini.com/service/introducing-the-world-fintech-report-2017/

https://www.bis.org/cpmi/publ/d102.pdf

http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/International_affairs/Articles/2016-12-13-study-fintech-market-in-germany.pdf?__blob=publicationFile&v=2
















https://www.eba.europa.eu/documents/10180/1919160/EBA+Discussion+Paper+on+Fintech+(EBA-DP-2017-02).pdf

https://www.eba.europa.eu/documents/10180/1919160/EBA+Discussion+Paper+on+Fintech+(EBA-DP-2017-02).pdf

https://ec.europa.eu/info/finance-consultations-2017-fintech_en


http://www.fsb.org/2017/06/financial-stability-implications-from-fintech

http://www.fsb.org/wp-content/uploads/CGFS-FSB-Report-on-FinTech-Credit.pdf

http://www.fsb.org/wp-content/uploads/CGFS-FSB-Report-on-FinTech-Credit.pdf

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/07/pulse-of-fintech-q2-2017.pdf

https://www.rolandberger.com/publications/publication_pdf/roland_berger_fintech.pdf

Dirk Schrade Deputy Head of Department Payments and Settlement Systems Deutsche Bundesbank Wilhelm-Epstein-Straße 14 60431 Frankfurt am Main Germany

Thank you for your attention!

Dirk Schrade, Deputy Head of Department Payments and Settlement Systems, Frankfurt am Main


Increased (cost-) efficiency

Improved liquidity management

Technical modernisation ISO20022 standards

Harmonised, multiple network connectivity

Extended RTGS-services

since Nov 2007 since June 2015

Eurosystem operates two of worldwide most prominent market infrastructures for payments and

securities settlement

vision 2020

Complementary to EU Capital Markets Union

Strategy for advancement of Eurosystem’s market infrastructure services „vision 2020“

Annex Vision 2020



Exploit synergies between T2/T2S

Support pan-European

instant payment solution

Check possibility of harmonised collateral management services

Eurosystem initiative

Settlement of Instant Payments in TARGET2

Single European collateral management system

Source: corporate.target.com



Annex Evolution of Eurosystem market infrastructures

innovations in retail payments - bank indonesia · banking others • insurance • search engine...

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