Benoît Coeuré: Retail payments at a crossroads
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at a joint conference by the European Central Bank and the Bank of France "Retail payments
at a crossroads - economics, strategies and future policies", Paris, 21 October 2013.
* * *
I wish to thank Monika Hempel for her contributions to these remarks. I remain solely responsible for the opinions
contained herein.
Ladies and Gentlemen,
It is a great pleasure for me to make some introductory remarks at this conference on the
different roads that may lie ahead for retail payments. But first of all, I would like to thank the
Banque de France for organising this conference jointly with the ECB, and for hosting it. I am
also grateful to Christian Noyer for opening this event. I am sure we will spend two fruitful
days having some valuable discussions and exchanges on the economics, strategies and
policies of retail payments.
Four years ago, in 2009, the ECB and the De Nederlandsche Bank organised the first
conference of this kind.1 The idea behind the conference was to foster the dialogue between
academics and policy-makers in the field of retail payments. The second conference was
organised with the Oesterreichische Nationalbank in 2011.2 And this is the third conference
in the series. It shows that we are committed to build on the progress achieved and keep the
dialogue going.
Before the crisis, the retail payments business went largely unnoticed as a substantial source
of revenue in banking. During the crisis, as was outlined in the 2009 conference, the retail
payments business had been resilient, providing reliable and regular revenues. As a result,
the subsequent realisation that banks with more stable funding models were better able to
cope with the crisis has led in recent years to a greater recognition of the importance of retail
banking and retail payments.
Indeed, one of the conclusions drawn at the 2011 conference was that retail payments have
also become more socially relevant. Businesses and individuals must have cheap and easy
access to basic retail payment services in order to pursue their economic activities. The
further development of retail payments is a key factor in financial inclusion. I will come back
to this issue later today in my panel discussion.
That said, the social costs of retail payment instruments, including cash and non-cash
payments, remain substantial, as a recent ECB study has shown. Those costs amount to
almost 1% of GDP in Europe, with considerable differences from country to country.3
In the title of the conference we say that retail payments are at a crossroads. This means
that the road we now follow will profoundly affect retail payment economics, strategies and
policies. Different roads may appeal in different ways to the various economic actors. One
possibility would be to preserve the status quo and to implement only the changes needed to
comply with the existing regulatory framework. Alternatively, we could follow a road less
travelled. Here, new economic actors may emerge and consumers may start to utilise more
personalised, simple and secure payment services and applications offered by the
information and consumption channels they increasingly (and in some cases even
exclusively) use, i.e. smartphones and the internet. Also, payment service providers may
push forward into the uncharted territories of further retail payments integration and
innovation.
I would like to elaborate on the different roads ahead, considering integration first and then
innovation.
Retail payments integration
Without wanting to pre-empt, Michel Barnier's keynote speech on retail payments and their
contribution to the Single Market, let me say that retail payment integration in the euro area
- and in Europe - has made progress. Although there is still considerable effort to be made,
we are just a few weeks away from completing the migration to new European schemes that
have been developed for credit transfers and direct debits. It's a big step forward.
But progress in the field of cards has been slower. We are still far from a situation where "any
card can be used at any terminal". To ensure a level playing field, national borders for cards
licensing, issuing and acquiring have to disappear, and the consistent implementation of the
separation of scheme management and processing has to be ensured. Some movement in
this area is expected to result from the revised Payment Services Directive and Regulation
on interchange fees for cards.4 Regarding standardisation, despite some progress made
during the last years, further work is required as recommended by the Eurosystem.
The question remains whether in future retail payments integration will be mainly a
compliance-driven process or whether it can be pushed further, making electronic payments
more widely used. Currently, there is evidence of cross-country convergence in the euro
area, especially for cards, direct debits and credit transfers, and the speed of convergence
has clearly accelerated for most of the payment instruments studied since the introduction of
the single currency.5
Despite the convergence, however, there are still large differences in payment behaviour,
starting with a choice between cash or cashless payments and then, say, selecting from a
range of cashless payment instruments. For instance, the persistent use of cheques in some
countries, even though it is steadily declining, shows that payment behaviour changes
slowly. This also means that cash remains an important means of payment in the
foreseeable future. Therefore, the Eurosystem continues in its efforts to protect the integrity
of the euro banknotes and stay ahead of counterfeiters, e.g. with the introduction of our new
series of euro banknotes, called the Europa series.
Promoting further integration of retail payments in Europe is seen as economically and
socially advantageous. There is empirical evidence that initiatives to integrate and harmonise
retail payment markets boost trade and consumption and benefit the whole economy.6 Data
from 27 markets in Europe between 1995 and 2009 confirms that the shift to efficient
electronic retail payments stimulates overall economic growth, consumption and trade. This
effect is most pronounced for card payments, followed by credit transfers.
Deeper integration of retail payments is expected to bring about more price convergence
among cashless retail payment instruments in the euro area, making those instruments more
affordable and thereby promoting financial inclusion.
The Single Euro Payments Area (SEPA) is instrumental in this respect. Later this week, the
ECB will publish the second SEPA migration report, which will highlight the progress
accomplished and the remaining challenges as we come closer to the SEPA end-date of
1st February 2014 for migration to pan-European payment instruments. As recalled by the
SEPA Council at its 23rd September meeting, the SEPA migration requirements set by law
have to be fully respected without exception. Looking beyond the end-date, the ECB will
establish and chair the Euro Retail Payments Board (ERPB) as successor of the SEPA
Council to contribute to and to facilitate the creation of an integrated, competitive, innovative
and level-playing field market for euro retail payments. The ambition is for the ERPB to
achieve a wider membership, strengthened mandate and a more output-driven approach. I
look forward to an active participation of the European Commission.
At present, financial inclusion is lower in those countries which make less use of cashless
retail payment instruments.7 Giving more people, especially those on lower incomes, access
to financial services not only adds to economic growth, but also plays a part in reducing
income inequality and poverty. In this way, it can help to achieve higher social welfare. At the
same time, it can integrate payment flows that currently exist outside the formal financial
sector and strengthen the social role of banks. This matters enormously as Europe is
emerging from a protracted crisis that has put its social model under strains and shattered
public trust in the financial industry.
To sum up, I would say that there are strong economic, social and political reasons for retail
payment service providers, users and regulators to aim for further retail payments
integration. European regulation is essential in paving the way, but there are many other
roads to follow for providers and users to reap the full benefits.
Retail payments innovation
As I said earlier, e-commerce and new communication and information media have set new
challenges in terms of functionality and security for retail payments. They have also given
providers of payment-related services new opportunities to compete. These chances are
valuable because, as we know, competition is good for business, i.e. it should provide users
with more choices and better services.
Unfortunately, these opportunities have not yet been fully exploited by the different market
players. Innovative retail payment solutions in the euro area are still largely being provided
by non-bank service providers, mainly for the payment initiation phase. Banks - the
traditional payment service providers - are at a crossroads. They can either try to defend
their existing products and leave this business segment to non-bank providers, or they can
become more open and innovative. If they go down the first road, they risk ending up in the
unpleasant situation of, say, bookshops confronted with the rise of online competitors. The
ability to maintain a diversified business model, including through retail banking, will be key
to the profitability and resilience of the European banking industry.
One reason for adopting a defensive posture may be that, until recently, most banks heavily
relied on interchange fees for cards in their business model. But this business model is being
increasingly challenged in a number of countries and jurisdictions. I mentioned earlier the
proposal for a Regulation on interchange fees for cards. This has the potential to break the
stalemate that has occurred not only in the cards dossier but also on the innovation front.
Transparency and clarity with respect to the real costs and benefits of cards and other
payment instruments are vital for a harmonised and innovative European retail payments
market.
Another reason for a defensive posture may be that banks face a coordination issue within
their own organisations. For one thing, retail payments are often perceived as a cost centre,
not as a profit centre. Moreover, innovations in retail payments require investments in IT as
well as the will to challenge well-established and profitable business models. Clearly, these
are not easy things to do in times of financial distress.
In the end, whoever provides innovative payment services should be mindful of two key
issues. First, those services should be safe and protected against misuse. For instance, it is
necessary that clear conditions are established under which payment initiation services
offered by third party service providers can use access to existing online banking systems.
Second, innovative services should have the potential to become pan-European solutions. If
we do not think about the European dimension right from the start, in a few years' time we
will face all the problems of having to merge multiple national solutions into a European
framework.
I said earlier that retail payments integration brings benefits. The same thing applies to
innovation. Fostering retail payments innovation is socially important as it should help to
lower costs and reduce entry barriers, and promote financial inclusion among the
underbanked and the unbanked.
Conclusion
I have only touched upon a number of very important issues. I am confident that today and
tomorrow, these issues will be explored in greater depth. Taken together, the speakers,
panellists, chairs and discussants at this conference as well as you in the audience possess
a vast body of knowledge and expertise. If all those assets are put to good use in choosing
the future direction, I am confident that the right road will be found.
Retail payments have reached a turning point as regards integration and innovation. As in
the famous poem by Robert Frost,8 the road that will be travelled by will make all the
difference - economically and socially.
Thank you very much for your attention.