Yves Mersch: Digital transformation of the retail payments
ecosystem
Introductory speech by Mr Yves Mersch, Member of the Executive Board of the European Central
Bank, at the Joint ECB and Bank of Italy conference, Rome, 30 November 2017.
* * *
Efficient and safe retail payments systems are a precondition for the functioning of any modern
economy. They allow for everyday transactions to take place, thus providing the foundation for
commerce and trade.
Central banks through cash and banks have traditionally offered these services. And they were
successful in creating a secure and trusted payment ecosystem for consumers.
However over time the banking ecosystem has developed inefficiencies. It has lost some
ability to innovate and adapt to the changing needs of the end-user.
In Europe technological disruptions, competition from non-banks and regulatory pressure has
forced banks to re-examine how they provide retail payment services.
The ability to provide real-time services will be essential if banks want to retain and gain
customers. The strategic importance of instant payments cannot be overstated.
The move towards a real-time world with the provision of real-time services cannot happen
without pan-European instant payments. They will provide a
new framework for innovative
and efficient retail payments in Europe.
My talk today will focus on instant payments but I will also briefly discuss the alleged innovation
brought by private virtual currency schemes without an identifiable issuer.
The foundations of instant payments and ensuring stakeholder involvement
The Single Euro Payments Area (SEPA) was the origin of today's digital landscape for retail
payments in Europe. It is a key ingredient of Europe's single currency and was necessary to
bring the full benefits of the euro closer to all citizens. This integration of electronic retail
payments in Europe was full of challenges and was only completed 12 years after the
introduction of euro notes and coins. One of the most prominent issues that faced SEPA was the
lack of full stakeholder involvement.
Initially, SEPA was considered an "IT" project to be implemented by banks. It was not seen in the
overall context of a project that could transform payments in Europe. The project did not engage
enough with Europe's consumers and businesses.
Support from all stakeholders is thus crucial to the success of any such undertaking. To facilitate
such support, the ECB established the Euro Retail Payments Board (ERPB). The ERPB
brings together both sides of the market, the supply and the demand side, the banks and the end
users in order to further the development of an integrated, innovative and competitive market for
euro retail payments in the EU. This co-operation has led to new synergies. It gave a voice to
those who felt excluded from the process of innovation in retail payments.
Recently we have gone further to enhance European cooperation and have established, in
conjunction with the European Commission, the European Forum for Innovation in Payments
(EFIP). This body brings together the national payments committees with the ERPB to foster
integration and innovation for retail payments in Europe.
The ERPB was instrumental in bringing the vision of real-time payments to Europe with the
inception of instant payments. The European Payments Council, acting on guidance from the
ERPB, created the SEPA credit transfer instant scheme. I am pleased that this scheme was
successfully launched last week and let me congratulate the following eight countries who signed
up as of today to the service. The tech savvy nations are: Austria, Estonia, Germany, Latvia,
Lithuania, the Netherlands, Italy, and Spain. Now, European end-users whose banks have
already joined and implemented the scheme can send and receive instant payments across
Europe in less than 10 seconds.
A positive end-user experience will ultimately determine the success of instant payments. The
ERPB is supporting the work of the industry and other stakeholders to facilitate the initiation of an
instant payment using the recipient's mobile telephone number as a proxy for their IBAN, no
matter where they are located in the EU. The ERPB expects that a pan-European mobile proxy
lookup service will be ready by the end of 2018 at the latest and I urge all stakeholders to ensure
that this deadline is met.
However, to facilitate the full roll-out of instant payments we have to enable reachability of all
banks in Europe. To enable full reachability the Eurosystem has decided to launch an
instant
payments settlement system in central bank money, the Target Instant Payment Settlement
(TIPS) Service. TIPS is scheduled to go live in November 2018.
Appropriate regulatory framework
SEPA and instant payments did not happen in isolation. An appropriate legislative framework that
supports digitisation, innovation and competition is also needed. In Europe we realise this
importance. The revised Payment Service Directive (PSD2) will provide the necessary legislative
framework to allow for innovation. It will enhance payment account access for regulated and
authorised third party providers. It will facilitate the participation of new actors in the payments
market. These actors will provide new innovative services, reduce costs and give consumers
more choice.
However this can only happen if standardised access to the payment account is provided. I
would therefore call upon stakeholders such as banks, standard setting organisations and, third
party providers to work together to ensure a single standard is developed for payment
account access.
The competition introduced by the revised Payment Service Directive can also provide an
opportunity for incumbent banks but only if they act urgently to implement instant payments. It
is crucial that banks invest to upgrade their legacy batch systems to enable real-time processing
and offer end-user solutions for instant payments. These solutions can provide them with a
strong tool to face the upcoming competition.
The recent experience with contactless payments shows that banks, in cooperation with other
stakeholders, are well capable to roll out payment innovations that can quickly take off and
improve end-users' payment experience.
Virtual currencies
It is my view that future innovations in retail payments will be based on instants payments in
combination with account access provided by the PSD2. I would like stress this point especially
in view of the ongoing public debate around the alleged innovation brought by private virtual
currency schemes or tokens.
While we have seen a substantial increase, albeit from low levels, in the value of some of the
virtual currencies lately, we should not forget that their usage as a settlement asset is marginal
and the overall user acceptance as a means of payment is negligible.
In fact, retail payment traffic in Europe alone is orders of magnitude higher than the global
transaction volume of virtual currencies. In view of the speculative market environment for virtual
currencies and for other types of virtual financial assets, one should bear in mind that these are
by definition virtual: they do not constitute a claim on an issuer and
do not formally qualify as
currency.
Their purchasing power fluctuates wildly and depends solely on the market activity of
speculators. It remains to be seen whether these virtual currencies can be considered as a
payment alternative for consumers - except in extreme case like in failed states- and to what
extent they can compete with the solutions market players will be able to develop in the safer
and more efficient European retail payments market.
The ECB continues to monitor these developments, not only from a market infrastructure
perspective, but also as regards monetary policy, financial stability, and prudential supervision.
And while we continue to fully meet the increasing demand for safe and efficient banknotes we
shall also experiment with cash on different digital technologies. Other adventurous applications
of a more disruptive nature are simply not robust enough from a legal, operational, governance
point of view to name but a few shortcomings which make these assets unfit for recognition from
the point of view of our mandate of efficient payments systems.
Conclusion
To conclude, the benefits of digital transformation and innovation for citizens can only be
achieved by means of full stakeholder cooperation and an appropriate regulatory framework that
fosters innovation.
Banks need to implement instant payments as soon as possible and provide an alternate
narrative to the ongoing public debate on the alleged innovation brought by virtual currency
schemes.
Instant payments in conjunction with the building blocks provided by the PSD2 can offer new
business opportunities for banks and third party providers and provide citizens with a real-time
safe payment experience.
Thank you for your attention.