Cecilia Skingsley: Are non-banks reshaping the retail payments
market?
Speech by Ms Cecilia Skingsley, Deputy Governor of the Sveriges Riksbank, at the
conference "Non-banks in Payment Market: Challenges and Opportunities", organised by
the Bank of Lithuania and the Sveriges Riksbank, Vilnius, 8 October 2015.
* * *
The retail payments market is undergoing a structural change, potentially unparalleled
with anything we have seen in a long time. This gives rise to a number of important
questions as regards competition and cooperation, regulation and where this development
may take us in the long run.
An interesting and important market
The retail payments market is an interesting and important market. Important because it
underpins the modern economy. If we were unable to pay in a safe and efficient way, the
economy would soon grind to a halt when markets for goods and services stopped
functioning. Interesting because of its rapid development. It is here the action is. On a
global level, the payments market has grown by some 8 per cent a year for a decade.
Growth has been higher not only in the developing world, reflecting overall higher
economic growth rates, but also in Europe and North America, where it has been some
four per cent annually. Given the financial crisis and the relatively low economic growth,
this is a healthy growth rate.
On a global level, estimates indicates that the retail payments market is worth several
hundred US billions in revenue from transactions. If we add account-related revenues and
interest rate and penalty fees from credit cards, the figures increase further. With this
growth rate and potential revenue, it is no wonder that the retail payments market attracts
so much attention.
There are other factors that help explain why so much has happened over the last few
years and that continue to drive the development. The rapid techno-logical development
of smartphones, tablets, and high-speed Internet connection is one of the most important
factors. Today, approximately half of all adults in the world have a smartphone and this
share is likely to increase significantly. Some 40 percent of the global population use
Internet. This technology is widespread and accessible at a reasonable cost and it has
changed the way we shop. We purchase goods and services in new ways and because
of this we also demand payment services that are suited to this new type of interaction.
E-commerce is the prime example. This year some 38 billion e-commerce transactions
will take place. We interact with e-merchants who we have no previous relationship with.
We download or stream music and movies. We order taxis through a smartphone app. To
maximize convenience, we demand tailored payment solutions increasingly often.
Businesses are in a similar situation. In e-commerce the purchase is often aborted if the
payment method is not quick and convenient enough. They want to be able to offer
payment alternatives that customers want to use.
This new technology has not only created a demand for new or improved payment
services, it has also provided payment service providers with new channels through which
their services can be supplied. The growing number of mobile payment services is an
example of this.
A number of challenges for the banks
Banks have dominated the retail payments market for a long time and they still have a
strong position. They are the "factories" of the retail payments market. They are usually
large scale and sell standardized payment services. However, they have to meet a
number of challenges.
One challenge relates to the fact that banks operate on a vast scale providing payment
services that can be used in a broad variety of situations. In an environment that quickly
changes and where tailor-made payment solutions are increasingly demanded, it is a tall
order to meet such a variety in demand. We should also remember that the core business
of banks is financial services including payment intermediation. They are not technology
firms even though they are heavy users of technology.
Innovation in payment services is usually not a question of inventing a wholly new payment
process from account to account. Rather it is taking some service that is already out there
and offering a new way of accessing that service. As an example, many mobile payment
services and electronic wallets are just new ways of initiating card payments. A recent
example is Apple Pay.
The possibility to create new access channels provides opportunities for nimble firms that
are not banks to act as middle men and provide interfaces that facilitate the initiation of
the underlying, more old-fashion payment. Remember that payment initiation services and
third-party providers have been at the centre of the discussions on the new Payment
Service Directive. These firms don't compete outright with the banks and in some cases
they may even directly cooperate with them.
In other cases, the non-bank may compete directly with the banks. It may even have built
its own infrastructure or account structure through which it processes payments. This is
most likely in cases where the non-bank already has a kind of network that it can adapt
and utilize for payments. Telecom operators and Internet service providers are examples
of such firms. A concrete example of such a case is M-Pesa, the mobile payment service
launched by SafariCom in Kenya. Initially intended for person-to-person payments, it
quickly became a success and a platform for a number of financial services.
Non-banks can also act as suppliers of services to the banks, e.g. payment switches
routing the payment information or the outsourcing of back-end services such as the
operation of large IT-platforms, etc. These are all essential inputs for payment
intermediation.
Because non-banks can enter the payment process in so many places, we have longer
and more complex payment processes with more actors involved. Banks, at least for some
type of payment services, have less direct contact with the end-users. This development,
whether we like it or not and depending on who we are, is a reality that we have to relate
to. In this structural development in the payment market, there will be several challenges
for commercial players, as well as for those of us working on the public side. Evolvement
is seldom a gradual and smooth process. This gives rise to a number of interesting issues
that we have the chance to address here today. It also explains the conference agenda.
Three topics for the conference
The first topic concerns the current development. How do the different market players view
the evolving ecosystem? Are the banks hurt or do they benefit from the entry of non-banks
as a result of an increase of payment traffic through their systems and between their
accounts? Are all market players a big happy family where everyone cooperates with
everyone else or is it razor-sharp competition, a dog-eat-dog market? Who, if anyone, is
gaining the upper hand? I'm looking forward to learning more about this type of issue in
the first session.
The second topic concerns the regulatory environment. The central role of the retail
payments market for social welfare ensures that the authorities will want to promote an
efficient outcome. How to balance cooperation and competition? How to ensure a level
playing field and how to protect consumers? For example, is the current supervision
sufficient or will we have to sharpen it in the future? Central banks have an additional
stake in this game. Cash is one of our main products and an increased supply of services
from non-banks is likely to reduce its usage. On the one hand, central bank should
embrace the development from an efficiency point of view. On the other, a rapid decrease
in the use of cash is not without problems. This is only a few of the aspects that may be
debated in the second session.
The third topic is the future and we all want to know what it will look like. Will the banks be
reduced to mere suppliers of infrastructure and account holding services while other
actors, the non-banks, have most of the end-user relation-ship? Or will the banks win by
knock-out? Will the non-banks become banks over time as their activity expands? Will
payment services be delivered to us by Apple? Google? Facebook? Alibaba? What about
Bitcoin and its peers? Will we simply have payment services provided by an anonymous
network?
In addition to having all these kinds of issue debated among representatives for market
actors and authorities, we will also have the pleasure of listening to the academic
perspective of Professor Charles M. Kahn from the University of Illinois.
I'm really looking forward to learning more about all these topics today.