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BANKING ASSOCIATION FOR
CENTRAL AND EASTERN EUROPE
Mr. István Lengyel, Secretary General
INSTITUTE OF BANKING
EDUCATION OF THE NATIONAL
BANK OF SLOVAKIA
Mr. Peter Szovics, Director
Selected Papers of the 4th
International Conference on
E-money, Cards and Payments
7-8 June 2017, Bratislava
ORGANISERS
BANKING ASSOCIATION FOR CENTRAL AND EASTERN
EUROPE (BACEE)
INSTITUTE OF BANKING EDUCATION OF THE NATIONAL
BANK OF SLOVAKIA
PUBLISHED
INSTITUTE OF BANKING EDUCATION OF THE NATIONAL
BANK OF SLOVAKIA
PRE-PRESS PREPARATION
ANITA NAGY, HUNGARIAN BANKING ASSOCIATION
EDITORS
ISTVÁN LENGYEL, SECRETARY GENERAL, BACEE
PETER SZOVICS, DIRECTOR, INSTITUTE OF BANKING
EDUCATION OF THE NATIONAL BANK OF SLOVAKIA
ISBN
978-80-972810-0-7
Conference Book of 4th International Conference on E-money,
Cards and Payments
2017
Table of Contents Challenges in payment environment in 2017 .................................................................. 1
Directive 2015/2366 on payment service in the internal market (PSD2) .................. 1
RTS on strong customer authentication and common and secure
communication .................................................................................................................... 3
Instant payments ................................................................................................................. 5
PSD2 and RTS – a game changer ..................................................................................... 8
Changing Digital Payments Ecosystem ......................................................................... 10
Increasing security & trust within the global financial community ........................... 13
New Regulations Impact on Traditional Payments Landscape ................................. 16
Introduction ....................................................................................................................... 16
Regulative changes in Europe ......................................................................................... 16
Traditional model of electronic payments market ....................................................... 17
New model of electronic payments market .................................................................. 18
Processor’s impact ............................................................................................................. 18
Bank’s impact ..................................................................................................................... 19
Scheme’s impact ................................................................................................................ 20
Summary ............................................................................................................................. 20
The Advantages of Partnerships in Merchant Acquiring............................................ 22
The acquiring landscape is constantly evolving ............................................................ 22
Partnerships are often a good solution for banks ........................................................ 22
Formation of REVO ........................................................................................................ 23
Key achievements .............................................................................................................. 23
Lessons learned .................................................................................................................. 23
About EVO ........................................................................................................................ 24
The effects of instant payment on the economy .......................................................... 25
The history behind instant payments ............................................................................. 25
The benefits of accelerated payments for companies ................................................. 30
New risks – new challenges ............................................................................................. 34
Summary ............................................................................................................................. 41
Literature: ............................................................................................................................ 43
Solving the challenges with mobile NFC Payments – Part 1 ..................................... 45
The history of contactless payments .............................................................................. 45
Solving The Challenges of Mobile NFC payments...................................................... 46
Solving the challenges with mobile NFC Payments – Part 2 ..................................... 47
Enter wearables.................................................................................................................. 47
Especially two major challenges can be met with wearable payments: iOS
support and speed at checkout. ....................................................................................... 47
What does this mean? ....................................................................................................... 48
Hype or future? .................................................................................................................. 48
Recension of Financial literacy ........................................................................................ 50
Contactless Card and Mobile Payment Adoption in Hungary ................................... 53
Deposit Insurance and Mobile Payments: Disparities on Regulatory
Approaches ......................................................................................................................... 58
Abstract ............................................................................................................................... 58
The Concept of Mobile Money, Deposit Insurance and their Function ................. 59
Oversights of Mobile Payment and Deposit Insurance .............................................. 61
Protection of Customer Funds: Main Types of Deposit Insurance
Approaches for Mobile Payments .................................................................................. 65
Cross-Country Examples on Deposit Insurance and its Regulatory
Approaches ......................................................................................................................... 66
Conclusion and Frontier Issues ...................................................................................... 69
References........................................................................................................................... 71
Curricula Vitae of the Presenters at the Conference ................................................... 77
PROGRAMME
SILVER SPONSOR
EVENT AND COCTAIL SPONSOR
BRONZE SPONSORS
CO-OPERATION PARTNERS
DAY 1: 7 JUNE 2017
13:30-14:00 REGISTRATION
OPENING SESSION
14:00-14:10
14:10-14:35
Welcome Speech Mr. Peter Szovics, Director, Institute of Banking Education NBS, n.o. Dr. Sándor Patyi, Chairman of the Banking Association for Central and Eastern Europe (BACEE); Deputy CEO, OTP Banka Slovensko Keynote Speech PSD 2 RTS - Authentication and security Mr. Ugo Bechis, e-Payment & SEPA Advisor, UB Adv
• EBA RTS highlights • How they will affect the value chain roles • The Gateways’ competition
SESSION 1: 14:35-15:55
NEW AND EMERGING REGULATION, REFORM AND RESILIANCE
The most important changes in payment environment in 2017 from central bank perspective Mr. Rudolf Pataki, Head of Section, National Bank of Slovakia
• Directive 2015/2366 on payment services in the internal market
• Current status of transposition, main
changes • EBA standards • Instant payments
PSD2 Overview Dr. Qazi Jalisi, Senior Legal Advisor, Electronic Money Association
• Payment initiation services • Account information services • Interaction with the GDPR • Sensitive payment information
Thriving in an Open Banking World Mr. Marten Nelson, Co-Founder & VP of Marketing, Token
• Threats and opportunities of open banking • How PSD2 serves as a catalyst • How banks across the EU are responding
API Economy for Financial Institutions Mr. Jan Sehnal, Business Solution
Architect, IBM What it is good for? • How to start • How to monetize • Use Cases
15:55-16:25 COFFEE BREAK
SESSION 2: 16:25-17:50
INSTANT PAYMENTS – THE NEW WINNING PAYMENT PRODUCT Instant Payments in Central & Eastern Europe and PSD2; Current Status and How to Generate Revenue Mr. Domenico Scaffidi, Principal Solution Consultant Immediate Payments, ACI Worldwide
• What is IP and where is the revenue • Status within the whole of Europe and the
ECB • EBA vs EACHA vs TIPS • How PSD2 can help drive innovation and
revenue
Instant Payments – the Hungarian Solution Mr. Kristóf Takács, Senior economic analyst, The Central Bank of Hungary
• Reasons for creating an instant payment
service and potential benefits • The rules of the Hungarian instant payment
service – additions to the European
approach • Additional services and possible use cases
Economic Effects of instant Payments Dr. Levente Kovács, Secretary General, Hungarian Banking Association
• The international development of
clearing/settlement • General benefits of CCP • The evolution of current account
management • Redefining risks
Trends for Instant Payments in Central & Eastern Europe Dr. Jozsef Czimer, Advisor to the CEO, CAPSYS
• Diversity of the region • Options for euro countries -domestic or Pan-
European? Special tasks for non-euro
countries Own system vs. managed service?
COCKTAIL RECEPTION
18:00-19:00
Offered by ACI Universal Payments
Welcome Speech by Mr Domenico Scaffidi, Principal Solution Consultant, Immediate Payments, ACI Worldwide
DAY 2: 8 June 2017
8:30-9:00 REGISTRATION
SESSION 3: 9:00-10:05
CARDS – EU, CEE AND CIS IN SPOTLIGHT Fast Forward to Innovative Payments and Fintech in Eastern Europe
Mr. Luděk Slouka, Product Manager CEE, Mastercard
• Payments, the heart of commerce, in Eastern
Europe • Role of Eastern Europe in fintech innovation • Future of payments and impact on business
models
Key trends in Payments Mr. Marcel Gajdos, Country Manager, Czech Republic and Slovakia, Visa Europe
• Mobile payments on rise • More connected devices • Visa Develop Platform
New regulations impact on traditional payment landscape Mr. Adam Tencza, Central and Eastern Europe Division Manager, SIBS International
• New business models on the payments
market • A competition landscape change • Reshaping of functions • Business impact
SESSION 4: 10:05-10:45
ROUNDTABLE DISCUSSION:
Payments Evolution/Revolution – payment technology for banks and alternative service providers of today and tomorrow - focus on consumer payment experience Moderator: Mr. Peter Szovics, Director, Institute of Banking Education NBS, n.o.
Participants: Mr. Martin Peter, Head of Banking Department, Ministry of Finance of the Slovak Republic Dr. Qazi Jalisi, Senior Legal Advisor, Electronic Money Association Mr. Peter Kvarda, Director of Back Office & Payment Systems Department, OTP Banka Slovensko, a.s. Mr. Julian Tencer, Department Head, Payments, VÚB, a.s. Ms. Anna Maj, FinTech Expert & Mentor, CEO, Payments Visionary
10:45-11:10 SWIFT’S PAYMENT CONTROL Correspondent Banking: Tackling Cyber-Enabled Fraud Ms. Gizem Tansu, Manager Financial Crime Compliance Initiatives, EMEA, SWIFT
• Fraud threats and modus operandi • Introduction to the SWIFT Customer Security
Programme • Mitigating fraud risk through business
hygiene and best practice • Payment fraud prevention and detection • How you can help yourself and your
community
11:10-11:40 COFFEE BREAK
SESSION 5: 11:40-13:05
CARDS, PAYMENTS, FRAUD AND CYBERSECURITY – WHERE ARE WE? Innovations in Payments Mr. Maris Cakste, Director of Sales, MeaWallet
• History • Payment convergence • Customer needs • Case study
Digitalization in modern world of payments cards Mr. Luděk Slouka, Product Manager CEE, Mastercard
• What are the challenges and what is really
behind the word “tokenization”?
• What is the technology, benefits and bottle
necks? • Is this the future for payment cards?
The Advantages of Partnerships in Merchant Acquiring Mr. Edward Strycharczuk, General Manager, EVO Payments International
• Rationale for Partnerships • Keys to Successful Partnerships • Case Study: EVO’s alliances with RBPL and
RBCZ
Monero - Introduction to truly anonymous cryptocurrency Mr. Pavol Luptak, CEO, Nethemba s.r.o.
• Anonymous cryptocurrencies - real digital
privacy • Crypto technologies - significant change
ahead
13:05-14:05 LUNCH
SESSION 6: 14:05-15:25
FUTURE OF PAYMENT SYSTEMS. FINANCIAL INSTITUTIONS AND THE ALTERNATIVE PAYMENT SYSTEMS – HOW TO BE PREPARED?
Changing Digital Payments Ecosystem Ms. Anna Maj, FinTech Expert & Mentor, CEO, Payments Visionary
• Challengers vs Incumbents: What are the
new roles in the value chain? • Customer Experience: How new payment
models transform customer behavior?
(payment platforms, mobile payments, one-click, digital wallets)
• Disruptive Innovation: AI and chatbots in
payments
Case Study by OTP eBIZ: Digital Finance Manager for SMEs Mr. Tamas Josvai, Managing Director, OTP eBIZ Ltd. Blockchain Technology: Basics, Insights and Opportunities Mr. Nikola Korbar, CEO,
DigitalMoneyPulse What is Blockchain and how it works? • Blockchain features and characteristics • Practical application of Blockchain for
banking solutions
The innovative answer to PSD2 - XS2A enabler specially for Banks Mr. Johannes Humbert, Partnerships - Banks & Financial Institutions, figo
15:25 End of the Conference
Mr Rudolf Pataki: Challenges in payment environment 2017
1 V6OF22092017
CHALLENGES IN PAYMENT ENVIRONMENT IN 2017
Mr. Rudolf Pataki
Head of Section
National Bank of Slovakia
The article provides an overview of the main elements of the EU Directive 2015/2366 on payment services in the internal market, broadly known as PSD 2. The author offers
a summary of PSD 2’s goals, the introduction timeline and expected consequences. The study also explains how PSD 2 is expected to open the EU payment markets to new
players and how the regulator intends to defend customers from unexperienced or low quality payment services providers.
In the closing part, the functioning of the TIPS service, designed by ECB for instant payments, is explained.
Directive 2015/2366 on payment service in the internal market (PSD2)
Since the adoption of the PSD, there has been significant technical
innovation in the retail market with rapid growth in the number of
electronic and mobile payments and emergence of new types of payment
services (payment initiation services in the field of e-commerce). This is
also associated with an increased security risk related to electronic payments
and new transparency and information requirements for payment service
providers as well as requirements for neutral definition of payment
transaction to ensure that merchants receive the same protection, regardless
of the payment instrument used, where the activity is the same as the
acquiring of card transaction.
The Directive should aim to ensure continuity in the market, enabling
existing and new service providers regardless of the business model applied
by them, to offer their services with a clear and harmonized regulatory
framework.
Mr Rudolf Pataki: Challenges in payment environment 2017
2
Timeline:
The Directive defines new types of payment services and payment service
providers: Payment initiation service providers and Account
information service providers.
Payment initiation service means a service to initiation a payment order at
the request of the payment service user with respect to a payment account
held at another payment service provider.
Account information service means an online service to provide
consolidated information on one or more payment accounts held by the
payment service user with another payment service provider or with more
than one payment service provider.
Mr Rudolf Pataki: Challenges in payment environment 2017
3
RTS on strong customer authentication and common and secure
communication
This standard was developed by EBA according to Art.96 and 97 of PSD2
with the aim to ensure the establishment of adequate security measures for
electronic payments. The standard is in the European Commission´s
approval process.
Strong customer authentication means an authentication based on the
use of two or more elements categorised as:
- knowledge (something that only user knows, such as PIN or password),
- possession (something only the user possesses, such as smart device),
- inherence (something the user is or has, such as biometric characteristics)
These elements must be independent from each other.
Strong customer authentication applies when the payer:
- accessed its payment account online
- initiates an electronic payment transaction
- carries out any action through a remote channel which may imply a risk of
payment fraud or other abuses
The requirements in RTS are technologically neutral in order to foster
innovation.
Mr Rudolf Pataki: Challenges in payment environment 2017
4
In order to dynamically link the transaction, the following requirements
must be met:
- the payer is made aware of the amount and of the payee
- the authentication code shall be specific to the amount of the payment
transaction and the payee agreed to by the payer when initiating the
transaction
- any change of the amount or the payee shall result in the invalidation of the
authentication code
Payment service providers are exempted from application of strong client
authentication in these cases:
- payment service user accesses payment account information
- contactless payments at point of sale (individual amount of the contactless
electronic transaction does not exceed EUR 50 or the cumulative amount
does not exceed EUR 150 or 5 consecutive individual payment transaction)
- transport and parking fares
- trusted beneficiaries and recurring transaction (payment transaction with the
same amount and the same payee)
- payment to self (the payer and the payee are the same natural or legal person
and both payment accounts are held by the same account servicing payment
service provider)
- low-value transaction (the amount of the remote electronic payment
transaction does not exceed EUR 30 or the cumulative amount does not
exceed EUR 100 or 5 consecutive individual remote electronic payment
transaction)
- transaction with low level of risk according to the transaction monitoring
mechanism
Mr Rudolf Pataki: Challenges in payment environment 2017
5
Instant payments
Instant payments are electronic retail payment solutions available 24/7/365
and resulting in the immediate or close-to-immediate interbank clearing of
the transaction and crediting of the payee´s account with confirmation to
the payer (within seconds of payment initiation).
This type of payment instrument is already implemented in Australia, Japan,
Brazil, Canada, Chile, India, Korea, Mexico, Singapore, South Africa,
Denmark, Poland, Sweden or UK.
Key feature of instant payments:
- payment in EUR
- up to 15 000 EUR
- a target maximum execution time of 10 seconds
- payments are made for the full Original Amount
- 24/7/365
- Go live 21 November 2017
Work flow of an SCT Inst:
Mr Rudolf Pataki: Challenges in payment environment 2017
6
TIPS is service for settlement of instant payments, designed by ECB. It
shall support Participants to be compliant with SEPA Instant Credit
Transfer scheme which the European Payment Council has developed for
instant payments in Euro.
TIPS is intended as a harmonized and standardized pan-European service
with common functionality across different countries and jurisdictions.
Actors in TIPS:
- Participant – entities that hold accounts in TIPS. Participants manage their
own liquidity and are responsible for all payments sent or received on their
account.
- Reachable Party – entities that do not maintain TIPS accounts. However,
they have contractual agreements with a Participant to use the Participant´s
TIPS account for the settlement of instant payments.
- Instructing Party – any entity that has contractual agreement with one or
more Participant to instruct on behalf of the Participant. Both, Participants
and Reachable Parties can act as Instructing Parties themselves.
- Central Banks – central banks provides cash account services to
Participants for settlement of instant payments in Central Bank money.
Additionally a Central Bank can act as a Participant in TIPS.
General principles:
- TIPS shall serve as a technical solution for providing instant payments
settlement serviced to Participants without the provision of clearing services
- The primary objective is to provide settlement services in euro, however the
service shall be technically capable of settling currencies other than euro.
- TIPS shall settle exclusively in Central Bank money.
- The settlement shall be final and irrevocable.
- TIPS shall allow operations on a 24/7/365 basis.
- TIPS shall be a lean, harmonised and standardised pan-European service
with common functionality across different countries and jurisdictions.
- TIPS shall follow the participation criteria of TARGET2.
- Participation in TIPS shall not be made mandatory by the Eurosystem.
- All eligible Participants shall have non-discriminatory access condition to
TIPS.
Mr Rudolf Pataki: Challenges in payment environment 2017
7
- TIPS shall be based on the ISO 20022 message standard.
- The Eurosystem shall take on the responsibility of developing and operating
TIPS by assuming full ownership.
- TIPS shall operate on full cost-recovery and not-for-profit basis.
Mr Ugo Bechis: PSD2 and RTS – A game changer
8
PSD2 AND RTS – A GAME CHANGER
Mr Ugo Bechis
e-Payment & SEPA Advisor
UB Adv
The PSD2 Directive adopted by the European Parliament and the Council of the EU sets the basic outline of the new payments ecosystem within the EU.
The Directive is to be completed by detailed technical requirements (RTS – Regulatory Technical Standards), issued by the EBA Authority, regulating the security requirements between TPPs (Third Party Providers) and the Banks, as well as the information, limited
to the payments, which can be given to them. The missing element, as the author points out, is a set of standards for PSD2 APIs,
which is expected for publication before RTS enters into force.
The payments development has to be seen in the wider perspective of an
overall ecosystem where payment, e-Commerce and the big web players are
active and competing with each other.
A recent e-Commerce feature to consider is also the convergence of the in-
App and the in-Store, where the transaction can be originated in a physical
environment and finalized on-line or the other way around; this practice
gives a critical role to the subject or subjects which are able to consolidate all
the information relevant to make the overall transaction quick and easy.
The wallet as a point of entry to conceivably access all these steps becomes
a critical service.
The banks and the card providers would be a priority choice but they
seldom are able to meet the usability ‘golden rule’ which is ‘sixty seconds, six
clicks’ to do all the steps from the end of the pure commerce transaction to
the payment phase, ie. information on and choice of the payment options
available, access to the chosen instrument, decision whether to redeem an
incentive programme, payment initiation and confirmation.
On the average this key metric, the ‘check-out time’, takes more than two
minutes leading to an abandon rate (loss of sales) of around 40%; the
subjects that are able to satisfy such a critical usability metric will be
Mr Ugo Bechis: PSD2 and RTS – A game changer
9
preferred as a point of access, so being the preferred points of entry who da
facto have the ownership of the customer, regardless who they are.
The PSD2 has introduced new key provisions for the subjects operating on
the last mile, the point of entry, so to have some rules of the game common
to all the subjects active at this step.
The EBA Authority has published its final draft of the RTS (Regulatory
Technical Standards) which qualify the security requirements between these
TPP (Third Party Providers) and the Banks, as well as the information,
limited to the payment, which can be given to them.
At implementation level the EBA also calls for the banks to publish un their
web sites the technical documentation so to allow to these TPP to plug-into
the banks, to retrieve information and to execute the payment.
An bank IT structure which defines such interfaces with Open APIs will be
an ideal approach.
Open APIs though require a comprehensive and well managed process
including: adeguate functionalities, security features, a structured and
monitored interface with the TP developers, testing of the TP interfaces
/APPs and their secure downloading to the customers.
There are not yet standards for PSD2 APIs; some organizations in Europe
are though working on them.
The final version of the RTS, approved by the EU Council and by the EU
Commission should be released next Fall, coming into force eighteen
months later, e.g. Q.2 2019. A sensitive aspect will be how strict the security
provisions will be; the trade-off between security and usability is not easy to
solve since it depends from rules and technical requirements (i.e. PSD2 and
RTS) as well as on the customers’ behavior.
The point to be seen is to what extent players will prefer to ‘handle the
money and act within the EU jurisdiction and the PSD2/RTS rules or the
preference to play a non-money role as some of them already do out-of the
EU jurisdiction.
Ms Anna Maj: Changing Digital Payments Ecosystem
10
CHANGING DIGITAL PAYMENTS ECOSYSTEM
Ms Anna Maj
FinTech Expert, Advisor & Mentor
Country Manager, PayTech Consulting
The author analyses how the payments infrastructure in the EU and in particular, in the CEE Region, has been changing and what can be expected with the introduction of new
technologies (e.g. blockchain) and new regulations (PSD2). As the ongoing process threats the banks’ franchise as main payment service providers, in order to defend their business, traditional payment agents should take advantage of the innovations introduced by their fintech challengers. They may either build partnerships with their fintech competitors or invest in new ventures just as fintechs are doing. The example of Polish banks proves, notes the author, that such defense strategies may be
successful and serve as example for other EU banks.
Payments have traditionally been the domain of banks. Today we can
observe how dynamically this paradigm is being transformed, especially due
to the participation of new players in the payment industry who develop
new products and new technologies. The models and the roles known so far
in the payment ecosystem are also being changed.
On one hand there is a shift in the scope of liabilities of the stakeholders as
well as their roles in the payment value chain, namely: banks, acquirers,
payment processors, money operators, payment schemes, resulting from the
introduction of new technologies (e.g. blockchain) or new regulations
(PSD2). There is either no payment intermediary inolved, so the parties are
able to make transactions directly between each other, like in the
blockchain-based payment solutions, or there is a room created for new
entrants, such as TPP (third-party providers) including non-bank entities
who gain access to a bank account information and payments, just to
mention PSD2-related models. According to PwC, payment companies have
carefully monitored the rise of FinTech and the implications to their
industry, and are investing in technologies, (blockchain technology being a
major investment), with 77% planning to adopt it as part of an in
production system or process by 2020 (PwC Global FinTech Report;
„Redrawing the lines: Fintech’s growing influence on Financial Services”,
March 2017).
Ms Anna Maj: Changing Digital Payments Ecosystem
11
On the other hand, all those technologically and regulatory driven changes
impact not only the payment ecosystem and its internal players, but
obviously result with the significant transformation of the customer
behaviour in payment services. Taking into account five billion unique
mobile users wordwide (according to the social media agency We are social)
and 2.7 billion active mobile users of social media (June 2017), as well as a
very dynamic growth of the latter ones (30% year-to-year), payments and
financial services in generally become mobile and social. Payments are not
standalone any more. They are being integrated with other value added
services, such as PFM (personal finance management) or consumer finance
and instant crediting. This again creates a new ecosystem of payment-related
solutions aimed towards seamless and eventually invisible payments in the
future.
Till 2020 payment solutions such as money remittances and funds transfers
will be changing the most significantly among other financial services, along
with consumer banking. (PwC Report: „Financial Sector – More and More
FinTech” Dec, 2016). Polish fintech startups are also very much focused on
digital payments, as „Fintech in Poland. Threaths and Opportunities”
Report conducted by Fintech Poland Foundation (Dec 2016) indicates. In
line with global trends new players come up with payment-related solutions,
such as payment platforms, payment aggregators, cross-border payments,
digital wallets. Although consumer payment services (e.g. P2P money
transfers) are predominant, the growing interest of some fintechs in the B2B
segment may be observed, particularly in SMEs, which have been
underserved by banks so far.
The value of the investments in FinTech amounted for EUR 2.2 billion in
CEE region (Deloitte „CEE FinTech Report”, Dec, 2016) with Poland
being on top with EUR 860 million. Top FinTech companies at Warsaw
Hub listed by Deloitte in the other report: „A Tale of 44 cities” (April 2017),
such as among others: PayU, BlueMedia, BLIK, Cinkciarz.pl are all dealing
with digital payments: e-commerce, instant payments, mobile payments, FX
payments, respectively. BLIK (PSP – Polish Payment Standard) founded by
six major Polish banks is an example of the successful mobile payment
scheme built from scratch by the banking sector two years ago (2015). BLIK
mobile banking application is a popular e-commerce payment method,
Ms Anna Maj: Changing Digital Payments Ecosystem
12
followed by ATM cash withdrawals, POS payments as well as P2P money
transfers.
E-wallet is another example of the digital payment method, which is
growing on its popularity. Besides international wallets like MasterPass,
PayPal or Visa Checkout (the latter was launched in April 2017 in Poland as
the first country in Europe), Poland is a place for homegrown solutions,
such as G2A Wallet. G2A is a gaming platform with its own online payment
gateway that aggregates over 200 different local and global payment
methods – both card and bank account based – as well as digital wallets.
While talking about changes in the customer journey all over the payments
world we can’t ignore AI-based solutions, such as chatbots who are virtual
assistants communicating with users (both individual and business) via
different voice and text channels, messengers being one of the most popular
(e.g. Facebook Messenger, Slack, WeChat). Payments are a part of
conversational finance that is being intesively explored by the companies
providing chatbot solutions, particularly in cross-border transactions, e.g.
TransferWise, Azimo.
To better meet the needs of clients – both consumers and businesses –
incumbents should take advantage of the innovation that is being brought
to the table by the FinTech industry. Based on already-proven cooperation
models worldwide, banks in CEE countries can either build partnerships
with challengers (ING, BGŻ BNP Paribas) or invest in new ventures to
provide faster and less expensive services just as fintechs are doing – mBank
has recently set up its own mAkcelerator fund (Feb 2017) and PKO BP, the
largest Polish bank, at the beginning of 2017 acquired ZenCard – a startup
providing digital loyalty based on card payments. That is why 82% of
incumbents expect to increase FinTech partnerships in next three to five
years according to PwC (PwC Global FinTech Report). Payments are the
business of scale, therefore innovators can also benefit from banks’ assets,
having access to their customer base.
Ms Gizem Tansu: New Regulations Increasing Security & Trust within the Global Financial Community
13
INCREASING SECURITY & TRUST WITHIN THE GLOBAL FINANCIAL
COMMUNITY
Ms. Gizem Tansu
Manager Financial Crime Compliance Initiatives, EMEA
SWIFT
Cybercrime is a major concern for banks around the world. Criminals are increasingly targeting not only clients but also banks and the payments infrastructure – a new strategy
that requires adequate defensive measures from payment service providers. Ready to the new challenges, SWIFT, a central player of the global payments
infrastructure, launched its Customer Security Programme in 2016. An important part of his project is the newly launched Payment Controls Service, which, together with other
solutions offered by SWIFT (RMA Plus, Sanctions Screening, KYC Registry and others) should substantially increase the security level of global payments.
Gizem Tansu from SWIFT’s Financial Crime Unit spoke about the
increasing threat of fraud and cybercrime and how SWIFT is supporting the
financial community to strengthen their defences against cyber criminals.
Cybercrime is a major concern for banks around the world. Criminals are
becoming more and more sophisticated. While in the past they tended to
focus on banks’ customers through card and account details, they are
increasingly targeting the payments infrastructure.
The shift from targeting banks’ customers to targeting banks themselves
represents a significant change and a threat to the correspondent and the
wider banking community. However, it is important to note that while
compromises have taken place in banks’ local environments, there is no
evidence that the SWIFT network and core messaging services have been
compromised in any of the attacks.
As cyberattacks become more prevalent, the industry and regulators are
taking steps to understand, address and mitigate the risk. In May 2016,
SWIFT launched its Customer Security Programme to help its customers to
reinforce the security of SWIFT-related infrastructure and provide a
collaborative framework for its 11,000+ member institutions to manage
evolving cyber threats. The Programme focuses on the need for institutions
Ms Gizem Tansu: Increasing Security & Trust within the Global Financial Community
14
to secure and protect their own environments, share information within the
SWIFT community and effectively manage relationships with counterparts.
Tansu highlighted a new solution that SWIFT will roll out as part of the
Customer Security Programme: the Payment Controls service. The service
aims to complement and strengthen existing fraud controls. Once launched,
the service will screen SWIFT customers’ messages according to their own
chosen parameters before the messages are sent, meaning that suspicious or
potentially fraudulent messages will be blocked for further investigation, or
stopped completely. ,
The payment controls service also further expands SWIFT’s growing
portfolio of community-inspired financial crime compliance solutions. It
complements SWIFT’s Daily Validation Reports tool, which is already being
used by smaller institutions to supplement their existing fraud controls and
provide an independent daily overview of their SWIFT transaction activity.
Tansu also outlined other SWIFT tools and services that can help to reduce
transaction and financial crime compliance risks and costs including:
• RMA Plus - an important tool to manage payments fraud risks by
helping banks manage which institutions they exchange messages with, and
what types of messages can be exchanged
• Sanctions Screening - an innovative SWIFT-hosted screening engine
that combines a best-in-class filter with a comprehensive database of
automatically-updated sanctions lists to deliver a highly effective sanctions
compliance solution
• Name Screening - secure online lookup tool which allows banks and
corporations to screen single names against sanctions, PEP and private lists.
Batch screening of databases will be added later in 2017.
• Sanctions Testing - a secure web-based service that leverages
SWIFT’s compliance expertise to test, fine-tune and optimise transaction,
customer and PEP filters, delivering independent verification of sanctions
screening processes
Ms Gizem Tansu: Increasing Security & Trust within the Global Financial Community
15
• The KYC Registry -a global Registry of data and documentation that
institutions can use to establish and strengthen correspondent banking
relationships while ensuring they perform the necessary due diligence to
achieve best practice in regulatory compliance
• Compliance Analytics - leverages SWIFT message data to provide an
unparalleled level of insight into institutions’ banking flows, enabling them
to monitor and address financial crime risk with pinpoint precision
• Payments Data Quality Service - helps banks comply with FATF
Recommendation 16 and enhances transparency and straight through
processing by helping banks analyse the quality of originator and beneficiary
information in their payment messages.
Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape
16
NEW REGULATIONS IMPACT ON TRADITIONAL PAYMENTS
LANDSCAPE
Mr Adam Tencza
Central and Eastern Europe Division Manager
SIBS International
The author provides an indepth view on the changing European payments landscape, comparing the traditional and the new model of electronic payments market. The
fundamental changes, as Mr Tencza emphasises, will effect all market participants, including clients, issuers and acquirers as well as payment processors and scheme
organisations. After 2018, a completely new payment marketplace may appear, with less legal entry
barriers but potentially more capital and technology barriers. Banks must keep up with the technological changes to stay in the game but their financial
strength should be a great advantage. Nevertheless, probably not all of them will be flexible enough to adapt and a number of them may lose their traditional payment
franchise.
Introduction
In the last years global payments market has been facing significant changes
and shifting many relevant business models. European market especially, is a
witness of regulations imposing new rules and conditions, which impact all
areas of payments industry.
Regulative changes in Europe
European payments market is on a ride to the new. Among the multiple
regulatory alterations that has happened recently or will happen soon, I will
mention only the one having utmost impact for traditional payments market
players, which will be defined later on:
• Payments Services Directive 2, further called PSD2. It has been
adopted by European Parliament in 2015, and has entered into force at the
beginning of 2016. Till January 2018, it shall be adopted into local legislation
of member states.
Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape
17
• Strong Customer Authentication (SCA) will be mandated by
PSD2 for certain types of payments. This method is not completely new for
the market as a whole, but will significantly impact specific players,
especially ones providing payment services remotely.
• Regulatory Technical Standards (RTS) are the indications to the
market about Strong Customer Authentication and common and secure
communication under PSD2, being prepared by the European Banking
Authority (EBA).
• Interchange Fee Regulation (IFR) adopted in 2015, has capped the
interchange fee levels on debit and credit cards transactions. Additionally,
IFR has forced more transparency on pricing offered by card acquirers to
merchants, with application from June 2016 on.
• General Data Protection Regulation (GDPR) has been approved
by European Parliament in April 2016, and will be enforced to the market
from 25th of May 2018. It reinforces very strict rules for personal
information handing, targeting among others such entities as banks and
payment institutions.
• SEPA Credit Transfers - European Payments Council has
prepared implementation guidelines for a new interbank scheme of Instant
Credit Transfers, and a first version was published in November 2016.
Traditional model of electronic payments market
The payments market get used to work in a relatively stable environment,
facing more dynamics in technological changes and clients behavior
modifications than in the operational and business models itself. The
traditional players are defined by me as:
• Clients - a group consisting of payments initiators (e.g.
cardholders, payments application users) as well as merchants;
• Issuers and acquirers, which provide services to its clients, and
therefore I will call them “clients relationship layer”;
Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape
18
• Processors and scheme organizations, which are the providers of
issuers and acquirers.
Since tens of years these three main layers of payments market coexisted
and no major disruption has been observed. One of important changes has
resulted from e-commerce development, which allowed expansion of
payments gateways, but keeping the status-quo of general model.
Since 5-10 years, more dynamic expansion of non-bank and non-traditional
players is slowly impacting the payments market, which PSD2 and other
new regulations might be designed anew.
New model of electronic payments market
The payment initiators and merchants are looking for most efficient and
simple payments methods, at the lowest costs and of highest quality. Their
behavior and expectations are changing jointly with purchasing habits and
trends.
The new regulations will mostly influence the client’s relationship layer, by
creating conditions for new type of players, such as Payments Initiation
Service Providers (PISP). The new players will have conditions to replace
the currently existing players in this field. It doesn’t mean that traditional
players will disappear from that layer, but rather will co-exist or change their
roles and adapt the activity.
Processor’s impact
Processor in this case is defined as provider of services to different entities
of a payments market, such as issuing bank, acquiring bank, payments
scheme and sometimes even to a specific merchant. Traditional processors
handle complex IT infrastructure, in order to assure reliability of its systems
and stability for provided services. Main risks for processors coming from
new regulations are:
• Appearance of new operational models might force processors to
adjust the messaging standards with existing client, adapting new procedures
or even refocus its services to other clients groups;
Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape
19
• Traditional clients will face reinforced competition and will
require from its providers a completely different dynamic of technological
changes and adaptation, which can also require the full infrastructure
revision;
Challenges might be transmitted into opportunities, among which I will
name:
• API management - RTS shall define a way of accessing the
payments initiation service and propose some level of standardization. This
creates an opportunity for processors to take leadership for this process and
intermediation between issuing bank and PISP. This approach shall allow
processors to develop value-added services both sides of the process.
• It is becoming more common for processors to take opportunities of
providing services directly to clients, by offering new payments methods to
payment initiators or entering into payments acceptance business (i.e.
acquiring) to merchants. This strategy might shift the role of a processor to
become payments services provider (PSP).
Bank’s impact
Banks are the most complex players on the traditional payments market,
having multiple roles, from issuers, acquirers, scheme members, and in some
cases even merchants. Since the IFR introduction in 2015, the issuers have
felt very significant reduction of revenues from the payment business, as the
reduction of Interchange Fee in some of member states was dramatic (for
example in Germany the debit card rate for Visa drop from 1,58% to 0,2%).
Banks have had a difficult time, defining new strategy and business cases for
payments business lines. Currently, new challenges are coming, and among
them:
• PISP will increase the competition for clients. This will demand
from banks a new approach in order to keep their position and role on the
market. The industry will be more open, allowing to provide initiation
Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape
20
services to very light organization with limited traditional “infrastructure
barriers”.
• Banks will be obliged to allow PISP and AISP (Account
Information Services Providers) access to payments and account
information. The PISP and AISP will be able to provide a full spectrum of
services to the bank’s clients being a serious competitive threat for
traditional issuers and acquirers.
The bank might also enter directly the competition and become the PISP
and AISP. It’s a very tempting idea but banks will must understand and
change the procedures jointly with processes in order to be able competing
with new players.
Scheme’s impact
The IFR regulations has introduced very important change for payments
schemes. Opening of co-badging capabilities and regulating its conditions,
has challenged both international and domestic schemes on protecting their
existing positions and improve them. It had also created the “space” for
new domestic schemes creation, both on cards and non-cards, such as
mobile schemes.
Introduction of PISP institution, together with works on pan-European
instant transfer scheme will be a great threat for card business. In a worst
case scenario, card infrastructure and schemes might be replaces by new
payments methods and systems, which will result with even more
competition.
International payments schemes especially, are changing their profiles and
introduce multiple value-added into the services portfolio, such us wallets,
loyalty products, and in some cases very aggressively enter into new business
lines, (ex. MasterCard has acquired a few local processors in EMEA region).
Summary
The payments market is being disrupted and it will reshape anew after 2018.
All regulative changes mixed with technological development shall end-up
Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape
21
with an interesting payments landscape, connected with less legal entry
barriers but potentially more capital and technological barriers.
Traditional players will must evolve to keep a position in the new market
game together with newcomers and financial strength will become even
more relevant in this game.
Summarizing, probably not all of the traditional players will be strong and
flexible enough to adapt in this new reality but definitely the traditional
market landscape will have a great impact on the future.
Mr Edward Strycharczuk: The Advantages of Partnerships in Merchant Acquirimg
22
THE ADVANTAGES OF PARTNERSHIPS IN MERCHANT ACQUIRING
Mr Edward Strycharczuk
General Manager
EVO Payments International
Banks may become winners in the current payments marketplace characterised by disruptive technologies and challenging new players, if they properly select their partners in
merchant acquiring – states the author. Setting up partnerships with acquirers creates a win-win situation for both banks and
their partners, as the experience Raiffaisen in the Polish and Czech market proves. The joint venture created under the brand name REVO with EVO Payments has been a great success, improving the efficiency attractiveness, and profitability of the bank’s card
business.
The acquiring landscape is constantly evolving
Changes in the scheme fees impact profitability. The borderless
marketplace is expanding. Regulatory requirements are increasingly
sophisticated and tougher. These changes are driving banks to increase
investments to stay competitive with disruptive technologies and new
market players.
Partnerships are often a good solution for banks
Merchant acquiring can add tremendous value to a bank…
Card acceptance is a “core, non-core” service. Acquiring is
needed by most businesses and is fundamental to the current account
relationship. Merchants who also take acquiring services from their bank are
significantly more loyal and typically have 5 times larger deposit balances.
…But partners are often better suited to manage the ongoing details of an
acquiring business
Monoline acquirers have deep experience in the constantly
changing acquiring industry, a business which is not always a core
competency of retail bankers.
Mr Edward Strycharczuk: The Advantages of Partnerships in Merchant Acquirimg
23
Monoline partners offer their bank partners the ability to offer
integrated payment solutions across multiple geographies, regulatory
compliance and the benefits of economies of scale.
Formation of REVO
Raiffeisen sought a monoline partner for its under-scaled acquiring
businesses in two small, but growing markets, Poland and the Czech
Republic. Raiffeisen felt that it lacked a competitive product and value
proposition in those markets and believed that without dedicated sales
capabilities, it would not be able to effectively compete with larger domestic
players. The Bank decided that aligning with a partner capable of filling
these gaps would improve its overall customer value proposition to its
business clients. Raiffeisen selected EVO Payments as its partner and in
April 2015 a new partnership under the REVO brand was formed.
Key achievements
Since its formation, REVO has made great strides to enhance the Raiffeisen
acquiring offering:
1. Organization & Operations – The businesses were migrated to
EVOs high-performing and low-cost processing platform in Poland
2. Sales & Distribution – Dedicated sales networks were formed,
with incentive schemes offered to spur high-performance
3. Product Development & Marketing – REVO introduced a
simpler and more attractive value proposition and enables paperless
merchant on-boarding
Lessons learned
Based on its experiences with REVO and its other alliances in Europe and
North America, EVO has gained valuable experience in maintaining high-
functioning relationships with Banks. These lessons include:
Get clear commitment from the top management of both Alliance
partners to properly invest in the business
Mr Edward Strycharczuk: The Advantages of Partnerships in Merchant Acquirimg
24
Maintain strong sponsorship from the Bank partner – ensure they
provide dedicated resources to manage the day to day Alliance business
Gain a strong understanding of your partner – the acquirer must
soak up the culture of the Bank and all Bank employees who interact with
customers must be well-trained on acquiring and its value to all stakeholders
Be disruptive – offering the same products and service at the same
prices as the competition is
a recipe for poor performance
Focus on service – quality and speed makes the difference
Set up adequate sales and distribution – this is vital for a success
of the business
Hold regular operational meetings
Make sure that the employees maintain a start-up mindset. And
plan your (key) hirings in advance
Get agreement among the partners on an appropriate incentive
scheme and minimum sales targets – this is vital to achieving goals and
maintaining a strong relationship
Don’t expect everything will go smoothly from the 1st minute:
constantly strive to learn from each other and continuously improve
About EVO
EVO Payments International is a leading payments service provider of
merchant acquiring and processing solutions for merchants, Independent
Software Vendors (ISVs), financial institutions, Independent Sales
Organizations (ISOs), government organizations and multinational
corporations located throughout Europe and North America. A principal
member of Visa and MasterCard, EVO offers an array of innovative,
reliable and secure payments solutions and merchant services, backed by an
uncompromising commitment to exceed the expectations of our customers
and partners.
For more information, please visit WWW.EVOPAYMENTS.COM
Mr Levente Kovács: The effects of instant payment on the economy
25
THE EFFECTS OF INSTANT PAYMENT ON THE ECONOMY
Mr Levente Kovács
Secretary General
Hungarian Banking Association
Historically, settlement of payments through clearing centres took several days. The application of computers helped to speed up the process to several hours, providing for next
day settlement. Intra-day settlement started slightly later, followed by real-time gross settlement for high value payments, during working days during opening hours of the
banks. Today, low-value transfers are also settled in real time, and in addition to that, 24 hours
a day, 7 days a week, including bank holidays. The introduction of instant payment puts a substiantial pressure on banks’ IT systems and raises a number of technical, liquidity and risk management issues. On the other hand, as the example of Hungary shows, instant payments have a number of positive effects on the economy, mainly in the corporate sector, including lower working capital
needs, elimination of „debt carousels”, better current account management by companies. Overall, as expected instant payment will reduce the use of cash and help the „whitening”
of economics in Central/Eastern Europe.
Since the emergence of ICT, there has been continuous development in
payments. Clearing houses are currently focusing on the switch to instant
payments. The present study analyses the potential effects of the switch to
instant payments on the economy, including its impact on the management
of corporate current accounts, the forms and potential management of risks
occurring in processes and on the side of the various participants of
payment traffic, as well as any economic benefits expected as a result of
developments. For the purpose of investigating these issues, we have also
incorporated in the study the instant settlement project launched recently in
Hungary, as well as any expectations and information that exists in respect
of the project.
The history behind instant payments
We typically split the development of clearing traffic into four stages. In the
first one, up until the mid-1980s, before the commercial use of ICT, inter-
bank payments were processed manually. The way it worked was that every
Mr Levente Kovács: The effects of instant payment on the economy
26
bank took the day’s payments to a central place, which in Central Europe
was mostly the central bank. There they sorted payments in cabinets with
‘pigeon holes’ like the ones we can still see in post offices. One box
contained all the payments coming from bank ‘X’ and heading to bank ‘Y’.
So, one line contained all the payments to be sent from bank ‘x’, while one
column contained all the items to be received by bank ‘Y’. Once the items
were sorted manually and the payment values were added up, the central
bank executed the actual clearing. Then banks credited the items, also
through a manual process. The entire payment process took several days
(Prágay, 2012).
The application of computers in clearing traffic (clearing and settlement)
started in the 1980s. From this point onwards, payments were received by
electronic clearing houses (ACHs) . They collected, sorted and then sent out
payment transactions to banks, forwarding information on the settlement
value to the central bank. (We note at this point that the arrangement
followed in the manual sorting process is also reflected in the electronic
clearing process, in the so-called IBI matrix .) Payment transactions were
processed in a few hours, typically overnight. From this point onwards,
inter-bank transfers were typically executed in 1 day; i.e. by the next day. In
socialist countries, due to the establishment of the two-tier banking system
and the COCOM list, this evolution took place one decade later. However,
in these countries the decade’s delay resulted in relatively more up-to-date
and faster ICT systems, as they were relying on automation levels and
payment traffic experience prevalent at the time of introduction.
The continuous development of clearing houses was determined by
innovation in payments and the strive to boost competitiveness
(Kemppainen, 2003). Accordingly, approximately one decade ago D+1
clearing systems were replaced by SEPA standard (Mai, 2009) and intra-day
payment systems. Fast proliferation was primarily driven by the needs of
large corporations; the shift happened relatively fast, and the market also
received developments positively. From the aspect of clearing houses, real
development was brought about by clearing and settlement cycles executed
faster and several times a day. This was facilitated by faster data
transmission channels, higher-performance computers and an incremental
increase in the availability of ICT systems. (Khiaonarong – Liebenau, 2009)
Mr Levente Kovács: The effects of instant payment on the economy
27
In the European Union, the introduction of the TARGET system, a system
developed for instant inter-bank and very high value payments, which also
incorporates national RTGS systems, took place one-and-a-half decades
ago. Now low-value payments are also added to this pool, which means that
the new clearing system to be established must be one that is capable of
processing large volumes of payments instantly. From now on, new systems
will not only operate on working days and during working hours, but
constantly, 24/7. This poses new challenges in terms of the banks’ IT
systems, data transmission processes and availability, while the instant
nature of transactions brings new challenges in the areas of risk
management and fraud prevention. When it comes to the operation of
clearing houses, one consequence of instantaneity is that instead of the
previously used batch settlements, now settlement information must be
provided individually, item-by-item; i.e. each clearing item has a settlement
item attached to it straight away.
The instant payment service – as explained by the National Bank of
Hungary (MNB) in its concept paper titled ‘A new dimension in payments’
affects the operation of all players in the payment cycle, as it introduces a
new, widely usable electronic payment method in the world of payments.
‘Residential customers and merchants will be able to use instant payments in
numerous situations where so far mostly cash was used. It is a general
expectation of the regulator that more advanced services using the single
infrastructure cannot be more expensive for customers than the services
offered till now.
The new technology will/may result in the establishment of new, potentially
still unknown payment products and services. It is a general expectation that
the costs of new payment solutions should not significantly differ from the
payment methods widely used today, e.g. payment by bank card. New,
primarily mobile phone-based solutions that allow people to pay in a
simpler, more convenient and faster way than before may also be
introduced. This could be helped by modern data entry solutions such as the
QR code or NFC (Near Field Communication), which not only simplify the
payment process, but also facilitate the connection of additional services to
Mr Levente Kovács: The effects of instant payment on the economy
28
the payment process. With the emergence of new products, digital
technology will also boost customer experience.
One important change for corporate customers can be that transactions
where execution by the partner company (e.g. delivery) is subject to on-site
payment, can be completed faster, and, as a result of items being credited
sooner, the liquidity management efficiency of businesses can improve. The
acceleration of the clearing process was a market demand, while intra-day
clearing was primarily a requirement coming from large corporations, which,
in a number of countries gained the support of authorities supervising
payment traffic.’ (MNB, 2016)
The enforcement of market requirements has been and is being supported
by the assumption that faster payments boost the economy in themselves,
and that the acceleration of payments can be interpreted as some kind of
social benefit, which, in turn, boosts the reputation and credibility of the
relevant authorities. It must be mentioned that in view of Central European
habits, increasing numbers of cash transactions may turn into electronic
ones, due to the new, convenient payment products and instantaneity. The
expansion of electronic payments is beneficial for the whitening of the
economy and also for tax purposes, as individual payment transactions are
instantly credited to bank accounts, and are therefore also fully booked.
When it comes to the acceleration of payments, one typical question that
arises concerns the distribution in time of transactions launched by
customers. Figures from Hungary show a distribution pattern seen on
Chart 1. This shows that bank customers send in transactions via e-banking
systems continually, 24 hours a day, with peaks at noon and at the end of
working hours.
Chart 1: The distribution in time of the acceptance by banks of electronic
transactions
Mr Levente Kovács: The effects of instant payment on the economy
29
Source: Helmeczi (2010)
In terms of intra-day and instantaneous transactions, experts typically
highlight the following benefits:
a) Economic competitiveness improves as a result of better current
account management by companies.
b) Due to the disappearance of hidden income in respect of float
(interest expenditure for sight deposits and interest income for overdraft
facilities), the fee structure becomes more transparent, which in itself boosts
competition in bank fees/charges, especially in the (currently extremely) low
interest rate environment.
c) Due to the acceleration of payments, in-depth subcontractor
networks can be paid much faster, which is one key factor in eliminating
debt carousels. (Although debt carousels are not caused by reasons to do
with the management of payments!)
d) The float is practically eliminated, as money is instantly credited to
customer accounts, thus entering the economy in a cost-free, direct and
prompt manner, potentially resulting in a lower working capital need.
e) The management of current account balances becomes more
economical, as the components of the ‘just in time’ stock management
methodology become increasingly applicable. For current accounts, the
Mr Levente Kovács: The effects of instant payment on the economy
30
continuous, highly reliable and precisely regulated operation of clearing
houses offers the right background. (Felföldi – Kovács, 2011)
f) Instant clearing may bring about a significant change in habits,
and the role of electronic payments may grow significantly, to the detriment
of cash usage. The single and widely used instant payment system may push
our parallel or riskier alternative payment systems from the market.
Several of the benefits are theoretical only, as these assumptions typically do
not take into consideration the degree of potential benefits compared to the
one-off cost of ICT development and the continuous cost of operation. It is
also ignored that due to the reduction of some income items, the revenue
level required for the healthy operation of the financial intermediary system
will have to be found by financial institutions elsewhere, via other channels.
Nevertheless, there is widespread agreement that benefits outweigh
disadvantages.
The benefits of accelerated payments for companies
Intra-day payments primarily show benefits for corporate customers. We
must also note here that the majority of payment transactions are also
initiated by such customers.
The acceleration of clearing traffic allows business customers to manage
their current accounts more efficiently. Chart 2 shows how much more
efficiently the Hungarian business sector could manage its current account
balances during the usual end-of-year boom in the years of switching from
the D+1 day system to the intra-day clearing system. (Kovács, 2013)
Chart 2: The evolution of corporate current account balances in the first
year of intra-day payments and in the preceding year
Mr Levente Kovács: The effects of instant payment on the economy
31
Source: National bank of Hungary (MNB). Chart edited by Péter Vass
(Hungarian Banking Association - HBA) – figures in billion HUF
In order to bring the starting values in line, the ranges of the two curves
have been shifted by 50 billion HUF. As you can see from the divergence of
the curves, corporate clients already exploited the benefits of intra-day
payments in the first two months following their introduction. The similar
arc of the two curves shows that economic activity changed along the same
pattern in both years, i.e. when interpreting the chart, no other significant
distortive impact needs to be considered apart from the intra-day nature of
payments. (Kovács, 2013)
Using the anonymised current account bank statements and transaction
details provided to us, we have conducted the following analysis: we looked
at 50 million HUF ranges of current account transactions per year for
companies without an overdraft facility, and analysed the value of average
current account balances falling into the same category in the February to
June and July to November periods (we left out the months of January and
December in order to eliminate the distortion resulting from annual cycles).
Then we placed these values on a curve. The first stage, where volumes,
and, consequently, the number of transactions were both low, could be well
managed with a linear approach. One reason could be that when volumes
are low, incoming items are not used on the same day or close to the same
Mr Levente Kovács: The effects of instant payment on the economy
32
day, so volumes that are twice as high require twice as large an account
balance. As volumes and consequently the number of transactions both
increase, there comes a point where incoming transactions can be used ever
faster (sometimes even on the same day) to launch transactions, and at times
like this the curve is similar to an exponential curve, which can also be
justified theoretically due to the number of received/launched transactions
and the assumed independence of their values. One very important result is
that the introduction of intra-day clearing did not change the current
account management of customers with low volumes, which, in turn, is
logical, as they do not transact daily. However, for regularly transacting
customers the curve rises less and less, which is also a logical consequence,
as the fact that there are several credit cycles through the day facilitates even
more efficient transaction and therefore balance management. In other
words, in the 21st century current account balances are not determined by
the classical statement of the professional book titled ‘Modern corporate
finances’ by Brealey-Myers, but by ‘just in time’-style current account
management practices. (see also: Felföldi – Kovács, 2011 and Kovács,
2010.) In the samples, the average corporate current account balance
reduced by 10.73%, weighted by payment traffic, as a result of intra-day
clearing, while the costs of deposit management did not change in the
period looked at. (Kovács, 2013)
Mr Levente Kovács: The effects of instant payment on the economy
33
Chart 3: Interconnections between corporate current account volumes and
balances (in the case of companies without an overdraft facility)
Source: Erste Bank – Hungary (year 2012 current account balance and
transaction volume figures of 1000 representatively chosen corporate
customers). Chart edited by Péter Vass (Hungarian Banking Association -
HBA) – figures in million HUF. (Kovács, 2013)
The reduction of float and the more efficient management of corporate
current accounts have resulted in a significant drop for the banking sector in
cheap sight balances and expensive overdraft facilities. These are the sums
that are split between numerous economic players on the customer side; i.e.
each transacting customer has a little bit more of these, in proportion to the
size of their volumes. (Kovács, 2013)
The introduction of instant payment systems clearly boosts these benefits,
as it facilitates the even more efficient management of account balances; i.e.
individual companies will need even less cash to be able to manage their
own corporate current accounts. This means that the trend line expected in
the wake of the introduction of instant payments, shown by Chart 3, is
expected to become even flatter.
Mr Levente Kovács: The effects of instant payment on the economy
34
Due to the way the system works, the ideal application of ‘just in time’
methods in the management of current account balances will become a real
possibility, as delivery time is practically zero (a few seconds), delivery costs
(payment fees) are marginal, stock-piling due to uncertainty is also around
zero due to the predictable and stable operation of clearing houses, and the
unit of delivery is a unit of money; e.g. 1 Euro cent.
New risks – new challenges
Players of core clearing processes: the customer initiating the payment –
initiating bank – clearing house – accepting bank – beneficiary customer.
I.e., in default cases the process has five players.
Chart 4: The Hungarian operating model and liquidity management
Source: Source: National bank of Hungary, Bartha (2017). Edited by Anita
Nagy (Hungarian Banking Association - HBA)
Mr Levente Kovács: The effects of instant payment on the economy
35
In the instant payment system, the clearing and settlement of payment
transactions takes place in the following steps:
Payment service providers (PSPs) send the sum earmarked for the pre-
financing of instant payment transactions to a single, dedicated account.
GIRO (the Hungarian ACH) holds the individual balances of PSPs in real
time, on the payment accounts managed by it. Parallel with clearing,
settlement also takes place transaction by transaction, in a gross fashion.
(Bartha, 2017)
The required liquidity is ensured as follows: PSPs have to transfer the sum
covering instant payments to a shared account held by the National Bank of
Hungary (MNB). GIRO has disposal of this shared account. PSPs have to
estimate the sum they need to keep on this account. Any sums requested by
PSPs to be transferred back, will be sent back from this account, subject to
GIRO’s transaction order, to the PSP’s VIBER (the RTGS between
Hungarian banks) account. As VIBER is not going to operate 24/7, PSPs
will have to estimate volumes on non-banking days in advance. (Bartha,
2017)
Customers run a credit risk in respect of their own banks up to the balance
of their deposits. Deposit holders can deposit/withdraw their money
to/from their bank in cash. Inter-bank clearing involves orders where the
paying party and the beneficiary party are customers of two different banks.
As part of the payment order, clearing takes place between the paying
party’s and the beneficiary’s banks, so an accounts payable/accounts
receivable relationship is created between the two institutions. As in the
payment system a lot of money of many-many customers moves between
payment operators, banks may develop a significant degree of unintended
exposure against each other. In a given payment transaction, the size of the
exposure is in direct proportion to the value and duration of the exposure.
Exposure can take a number of different forms, and therefore the approach
to reducing and managing it can also vary widely. One of the key features of
clearing systems is their financial architecture – the method they apply in
processing orders in view of financial considerations.
Mr Levente Kovács: The effects of instant payment on the economy
36
When it comes to knowledge, it’s worth reviewing the ‘classical’ risks
involved in clearing (Kovács et al., 2017), and where necessary due to the
instantaneity of the new system, re-interpret and/or supplement these
definitions.
In the context of the clearing system, financial risks may emerge in different
forms, such as so-called credit, liquidity, execution (settlement) or system
risk.
‘Credit risk occurs in clearing systems where orders are forwarded to the
beneficiary bank before financial settlement. Market competition encourages
the beneficiary bank not to wait for the arrival of the credit item and the
notification of financial settlement issued once the sum is made available for
use by the beneficiary, but to do everything in its power to make sure the
beneficiary can dispose of the amount received as soon as possible. This
behaviour can cause serious issues in situations where the paying bank
(which can be an intermediary or also the beneficiary’s business partner)
becomes insolvent and cannot meet its payment obligations then or later.’
(Kovács et al. 2017, p. 35.) In terms of the instant payment system, the
credit risk, as such, does not change, but the customer may have such
perception because of the increased difficulty of liquidity management.
‘Liquidity risk is potentially just as dangerous as credit risk. Liquidity risk
arises in systems which are protected from a financial aspect. That is
because in such systems the continuous processing of orders is based on the
assumption of liquidity or the existence of bilateral or multi-lateral credit
lines. In cases where some banks try and fulfil orders on time, potentially at
a specific point in time within the day, but another bank is unable or
unwilling to do so, conscientious banks (or financial service providers) can
get stuck in a bad situation. Liquidity risk means that the insolvent bank may
only meet its payment obligations late. The delay, however, may push the
other bank, dependent on the defaulting bank, into being late, and therefore
a large number of banks may be affected by the delay. For some banks,
liquidity risk may become fatal, as their temporary insolvency may be
perceived by others as long-term insolvency, which, in turn, may seal the
fate of the bank in question.’ (Kovács et al. 2017, p. 35.) In order to
maintain the continuity of operation, in the instant payment system
Mr Levente Kovács: The effects of instant payment on the economy
37
members must be able to precisely estimate and pre-fund their volumes for
periods beyond opening hours.
‘Execution risk occurs when financial execution does not take place at the
originally scheduled time, due to non-payment by one or more participants.
Execution risk also carries credit and liquidity, as well as operating risks.’
(Kovács et al. 2017, p. 35.
‘We can speak of system risk when, due to occurrence of credit, liquidity
and/or execution risk, a domino effect forms, causing serious liquidity and
lending difficulties across the entire financial system. The starting point of
system risk can also be an operating risk event. Therefore, when it comes to
system risk, the primary objective is not reduction but avoidance.’ (Kovács
et al. 2017, p. 35.) When estimating liquidity, latency must also be taken into
consideration.
‘Membership risk. When it comes to the safe operation of clearing systems,
the solvency and creditworthiness of the institutions participating in such
system cannot be ignored either. The number of participants and their
relationship with each other also matter; i.e. whether they trust each other
and are prepared to engage in a business relationship with each other. The
criteria of system membership and the requirements members have to meet
at all times have a significant influence on the system’s operation. The
conditions of system membership are risk management tools, and are
typically based on risk assessment, but they can also take the form of
technical requirements. To make sure that a given participant of the clearing
system does not pose any risk to the rest of the participants, in addition to
being solvent it must generally also be fully aware of and able to assess the
risks it takes on, and act accordingly. Those who safeguard these systems,
typically expect clearing systems to make the conditions of system
membership public and objective, and differentiate between applicants on
risk grounds only.’ (Kovács et al. 2017, p. 41-42.) In instant payment
systems, this risk gains special significance, as a partially assumed liquidity
buffer can result in the tightening of membership conditions.
‘Operating risks: The most complex of risks. They include hardware or
software faults, communication issues, disaster events and security/fraud
risks. I.e. they cover all human (negligence, error and wilful damage) and
Mr Levente Kovács: The effects of instant payment on the economy
38
technical risk components, which, when they occur, temporarily disable the
operation of a critical component of the clearing system. However, they can
also occur as a result of the loss of a key infrastructural component keeping
the system in motion (e.g. power or communications channel), caused by a
natural disaster.’ (Kovács et al. 2017, p. 42.) When it comes to instant
payment systems, every impact manifests itself in a way that’s visible to
customers, which can trigger panic, and shake their trust in the system.
When it comes to management and governance risk, it must be understood
that the instant system is a new product not only for customers and
payment operators, but also for the AChs responsible for clearing and the
central banks taking care of settlement. All stakeholders must therefore
obtain the right experience.
‘Legal risk. As the instant payment system is a brand new system to be
introduced from scratch, the classical regulatory toolkit must also be
renewed and adjusted, including the clearing process, the general provisions
of law pertaining to both the clearing system and its members, such as
provisions of law governing the definitive nature of execution, the
bankruptcy procedure and payments; decrees issued by the Central Bank, as
well as contracts and system regulations (e.g. internal regulations and
operating procedures).’ (Kovács et al. 2017, p. 33.)
Finally, country risk must also be mentioned, which covers the management
of fraud and general cyber threats affecting a given country’s financial and
payments system and electronic payments. As a result of the proliferation of
digitalisation, the threat of this risk will most probably grow.
Out of the risks listed, the introduction of the 24/7 payment system affects
two areas most. The increase in liquidity risk is apparent, as, in order to be
able to manage payment volumes, clearing members need to hold balances
that most probably will suffice for covering expected debits, with the
anticipated level of credits. High probability, however, cannot mean
absolute certainty, as several members of the clientele or certain large
deposit holders may have a concentration in payments that a bank cannot
prepare for in advance. Previously, they had the option of raising short-term
funds from money markets until settlement took place at the end of clearing
cycles. The usage of instant payment systems and the lack of experience
Mr Levente Kovács: The effects of instant payment on the economy
39
particularly at the time of its introduction may turn this risk into reality,
which can shake trust in the new system. This could be prevented if clearing
membership conditions were tightened up, and, at the same time, central
banks provided an unlimited credit line to clearing members during the day
and also in non-banking periods.
A special mention must be made of fraud risks, as the invisibility period will
dramatically reduce. A number of studies deliver specific examples for
recent fraud cases (e.g. Kovács – Dávid, 2016). In part of these, the period
between clearing cycles still allowed for catching up with identified fraud
cases, making them still reversible. That’s because if fraud was identified
within a short period of time, the manual alarm chain could still catch up
with the float in transit. With the instantaneity of the new system, there is no
chance of this; i.e. the chance to reverse fraudulently taken funds is reduced
to zero.
This risk can be reduced by keeping the upper limit of instant payments low,
and by boosting the security components for both clearing members and
customers. Further methodological support can be provided by the EBA
Decree (2017) currently under preparation, which focuses on the
management of operating and security risks linked to payment services.
Practical questions concerning the feasibility of instant payment systems
Feasibility raises a number of questions, which primarily concern speeds that
exceed the speed of all manual processes. In Hungary banks and other
financial service providers have raised the following issues (derived from the
correspondence between the Hungarian Banking Association and its
members banks in May, 2017):
First of all, to ensure the security of transactions, which covers all checks
aiming to prevent misuse, fraud, money laundering and the financing of
terrorism, they consider it important that the system is regulated in such a
way that the relevant legal provision should give the right to financial
institutions participating in the system to handle certain transactions
separately, subject to a well-defined set of conditions. This means the
execution of the transaction in a non-instantaneous manner, but within a
reasonable time period; or, if a risk involving security issues, money
Mr Levente Kovács: The effects of instant payment on the economy
40
laundering or the financing of terrorism is identified, the suspension or
rejection of the transaction. The relevant provision of law should also
guarantee that payment service providers cannot be held liable for executing
instant payment transactions late or rejecting them for the reasons listed
above, and that in such cases customers cannot claim damages. There
should also be clear and precise regulation in place for how and what
payment service providers should communicate to customers in the
aforementioned, exceptional cases.
The strong protection of secondary IDs is also a key issue, as their
manipulation can represent an outstandingly risky area in potential future
fraud. They believe that for this we need regulations that clearly stipulate
how and subject to what conditions payment service providers should be
allowed to enter secondary IDs for a given customer account, and what
procedure is to be followed when modifying or deleting such IDs. The
provision of law must also stipulate what security solutions payment service
providers and the operator of the central registry system will have to offer in
order to safeguard the integrity of secondary IDs. The regulation must also
extend to the type of protection to be provided to safeguard the database of
secondary IDs from unauthorised access. It should stipulate that one
secondary ID should only be linked to one customer, irrespectively of which
payment service provider the given customer belongs to; and it should also
cover the way the originator of the financial transaction should be able to
check the identity of customers linked to the secondary ID, from the central
database.
Identifying the booking value date of transactions is of key importance for
both system members and their customers. It makes sense to aim for a
single solution nation-wide, as any customer, be it a private individual, a
business or an institution, can have accounts with several banks or financial
service providers. The regulation would ensure a single, shared approach to
tracking and processing, which, in turn, could reduce the resources required
for complaints management and the costs of service providers. Regulations
would also be needed for timeout cases occurring for a variety of reasons
(e.g. an error by the service provider of the paying party, the lack of
available funds on the customer’s payment account at a given moment in
time, or some kind of error occurring in respect of the infrastructure used).
Mr Levente Kovács: The effects of instant payment on the economy
41
Payment service providers are of the view that standard, shared regulations
are needed to govern the management of impacts resulting from the not
entirely smooth operation of IT communication, as well as the maintenance
of their own connecting systems.
In addition to these mainly legal and technical requirements, further
questions were raised about some already known characteristics of the
system to be introduced; i.e. the feasibility of new convenience services,
such as ‘Pay when there is enough money on my account!’. The
incorporation of high-volume payments by the State (e.g. pensions and
benefits) in the instant payment system is also an open issue for payment
service providers.
Summary
Over the past years, intra-day clearing has become a basic expectation of the
corporate sector, constantly present on money markets; of the SME sector,
which is also active from this aspect, and also of the retail sector. There is
market demand for the further acceleration of payments, which could be
ensured by clearing houses as a result of their use of up-to-date IT systems.
Clearing houses that delay or refuse the introduction of instant clearing can
easily lose their markets.
Instant clearing requires new processes and regulations. It also offers the
opportunity to develop new payment products. Therefore, if we look at the
impact of the current transition and the tasks involved, we cannot speak of
an upgrading of the previous intra-day system, but the establishment of an
entirely new system.
The unique characteristic of the instant clearing system is speed that
surpasses all manual processes, which, in turn, brings new challenges in all
areas of risk management. The prevention of fraud, the on-going provision
of liquidity and the availability of ICT systems must be given more focus
than with any previous method. However, all these tasks will cost money. In
the meantime, the classical revenues of the banking sector will reduce, as the
market and supervisory authorities would not go along with increasing the
rate of payment commission, while the ‘Just in time’-style current account
management reduces the value of current account balances; and the
Mr Levente Kovács: The effects of instant payment on the economy
42
development and continuous (24/7) operation of the new system will
involve significant costs. These can be partly off-set by the expected
increase in transactions numbers in the wake of the introduction of new
payment products.
Organisations responsible for the introduction of instant payments trust that
in the medium run, with the proliferation of electronic payment products,
there will be a clear reduction in cash usage, and economies will whiten,
which, in turn, will support the competitiveness of national economies.
Mr Levente Kovács: The effects of instant payment on the economy
43
Literature:
Lajos Bartha (2017): Instant payment - presentation, The establishment of
an instant payment system – forum, National bank of Hungary, May 24,
2017
EBA (2017) Draft Guidelines on the security measures for operational and
security risks of payment services under PSD2, EBA Consultation Paper
EBA/CP/2017/04
https://www.eba.europa.eu/documents/10180/1836621/Consultation+Pa
per+on+the+security+measures+for+operational+and+security+risks+of
+payment+services+under+PSD2+%28EBA-CP-2017-04%29.pdf
Felföldi – Kovács (2011): Analysis of corporate current account balances,
Hitelintézeti Szemle [Financial and Economic Review], 2011/1. pp. 61-69.,
ISSN 1588-6883
István Helmeczi (2010): Payments map in Hungary, MNB studies 84., Press:
MNB, ISSN 1787-5293
Kari Kemppainen (2003): Competition and regulation in European retail
payment systems, Discussion papers 16., Bank of Finland, ISBN 952-462-
066-9
Khiaonarong – Liebenau (2009): Banking on Innovation – Modernisation of
Payment Systems, Press: Springer, e-ISBN: 978-3-7908-2333-2
Levente Kovács (2010): New model of the current account balances,
Theory, Methodology, Practice, December 2010. Vol. 6./No. 2. pp. 31-35.,
Press: Miskolc University, ISSN: 1589-3413
Levente Kovács (2013): The impact of intra-day clearing on the economy;
Intra-day payment project 2010-2012 study collection pp.31-38., Publisher:
GIRO Zrt., ISBN 978-963-86819-5-9
Kovács - Dávid (2016): Fraud risk in electronic payment transactions,
Journal of Money Laundering Control, 2016/2. Vol.: 19., pp. 148-157. Press:
Emerald Group Publishing Limited / UK, ISSN 1368-5201
Mr Levente Kovács: The effects of instant payment on the economy
44
Kovács – Divéki - Dávid - Pál - Kada (2017): Low value payments and their
clearing systems, pp. 134. Press: Miskolc University, ISBN 978-615-5626-
14-2
Heike Mai (2009): SEPA: Changing time for payments’, Financial Market
Special / EU Monitor 64., Press: Deutsche Bank Research, Frankfurt am
Main. ISSN: 1612-0280
MNB (2016) A new dimension in payments – Options to introduce instant
payments in Hungary, MNB concept paper (April 19, 2016)
https://www.mnb.hu/letoltes/az-azonnali-fizetesi-szolgaltatas-mukodesi-
modellje-magyarorszagon.pdf
István Prágay (2012): The past, present and future of payments and clearing,
The Hungarian banking sector is celebrating its 25th anniversary – study
collection, Press: Hungarian Banking Association, p. 217-231, ISBN 978-
963-08-484
Mr Maris Cakste: Solving the Challenges with Mobile NFC Payments
45
SOLVING THE CHALLENGES WITH MOBILE NFC PAYMENTS – PART
1
THE HISTORY OF CONTACTLESS PAYMENTS
Mr Maris Cakste
Director of Sales
MeaWallet
Mobile contactless payments look „user-friendly” in many ways - the mobile phone is the last thing to be forgotten at home and the holder may have several cards in one device.
However, traditional answers to the contactless challenge left a number of issues unsolved- iOS support, merchant acceptance, speed at the checkout counter, the SWW (something
went wrong) experience, just to name a few. Are wearable gadgets the answer to the challenges? The author gives a positive answer,
forecasting that 2018 might be the Year of Wearable Payments.
Payments using NFC is nothing new – it is something we have been talking
about since 2003/2004.
NFC is often referred to as The radio frequency standard that could solve
all problems, removing any friction from payments and removing all of the
world’s checkout queues.
NFC has slowly grown popular in the form of the plastic card, but when we
talk about NFC payments, I bet the average industry veteran will drift his, or
her, mind to mobile NFC payments.
Mobile payments using NFC has almost been considered the Garden of
Eden or the fountain of youth. And boy, has it been long expected; try do a
search for “year of mobile payments”, and you will find no less than 35+
million results!
If I had a dollar for every time I heard that this year/next year will be the
year of mobile payments, I’d rather be drinking Piña Colada at my private
beach, rather than writing this blog post.
Mr Maris Cakste: Solving the Challenges with Mobile NFC Payments
46
But something has happened. After the launch of HCE in 2013, Apple Pay
and Android Pay in 2015, the avalanche of Issuer-HCE solutions launched
in 2016, in 2017 to date, I think we finally can say that mobile payment
based on NFC has reached some sort of a maturity and market acceptance.
Alas, the offering and acceptance vary from market to market, but the
standards are set and the world is moving unified in one direction.
Solving The Challenges of Mobile NFC payments
Mobile contactless payment is in many ways a great answer to several
challenges: the user “never” forgets his/her phone at home, you can
combine multiple cards in one device, it makes the Issuer look forward-
leaning and modern, and it provides a sense of coolness for the one using it.
But even as mobile contactless are being spread, it still comes with some
challenges.
Personally, I’ve been meeting with Issuers countless times the last five years,
and I’ve also had first-hand experience with the eight different wallets I’ve
installed and use on a regular basis. In short, the issues and concerns I’ve
heard about or experienced are:
•iOS support – only for the selected few in the selected markets that are
willing to accept Apple’s terms
•Merchant acceptance – for the user to trust the solution he must trust that
it is accepted. In most markets, albeit growing, contactless acceptance is still
under par.
•SWW – SWW, or “Something went wrong” is unfortunately still a problem.
With a myriad of devices, standards, payment terminals and user
expectations to the speed of tap & pay, the user still ever-so-often will
experience that “something went wrong”.
•Speed at checkout counter – Some Issuers require the user to unlock their
phone, find and open app, select card, and type in PIN before they can tap
– it’s not always as easy as just tap-and-pay with your contactless plastic
So how can these challenges be solved? This will be discussed in Part 2 of
this blog post about wearable payments.
Mr Maris Cakste: Solving the Challenges with Mobile NFC Payments
47
SOLVING THE CHALLENGES WITH MOBILE NFC PAYMENTS – PART
2
As discussed in Part 11 of this blog post, mobile NFC payments have some
challenges. This post will look at how wearable payments work and how
they can meet these challenges.
Enter wearables
In October 2015, Mastercard and NXP announced something that might
have been the start of the solution: New Program that can Turn any
Wearable into a Payment Device2. Following this, several announcements
have been done on wearable or IoT payment (like this3, this4, or this5).
While several of these are quite distant for the average consumer, the
wearable device payments are already here.
Especially two major challenges can be met with wearable payments: iOS
support and speed at checkout.
Payments using wearables basically works by provisioning the payment
credentials onto the wearable device. This can be done during production,
but only allows for simple, static, pre-paid solutions. However, by
connecting the wearable to a mobile app and use the app as a proxy for
credential provisioning, there are (almost) no limits to what cards possible to
add. In addition, this allows for real-time lifecycle management of the
credential stored on the device.
1 https://www.meawallet.com/2017/07/06/397/ 2 https://newsroom.mastercard.com/press-releases/mastercard-launches-new-program-that-can-turn-any-consumer-gadget-accessory-or-wearable-into-a-payment-device/ 3 https://globenewswire.com/news-release/2017/01/04/903067/0/en/NXP-Drives-Innovation-for-Future-Wearable-Technologies.html 4 https://kerv.com/en/news/news/kerv-wearables-launches-contactless-payment-ring-at-wearable-technology-show-2017/ 5 https://www.otiglobal.com/pr-news-events/oti-launches-breakthrough-wearable-payment-device-beautiful-silver-ring-smart-payment-bling/
Mr Maris Cakste: Solving the Challenges with Mobile NFC Payments
48
What does this mean?
1. Remove the NFC block on iOS device. Even if your customer is
using an iPhone, she/he can deploy payment cards on his wearable device
through the open Bluetooth channel. During payment, she will use the NFC
channel on his wearable, circumventing the close control Apple has put on
their devices.
2. Always at hand – literally. Paying using a wearable device, such as a
smart watch, bracelet or even a ring6, removes the need of finding the device
in the first place. Tap your wrist or hand towards the payment terminal, and
the purchase is performed within milliseconds. You can’t do it cooler – or
faster!
Hype or future?
Obviously, payment through wearables has its advantages. The big question
that remains whether it is only a hype, or if we actually will see people
tapping their wrists to get their favorite sub on their way home from work.
Apple Pay through Apple Watch has been around for about three years.
Even so, analytics report of a slow start7. Similarly, Samsung Pay has been
available on Samsung Gear devices since 2015. These solutions have had a
limited list of supported Issuers, but as the list of supported Issuers is
growing8, the use is growing at high speed9.
A user research conducted by Seqr10 showed that 61 % of all users wanted
to pay with a wearable device. Furthermore, it showed that more than 70 %
would have no worries about the security of such a solution.
6 https://kerv.com/en/ 7 https://www.wsj.com/articles/apple-pay-promised-to-make-plastic-obsolete-then-came-wary-shoppers-confused-clerks-1491384606?mod=rss_Technology 8 https://support.apple.com/en-us/ht204916 9 http://www.pymnts.com/news/payment-methods/2016/contactless-payments-card-usage-in-europe-exploding/ 10 https://www.seqr.com/int/
Mr Maris Cakste: Solving the Challenges with Mobile NFC Payments
49
MeaWallet has seen an increase in OEM vendors – well established as well
as small start-ups – that reaches out to us to learn more about our offerings
for wearable payments.
In summary, we see that wearable payments are coming, and we believe they
are coming fast. We might be too far into 2017, but 2018 might prove to be
the Year of Wearable Payments.
Mr István Lengyel: Recension of Financial Literacy
50
RECENSION OF FINANCIAL LITERACY
Mr Istvan Lengyel
Secretary General
Banking Association for Central and Eastern Europe (BACEE)
Levente Kovács & Elemér Terták: Financial Literacy
ISBN: 978-80-8178-016-5
Published: Verlag Dashöfer,
Bratislava 814 99 Slovakia
In their publication, the authors cover the issue of financial literacy from the
point of view of Central Europe, using examples from the region.
As they point out, the lack of financial literacy, it was one of the main
reasons of the 2008 economic crisis. Central Europe, despite the relatively
low level of penetration of the financial sector, had its faire share of the
crisis, mainly through a wave of currency devaluations and consequently, a
very high level of non-performing retail mortgage loans (with the exception
of the Czech Republic and Slovakia). As the authors emphasize, following
the crises, according to the global experience, it usually takes 5 to 10 years to
regain confidence and forget the blows Central Europe is no exception and
offer nearly 10 years we witness recovery of banks’ profitability and increase
of lending activities.
These years following the crisis have been a golden period for dissemination
of financial knowledge – political leaders, professionals and practicing
economists have been keeping financial literacy on top of the agenda and
people, suffering from the crisis are more open to information helping them
to avoid similar losses in the future.
It is fair to ask the question if this period has been used properly to educate
the population in financial matters and would be current level of financial
literacy guarantee avoiding the next crisis?
Mr István Lengyel: Recension of Financial Literacy
51
As far as Central Europe is concerned, the answer is quite disappointing.
We have witnessed the appearance of new Ponzi schemes, resulting in large
losses for the population – small-scale investors seen not to have learned
much from the crisis. In Hungary, according to a research carried out in
2015 by the authors, even university and college students studying
economics, had only a slightly better understanding of financial issues, not
directly related to their mandatory curriculum, than their peers studying
other disciplines.
What could be a solution? The authors advocate that teaching of financial
skills should be made an integral part of the mandatory school curriculum,
leading to an increased level of financial awareness.
However, as the authors point out, European education systems are mostly
conservative and react too slowly to challenges. In the era of digitalization
of financial services it may easily happen that a large part of traditional
financial knowledge found in textbooks, become quickly outdated.
Nevertheless, despite all technical developments, the basic task of increasing
financial literacy of the population remains unchanged, even if the way
financial services are delivered develops quickly: in a market economy,
citizens must take care of their finances and should be able to manage their
financial assets and liabilities reasonably. One should learn at an early age
that, in whatever form money appears, it needs to be managed carefully. It is
not too early to speak in schools about the dangers of overleveraging (using
probably more simple expressions) and about the risks of “incredibly
profitable investments”.
As the authors emphasize, similarly to a driving license that is obligatorily
obtained by the adult population, managing one’s finances (mostly through
digital channels) should be also considered a necessary skill.
The authors build their conclusions on a thorough analysis of available
literature, adding the results of their own research. The basic materials used
also include surveys carried out by different research institutes,
consultancies and state organisations in Hungary in the period of 2011-2016.
The authors start with analysis of the different approaches to the concept of
financial literacy, pointing out at the difficulties of international comparison
Mr István Lengyel: Recension of Financial Literacy
52
of financial knowledge. They also note the changing content of FL which
more and more includes the ability to use digital financial services.
Introducing the concept of cyclical character of FL, they emphasize the link
between the level of financial knowledge and the economic and financial
crises. They also note the difficulties of designing financial education
programs, referring the trap of “fighting the last war” – preparing people
against risks, characteristic for the previous crises.
In order to define a strategy of financial literacy, the authors show the
different levels of financial knowledge on an ascending scale, from knowing
simple financial concepts to the ability to reach well-founded and conscious
financial decisions, and propose corresponding solutions to reach higher
level of FL.
The authors complete their analysis with a survey on the new challenges of
the digital era and on how banks react to the changing customer behavior.
Their conclusion is clear – clients should understand not only how to use
the new distribution channels but also the opportunities provided by
modern online banking. In a way, technology may support better
management of personal finances, but the final responsibility will always
remain with the individual customer.
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
53
CONTACTLESS CARD AND MOBILE PAYMENT ADOPTION IN
HUNGARY
Mr Zsolt, Pál
Assistant professor
University of Miskolc
Electronic payment transactions can be classified as „proximity”/„remote” payments or Consumer-to-Consumer (C2C), Consumer-to-Business (C2B) or Business-to-Business
transactions. As VISA’s 2016 survey shows, within proximity payments, the most promising growth
area is that of payments using NFC (contactless) technology. In Hungary, electronic payment methods should compete with cash which still has an 80%
market share but card payments are quickly gaining market share, in particular in the contactless segment.
A number of providers, including Gránit Bank, OTP, MKB, Telenor, Cellum offer this service and the number of avaible opportunities should quicly grow in the coming years,
together with the number and volume of NFC card transactions.
Visa’s 2016 Digital Payments study, for which more than 36,000 online
consumers in 19 European countries were surveyed shows that 54 percent
of European consumers regularly use their mobile device to make payments.
The number of consumers making mobile payments has tripled in the past
year, as 18 percent used mobile payments to pay for goods and services in
201611.
The most current classification of mobile payments is about the distance of
the transaction. According to this, we can speak about “proximity
payments” or “remote payments”. For “proximity payments” the consumer
and the merchant (and their equipment/devices) communicate directly using
a proximity technology (in most of the cases NFC or 2D barcodes), as they
are in the same location and. For “remote payments” the transaction can be
made independently of the payer’s location and it is conducted over
telecommunication networks such as GSM or internet. Sometimes these two
categories are overlapping, when information for the transaction is gathered
11 Digital Payments study – VISA Europe (2016)
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
54
via a proximity technology, but the actual payment initiation is done
remotely via the mobile device.
Mobile payments may be also classified as Consumer-to-Consumer (C2C),
Consumer-to-Business (C2B), Business-to-Consumer (B2C) and Business-
to-Business (B2B) payments, considering the type of the payer and
beneficiary (being a consumer or a business).
Proximity Remote
C2C
C2B typical
B2C
B2B
C2B proximity payment is the most typical card transaction
“A typical payment card transaction is C2B, with the beneficiary usually
being a merchant. The payments card industry has been developing the
concept of contactless cards based on NFC technology which offers a viable
alternative to cash for low value transactions. This allows the cardholder to
simply wave or tap the card close to the merchant’s payment terminal for
the payment to proceed. Mobile devices are capable of supporting the same
technology and therefore can be used by the cardholder instead of the
physical card itself. This offers a great opportunity for the development of
interoperable mobile contactless payments.”
Surveys have shown that for proximity payments whereby cards are the
underlying payment instrument, the NFC technology is by far the one with
the best market take-up. 12
The most common payment method In Hungary is still cash (about 80%),
but in the last few years we experienced a significant growth in card
payments, and in the proportion of contactless (MasterCard PayPass)
transactions. In the Hungarian payment card infrastructure, now contactless
payments became dominant. In the first quarter of 2017 63 per cent of
transactions were conducted using the contactless technology. This
accounted for nearly a half of the value of total domestic purchase
12 EPC White paper on mobile payments
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
55
transactions conducted with payment cards.13 This means a strong base for
the introduction of proximity mobile payments, as “contactless card
payment is the predecessor of (proximity) mobile payments.14
According to OTP figures, there are 1.2 million smartphones in Hungary
able to use NFC for transactions. Smartphones with iOS are only able to be
used for mobile payments with Apple Pay, which is in Europe only available
in some banks of France, Ireland, Italy, Spain, Switzerland and The United
Kingdom.
Hungarian bank account holders have the following opportunities to pay
with their smartphones at the moment.
In September 2016 GRÁNIT Bank in cooperation with MasterCard
introduced GRÁNIT Pay, a new generation mobile payment solution.
GRÁNIT Bank clients need an NFC-enabled Android smartphone and the
mobile app of the bank on it to digitalize their bank cards and be able to pay
with their devices.
In the recent past OTP Bank also launched contactless NFC payments on
its Android mobile wallet application. The upgraded Simple Android app
incorporates NFC point of sale payments, which are running alongside the
QR code system previously in place. The NFC payment functionality of the
app is currently only available to OTP customers. MKB Bank has launched
a similar solution too.
There are some other alternatives such as Telenor MobilPass or Cellum
Connected Card. To use the solution of the telecommunication company,
customers also need an NFC-able SIM-card. Cellum’s solution is based on a
prepaid card.
We can state, that our country is not the epicentre of mobile payment
adoption. However, there are some trustworthily working and quickly
developing solutions. These can be supplemented with FinTech companies
now offering a lot of cashless payment services and neobanks supplying
bank accounts compatible with services like Apple Pay, Anroid Pay, or
13 MNB Information Release – 15 June 2017 14 Eölyüs Endre: Innovations and the future in the world of digital payments
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
56
Samsung Pay.15 Instant bank transfers will be launched in Hungary16 on 1
July 2019, which also could be an important milestone17.
I think Hungary can expect a rapid development in the spread of proximity
mobile payments and other cashless payment solutions in the next few
years. I expect a lot of coexisting infrastructures resulting better user
experience, and a dynamic, secure payment system.
15 KOVÁCS, Levente – TERTÁK, Elemér: Financial Literacy 16 Instant Payments – Magyar Nemzeti Bank 17 KOVÁCS, Levente – DÁVID Sándor: Fraud risk in electronic payment transactions
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
57
References
Digital Payments study – VISA Europe (2016)
Eölyüs Endre: Innovations and the future in the world of digital payments
(Mastercard, talk, University of Miskolc, Financial Literacy Conference, 8th
March 2017)
Contactless payments account for nearly two-thirds of total card payments
(Information Release – Magyar Nemzeti Bank, 15 June 2017)
EPC White paper on mobile payments (version 5.0) – European Payments
Council (2017)
KOVÁCS, Levente – TERTÁK, Elemér: Financial Literacy – Panacea or
placebo? - A Central European Perspective
Instant Payments – Magyar Nemzeti Bank
www.mnb.hu/en/payments/instantpayments
KOVÁCS, Levente – DÁVID Sándor: Fraud risk in electronic payment
transactions
JOURNAL OF MONEY LAUNDERING CONTROL (ISSN: 1368-5201)
19.: (2.) Paper 5. (2016)
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
58
DEPOSIT INSURANCE AND MOBILE PAYMENTS: DISPARITIES ON REGULATORY APPROACHES
Ms Shengxia Li
PhD student
University of Miskolc
Deposit insurance (DI) is a widely accepted global concept, with 125 jurisdictions where explicit DI systems have been introduced. Do these schemes also cover mobile money
(MM)? To answer this question, the author first provides definition of MM and short description of the three main types of the existing DI systems (direct, pass-through and
exclusion). MM is different from traditional money and this is a specific challenge for regulators. MM issuers have different status around the globe and the legal requirements for issuing MM
also differ across jurisdictions. When extending DI to MM in order to defend the poulation, regulators should consider the specific risks characteristic for MM – the
liquidity risk, risk of insolvency of the issuers and their banks. In order to meet these challenges, regulators should apply a country-specific approach,
considering the local legal environment, level of financial incusion and public awareness and the cost of deposit insurance, emphasizes the author.
Abstract
With the increased deployments of Mobile Network Operations (MNOs)
and mobile device market penetration, there is a broader number of
financial services provided to the customer. Along with the booming of
mobile money, there are emerging risks: Do the mobile money providers
have enough money to liquidate and meet customers’ needs? Are they
solvent enough to reimburse their customers? When there is a bank failure,
are mobile money users protected? This paper investigates mobile money
risks and how deposit insurance can be involved to protect customers in
different jurisdictions.
Most nonbank mobile money issuers are requested to have initial capital
requirements to meet the liquidity limits for their customers. What’s more,
in different jurisdictions, there are a variety of provisions on how to separate
customers’ funds and the providers’ assets, in countries applied with
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
59
common law, there is a trust law to regulate related participants, and under a
civil law, such law may be ambiguous and more indirect.
Even if the mobile money issuer is well organized, customers’ funds may
still be at risk when a bank fails. To address these issues, there are three
main approaches to deposit insurance for digital payments: direct coverage,
under which regulation is adjusted as needed to bring mobile payments
within deposit insurance coverage; “pass-through” or indirect coverage,
which allows for customer funds held in pooled custodial accounts to be
insured, and the insurance is “passed through” to individual account
balances managed by a third party; as well as the exclusion approach. In this
paper, the author presents cross-country examples on the disparities of this
issue and its different deposit insurance scheme characteristics.
The Concept of Mobile Money, Deposit Insurance and their Function
Mobile Money and its function
Mobile money is defined as a digital equivalent of cash which is transmitted
and stored on electric devices or some mobile communication networks
(CPSS,2012). It differs from traditional payments in that it requires the payer
to possess a digital instrument to interact and initiate a transaction via their
devices with the related information routed.
Most mobile payments transactions are small in value but more
approachable for the customer, especially among the unbanked and remote
residents. Its foremost and predominant role is to act as a payment channel
to more customers. With the potential prospective of reaching billions of
new customers, there are many banks and financial institutions that desire to
provide more innovative and accessible financial services to their customers,
who come from among more than 80 countries (GSMA, 2014). Through
the expanded digital connectivity ensured by MNOs, there is an exponential
growth in mobile transactions and mobile money accounts worldwide. This
is most visible in developing economies: mobile penetration in the
developing world increased from 24% in 2007 to an estimated 47% in 2017,
with the number of mobile subscribers reaching 3.2 billion, and the number
of mobile connections doubling during the last four years in Africa and
South-East Asia, and more than tripling in South Asia (GSMA, 2013). Its
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
60
repaid diffusion shows mobile money’s immense potential to extend
financial inclusion.
The priority function of mobile money is to act as a tool for payment and
transfer; with the development of MONs, a myriad of financial services and
unpracticed players are involved to form a new landscape, such as mobile
device producers, application providers and third-party agencies. Another
role for mobile money is value store functional (GPFI, 2014). It can be
post-paid or pre-paid, through different methods which also help to reduce
transaction cost during the delivering of financial services.
Interaction between Deposit Insurance and Mobile Money
Deposit Insurance, designed to protect customer’s deposits when a bank
fails, plays a significant role in promoting confidence among customers,
promotes financial stability and prevents chaotic depositor runs. There are
125 jurisdictions in the world that have established an explicit deposit
insurance system prior to 2016 (IADI,2016). Meanwhile, the involvement of
deposit insurance in the promotion of financial inclusion should adequately
be addressed by determining what types of deposits and other money
transfer vehicles are covered by the deposit insurance (IADI,2014).
Allowing both banks and nonbanks to issue mobile money will foster
financial inclusion, however, there are also emerging risks presented:
liquidity risk rises when customers are unable to access their funds upon
demand and thus lose funds stored on the electric account; solvency risk
appears when the issuers fail to pay back the money. Mutual trust is the
basis of the whole banking sector; banks provide a collateral support for
customers’ deposits, and when there are any disruptions to mobile banking
services and telecommunication networks, the public confidence will be
undermined (Kovács, Levente 2015, and Kovacs, Levente 2016). The most
important purpose of deposit insurance is to protect its customer against
loss, and when confronted with the disruption, if the MON platform is
offered by members of the deposit insurance, its customer will be
reimbursed. Vice versa, if the digital platform is provided by nonbank
financial institutions, the number of small depositors could lose all they have
if one or more providers of digital transaction platform fail, more severely, it
may lead to systematic chaos (GPFI,2014). Even if the mobile money
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
61
issuers store customer funds in a licensed bank, it is insufficient to ensure
that customer funds are protected (GSMA,2016). Deposit insurance systems
are seeking to shift the financial burden of protecting smaller, retail
depositors to the government, and to mitigate the possible riskiness,
countries and jurisdictions have followed new developments on coverage
approaches to protect their customers. These are mainly: the direct
approach, the pass-through approach and the exclusion approach. There is
no worldwide universal benchmark concerning the approaches that a
specific country should adopt, namely there are still large disparities
concerning the deposit insurance approach for mobile payments.
Oversights of Mobile Payment and Deposit Insurance
Legal Regime
Legal uncertainty comes from the insufficiency of licensed providers.
According to a World Bank survey, less than half of the operators or
providers are licensed. These unlicensed providers may potentially abuse
mobile money. To mitigate the abuse of electronic money, virtually all
jurisdictions have set an initial capital requirement for nonbanks, which
varies greatly among different countries: the European Union’s is at 350,000
Euros under Directive 2009; India at INR 1 billion, which is approximately
USD 15.8 million, with an ongoing requirement at a minimum 15 percent of
risk-weighted assets and liabilities may not exceed 33.33 times net worth;
Kenya’s initial requirement is at KES 20 million (USD 198,000); and the
requirement int he Philippines is PHP 100 million (USD 2.2 million)
(GSMA,2016). There is a lack of consensus on how to establish appropriate
initial minimum capital requirements for nonbank mobile money issuers.
The initial capital requirements are designed to address bank insolvency and
remain sufficient as mobile money grows.
Even though there is a requirement for the initial capital, customer funds
may still be at risk. In most nonbanks, mobile money collected from many
customers is put in pooled accounts that are kept at one or more
commercial banks, while each pooled account is just treated as one single
account in the deposit insurance scheme. As a result, each customer may
have less percentage of their actual value guaranteed. One way to address
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
62
the problem is the pass-through deposit insurance, which is applied in
limited jurisdictions.
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
63
Possible Risks
Liquidity Risk: regulators mostly tend to require that providers maintain a
1:1 ratio between e-money and customer’s funds, to promise timely
payback. In case of non-bank e-money issuers, they also request them to
hold 100% of the float in safe, liquid investments (IMF 2014). However,
there also some exceptions, such as in the European Union, where this
requirement doesn’t apply if customers’ funds are protected by private
insurance. (Financial Inclusion Watch, 2016). Regulations on these issues are
not harmonized and vary in different jurisdictions, which leads to disparities
in this key issue.
As for mobile money fund diversification, cases are also different from
country to country. For example, markets like Afghanistan, Colombia,
Indonesia and Turkey are not sufficiently developed and only permit mobile
money put in banks; countries like Kenya which have a significant booming
of mobile money, are more diversified by allowing investments among
several credit institutions, but with a requirement from the mobile money
issuer to set aside funds equal to or greater than their obligations to
customers. Brazil and the EU, India, US, and the Philippines are diversified
among several asset classes by letting some government securities and other
authorized assets be invested (BBAV, 2016). It is obvious that different
regulations are largely influenced by country specific characteristics and
considerations, which is combined with the market development of mobile
money and the sophistication of their financial stability and sufficiency.
Risk of insolvency of the mobile money issuers: In the event of the
insolvency of a mobile money issuer, even though the regulator requires
100% of mobile money to be put in safe, liquid assets, the customer still is at
risk to not get all his or her money back; without any provision to protect
customers’ funds, they may only have an unsecure claim on the issuer’s
assets instead of a full value reimbursement. As a result, most regulators
require mobile money to be separated and ring-fenced from other assets of
the provider. The legal regime used to isolate and ring-fence customers’
funds once again varies by jurisdiction, which will largely be determined by
that jurisdiction’s legal law systems. Countries adopt common law based on
the concept of trust. Trust is a legal instrument whereby the provider
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
64
transfers the money to the trustee, who will manage their property for the
benefit of one or more beneficiaries. Under this regime, the trustee holds
the funds only on behalf of its customers and these customers’ funds are
not considered the providers’ assets and should be isolated from the
trustee’s other assets. Countries like India, Kenya, the Philippines, and
Uganda are under the applicability of trust law protection.
In civil law jurisdictions, on the other hand, the isolating of mobile money is
less evident. In the context of mobile money, there are also three
participants: the issuer, the financial institution, which serves as the fiduciary
and the customers, who are beneficiaries. While these contracts have been
adopted in several civil law countries, they still lack the legal construction,
since as common law countries, regulators are driven to take more steps in
order to mitigate further risks. The application of fiduciary protection has
mostly been used in Latin American countries, such as Paraguay, Colombia,
Peru, Uruguay (Figueroa, 2007).
The risk of insolvency of banks: Even if a mobile money issuer set the ring-
fenced funds to repay its customers, customers’ funds may still be lost in the
event of a bank failure. If the country does not yet have an operational
explicit deposit insurance, in such countries, mobile money customers
would not be entitled to priority status in terms of reimbursement in the
event of bank insolvency, and as a result the holders of mobile money may
receive less value deposits than their funds. Considering a country with
explicit deposit insurance system, regulators are exploring options for fully
insuring individual mobile money accounts. Pass-through deposit insurance
has been introduced in the United States and Kenya; direct insurance
approach has been applied in India and Colombia; and a majority of deposit
insurance schemes choose the exclusion approach, such as Brazil, the EU,
Indonesia, Malaysia, the Philippines, Turkey, and Peru. Deposit insurance
approaches are not harmonized worldwide and are largely influenced by
country specifics.
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
65
Protection of Customer Funds: Main Types of Deposit Insurance
Approaches for Mobile Payments
Pass-through Deposit Insurance
Accounts that may be covered by pass-through deposit insurance are
fiduciary accounts. These accounts are established and maintained by the
mobile money issuers on behalf of their customers. The FDIC, for example,
will insure the funds deposited by a fiduciary on behalf of their real owner as
if the actual owners had established deposit.
The pass-through approach allows customer accounts to be covered even if
they are not members of the deposit insurance system. Funds collected by
the mobile money provider and placed in a pooled account must be
qualified as “insured deposits” and individual customer accounts must be
eligible for “pass-through” treatment. Even though, the pass-through
approach is not widely recognized, it is already applied by the United States,
and is under the process of Kenya deposit insurance scheme.
Direct Coverage Insurance
Direct coverage insurance was established in India and Columbia in 2014.
Both countries claim that customer funds held by these nonbank mobile
money issuers will be under the protection of the deposit insurance system
in the event of bank insolvency.
Under this approach, a single entity may be both e-money provider and the
insurance system itself and funds are insured through specialized regulation
schemes. Through this approach, individual customers’ mobile money is
directly insured up to the coverage limit according to its jurisdictions. For
this approach, it is obvious that adequate and prudential regulation, together
with an efficient supervision and resolution framework must be in place,
aimed at mitigating potential risks.
Exclusion Approach
The exclusion approach, namely, to state that electric money is not covered
by the deposit insurance system, nowadays is adopted by most countries
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
66
around the world. There are some foreseen challenges for the existence of
this approach: inclusion tradeoffs associated with extension of deposit
insurance via digital platforms should be narrowed significantly; practical
feasibility for the whole society and the financial market may be challenging;
customers and the public should be acknowledged and customer awareness
should be enhanced properly about the exclusion of mobile money; the
definition of deposit should exclude e-money and any other digital
transaction platforms. There are also countries that have decided to extend
deposit insurance to individual e-money accounts, either directly or
indirectly.
Cross-Country Examples on Deposit Insurance and its Regulatory
Approaches
United States: The link between deposit insurance, banking supervision and
bank failure in the United States is the strongest in the world (Calomiris and
Gorton, 2000). The Federal Deposit Insurance Corporation, is a politically
independent entity which insures its members’ deposits, it is completely in
charge of the bank resolution process, administratively as well, and may
execute the process without involving the court, trying to resolve the bank
at its least cost criterion (Thorsten Beck and Luc Laeven, 2008). In 2008,
the FDIC establishes that all funds underlying stored value products and
other non-traditional access mechanisms will be treated as “deposit”. As a
result, all such funds including mobile money will be subject to FDIC
protection and insured up to the deposit insurance limit. Requirements for
this pass-through deposit insurance indicate that funds must be owned by
the principal and not the mobile money issuer who set up the account, to
confirm the actual ownership of the deposit funds, FDIC may review the
agreement between the mobile money providers establishing the account
together with the state law.
EU Countries: the EU requires all its members to establish an explicit
deposit insurance institution. All its member are regulated under specific
directives to be more harmonized. Some of the countries in the EU
developed multiple deposit insurance schemes such as Germany. Germany
Bankers Association has the right to cancel the membership of weak banks
and demand a regular audit, whereas the Federal Financial Supervisory
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
67
Authority is mainly in charge of the resolution of failed banks. The German
deposit insurance system is also strongly linked to bank resolution. For the
issue of mobile money, the EU offers two options: 100% percent of
customer funds must be isolated from the mobile money issuer’s other
funds and deposited in a separate account at a credit institution or invested
in “secure and low-risk assets”, or the mobile money must be covered by
insurance. India requires at least 75% of customers’ funds to be invested in
short-term government securities and up to 25% of customers’ funds may
be held in commercial banks. Mobile money issuers in the Philippines must
always have “liquid assets equal to the amount of outstanding mobile money
issued” and these funds may be invested in bank deposits, government
securities or other permitted liquid assets. Hungary, also has separated DIS,
and financial corporations are obliged to pay surtax in Hungary; the financial
institutions must pay the surtax based on their activities. Domestic
electronic money steadily increased, and the rapid development of
contactless technology gave birth to the improving efficiency of payment
transactions for Hungary, but households’ use of electronic payments
instruments still lags a little behind EU average. Hungary also introduced
the widest scope of the financial transaction levy, together with the
overburdened banking sector (Kovács Levente 2013.), it may also bring
additional challenges for the implementation of newly developed guidelines
at EU level, such as the minimum requirements for internet payments.
Brazil: The deposit insurance agency in Brazil is independent and privately
managed. It is not involved in bank supervision or the resolution of any
failed banks, but will intervene in the case of problematic banks. The central
bank is in charge of liquidation, so the role of deposit insurance and bank
supervision is institutionally separated. As another example, in the case of
Uganda this is different. Uganda’s deposit insurance was administrated by
the central bank, which is also the bank supervisor. Thus, in this case, the
housing of depositors’ funds and the supervision of banks is not separated,
which does not seem to ensure high efficiency in mitigating risk and
minimizing customers’ funds in the event of bank insolvency. When it
comes to mobile money requirements, Brazil applied an exclusion approach,
digital money is not covered by deposit insurance at all.
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
68
Kenya: Kenya’s deposit insurer plays a significant role in bank failure
solution, but this role is limited to a certain extent. The Deposit Protection
Fund is housed in the central bank of Kenya, and the decision of bank
resolution is made by the central bank even though the DPF is also involved
in the liquidation of closed banks. Kenya enacted an act in 2012 which
provides for pass-through deposit insurance. Payment service providers,
including mobile money issuers must establish a trust for customer funds
and ensure these funds are segregated from other funds.
Countries selected on mobile money provision and its deposit insurance
characteristics are presented as table 1.
Table 1. deposit insurance characteristic and its mobile money
provisions
Countries Link between
DIS and bank
supervision
Liquidity Requirements for
Mobile Money Funds
Initial
Capital
Requiremen
ts
Deposit Insurance
Approach to Mobile
Money
US Strongly
linked
All funds should be
held in a trust
Not
Specified
Pass- through
EU Legally
separated
100% of funds must be
in a bank account or in
low risk assets; or
protected by private
insurance
EUR
350,000
Exclusion
Approach
Kenya Role of DIS
limited
Funds must be held in a
trust and placed in
licensed banks
KES 20
million
approx.E
UR
176,000
Pass- through
Uganda Not
separated
Funds must be placed
by issuers in a licensed
Not
Specified
Not Specified
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
69
DIS financial institution.
Brazil Separated
DIS
Funds must be deposit
in the Central Bank on a
target balanced ratio
BRL 2
million
approx.E
UR
550,000
Exclusion
Approach
India Legally
separated
75% of funds should be
invested in government
securities.
INR 1
billion
approx.E
UR 13.4
million
Direct Coverage
Philippi
nes
Legally
separated
Funds should be
invested in government
bonds or other
authorized liquid assets
PHP 100
million
approx.E
UR 1.8
million
Exclusion
Approach
Source: own contribution based on Asli: database, GSMA research and
BBVA research.
Conclusion and Frontier Issues
Regulators are striving to follow approaches to ensure that mobile money is
effectively safeguarded against the potential risk of liquidity and insolvency
of the mobile money issuers as well as the insolvency of banks. However,
the approaches are not being tested in practice to approve which one is the
best. Disparities are due to the country specifics among jurisdictions.
The pass-through deposit approach is in place in limited countries even
though surveys show that mobile money funds could benefit from the
approach, though in the long run, such an approach will reduce risk in the
event of bank failure and bolster confidence among customers. Direct
coverage, which is also rarely adopted by regulators, may increase the cost of
deposit insurance in terms of its higher rate of reimbursement. The
exclusion approach is currently the most widely used. It seems that for
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
70
prudential steps regarding mobile money, there remain some challenges,
such as public awareness, and trust between customer and mobile money
issuer, and will sooner or later be driven to a more diverse and inclusive
approach.
There is no one size fits all approach to extending deposit insurance to
mobile money. Taking into account all the risks, from liquidity to insolvency
risk on mobile money issuers to bank failures, the optimal approach will
most likely be country-specific, and will consider the extension of mobile
money platforms, financial inclusion, feasibility of possible novel
approaches and the cost of deposit insurance, and public awareness.
Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches
71
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Payments Service Management Roles, Requirements, and Specifications,
Document No. EPC 220-08, Version 2.0, October.
[17] Global Partnership for Financial Inclusion: Deposit Insurance and
digital transaction platforms- a frontier issue. 2014, October.
[18] Groupe Speciale Mobile Association, Safeguarding Mobile Money: How
providers and regulators can ensure that customer funds are protected.
January,2016.
[19] Peter Gross. “Microinsurance: Delivering microinsurance through
innovative channels.” November 2012.
[20] Accessing Risk in digital payments, Special report financial service for
the poor. February,2015.
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CURRICULA VITAE OF THE PRESENTERS AT THE CONFERENCE
Anna Maj
FinTech Expert, Advisor & Mentor
Country Manager, PayTech Consulting
Anna has been involved in the financial and payment services sector since
2000. She acquired experience in the banking and telecommunications while
working in Polish and foreign corporations (Citigroup, T-Mobile) as well as
a consultant and advisor. She was a CEO of one of the leading Polish
payment institution and acquirer – PayTel SA. She is a Board Member of
the Coalition for Development of Cashless Payments. She is involved in
fintech advisory projects and programs (e.g. PwC Startup Collider). Featured
in the TOP 20 Women in FinTech Report (IIG, March 2017). She is a
speaker at industry (fintech and paytech) conferences in Poland and abroad.
Anna graduated of Interdepartmental Individual Studies in Humanities at
the University of Warsaw and International MBA program at the Warsaw
University of Technology accredited by the London Business School. She is
a PhD candidate in the Collegium of Management and Finance at the
Warsaw School of Economics.
Domenico Scaffidi
Principal Solution Consultant Immediate Payments
ACI Worldwide (EMEA) Ltd
EDUCATION AND TRAINING:
From 2015 to 2016
From 2000 to 2005
Master in International Project Management at the LSBF (London School of Business and Finance - London)
Payment Infrastructure Researcher at the Catholic University in Milan – Italy
Curriculum Vitae
78
From 1988 to 1991
From 1982 to 1986
Cagliari Mathematics University – Italy
Accounting and Information Technology Degree - Commercial and Technical Institute P. Martini, Cagliari – Italy
ACHIEVEMENTS
•Italian Banks representative at the ”EBF TARGET2 Working Group” -
European Central Bank – TWG Frankfurt
•Member of the European Payment Council – Brussels
•Iccrea Banca Representative at ABI - Rome
•Italian Banks Representative at EBA STEP1 and Euro1 UAG –
Paris/Brussels
•Italian Banks Representative at EBA STEP2 BWG - Paris
•European STEP1 Banks representative at EBA OTC UAG - Brussels
•European Association of Co-operative Banks Member – Brussels (EACB)
•Future Development Group EBA STEP 1 Member – Paris.
WORK EXPERIENCE
2016-now Principle Consultant Instant Payments
2010 – 2016: Head of Payment Systems and International Business
Applications Department
2006-2010: Program Manager of the SEPA Migration Project
2008-2010: Demand Manager for System Payment Platform
2005-2008: Operative Desk TARGET2 Project Manager
Curriculum Vitae
79
Dr. Jozsef Czimer
Advisor to the CEO
CAPSYS
Jozsef started his career in the National Bank of Hungary working in
international money market operations. Later he joined the regulations
department where he had the opportunity to manage a considerable part of
the country’s banking devolution reform by organizing the handing over of
foreign currency operations by the National Bank to the new commercial
banks.
Still as a regulator he started to deal with bank card operations. Later, as a
deputy CEO of the new IBUSZ Bank he had the opportunity to manage the
country’s then largest card acivity. Having an innovator’s view he started to
deal with e-money operations already in the 1990s by exploring possibilities.
Later he became to be an expert of this subject lecturing in the Central
Europen University on it and advising several companies including the
Hungarian Post and SenseNet Ltd. The latter later became to be the issuer
of the first and only Hungarian e-money, Barion. Applying his expertise
Jozsef took part in the working out of the European E-money Directive as
well.
In 2010 as the CEO of HFR, Budapest he started to work on a kiosk based
payment system which was implemented in 2013 in the country. Having
successfully finished the project he moved to London to manage Intersoft
London Office working together with VocaLink on different projects
including the marketing of the Immediate Payments System and mobile
payment systems based on the instant payment solution.
Curriculum Vitae
80
For the time being he is the manager of the Capsys Informatics London
Office and responsible for instant payments services professionaly and also
or the VocaLink and ACI Worldwide partner relationships.
Dr. Levente Kovács
Secretary General
Hungarian Banking Association
Levente Kovács became in 2011 Secretary General of Hungarian Banking
Association. Prior taking up his assignment he served for 6 years as Group
Head at KDB Bank. For more than one and a half decade he worked in
high ranking positions in banking industry. He had been Managing Director
at GIRO Ltd. from 2002 to 2006, Managing Director at Budapest Bank
from 1999 to 2002, beforehand he had been Managing Director at
HypoVereinsbank for 2 years and different positions at CIB Bank for 3
years.
In addition to his professional functions he holds several honorary, high
level positions in financial industry and educational field. He is assistant
professor and head of International Finance Department in University of
Miskolc. He is a member of various other Boards including Asian Financial
Cooperation Association, European Banking Federation, Hungarian
Automated Clearing House, Hungarian Credit Guarantee Ltd., Hungarian
Deposit Insurance Company and he is a member of editorial boards of
several scientific publications.
He is a Master of Science in Mathematics and Physics, Master of Business
Administration, Ph.D. and Habilitation.
Curriculum Vitae
81
Dr. Qazi Jalisi
Senior Legal Advisor
Electronic Money Association
Qazi is a dual-qualified multi-specialist lawyer advising on regulatory matters
concerning financial services, money laundering and data protection. He is
admitted as a solicitor in England and Wales, and in Ireland.
Qazi has worked on a variety of projects in the financial sector, including
advising on multi-jurisdictional regulatory requirements, the negative scope
of the EU e-money and payments regimes, the regulatory and VAT
treatment of virtual currencies in the EU, and structuring crowdfunding in
the UK.
Prior to his legal career, Qazi was a physicist and research engineer.
• Senior Legal Advisor to the Electronic Money Association (Trade body)
• Partner at FM Legal (English law firm)
• Senior Regulatory Consultant at Flawless Money (Regulatory
consultancy)
T: +44 20 3372 9045
W: www.linkedin.com/in/qazi-jalisi-3543b19
Dr. Sándor Patyi
Chairman of BACEE
Curriculum Vitae
82
Member of the Board of Directors and Deputy CEO
OTP Banka Slovensko
Dr. Patyi graduated from the Marx Károly University of Economics,
Budapest, Faculty of Foreign Trade. He got PhD from the same university
in 1987. He started work at Hungarotex Foreign Trade Company as sales
representative and joined Magyar Külkereskedelmi Bank Rt. (MKB) as Bank
economist in 1981. He held different positions at MKB at the International
Department, International Banking Relations Directorate and MKB
Corporate and Financial Institutions Directorate. He became responsible for
MKB Sales and Customer Relations as Deputy CEO in 2001 and in 2005
became MKB Wholesale Deputy CEO.
In 2010 he joined to OTP Bank Plc. as a Director and in 2012 he became
Member of Supervisory Board, OTP Banka Slovensko. Since 2013 he has
been Member of the Board of Directors and Deputy CEO of the bank.
He is Chairman of the Banking Association for Central and Eastern Europe
(BACEE) from its foundation in 1996.
Language skills: German, English
___________________________________________________________
Mr. Adam Tencza
Central and Eastern Europe Division Manager
SIBS International
Adam is the Head of CEE Region at SIBS International, a part of SIBS
Group, which is one of largest payments processors in Europe, and globally
recognized as case of highly succesful payments system.
Curriculum Vitae
83
Adam has collected its expariance working among others in Bulgaria,
Greece, Poland, Portugal, Romania and Kazakhstan. He participated and
coordinated multiple projects, inlcuding among others: integrated ATM
networks on national level, domestic card schemes, antiraud systems,
internet and mobile payments, as well as central card and processing
systems. Previous to current position, he held a position at Nowa France
and was seating at Management Board of PBDA Consulting. Master of
Economics, graduate of Poznan University of Economics, currently PhD
candidate at University of Warsaw.
Mr. Edward Strycharczuk
General Manager
EVO Payments International
Mr Edward Strycharczuk – since June 2015 is the General Manager at EVO
Payments International for Poland and Czech Republic holding the overall
responsibility for the newly formed Alliance REVO between Raiffeisen
Polbank in Poland and the Czech Republic Raiffeisen Bank (both part of
Bank International AG), and EVO Payments International- a global market
leader in the Electronic Clearing and payment card services.
Mr Strycharczuk has more than 15 years’ experience in banking, financial
industry, cards & payment business and merchant services. Since November
2008 till May 2015 as the Head of Card Acquiring at Raiffeisen Bank
International AG he was responsible for the POS and ATM acquiring
business in the RBI group. In his role Mr. Strycharczuk was responsible for
the card acquiring strategy in the RBI group, which includes sales and
marketing, product development and management, risk policy development
Curriculum Vitae
84
and implementation as well as the coordination of organizational changes in
the RBI network banks.
Before joining Raiffeisen group Mr. Strycharczuk worked for Citibank Card
Acceptance, Frankfurt and Elavon Merchant Services, Frankfurt (USBank
subsidiary) holding different management roles. As Head of Sales he was
responsible for acquisition of new merchants in Germany and Austria and
Switzerland.
Mr. Julian Tencer
Department Head, Payments
VUB, a.s.
Mr. Julian Tencer works in VUB Banka since 1991 – covering complex
management in processing, product development and processes design in
payments area (domestic and cross-border, foreign cheques). He
participated on implementations of new payment systems, remote banking
applications, automation of the international payments processing, in the
projects admission of Slovakia into EU, Euro introduction, SEPA, back-
office centralization in VUB, CBA/BACEE payments solution, and projects
within IntesaSanpaolo group.
Since 2005 he is deputy chairman of Payments Committee at Slovak
Banking Association. Within 2006-2014 he has been representative of the
Czech Banking Association and Slovak Banking Association in European
Payments Council WG – Program Management Forum and Roll-out
Committee in SEPA project
Mr. Luděk Slouka
Product Manager CEE
Curriculum Vitae
85
Mastercard
Luděk has worked for Mastercard, as a Senior Product Manager for Central
and Eastern Europe markets with a focus on mobile payments since 2014.
He is primarily responsible for MDES and Masterpass.
From 2005 to 2014 he worked in the telecommunications sector at O2
Czech Republic as a product manager for fixed internet services, voice-over
IP and contactless payment by mobile phone.
Luděk has been focusing on payment services since 2011, when he
participated in the launch of the first commercial payment card with a SIM
in the Czech Republic. In 2012, he successfully introduced the first TSM
solution in the Czech Republic with over-the-air payment card distribution
into a mobile phone.
Mr. Marcel Gajdos
Country manager for the Czech Republic and Slovakia
Visa Europe
Marcel Gajdos was appointed Multi-region Country manager for the Czech
Republic and Slovakia in 2012. He is responsible for developing Visa
Europe’s relationship with Czech and Slovak members. Prior to this
position he was Multiregional manager for Visa Europe.Marcel is an
experienced card expert who joined Visa in 2006 from UniBanka Slovensko
where he spent three years in Corporate banking division.
Prior to joining UniBanka, Marcel worked at Wells Fargo Bank in retail
division. Marcel began his career in the family business, where he worked in
sales division.
Curriculum Vitae
86
Marcel completed his MBA studies at City University Bellevue and was part
of UniCredit banking programme at Bocconi University.
Mr. Maris Cakste
Director of Sales
MeaWallet
Maris Cakste is Director of Sales at MeaWallet. Passionate about digital
payments, Maris gains more than 10 years of experience in sales of
payments, cards and mobile solutons in Europe. He holds a MSc degree in
International Management at Flensburg University, Germany.
Mr. Marten Nelson
Co-Founder & VP of Marketing
Token
Marten Nelson is co-founder and VP of Marketing at Token, a Silicon
Valley based technology company, focused on building a global open
banking platform that addresses PSD2 and helps bank generate new
revenues from open banking. Marten is a technology
entrepreneur/executive who has been getting things done in startups and
Fortune 100 software companies for over 20 years. His experience spans
Product Development, Business Strategy, Business Development and
Marketing. Token is his third company to found. Abaca, a leading email
Curriculum Vitae
87
security company was sold to Proofpoint and the edtech LearnCentral was
sold to Blackboard.
Mr. Nikola Korbar
CEO
DigitalMoneyPulse
Nikola Korbar is Founder and CEO of DigitalMoneyPulse, online
cryptocurrency education platform and Founder and Owner of Crypto
Telegraph, cryptocurrency and blockchain technology news website with a
particular focus on centralised cryptocurrencies, as well towards news from
banking, merchant, regulatory, security and technical news from the world
of cryptocurrencies and blockchain technology.
Prior to founding DigitalMoneyPulse, Nikola’s expeirence includes various
positions in middle and top management in several companies, trading on
Forex markets and one e-commerce startup. Nikola’s first business steps
were in his father’s family business, NiNa Trade – car parts import/export
business for Yugoslavia, Bosnia and Herzegovina, Hungary and Austria.
Nikola has a degree in Economy at Belgrade Business College
________________________________________________________
Mr. Pavol Luptak
CEO | Certified IT Security Professional
Nethemba s.r.o.
Curriculum Vitae
88
He gained his BSc. at the FEI-STU in Bratislava and MSc in Computer
Science at the Czech Technical University with master thesis focused on
ultra-secure systems. He holds many prestigious security certifications
including CISSP and CEH, he is Slovak OWASP chapter leader, co-founder
of Progressbar and SOIT organizations where he is responsible for IT
security.
Pavol uses to have regular presentations at various worldwide security
conferences (in Netherlands, Luxembourg, Berlin, Warsaw, Krakow,
Prague). In the past, he demonstrated vulnerabilities in the public transport
SMS tickets in all major cities in Europe, together with his colleague
Norbert Szetei he practically demonstratedvulnerabilities in Mifare Classic
RFID cards. He has 14 years experience in IT security, penetration testing
and security auditing including social engineering and digital forensic
analysis.
He is co-author of the OWASP Testing Guide v3, has a deep knowledge of
the OSSTMM, ISO17799/27001 and many years experience in seeking
vulnerabilities. He has a knowledge of many programming languages (ASM,
C, C++, XSLT, Perl, Java, PLSQL, Lisp, Prolog, scripting languages) and
operating systems. He is also focused on VoIP and interesting IT security
research.