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14 March 2016

`Fin Tech’ Payments: the Revolution Ahead

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`Instant payments’ may change the financial system far more than can be imagined easily today. A deeply technical part of the financial infrastructure may surprise us all by launching a revolution.

“Fin Tech may make it happen this time”… This is what Graham Bishop said about the European Commission’s Green Paper on Consumer Financial Services in a recent edition of Financial World. But a key building block is the payments system and this seems to be evolving at a rapid rate.

Where consumers are offered `FinTech’ services, they seem to adopt them swiftly if they are perceived to add value and convenience. The evidence from the UK is compelling: Visa Europe reports that contactless readers are now used in one in seven sales, up from just one in 25 a year ago - though much of this surge reflects the late 2014 introduction of contactless fares on the Transport for London network; Barclays’ mobile payments app Pingit hit its millionth business transaction in January, up from 100,000 a year ago.

Tim Franklin of Firstsource Solutions commented recently “There is no denying that now electronic payments have overtaken cash for the first time and mobile has become the UK’s number one way to bank, that the landscape has changed dramatically and permanently. This change will only accelerate and the need to keep pace with customer expectations will increase with it. With 5G due to arrive in 2020 and the quantum leap in transaction speeds and other technological capabilities it will bring, banks need to be closing the customer service gap.”

What is Fin Tech doing about this around the rest of the EU? A raft of EU legislation has cleared away many barriers created by banks’ legacy systems. In particular, the SEPA Regulation of 2012 made all electronic payments in the euro area as easy as cash payments. The second Payments Services Directive (PSD2) of 2014 has opened the door to even more innovative pan-EU services and the ECB is taking a leading role in encouraging developments by setting up the Euro Retail Payments Board (ERPB) to bring together the key stakeholders on the supply and demand side of the industry. However, PSD2 must be implemented into national legislation in the 28 EU countries so that the new rules are in force from 13 January 2018.

Applying these new pan-EU possibilities to instant payments perhaps unsurprisingly, one of the first steps was to agree on the exact definition of ‘instant payments’: “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 is irrespective of the underlying payment instrument used (credit transfer, direct debit or payment card) and of the underlying arrangements for clearing (whether bilateral interbank clearing or clearing via infrastructures) and settlement (e.g. with guarantees or in real time) that make this possible.”

Even the lay observer will recognise that this is a bold goal. Even more surprisingly, there is already a target date for implementation: November 2017 to mesh with PSD2 coming into force.

The process is seen as part of the digitalisation of the European economy – a process that is expected (and intended) – to boost competitiveness and thus growth. However, the financial services industry is struggling to ensure that it keeps up with the expectations of first customers and secondly retailers. But will the implications stop at relatively low-value retail transactions and bus fares? Probably not.

Indeed, in its June 2015 `Report to the ERPB on Instant Payments’, the European Payments Council (EPC) – the trade body of the payments industry - listed many possible uses for instant payments, “such as the purchase of high-value goods (car, antique…) between two individuals, the paying of a share of a joint bill, and the payment of services requiring to be paid on the spot.”

This vision opens the way to a much wider change of economic culture – albeit one where security will become a big issue. What should be the limit on the size of a payment? What about monitoring illegal activity such as money-laundering and terrorism?

Assuming such problems are resolved…then another component of financial culture could be changed radically. Citizens keep their liquid resources ‘in a bank’ because they need ready access to the liquidity to make payments. This gives the banking system a float of low cost deposits. But what if consumers have instant access to higher yielding securities – as part of the drive to encourage them to invest in securities to create the Capital Market Union?

After all, the average size of a bargain on the London Stock Exchange is now about £8000 – the price of a modest car. So why not allow securities trading with instant payments? If there are no complex and expensive intermediation steps, what would stop an exchange from offering individual membership with instant settlement of a transaction – subject to the security being held in a depositary that can link to the exchange?

`Instant payments’ may change the financial system far more than can be imagined easily today. A deeply technical part of the financial infrastructure may surprise us all by launching a revolution.


© Graham Bishop

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