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Payments and remittances

The future of retail payments: opportunities and challenges

Executive summary.

Retail payment markets have been developing rapidly throughout the last decade. In Europe a number of legal and regulatory measures have been adopted with the aim of achieving an integrated single market for payments. In other regions (e.g. Australia, Canada and the United States) retail payments have recently also been subject to regulatory and legal interventions. The market-initiated Single Euro Payments Area (SEPA) project has accelerated the development of the European retail payments market into one that is based on increasingly integrated and more competitive market structures. Technological innovations have facilitated these fundamental changes. Other regions have had similar experiences or even more significant changes in the field of payment innovations and developments. Although there is a widespread belief that developing and increasing the integration of the retail payments market is likely to generate macroeconomic benefits, it may also involve challenges regarding risks and security threats. Against this background, it is important to understand the economic factors driving future developments and to take a forward-looking perspective that anticipates the factors likely to influence developments in the retail payments market.

In this context the ECB organised the second biannual retail payments conference, this time in cooperation with the Oesterreichische Nationalbank. The conference took place in Vienna on 12-13 May 2011. Its objectives were twofold: first, to improve the general understanding of payment economics (and related disciplines) in the field of retail payments and, more specifically, to help identify possible developments and dynamics that will shape the future payment landscape; and second, to provide a forum for debate and interaction among market participants, policy-makers and researchers.

The two-day event was centred on four main themes:

  • the transformation of the banking business and its impact on retail payments;
  • payments behaviour and usage of payment instruments; • the creation of a competitive retail payments market;
  • future challenges and opportunities in retail banking and payments.

The following paragraphs highlight a number of key messages and conclusions that emerged from the debate on these themes.

It was widely acknowledged that retail payments are a cornerstone of retail banking and consequently banks’ business case. As the financial crisis has shown, Europe has benefited substantially from the level of integration and innovation achieved so far in the field of retail payments and banking. However, more work needs to be done to achieve a fully integrated and innovative European retail payments market. It further emerged from the discussions that retail payment integration should be understood not as harmonising payments behaviour but as harmonising instruments, standards, rules and systems.

For Europe, it was recognised that the SEPA project is on the right track and that a lot has been achieved over recent years. However, more work needs to be done, in particular in the area of the standardisation of card payments and the migration towards the SEPA payment instruments. In this respect the Eurosystem welcomes the European Commission’s proposal for a regulation setting an end date for migration. Moreover, it is important to involve users and to ensure the acceptance of the SEPA instruments

In this respect, a few speakers mentioned network effects as an obstacle to integration and innovation and argued in favour of intervention by public authorities to address the coordination failure in payment innovations and in the standardisation of the security of retail payments. Other speakers said that the policy strategy should be clear and the regulatory environment stable and consistent in order to win support from banks for change.

Research work in this field has concluded that payments behaviour differs considerably across cultures and countries. In fact, a marked persistence of traditional payment habits can be observed across European countries. Despite the relatively high cost of cash when it comes to payments above a certain threshold, cash continues to be used extensively for day-today payments at the physical point-of-sale. One reason why the use of cash is high in some countries is the budget monitoring and memory feature of cash. Further country evidence shows that other factors also play an important role in consumers’ payment decisions, i.e. speed, merchant acceptance and low transaction specific fees. Empirical evidence shows that debit and credit cards are used for higher-value transactions because of perceived safety, record keeping, rewards and the possibility of delaying the settlement of the payment.

Another important topic addressed during the conference and closely linked to perceived safety related to fraud in retail payments. Even if financial stability is not directly affected by the overall level of fraud losses, fraud incidents can have downward effects on card usage. On the basis of evidence from the analysis of debit card payments and media coverage of security incidents, however, it can be concluded that the effects seem to be economically relatively small compared with other influencing factors. This suggests that consumer confidence in the debit card is relatively high and robust.

Efficient and secure payment systems are a key concern for central banks worldwide, for which reason central banks are interested in the field of retail payments. While the role of central banks in offering large-value payment systems is generally accepted, the future of retail payment processing in an integrated market and the operational involvement of central banks is still subject to intensive discussions.

A large part of the conference was dedicated to the discussion of issues related to card payments. Country-level evidence demonstrates that merchants’ perception of the cost of different payment instruments affects acceptance as well as surcharging decisions. Merchants who find payment cards expensive are less likely to accept them and more likely to surcharge their customers for card payments. Merchants facing competition accept debit card payments relatively more often and are less likely to surcharge their customers for debit card use than merchants with monopoly power.

The discussion on the possible and/or allowed level of multilateral interchange fees in the field of cards and the methodology to be used for calculation has not been conclusive so far. Therefore, increased clarity on the business model for cards seems to be needed to increase planning security for issuers and acquirers.

The provision of consumer credit in payment networks plays an important role in efficient pricing and competition between debit card and credit card networks. Moreover, academic research has shown that merchant fees and reward programmes generate an implicit monetary transfer to credit card users from non-credit card (debit card, cheque or cash) payers because merchants generally do not set differentiated prices per payment instrument to recoup the costs of fees and rewards. Since credit card users are on average wealthier than persons without a credit card, this monetary transfer also benefits higher-income families to the disadvantage of lower-income families. Accordingly, reducing merchant fees and card rewards would likely increase consumer welfare.

It was generally accepted that innovations in retail payments will make everyday life more convenient by offering easier access to payment instruments. In addition, innovation may also be a chance to decrease the number of unbanked and underbanked people, i.e. it could be a powerful tool for financial inclusion. Several speakers pointed out that innovations in retail payments are taking place more rapidly than ever and that banks and regulators should adapt quickly to their changing business and technological environment.

The remainder of these conference proceedings is structured as follows. Section 2 contains the opening and welcome remarks by Wolfgang Duchatczek (Oesterreichische Nationalbank). Section 3 presents a summary of the first panel session, chaired by Gertrude Tumpel- Gugerell (European Central Bank), including her opening remarks. Section 4 highlights the discussions on payments behaviour and the usage of payment instruments. Sections 5 and 7 deal with issues relating to the creation of an efficient and competitive retail payments market. Sections 6 and 8 give keynote speeches on opening financial services markets by Cecilio Madero Villarejo (European Commission) and on innovation in retail payments by David S. Evans (Market Platform Dynamics). Section 9 highlights the key messages from the panel session on innovations, security and financial inclusion.

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