The intersection of technology, its applications in financial services and the resulting laws and regulations impacting the transaction banking industry is reordering the competitive basis of e-payments. Boon-Hiong Chan examines these changes and shares his perspective on how collaborative approaches to regulation will take the industry forward
In recent years, the global e-payment industry has rapidly expanded, with a multitude of choices that range from the faster or instant classic bank-intermediated remittance through to telecommunication-led ‘wallets’ and cryptographic-based ones that promise alternative and interesting ways of transferring value.
Beyond the benefits of speed and convenience for consumers, the e-payment choices have also created new business segments for fintechs such as a cash management, a supply chain or even a treasury management client for banks in the future. These choices have also unveiled real-time treasury1 and direct sales channels to corporate clients, and the potential for more efficient post-trade securities settlement. Public sector and governance bodies have also been highly responsive to the changes, with equally fresh approaches to public policies, consumer protection and financial industry integrity.
Here we highlight three changes in the e-payment space that are driving the industry, some current implications and possible future directions.
Three change vectors
In recent years, fintechs’ successes in addressing banking frictions such as high remittance costs and de-risking consequences have drawn the attention of regulators and raised the question of whether they should be licensed. The licensing approach is not without its challenges, since a fintech can be both a technology company and a financial services one. The ‘Duck Principle’2 encapsulated this conundrum well, and belies the now accepted approach of assessing activities rather than entities for regulation.
One: Licensing taxonomy by payment activities, including:
- Domestic money transfers;
- Cross-border money transfers;
- Merchant acquisitions;
- e-money, including stored value, e-wallets and pre-paid cards;
- Digital payment tokens, including ‘dealing’ and ‘exchanges’; and
- Money changing3.
Licensing provides a more consistent set of rules for incumbents and new entrants performing banking activities, and for a fairer competitive basis. This has injected a new type of participant into the banking industry, as a competitor, client and/or a partner.
These new entrants' approaches to finding solutions to new payment frictions continue to disrupt the status quo and change the competitive landscape.
As regulations around virtual assets and virtual asset service providers4 start firming up, the banking industry could see the entry of yet another class of participant to introduce a new set of dynamics.
Two: e-payment channels, including:
- Internet/mobile banking;
- Credit card;
- Host-to-host system integration;
- Peer-to-peer mobile phone transaction;
- Open banking, application programming interface (API); and
- Quick response code (QR code).
Meanwhile, changes in e-payment channels are raising user experience standards by allowing ubiquity of speed and convenience; for example, by using mobile phone wallets, API connectivity and QR code schemes.
The characteristics of (almost) ‘pay anytime’ and ‘connect to everywhere’ technology also mean that cybersecurity and data governance are key banking safety-and-soundness considerations.
For example, the democratising feature of APIs versus the chunkier host-to-host connectivity of banks also means that APIs’ two-way traffic can be of much higher frequency. It will thus need legal or service-level agreements to cover aspects like maximum number of calls per minute as a non-technical preventive measure against cyber-attacks.5
An inventory of the data would also be necessary to ensure compliance with relevant data privacy laws, data localisation and technology governance requirements. Such an inventory would include: determining the API from where the data was called; the system from which it was extracted and the applicable geographic filters.
Three: Payment value transfer methods
- Bank ‘clearing-and-settlement’ infrastructure;
- Credit card acquiring infrastructure;
- Non-bank fintech account balance method;
- Non-bank ‘clearing-and-settlement’ and interoperability infrastructure;
- Telecommunication wallet-to-wallet transfer method; and
- Digital representation of currency that uses cryptography and the internet infrastructure as a transfer method (‘digital currency’).
The drivers of the third category of change include financial inclusion initiatives and concerns about de-risking of correspondent banking relationships, especially in frontier markets. In turn, they have created new value transfer methods that are distinguished by their reach and connectivity and/or by their minimalist touchpoints with the formal banking channels.
For example, digital currency uses a combination of cryptography and internet technologies to connect payment originator and beneficiary through an internet connection and pay-in/final cash-out point. The digital currency’s distributed ledger brings participants closer as part of a concentric paradigm that reduces time delays and addresses time zone differences. In addition, the cryptographic-based value transfer allows a built-in quasi-transparency of transaction flows that is an effective built-in transaction-monitoring and sanctions-checking mechanism.
Responding to this complex mix of potential and risks, the Financial Action Task Force (FATF), the global standards setting body, has updated its 2012 Recommendations to reinterpret6 certain know your customer and anti-money laundering recommendations. For example, it recognises that originator and beneficiary information is not available as an information payload on public digital currency and has proposed alternative transparency approaches.
Meanwhile, the take-up of digital cashless payments represented by e-wallets and fintech account transfer methods would invisibly shift central bank trust contained in legal tender physical currency bills – bypassing trust in Basel-strengthened commercial banks – to trust in fintech’s counterparty risks and its technology and cybersecurity standards. An increasing uptake that crosses certain materiality thresholds would have implications for the financial system’s stability.
This on-the-horizon scenario has already prompted a number of central banks to study the area of fiat digital currencies7 that can reintroduce central bank trust as a digital ‘backstop’. However, central bank digital currency has fundamental ramifications for the banking structure and behaviours, and is a topic under much analysis.
Who would have thought that the words “I pay you” could be so exciting and involve so much innovation? Within each of the three changes impacting e-payments – the intersection of technology; its applications in financial services; and the resulting laws and regulations impacting the transaction banking industry – the competitive landscape changes that bit more again.
An adage goes that we tend to overestimate the effects of technology in the short term and underestimate them in the long term. If so, collaborative approaches for holistic views, boldness based on new knowledge and new skills and experiences are some prime ingredients that would gear us toward the future – and for better quality successes.
Boon-Hiong Chan is Head of Business Control Unit-Market Advocacy in the Global Transaction Banking division at Deutsche Bank
1 See https://bit.ly/2MR8N7M at cib.db.com
2 “… As a matter of principle, if it walks like a duck and quacks like a duck, it should be regulated like a duck”: see https://bit.ly/1XvKvfq at finextra.com
3 Based on Singapore MAS Payment Services Bill
4 Virtual Asset and Virtual Asset Service Providers (VASPs) are defined in The FATF Recommendations, updated October 2018
5 Information provided by Deutsche Bank’s Chief Information Security Office and the Global Transaction Banking API India teams
6 Public Statement – Mitigating Risks from Virtual Assets, FATF, 22 February 2019
7 There are many studies in this field. See https://bit.ly/2J0puwp at imf.org, https://bit.ly/2WXZq7N at boj.or.jp, https://bit.ly/2qvvLEE at riksbank.se
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