De Nederlandsche Bank
Innovations in retail payments,
security and regulation
Thijs Kettenis
Conference Financial Sector of
Macedonia on Payment and
Securities Settlement Systems
Ohrid
25 June 2008
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Contents: new technologies and new
providers

Innovations in POS payments
 Contactless card payments
 Contactless payments by mobile phone
 “Biometric payments”

Innovations in “remote” payments (access to bank account)
 internet banking
► safe access
► regulation
 iDEAL
 Electronic Bill Presentment and Payment (EBPP)

Non-banks in the payment system (telecom providers, public transport etc.)
 Should non-banks be regulated?
 Electronic Money Institutions and Payment Service Providers
 Payment Services Directive
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New Technologies
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Contactless Payments
US case
MasterCard
Visa
American Express
Cards:
2005: 5 mln
2006: 30 mln
Terminals:
2005: 20.000
2006: 200.000
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Mobile Payments
Near field communication (NFC)
 Contactless
 Wave
chip in mobile phone
& Pay vs Chip & Pin
NFC can be used for all kinds of applications
 contactless payment at POS
 Also P2P payments possible

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Mobile payments
Screen
 information on products, balance
Keyboard
 enter information
 communicate
• Authorize large payments by
PIN
• Top up from online bank
account
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Proximity / NFC
Expected number of NFC mobiles:
 2010: 300 million
 2013 600 million
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Biometrics Security
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Internet use in European Union
(Eurobarometer, 2006)
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Internet access and banking in the
Netherlands
(Statistics Netherlands, DNB, 2006)
PC
PC with internet access
Internet banking
100
90
80
70
60
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
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Advantages and risks of internet
banking
Advantage:
 Efficiency
Risks:
 Unwanted access to bank accounts
 Reputation risk
 Operational risk
 Reputation risk, liquidity risk, credit risk,
strategic risk, legal risk…
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Regulation of internet banking in the
Netherlands

Principle-based (↔ rule-based)
Approach:
 Compliance to law and rules
 Law: “controlled operations”
 Two-factor authentication
 Best practices
 BIS: Risk Management Principles for
Electronic Banking
 Self-regulation of banking sector
 code of conduct
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Two-factor authentication


Something you know (password)
Something you have (token, TAN)
authentication
 Safer than one-factor
 Common in European Union
 “Factors” in use:
► Account number, username, password…
► TAN (paper, SMS), token…
 Future: hardware token combined with EMV
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iDEAL: Dutch standard for online
banking based electronic payments

Launched in October 2005

Three major banks in the
Netherlands
(market share > 90%)

Existing internet banking interfaces
used for authentication and
authorization

Additional banks
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User experience: the webshop
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User experience: choice of payment
method
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User experience: choice of issuing
bank
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User experience: payment
authorisation
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User experience: back to the webshop
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iDEAL: advantages

Customer:
 Easy
to use (pre-filled transaction form; familiarity with
electronic banking and security)
 Safe and trusted payments

Merchant:
 Guaranteed
payment (no charge-backs)
 Low
cost
 Large potential customer base

Bank:
 Further
usage of electronic banking systems
 Further reduction of “paper based payments”
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iDEAL: statistics
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Electronic Bill Presentment and
Payment

New way of receiving and paying bills
Step 1:
Customer receives a link to new bill
by e-mail
Step 2: After review, customer can click
“I want to pay” button
Step 3: Customer is directed to internet
banking application of “his” bank
Remainder of the process is similar to iDEAL

Estimation: potentially € 50 - € 100 billion yearly
efficiency gains in European Union
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Internet banking: conclusions
Very important in payment landscape
 Numerous and clear advantages
 Risks: safety, operational
 Principle-based regulation
 Innovations: iDEAL, EBPP

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Non-banks in the payment system:
regulation?
Possible objectives of regulation:
 Generate trust (settlement finality, smoothness …)
 Protect consumers (guarantee money back, sound
operations…)
 Stimulate competition (create level playing field,
removing entry barriers)
 Stimulate efficiency
 Prevent uncontrolled money creation
 Enforce compliance (anti-money laundering, counter
terrorist financing)
 Safeguard privacy
 …
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Regulation: drawbacks



Regulation can hamper innovation
Regulation is costly
Some of the goals can be realised by market incentives
Goals can be contradictory!
 Consumer protection ↔ efficiency
 Competition ↔ efficiency
 Compliance ↔ efficiency
 Privacy ↔ compliance
 Competition ↔ trust
 Competition ↔ consumer protection
 …
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Regulation?
Weigh the importance of the different stakes!
Growing concern among legislators that
benefits of stability may not outweigh cost,
particularly in terms of competition and
innovation.
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EU solution: proportionate regulation
Activity ► Risk ► Regulation
Banking directives (national)
 E-money Directive (2000)
 Payment Services Directive (to be
implemented by 1 Nov 2009)

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E-money Directive

Electronic money: an electronic store of monetary value on a technical
device that may be widely used for making payments to undertakings
other than the issuer without necessarily involving bank accounts in the
transaction, but acting as a prepaid bearer instrument

Examples: e-purse, prefunded internet accounts

Less stringent regime than for banks

Conditions:
 refundable balance
 no other business activities

Does not regulate Payment Service Providers
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Does e-money directive facilitate
market entry?
Prudential requirements dominate
 High administrative burden to comply
 Limitation on activities makes business case
difficult
Result: Low number of ELMIs (throughout EU),
only in UK more approx. 10 licenses (“liberal
approach”)
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Payment Services Directive

Legal harmonisation for SEPA

Three parts:
Payment Institutions
Information and transparency requirements
Rules on the relation user and provider

Consumer protection and safety seem to be
dominant objectives
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PSD: institutions

Two types of institutions:
 Credit institutions
 Payment institutions:
Legal person granted authorisation … to
provide and execute payment services
throughout the Community

Payment Service Providers are regulated
under PSD
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Regulation of non-banks: conclusions
Regulation seems appropriate
 However, there are serious drawbacks
 Level of regulation: weighing pros and cons
 EU solution: proportionate regulation
banking directives ► E-money Directive ►
Payment Services Directive

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Innovation, security and regulation
QUESTIONS?
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