Issues in Retail Payments

Regulating and overseeing
non-bank payment service providers
Seminar on Payment Schemes and Payment
Institutions, Brasilia, Brazil, September 9, 2014
Massimo Cirasino
Head, Payment Systems Develoment Group
The World Bank
Content of the presentation
Public policy objectives in retail payments, remittances, and financial
Role of non-banks in the provision of payment services
Towards common principles for the regulatory and market approach
Empowering the payment system overseer
Considerations around public policy objectives
in retail payments / remittances
1) Affordability and Ease of
Access to Payment Services
• The “demand” for electronic
payments is often restricted by
limited inclusion of the country’s
• The typical usage patterns of the
financially excluded – erratic,
small-value – coupled with limited
ability to comply with product
requirements (ID, minimum
balance, fees) and indirect costs
(e.g., time / distance travelled)
may make it financially unviable
for banking institutions to service
these segments using traditional
payment product
2) Availability of an efficient
infrastructure to support
development of payment
• Supply / provision of electronic
payments is dependent on
availability of certain common
infrastructure (payment networks,
ACHs, etc.)
• Where commercial banks could
not make a viable business case
to expand the traditional payment
infrastructure beyond major urban
areas, there have been promising
innovations, e.g. mobile phones
to initiate / receive payments and
non-bank agents
• These developments cannot
reach their full potential without
an appropriate payment
3) Socially Optimal Usage of
Payment Instruments
• Usage of payment instruments
also entails costs, with some
payment instruments being better
suited for certain payment needs
than others
• While at a conceptual level the
overall public policy objective
could be to promote and
encourage usage of electronic
payment instruments, associated
costs and other factors must be
taken into consideration
The 5x5 objective: reducing the average cost
of sending remittances globally by 5 percentage points over 5 years
- If the cost of sending remittances could
be reduced by 5 percentage points
relative to the value sent, remittance
recipients in developing countries would
receive over $16 billion dollars more
each year
- Adopted by the G8 at the 2009 L’Aquila
meeting and in by the G20 in 2010
- Global efforts led by the World Bank
matched with interventions at the country
level are bringing down the cost of
remittance services: estimated US$
42.48 billion saved
- Over ¾ of the 226 corridors evaluated
(77%) are below 10%, and almost ¼ of
the corridors evaluated (24%) are
already below the 5% target
Source: Remittance Prices Worldwide data
- 118 corridors, or 52%, have average
total costs that are between 5% and 10%
Transaction Accounts for All – TALL
the new objective
•Source: IFC-The World Bank Press Release, 11 October 2013
World Bank Group President
Jim Yong Kim
“Universal access to financial services is within reach –
thanks to new technologies, transformative business
models and ambitious reforms”
“As early as 2020, such instruments as e-money accounts,
along with debit cards and low-cost regular bank accounts,
can significantly increase financial access for those who
are now excluded”
Classification of non-banks*
Front-End Service Provider
• Provides services to Payers or Payees in association with / On Behalf of Payment Service
Provider (PSP)
• Examples: Agents, Payment Gateways
Back-End Service Provider
• Provides services to the PSP
• Examples: Operation of IT infrastructure, Customer service Center
Payment and Settlement System Operator
• Operates a payment system for participating payment service provider
• Examples: Operator of Card Switch, ACH, CSD/SSS, CCP
Independent provision of payment Service
• Offers services to payers and payees independently
• Examples: Mobile Money, Remittance Service Provider
* Not the only way of classifying non-banks. Similar entities could organize themselves differently in
different situations. There could be overlaps
Role of non-banks in the provision of innovative
payment services (2009)
Role of banks still dominant -
but in (contractual)
collaboration with other
73% Banks are involved in the
43% of the products
surveyed use agents,
with highest usage of agents found in low-income
countries (75%), EAP (100%) and SSA (71%), and
large countries >30 million inhabitants (49%)
Banks and their branches
operation of the innovative product
in terms of being responsible for
signing up new customers, setting
up account and managing
customer service, BUT in only
Non-bank financial institutions
33% banks are solely responsible
Retailers (e.g. grocery stores)
9% schemes are operated by
explicit joint venture between
banks and non-banking entities
0% 10% 20% 30% 40% 50% 60% 70% 80%
Trends based on the Global Payment Systems Survey 2012*:
Non-banks issuing non-cash payment instruments
In over 1/3 of the countries surveyed, non-banks issue non-cash payment instruments.** At the global
level, the postal network and mobile operators are equally active as NBFIs
Mobile operators are mostly active in low income and lower-middle income countries, typically of large
population, located mainly in SSA, SA, and EAP
The postal network has a stronger role in European countries and higher income levels
Credit cooperatives offer non-cash payments in slightly less than 30% of the countries surveyed,
followed by MFIs. The first appear to have a stronger role in upper-middle income countries, while the
latter have a bigger presence in low-income countries. These are mostly supervised – nevertheless
exceptions exist and are more frequent for MFIs
The overall picture is not yet clear: unspecified “other” non-bank financial institutions were found to be
equally relevant
Where applicable, unsupervised NBFIs and non-financial institutions rely almost exclusively on a
customer relationship with a direct account holder to access RTGS services. Although indirect access
is more common, it emerges that supervision often translates in NBFIs being granted direct access
(either with or without access to credit credit)
Direct access of ACH infrastructure is mainly the prerogative of banks***
*Based on preliminary results
**Ongoing analysis will establish the extent to which this figure may be underestimated – due to lack of oversight /regulation powers (?)
***Bank ownership and specific risk control requirements are being considered as the main factors behind this result
However, the incumbent continues to hold strong lead…
2) Electronic payment transactions by type of instruments in
select CPMI countries, 2012 (millions, total for the year)**
1) Use of payment instruments by non-banks: relative
importance of payment instruments, in number of
transactions in CPMI countries* (2012)
Credit transfers
Direct debits
E-money payment
Credit card payments
Debit card payments
*% of total number of transactions, based on available data. Please note,
e-money transactions nav for 7 CPMI countries. Source: CPMI, 2013
3) Global trends for innovative retail payment products (GPSS, 2012)***
South Africa
**Source: CPMI, 2013. Please note, direct
debits nav for China. E-money nap for China
and South Africa
Are growing
Account for more than
5% of traditional
electronic instruments
Are growing at a faster
rate than traditional
electronic instruments
Are being used for
For the majority of users,
payments - not just for the innovative product is
safekeeping of money
the only electronic
instrument they have
access to
*** Based on 150 countries
covered in the GPSS. Preliminary
Banks vs. non-banks according to RPW (Q2 2014 trends)
MTOs and Post Offices remain well below
the Global Average, at 6.65% and 4.66%,
The current costs of sending remittances
through MTO are the lowest since before
2008 (6.56 percent on average in Q2 2014,
remaining below 7% for two consecutive
At the beginning of 2014, the yearly
variation in the cost of sending remittances
through Banks showed a considerable
decrease of 1.01pp. A further decrease of
0.50 pp was registered in Q2 2014
Remittance transfers by remittance products: mobile still limited,
online gaining ground (Q2 2014 trends)
Cash-to-Cash services continue to be the most
popular remittance transfer method, but
Account-to-Account services are gaining
The average total cost of Cash-to-Cash
services is 6.60% (0.55pp decline in the last
year) versus 12.93% for Account-to-Account
(1.96pp decline in the same period)
Remittance costs for Mobile Services declined
to 6.39% (0.93pp decline), however they only
represent 1% of remittances services
Online Services are gaining ground (16% of
services in the sample compared to 13% in the
last iteration) and now cost at 6.13% on average
Cash to account services are the cheapest
product type and are becoming more widely
available (9% of the sample)
Impact of mobile financial services on financial inclusion in Tanzania
Case in Point: Tanzania
Source: FinScope Tanzania 2013
Entry of non-banks: some regulatory considerations
Safety of customer funds – operational reliability issues and bankruptcy of issuer. Even where a
bank is the issuer, existing treatment of deposit accounts might not be legally applicable to prepaid
account. Measures like trust funds, segregation of funds, requiring basic operational reliability
measures etc. can be used to mitigate risk
(Perceived?) heightened AML/CFT risks. This is addressed effectively through simple measures,
e.g. limit transaction size and frequency
Security issues. Weaker authentication could lead to higher fraud risks
Consumer protection. The profile of customers targeted could be first-time users of payment
products. Need to ensure they understand the terms and conditions. Ownership and use of
customer data may pose privacy concerns
Competitive market conditions. Restrictive, non risk-based access conditions to clearing and
settlement infrastructure may result in impeding non-banks’ ability to effectively compete with
banks. On the other hand, in the absence of a functional approach to regulation, banks may be
constrained with banking regulations while the new set of players have relaxed or no regulatory
requirements thus affecting costs and competition
System-wide risk. While systemic risk may not be relevant, major disruptions / operational issues
incurred by non-banks can impact the overall retail payments system and affect customers’ trust in
electronic payments. Source of reputational risk for central banks and regulators
Relevant findings on regulation of payment service providers from
the Global Payment Systems Survey 2012*
Regulation and supervision of non-bank payment service providers is the main
responsibility of central banks, followed by, or in cooperation with, the banking
supervision authorities. An exception is mobile operators whose regulation and
supervision involves telecom authorities more heavily – although still second to central
Role of anti-trust authorities is relatively stronger in other developed countries (ODC),
euro area, and ECA
MTOs and exchange bureaus are subject to AML/CFT regulations in the great majority
of the countries (91% and 87% respectively). This figure is slightly lower for other NBFIs
(credit unions and microfinance institutions) and for non-financial institutions (postal
network and mobile operators)
MTOs must be licensed and/or registered in 2/3 of the countries. The legal and
regulatory framework of most countries (68%) requires that supervised NBFIs be subject
to specific licensing and/or registration regimes – although if NBFIs are not supervised
these regimes do not apply for the most part. In less than half of the jurisdictions mobile
operators are required to be licensed and/or registered
*Based on preliminary results
A holist approach to retail payment development
Retail payment systems need a holistic
reform approach – synthetized in the
WB “retail package”:
 Developing a comprehensive
national retail payments strategy
 A practical guide to retail payments
 From remittances to m-payments:
understanding ‘alternative’ means
of payment within the common
framework of retail payments
system regulation
 World Bank Survey on Innovative
Payment Products
Cost does matter. Knowledge of cost
structure can result in offering appropriate
incentives to pave the way for epayments
 World Bank is developing a
methodological framework to
measure and compare costs of retail
payments and quantify benefits
deriving from migration to electronic
 Main features are:
 Comprehensiveness (all retail payment
instruments, cost elements)
 Comparability across countries and over
 Standardization of terms
 Broad applicability (developed and
developing economies)
In May 2012, the CPMI published a report on Innovations in Retail Payments. An analytical
study on the involvement of non-banks in retail payment systems – including implications for
central banks – has been conducted by the Working Group on Non-Banks in Retail Payments
and will be published shortly
CPSS-WB General Principles for International
Remittances Services
GP1: The market for remittances should be transparent and have adequate consumer
GP2: Improvements to payment system infrastructure that have the potential to
increase the efficiency of remittance services should be encouraged
GP3: Remittance services should be supported by a sound, predictable, nondiscriminatory and proportionate legal and regulatory framework
GP4: Competitive market conditions, including appropriate access to domestic
payments infrastructures, should be fostered in the remittance service industry
GP5: Remittance services should be supported by appropriate governance and risk
management practices
Remittance Service
Public Authorities
Should participate actively in the application of the general
Should evaluate what action to take to achieve the public policy
objectives through implementation of the general principles
Payment Aspects of Financial Inclusion (PAFI) Task Force
CPMI and WB established in Nov. 2013 the PAFI Task
Force. Members are CPMI central banks, non-CPMI
central banks active in the area of financial inclusion,
the IMF, and international development banks
PAFI’s work will be comprehensive addressing the
user and the supplier perspective, legal and regulatory
aspects and the payment infrastructure element of FI
PAFI will support the “Financial Inclusion Action Plan”
approved by the G20 at the Seoul Summit (Nov. 2010)
Building on the work already carried out by CPMI /
WB, PAFI is expected to fill the gap in international FI
guidance and recommendations by analyzing:
the role of PS as a gateway to more
comprehensive FI and how to realize that role
advances in FI to enhance PS efficiency,
flexibility, competitiveness, and integrity
requirements for effective, broader, reliable and
cost-efficient access to PS for adult individuals
(i.e. 15 years or older) and micro and small
enterprises (MSEs)
• Regulatory
• Basic Bank Accounts
• Government
• Payment System
• Competition, Level
Playing Field
• Risk Management
and Security
• Consumer Protection
and Transparency
• Payment Products
PAFI aims to publish a report in the second half 2015
!!! For example, outsourcing
/ agency schemes may
generate additional risks.
Although the service
provider is responsible for
agents / operators, the
regulator must be in a
position to identify sources
of risk and have the power
to intervene directly in how
arrangements should be
Provision of payment
services by non-banks
should be considered under
the same set of general
parameters and evaluated
for their inclusion into this
business sector. This
approach would inevitably
lead to apply the same (riskbased) analysis also to
“traditional” financial
institutions / providers
WB-CPSS Principles for
International Remittance
Services represent a very
relevant, flexible tool for all
retail payment services /
service providers
Empowering the
Abandoning a pure
institutional approach,
regulation should be based
on kinds of services
provided and, most
importantly, on the business
scheme adopted
Common reference
Towards common principles in retail payments
Adopting a “functional
approach” requires a
parallel empowerment of
one or more financial
authorities able to oversee a
more complex / diverse
market. Conversely, an
institutional approach in
financial regulation often
leads to some services
being left outside the realm
of financial authorities
Lack of empowerment may
result the adoption of a
“conservative” approach
and blocking / delaying
market developments; in
this sense, proper oversight
serves as an enabler of
Payment system oversight as the fundamental building block*
139 countries indicate that their central banks have formal legal powers to perform the
payment system oversight function, equivalent to 93%. Proportions are higher in the EU,
ECA, and other developed countries
At a global level, about half of the countries indicate that oversight powers are explicitly stated
in the law (similar to 2010). (Possible underestimation? given the recent surge in payment
systems laws – cited as the second most important source of oversight powers – one would
expect increasingly explicit empowerment…)
In 83% of the countries the payment system oversight function was formally established
and operating on a continuous basis. In 70%, oversight is independent of payment
system operations
Responsibility ranges from wholesale (80%) through retail (70%) to international (30%)
aspects of payments
Oversight is limited to central bank-owned systems in only 19% of the cases
At 1/3 of central banks, responsibility extends beyond financial stability to encompass
financial inclusion, the promotion of competition and consumer protection
*Based on GPSS preliminary results
Challenges faced by the overseer (I)
A number of challenges may be identified which are not of exclusively related to non-banks,
rather apply to a more differentiated / sophisticated retail payments landscape also as a
result of new entrants / products
Risk controls
Generations of technology bring in new threats whose implications require time and
effort to be fully appreciated, and demand more forward-looking monitoring tools and
sufficient technical expertise
Concentration can create the potential for a single point of failure with widespread
consequences. Question whether overseer has the tools (legal and technical) to
identify and possibly address concentration issues
Outsourcing to non-banks may generate uncertainties in the assignment of
responsibilities, and scope of overseer’s direct intervention
Fraud and operational disruptions become major sources of risk in networks that
are open to large numbers of participants and users, and integrate various
technological components
Challenges faced by the overseer (II)
Maintaining level-playing field
Competition can be intense among providers, all striving to achieve a critical mass.
Incentives to unfair competition could be strong. Strategic choices that providers can
use to win competition are exclusivity and non-interoperability – to be monitored
When, how, and to what extent to impose interoperability is a significant policy issue
with relevant implications on schemes’ viability and ability to compete
Overseer to monitor access conditions to the clearing and settlement services /
infrastructure as a possible factor to influence level-playing field and competition.
(See also recent MTO accounts’ closure trends)
Other relevant challenges include adequacy of oversight tools and cooperative
Central banks have traditionally preferred “soft” oversight instruments: monitoring,
moral suasion, assessment against international standards / best practices
Although the World Bank found over 70% of central banks reporting a significant
degree of cooperation with other regulators, this is more likely to be occurring
between central banks, banking supervisors and securities regulators
Closing Remarks
Non-banks can play a key role in enhancing efficiency of and access to payment
Non-banks could enhance certain types of risks due to their structure and
operating model; however risks need to be also seen in context / functional
Non-banks are very varied and have different roles and inherent challenges; need
for a robust regulatory and oversight framework to achieve proportionality
The World Bank – CPSS General Principles for International Remittances provide
a framework for non-banks / innovative products as well
Payment system oversight to broaden scope and overcome challenges to cover
the entire spectrum of payment services / providers. Information gathering and
knowledge / expertise sharing are fundamental
PPP Goals
Thank you
Payment Systems Development Group
The World Bank