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Innovations in retail payments, security and regulation Thijs Kettenis

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. Contents: new technologies and new providers. Innovations in POS payments

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Innovations in retail payments, security and regulation Thijs Kettenis

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  1. 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

  2. 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

  3. New Technologies

  4. Contactless Payments US case MasterCard Visa American Express Cards: 2005: 5 mln 2006: 30 mln Terminals: 2005: 20.000 2006: 200.000

  5. Mobile Payments Near field communication (NFC) Contactless chip in mobile phone Wave & Pay vs Chip & Pin NFC can be used for all kinds of applications contactless payment at POS Also P2P payments possible

  6. Mobile payments • Screen  information on products, balance • Keyboard  enter information  communicate • Authorize large payments by PIN • Top up from online bank account

  7. Proximity / NFC Expected number of NFC mobiles: • 2010: 300 million • 2013 600 million

  8. Biometrics Security

  9. Internet use in European Union(Eurobarometer, 2006)

  10. Internet access and banking in the Netherlands(Statistics Netherlands, DNB, 2006)

  11. 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…

  12. 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

  13. Two-factor authentication • Something you know (password) • Something you have (token, TAN)  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 authentication

  14. 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

  15. User experience: the webshop

  16. User experience: choice of payment method

  17. User experience: choice of issuing bank

  18. User experience: payment authorisation

  19. User experience: back to the webshop

  20. 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”

  21. iDEAL: statistics

  22. 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

  23. Internet banking: conclusions • Very important in payment landscape • Numerous and clear advantages • Risks: safety, operational • Principle-based regulation • Innovations: iDEAL, EBPP

  24. 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 • …

  25. 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 • …

  26. 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.

  27. EU solution: proportionate regulation Activity ► Risk ► Regulation • Banking directives (national) • E-money Directive (2000) • Payment Services Directive (to be implemented by 1 Nov 2009)

  28. 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

  29. 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”)

  30. 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

  31. 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

  32. 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

  33. Innovation, security and regulation QUESTIONS?

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