INNOVATION IN RETAIL PAYMENTS WORLDWIDE: A...

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FINANCIAL INFRASTRUCTURE SERIES PAYMENT SYSTEMS POLICY AND RESEARCH

INNOVATION IN RETAIL PAYMENTS WORLDWIDE: A SNAPSHOT OUTCOMES OF THE GLOBAL SURVEY ON INNOVATIONS IN RETAIL PAYMENT INSTRUMENTS AND METHODS FINAL PRINT-READY VERSION October 2012

THE WORLD BANK

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Foreword and Acknowledgements

Retail payment systems play an important role in the smooth functioning of any economy and inefficiencies in the retail payments market can have cascading effects throughout the economy. The World Bank Global Payment Systems Survey 2010 has shown that inefficiencies persist in many middle-income and low-income countries, with cash still being the most widely used payment instrument for small-value payments. There are a number of issues that are responsible for this, and the lack of a coherent, holistic strategy for the development of retail payment systems is among the most common.

The lessons learned in over a decade of technical assistance, and research outputs of other international and national agencies have been merged into a comprehensive “package” for the development and reform of the national retail payments system:

1. “Developing a comprehensive national retail payments strategy” intends to provide public authorities and market players with detailed guidance on how to develop and implement a comprehensive, strategic retail payments reform.

2. “A practical guide for retail payments stocktaking” identifies a methodology for undertaking a detailed stocktaking of a country’s retail payments landscape.

3. “From remittances to m-payments: understanding ‘alternative’ means of payment within the common framework of retail payments system regulation” discusses the development of a normative framework to underpin an efficient retail payments industry, including the so-called innovative payment mechanisms.

4. “Innovations in retail payments worldwide: A snapshot. Outcomes of the global survey on innovations in retail payment instruments and methods 2010” presents the results of the first World Bank survey among central banks that collected information on innovative retail payment products and schemes.

This paper has been developed by the Financial Infrastructure Service Line (World’s Bank Financial Inclusion Global Practice) led by Massimo Cirasino. Lead author is Harish Natarajan (World Bank), under the overall guidance of Massimo Cirasino and Jose Antonio Garcia (World Bank). Maria Teresa Chimienti (World Bank) contributed immensely to the management of the survey and analysis of the survey responses. Luchia Christova (World Bank) and Hemant Baijal (formerly World Bank) contributed to the development of the questionnaire. The members of the Retail Payments Working Group of the Committee on Payment and Settlement Systems (CPSS) participated in the review of the questionnaire.

This paper has benefited from the comments of a number of World Bank Group colleagues, national central banks and other national and international institutions, as well as private sector entities.

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Contents

List of Acronyms .............................................................................................................. 5

Executive Summary ........................................................................................................ 6

1. Introduction .............................................................................................................. 9

1.1 The Evolution of Retail Payment Instruments and Services ................................... 9

1.2 What Constitutes Innovation in Retail Payments? ................................................ 13

1.2.1 Technology-Driven Innovations ..................................................................... 13

1.2.2 Business Model Innovations .......................................................................... 14

1.2.3 Confluence of Technology and Business Model Innovations ......................... 15

1.3 Policy Implications ............................................................................................... 15

2. Survey Outcomes ................................................................................................... 17

2.1 Methodology ........................................................................................................ 17

2.2 Types of Innovative Products ............................................................................... 18

2.3 Usage and Adoption of Innovative Payment Products.......................................... 20

2.4 Design Features of Innovative Payment Products ................................................ 21

2.4.1 Entities Involved ............................................................................................ 22

2.4.2 Protection of Customer Funds ....................................................................... 26

2.4.3 Types of Accounts ......................................................................................... 28

2.4.4 Types of Transactions Supported .................................................................. 31

2.4.5 Interoperability ............................................................................................... 32

2.4.6 Pricing and Charges ...................................................................................... 36

2.4.7 Clearing and Settlement Arrangements ......................................................... 38

2.4.8 Security and Fraud Risks .............................................................................. 40

2.5 Legal and Regulatory Framework ........................................................................ 40

2.5.1 Applicable Laws for Innovative Payment Mechanisms................................... 42

2.5.2 Roles and Responsibilities of Regulators and the Overseer .......................... 45

2.5.3 Licensing and Reporting Requirements ......................................................... 48

2.6 Planned Reforms and Future Outlook .................................................................. 54

3. Concluding Remarks .............................................................................................. 56

Tables

Table 1: Innovative Products ......................................................................................... 18 Table 2: Transaction Channels Supporting Innovative Payments .................................. 19 Table 3: Usage Trends of Innovative Payment Products ............................................... 21 Table 4: Usage of Agents for the Provision of Payment Services .................................. 24

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Table 5: Types of institutions that can be agents ........................................................... 25 Table 6: Protection of Customer Funds ......................................................................... 27 Table 7: Types of Underlying Accounts Used with Innovative Payment Products .......... 29 Table 8: Entity with Ultimate Responsibility for Customers Funds ................................. 31 Table 9: Interoperability of Innovative Payment Products .............................................. 35 Table 10: Fees and Charges for Innovative Payment Products ..................................... 37 Table 11: Clearing and Settlement Arrangements ......................................................... 39 Table 12: Security and Risk Management Aspects ....................................................... 41 Table 13: Legal Framework of Innovative Payment Products ........................................ 43 Table 14: Applicable Laws and Regulations with Regard to Consumer Protection ........ 45 Table 15: Regulator of Innovative Payment Products .................................................... 46 Table 16: Overseer of Innovative Payment Products ..................................................... 47 Table 17: Licensing Requirements for Issuers/Operators of Innovative Payment Products ...................................................................................................................................... 49 Table 18: Conditions and Requirements Underlying the License ................................... 51 Table 19: Reporting Requirements ................................................................................ 53 Table 20: Anticipated Impact of Proposed and Ongoing Reforms.................................. 55

Charts

Chart 1: Entities Allowed to Offer Non-cash Retail Payment Services ........................... 22 Chart 2: Transaction Types Supported by Innovative Payment Products ...................... 32 Chart 3: Fees Charged by Different Entities Offering Innovative Payment Products ...... 38

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List of Acronyms

ACH Automated clearinghouse

AML/CFT Anti-Money Laundering / Combating The Financing of Terrorism

ATM Automated teller machines

CGAP Consultative Group to Assist the Poor

CPSS Committee on Payment and Settlement Systems

EAP East Asia and Pacific

ECA Europe and Central Asia

EFT Electronic fund transfer

EMV Europay, MasterCard and VISA

EU European Union

GPSS Global Payment Systems Survey

IAT International ACH transactions

ICT Information and communications technologies

IVR Interactive voice response

KYC Know-your-customer

LAC Latin America and the Caribbean

MFI Microfinance institution

MICR Magnetic ink character recognition

MNA Middle East and North Africa

MNO Mobile network operator

NACHA National Automated Clearinghouse Association

NBFIs Non-bank financial institutions

ODCs Other developed countries

PIN Personal identification number

POS Point of sale

PSDG Payment Systems Development Group of the World Bank

SA South Asia

SSA Sub-Saharan Africa

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Executive Summary

In July 2010, the Payment Systems Development Group (PSDG) of the World Bank launched the second Global Payment Systems Survey. In all, 132 central banks have responded, representing 139 countries. As in the first iteration, the survey provides an updated snapshot of payment and securities settlement systems worldwide, identifying the developments in this field in the last few years. Areas covered by the survey included the legal and regulatory framework, large-value payment systems, retail payment instruments and systems, cross-border payments and international remittances, securities settlement systems, and payment system oversight and cooperation.1 The main findings in the area of traditional retail payment systems are: (i) the usage of traditional retail payment products continues to grow, however disparities among regions and between high income and low income countries persist; (ii) the risk management mechanisms used for retail payment systems is improving with higher number of cheque, ACHs and payment card systems settling in central bank money and using some risk management mechanisms. However, usage of standard mechanisms like guarantee funds are still limited; (iii) payment card systems are being used for processing of mobile initiated transactions and are also supporting funds transfer transactions; and (iv) in general, the majority of central banks view the fees on retail payment products being moderate; however, significant variation among products and income levels of countries was reported—over 40 percent reported payment card and direct debit per transaction fees to be negligible, in comparison to 20 percent for credit transfer and 10 percent for other mechanisms which include innovative payment mechanisms. In general, a much lower proportion of central banks representing low-income countries rated fees in their jurisdiction as being negligible. In addition, in recognition of the innovation that is taking place in the retail payments arena and the interest in this matter expressed by local authorities as well as international bodies such as the G-8 and the G-20, a dedicated questionnaire to capture developments in this space was added as an annex to the main survey.2 The questionnaire was designed to capture innovations resulting in new products as well as innovations in processing. A total of 101 central banks completed the annex and reported 173 innovative retail payment products/product groups. Many central banks provided information on a product group basis and not individual products.

The main findings from the survey on innovative payment products/mechanisms are as follows:

1. There is a fairly widespread adoption of electronic payments channels for initiation of payment transactions using innovative retail payment mechanisms. In this survey, 91 central banks reported having internet banking of some form and 76 central banks reporting having mobile based access to bank accounts—mobile banking. Around 70 percent of the central banks reported the usage of ATM and POS infrastructure for innovative retail payment mechanisms as well.

2. In terms of usage, innovative payment products are still much lower in comparison to traditional retail payment products. However they are

1The outcomes of the Global Payment Systems Survey 2010 are available at

www.worldbank.org/paymentsystems 2 Annex 1 to the Global Payment Systems Survey 2010, “Questionnaire for Collecting Information on

Innovations in Retail Payment Instruments and Methods Worldwide”.

http://www.worldbank.org/paymentsystems

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important for financial inclusion in over 14 percent of the jurisdictions. Only 11 countries reported that transactions on innovative payment products represented more than 5 percent of traditional retail payment products. However, 70 countries reported that usage of innovative payment products are increasing, with 19 countries reporting that innovative payment products usage was increasing faster than that of traditional payment products. Significantly 14 central banks reported that a majority of the users had access only to innovative retail payment products instead of traditional payment products. Around 75 percent of the innovative payment products reported were used only for domestic transactions.

3. While non-banking entities are playing a significant role in the provision of innovative retail payment products/mechanisms, banks remain a significant player in this field. In 73 percent of the innovative retail payment mechanisms banking entities were actively involved in the provision of the services. Collaboration among various types of entities is widespread, with over one-third of the products involving joint provision of product/service, of which almost all involved a bank and telecom company. In over 9 percent, a formal joint venture between banking and non-banking entities was involved in the provision of the services. For over 61 percent of the cases, the underlying account was a traditional bank account, with an additional 17 percent being in a non-traditional bank account. Over 38 percent of the products reported by the central banks used services of agents, with around two-thirds of these products using non-banking entities like retailers as agents.

4. Customer funds are protected fully in around 60 percent of the cases. For around one-third of the products, customer funds were protected by deposit insurance and for an additional one-fourth of the products customer funds were fully backed up by deposits. Around one-fifth of the products, however, were not protected at all.

5. Innovative payment products appear to have fairly well developed pricing models. Only around 10 percent of the products were reported to have no fees. Around 80 percent of the products had a per-transaction fee, with a higher proportion of multiple fee components for products offered using a collaborative model involving multiple entities.

6. Merchant payments, utility bill payments and person-to-person transfers were the most common transaction types supported by the innovative payment mechanisms. Less than 10 percent of the products supported government-to-person payments.

7. The majority of the innovative products/mechanisms have very limited interoperability. Less than 20 percent of the products were reported to be fully or partially interoperable. Around 25 percent of the products/mechanisms supported some mechanism to exchange funds with traditional payment products.

8. The traditional clearing and settlement infrastructure is not generally used. More than 50 percent of the innovative products reported in the survey were settled in the books of the issuer, with only around 24 percent settling in central bank money. Less than 40 percent of the products settled in T+0.

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9. Security and fraud risks seem to be getting inadequate attention. In general, central banks do not seem to have formed an opinion on the likelihood of fraud and other security risks related to innovative payment products: for over 60 percent of the products central banks reported having no specific view on the fraud and security risk perception, and for around 10 percent of the products the fraud risk perception was reported as being higher than for traditional payment products.

10. Central banks identified themselves as the overseers for around 60 percent of the products. However, 10 percent of the products were subject to collaborative oversight. A small percentage of products—around 5 percent of the products—were identified as not being overseen by any public authority.

11. In contrast to the detailed transaction data available for traditional retail payment systems and products, the details available for innovative payment products and payment systems are limited.

12. In general, central banks are not overly optimistic about the anticipated impact of innovations in their respective jurisdictions. Thirty-one central banks anticipated the usage of electronic payment instruments to increase, sixteen anticipated a positive impact on financial inclusion, and eight central banks anticipated a positive impact on efficiency. Seven central banks anticipated no significant impact because of ongoing innovations.

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1. Introduction

In July 2010, the Payment Systems Development Group (PSDG) of the World Bank launched the second Global Payment Systems Survey. In all, 132 central banks have responded, representing 139 countries. Areas covered by the survey included the legal and regulatory framework, large-value payment systems, retail payment instruments and systems, cross-border payments and international remittances, securities settlement systems, and payment system oversight and cooperation.3 In addition, in recognition of the innovation taking place in the retail payments arena as well as the interest on this matter expressed by local authorities and international bodies such as the G-8 and the G-20, a dedicated questionnaire to capture developments in this space was added as an annex (hereinafter referred to as the “Survey”), to the World Bank Global Payment Systems Survey 2010 (hereinafter referred to as the “GPSS 2010”).4 The Survey was based on the 2004 CPSS Survey of Developments in Electronic Money and Internet and Mobile Payments.5

This report presents the outcomes of the responses to the World Bank innovations questionnaire. The remainder of this chapter describes the evolution of retail payments over the last several decades, clarifies what constitutes “innovations in retail payments,” and discusses some of the main policy issues derived from such innovations. Chapter 2 presents the detailed outcomes of the innovations questionnaire. Chapter 3 presents some concluding remarks.

1.1 The Evolution of Retail Payment Instruments and Services

Retail payments play a critical role in supporting economic activity and growth in commerce. The design and functioning of the domestic retail payments system can also have a major influence on the safety and efficiency of the national payments infrastructure. There is evidence that widespread adoption of electronic retail payment instruments for various payments needs can influence the overall economic growth as well as provide safety, efficiency, and convenience to the users.6

Historically, cash and cheques have been the dominant form of retail payment instruments especially for face-to-face payment transactions. As an outcome of several initiatives undertaken to determine alternative approaches to small value, recurring check-based payments; the Automated Clearinghouse (ACH) was born in the 1970’s. Over the years ACH’s have focused their development to support two distinct retail payment products: credit transfers and debit transfers.7 In many countries, with the evolution of information technology, credit and debit transfers can now be initiated through a range of channels—Internet, telephone, IVR, ATMs and increasingly through mobile phones and other mobile devices. Credit and debit transfers are also commonly

3 The outcomes of the Global Payment Systems Survey 2010 are available at

www.worldbank.org/paymentsystems. 4 Annex 1 to the Global Payment Systems Survey 2010, “Questionnaire for Collecting Information on

Innovations in Retail Payment Instruments and Methods Worldwide”. 5 CPSS, “Survey of Developments in Electronic Money and Internet and Mobile Payments”, Bank for

International Settlements, 2004. 6 For a detailed discussion on this refer to World Bank, “Developing a Comprehensive National Retail

Payments Strategy (consultative report), 2012. 7 Debit transfers are often processed in bulk. The payee collates the various payment orders and submits

them to their financial institution for collection through the ACH. Credit transfers are initiated by the payer and could be for individual payments or for bulk payments as in the case of salary payments.

http://www.worldbank.org/paymentsystems

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referred to as Electronic Funds Transfer (EFT) products. In some countries like Germany, the Netherlands, Japan, and Belgium, EFT-based direct credit transfers became an important electronic payment instrument for consumer-to-consumer payments and also for consumer-to-business payments.

In some of the countries where paper cheques were the dominant form of noncash payments,8 electronic cheque applications were developed which further expanded the use of ACH for retail payments. These applications were introduced to capture magnetic ink character recognition (MICR) line information on the cheque to create ACH transactions at merchant point of sale, at lock box locations, Internet, and over the telephone. In addition to consumers, corporations, and governments, these applications enabled retailers, both physical and virtual, to process payments via the ACH. More recently, countries such as the U.S. have developed the new international format for ACH—International ACH Transactions (IAT), which is one of the most significant changes to the existing ACH network in decades.9 This will require corporate payment initiators, financial institutions of all sizes, financial software companies, and payment service providers to adopt the new rules to use ACH for consumer and corporate cross-border transactions. Other recent developments include same day ACH service and the use of devices such as ATM’s and smart mobile phones to capture cheque images and initiate ACH payments.10

The World Bank’s 2010 global survey of payment systems recorded 87 ACH systems serving 92 countries.11 This is a small increase from the 2008 survey, which recorded 83 ACH systems worldwide. The existence of ACHs is more frequent across the EU, Latin America and the Caribbean (LAC), and other developed countries (ODCs). They are also more frequent in larger countries.

In the recent years, the ACH network and other similar systems have been leveraged to provide authenticated direct debit transactions; for example, the National Automated Clearinghouse Association (NACHA) joined eWise systems in the U.S. to provide a mechanism, Secure Vault Payments,12 by which a bank account holder can authorize an ecommerce merchant to collect payment for his online sales through an ACH direct debit. There is a similar arrangement in the Netherlands called the iDeal13 system. In many countries third party providers operate similar services by using bilateral arrangements instead of ACH and in general such arrangements are becoming common in a large number of countries. These systems redirect the buyer to their bank’s online banking website for authentication purposes and also ensure availability of funds, thereby providing an assurance that the merchant’s direct debit request will be honored.

Whereas ACH has had some success in converting certain types of person-to-person and business-to-business payments from paper to electronic, payment cards in the form

8 USA and France are the biggest users of check payments. Australia, UK, and Canada are also big users of

checks. 9 Launched in September 2009 by the Federal Reserve Bank Atlanta, requires all international transactions

made via the ACH Network in the U.S. to use specifications developed by FedACH. 10

USAA Bank in the U.S. launched the first iPhone application that allows users to capture the photo image of a check and send it to the bank for processing. This development has moved part of the process of check processing right down to the beneficiary of the check. 11

For comparative purposes, each country having two or more ACH systems in place is counted as one, just like all other countries with a single ACH system. Also, this total includes the ACH system of the BCEAO, which serves eight different countries. 12

NACHA’s Secure Vault Payments, Javelin Strategy and Research, October 2008. 13

www.iDeal.nl

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of credit and debit cards have proved to be most instrumental in making the conversion from paper to electronic at the point of sale. Payment networks such as Visa and MasterCard, American Express, Diners Club, Discover and some other national and regional networks typically mange payment card infrastructure. By leveraging the increased sophistication in technologies relating to information processing and telecommunications, payment cards have become an important form of payment in many countries. Advancement in information technology and telecom services made real-time, point-of-service verification of cardholders and their credit status widespread, speeding up transactions and curtailing fraud and credit risk related losses. As payment cards became the more accepted form of payment and their volumes grew, the processing of card payments also became more complicated. To address this need, third party payment service providers started to emerge to provide specialized services related to both the issuing and the acquiring sides of the business. To address these complexities, the international card associations developed rules and standardized procedures for handling transaction flows. They also created international processing systems to handle the exchange of money, and established dispute resolution procedures (including arbitration mechanisms) to handle disputes between consumers and merchants.

Recent technological developments are further leading to the emergence of new retail payment instruments. While the environment for emerging payments is highly dynamic, the most important emerging payments types today are electronic bill presentment and payment (EBPP), person-to-person and account-to-account transfers, and e-money instruments. Several more recent emerging payment mechanisms are contactless payments, biometric based payments, and proximity payments as well as the development of new transaction messaging formats and transmission mechanisms used to effect these payments.

Electronic money (e-money) instruments,14 which are essentially access mechanisms to pre-funded accounts held at banks or non bank institutions, can be used through the Internet, payment cards, or mobile phones. Such instruments have the potential for further reducing the dependence on paper-based payment instruments by dramatically broadening access to electronic payments for a larger number of consumers, especially unbanked and under-banked consumers. The market for prepaid cards and stored value cards has also emerged as one of the fastest growing segments in the retail payments industry. In the 1990s, when prepaid cards were first adopted, their issuers were primarily nonfinancial businesses in limited deployment environments such as mass transit systems and universities. In the survey, Hong Kong, Malaysia, Germany, and the Netherlands reported launch of e-money products in the 1990’s, and Japan and Thailand in early 2000’s. In recent years, prepaid cards have grown significantly as financial institutions and nonbank organizations target unbanked and migrant remittances segments. Technological innovations in the way information is stored (e.g., magnetic stripe or computer chip), the physical form of the payment mechanism, and biometric account access and authentication are converging to create efficiencies, reduce transaction times at the POS, and lower transaction costs.

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E-money is a record of funds or value available to a consumer stored on a payment device such as chip or magnetic stripe prepaid cards, mobile phones or on computer systems as a non-traditional account with a banking or non-banking entity. E-Money products are further differentiated into: network money, M Money, electronic purse, and electronic wallet.

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During the last decade, financial institutions and retail establishments also developed electronic payment instruments that use the Internet. Using specialized, account-to-account services, individuals can transfer e-money value to other individuals or businesses.15 Consumers can use the payment instruments for purchases at retailers’ web sites or they can transfer cash to other individuals using e-mail IDs as identifiers. Pre-funded accounts that consumers use for online auction payments were among the earliest applications to use these new payment instruments. In these applications, individuals use a payment card to pre-fund the account, and recipients redeem the value from the issuer at the time of the transaction, or also transfer money from these accounts to their regular bank accounts. Some of these instruments are now being extended to the mobile channel, for example, replacing email ID with a mobile number for sending person-to-person transfers. The increasing popularity of social networking websites is also translating into increased ecommerce activity among the members of the social network and also with external entities who create content-like games for sale on such sites. This closed user group kind of environment is creating a demand for efficient micro-payment solutions. Facebook, one such social network, has created a closed-loop payment product “Facebook credit” which is pre-funded account akin to PayPal with the current restriction that it is used only for purchases in the Facebook environment. Payments and other fees accounted for $557 million in revenue for Facebook in 2011, up from $106 million in 2010, showing the dramatic growth in payment volumes on such platforms.16

Mobile telephony started spreading around the world in late 1990’s, the inherent data communication capability of mobile phones, caught the attention of banks and they started launching basic inquiry services like account balance inquiry, and slowly starting expanding the range of functions to also include transaction services such as funds transfer. These set of services collectively started being referred to as mobile banking. The subsequent worldwide rapid spread of mobile telephony in the 2000’s and the early experiences with mobile banking, combined with the experiences with e-money products motivated various entities to experiment with e-money products with transaction initiation through mobile phones as a key design aspect. This document refers to such transactions as mobile money. A recent industry report17 identifies the first issuer of mobile money in the world as Smart Telecom in the Philippines in 2004, and the 100th mobile money product was launched in May 2011, with 88 percent of the products being in developing countries.

To summarize, an analysis of the evolution of retail payments over the last five to six decades shows the following: (i) Successful adoption of advances in technology have played a key role in development of new channels for payment initiation, improved authentication and efficient processing; (ii) development of new payment needs (transit payments, internet auction sites and social networking sites) have also led to creation of new payment mechanisms; and (iii) payments infrastructure created for one payment product have been successfully leveraged for other payment products, such as using ACH for online banking enabled payments and successful leveraging of infrastructure created for credit cards by debit cards.

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PayPal and Google Cash are good examples of such payment instruments. 16

The Economist, February 4th

2012 edition. 17

GSMA, “Mobile Money for the Unbanked”, Annual Report 2011.

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1.2 What Constitutes Innovation in Retail Payments?

Innovation is generally understood to be a new way or approach, often dramatically different, from the then prevalent way or approach of delivering the same product, service or experience in a more efficient or effective manner, making the new way or approach more attractive.

In the context of retail payments innovation can happen at various levels. A retail payment has at least two parties involved: the payer and payee. It may involve multiple processes: initiation, authentication, authorization, clearing, settlement, along with post-transaction inquiries and dispute resolution. Finally, a retail payment may involve multiple intermediaries: payer’s bank or other payment services provider, payee’s payment services provider, third-party service providers and one or more inter-institution networks.18 An innovation can impact one or both of the parties, one or more of the processes, and, finally could have been introduced by any of the intermediaries involved.

As the analysis of the evolution of retail payments in the previous section shows, innovation in the retail payments space generally involves two key aspects: the first is the adaptation of existing technologies or adoption of new technologies to improve the efficiencies in the way payments are made in terms of the transaction channel used or device used; and the second is the development of new business models and mechanisms for handling the underlying payment processes and activities. While some innovations involve only one of these aspects, many innovations see a confluence of these two aspects. The result could be one or more of the following: a new payment product (e.g., e-money products), a new channel for using an existing payment product (e.g., using a mobile phone to initiate a credit transfer or using a business correspondent for cash deposit), changes in how the product is used (e.g., biometric authentication), and, finally, an improvement in internal processes that often are not perceived by the final user (e.g. cheque truncation).

1.2.1 Technology-Driven Innovations

In the payments industry, innovations in information and communications technologies (ICT) have generally paved the way for growth of certain types of payment instruments. During the second half of the 20th century, improvements in ICT led to the adoption of various types of innovations for point-of-sale and remote payments. This allowed payment service providers to significantly expand the options available to users for making payments, which had been previously limited to face-to-face payments and a few costly and inefficient alternatives for remote payments (e.g. cheques by mail).

In the 1990s, the Internet opened up the world of e-commerce and users who had safe and convenient access to it started making various types of payments remotely. Online banking platforms allowed for electronically initiated credit and debit transfers. Although these payment instruments had existed for 20-25 years, their usage increased significantly once consumers realized that they could initiate such payments with their computers through the Internet and not have to make a physical trip to a bank branch. The Internet as a channel also influenced the increased usage of payment cards for purchase of goods and services remotely, and also contributed to the evolution of prefunded electronic money accounts such as PayPal. There was a manifold increase in

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This is a generalized description. Some retail payments may not involve all the institutions mentioned. Likewise, not all the processes mentioned may be required for all retail payments.

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the overall efficiency of payments through allowing consumers to make payments and conduct banking operations beyond the normal business hours.

In the last decade, perhaps the most talked about innovation is the use of mobile phones as a mechanism to initiate and receive payments. This innovation has been seen as having the potential to further simplify payments for already banked customers through mobile banking. In country environments where the conventional payment infrastructures are still underdeveloped, mobile-phone-initiated payments have held out the tantalizing possibility of bringing about a dramatic increase in the reach of electronic payment services to broader segments of the population. Some recent experiences have proven to some extent that this possibility is real, but at the same time have made it clear that there are still huge challenges to fully realizing this potential, including the need for basic payment system infrastructure arrangements.

Innovations leveraging technological developments are not just restricted to the development of newer and more efficient access channels in terms of ATMs, Internet or mobile phones. There have been innovations in other areas as well, notably:

Faster processing of payments due to better and more robust technology;

Better customer service through more convenient access channels for customer services;

Better authentication and validations mechanisms like chip cards, two-factor authentication, biometric based authentication, and so forth; and

Improved fraud detection by leveraging new and sophisticated technologies like neural networks and artificial intelligence, and also better notification and alert services using emails and mobile phone SMS messages.

1.2.2 Business Model Innovations

The business models associated with payment services have evolved over time. In the earlier days, payment services were seen as a service associated with traditional banking activity. The revenue streams associated with payment services were, to a large extent, implicit in the form of float income. Gradually, payment services began to be seen as an independent business line with associated revenue streams, though still closely linked to the underlying banking activity. In consequence, the emergence of specific fees and charges associated with payment services became an important component of overall revenues.

The recent past has seen the evolution of two major business model changes: (i) emergence of prepaid products; and (ii) emergence of non-bank payment service providers. Prepaid products marked a shift from the notion of payment services being associated with an underlying bank account or a credit account (i.e. a credit line), to a stand-alone product created specifically for meeting payment needs. The emergence of prepaid products, many of which eliminated the need to have a bank account, also prompted non-banking entities to explore offering payment services built around such prepaid products. Moreover, the difficulty of expanding the traditional payment infrastructure of bank branches, POS terminals, ATMs and to some extent even traditional Internet channels (due to Internet access constraints and Internet literacy issues, among other factors), motivated banks and other payment service providers to leverage small commercial establishments to provide basic payment services of accepting deposits and providing cash withdrawals in alliances with banks/payment service providers. In this Survey over 38 percent of the products reported by the central

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banks used services of agents, with two-thirds of these products using non-banking entities like retailers as agents. A recent report19 by CGAP reported about seven schemes world-wide which had an agent network of more than 10,000 each—three from Brazil, two from India and one each from Philippines and Kenya.

1.2.3 Confluence of Technology and Business Model Innovations

Some of the recent innovations in retail payments have involved a confluence of technology and business model innovations. This confluence is best reflected in the development of mobile money products. For the purposes of this discussion, mobile money is defined as: an e-money product where the record of funds is stored on the mobile phone or a central computer system and which can be draw-down through specific payment instructions to be issued from the bearers’ mobile phone.

Banks started leveraging the emergence and wide spread adoption of mobile phones by extending traditional banking and payment services to mobile phones. To a large extent, mobile phones were treated just as an additional transaction channel. Mobile money was created by the confluence of: prepaid products; the ability of mobile phones to be a ubiquitous transaction initiation device on either payee or payer side or both, and non-banking payment service providers and agents. Given that mobile money products are often linked to prepaid accounts, non-banking entities also have been very active in this area. In fact, telecom providers have been successful mobile money issuers.

1.3 Policy Implications

Central banks and other regulators worldwide embrace the public policy goal of promoting safe and efficient payment systems. The forthcoming World Bank publication “Developing a Comprehensive Retail Payments Strategy” argues that the concepts of safety and efficiency need to be understood broadly in the context of retail payments. Moreover, it argues that in countries with an underdeveloped retail payments market the public policy goals might need to be expanded beyond safety and efficiency issues to address both demand-side as well as supply-side constraints. In this regard, the PSDG’s global experience in the modernization and reform of retail payment systems indicates that national authorities should have at least three additional policy goals with respect to retail payment system development:

1. Promote affordability and ease of access to payment instruments and services;

2. Promote development of efficient infrastructure to process electronic payment

instruments and mechanisms to meet the retail payment needs; and

3. Promote socially optimal usage of payment instruments.

Innovations in retail payment products and processes could enhance the safety and efficiency of retail payments and retail payment systems, and also could serve to increase affordability and accessibility of payment services. There are innovations that could result in better authentication and fraud detection measures, which enhance the safety of retail payment systems. Other innovations could actually weaken overall safety, for example due to inadequate AML/CFT measures, weaker KYC procedures, data security issues or inadequate protection of customer funds.

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Flaming, M., C. McKay, and M. Pickens, “Agent Management Toolkit: Building a Viable Network of Branchless Banking Agents.” CGAP, 2011.

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Innovations thus have a direct bearing on the public policy objectives in the area of retail payments, which makes it important for public authorities to monitor them, and eventually to regulate them to avoid compromising the safety of both the underlying system and the overall national payment systems. In parallel, in light of the new business models being deployed, authorities may need to revise the legal and regulatory framework governing the provision of payment services. While in many cases the various innovative retail payment mechanisms have specific business features designed for meeting specific payment needs, from a legal and regulatory perspective they all raise similar overall concerns, and are even similar to traditional payment instruments and mechanisms in that regard. Innovative payment mechanisms thus need to be understood and regulated within the common framework of the retail payments system of a country.20

20

These ideas are discussed in detail in M. Cirasino and M. Malaguti, “From Remittances to M-Payments:

Understanding ‘Alternative’ Means of Payment within the Common Framework of Retail Payments System Regulation (consultative report)”, The World Bank, 2012.

17

2. Survey Outcomes

This section presents the detailed outcomes of the Survey. The analysis and data presented herewith are based on the responses provided by the 101 central banks that completed the Survey.

2.1 Methodology

The Survey aimed at capturing innovations resulting in new products as well as innovations in processing. For the purposes of the survey, “innovative products” were defined as products that are not based on cheques, traditional credit and debit cards, or traditional direct credit and debit services.21 This definition, therefore, captures: prepaid cards, card-based e-money products, and other types of e-money products including those developed around mobile phones and mobile technology, among others.

The Survey covered general information on the types of innovative products and on innovative access channels to bank accounts used in a country, as well as more specific information on the design features of the relevant innovations (e.g., protection of the monetary value created, stakeholders, usage of the product, pricing, clearing and settlement, and security and fraud issues). In addition, several legal and regulatory issues were covered (e.g., legal provisions, main regulator and overseer, licensing and reporting requirements, and consumer protection) and some statistical data was requested. Central banks were also asked to provide information on whether reforms on any of these matters are being sought.

The questionnaire did not aim to obtain systematic statistical information on the number of payments and total value settled for each of the different innovative retail payment mechanisms. While some specific data were requested, the main purpose of this information was to provide a “sense of magnitude” rather than to build a thorough statistical database for cross-country comparisons.

As with the GPSS 2010, for each of the questions included in the questionnaire the worldwide totals are presented followed by three broad country classifications based on the following variables: i) level of per capita income; ii) region/geographical location; and iii) population size.22 With regard to the regions, the following abbreviations are used: EAP-East Asia and Pacific, ECA-Europe and Central Asia, LAC-Latin America and the Caribbean, MNA-Middle East and North Africa, SA-South Asia, SSA-Sub-Saharan Africa, Euro Area-EU countries that are part of the euro area, Other EU members-EU members that are not part of the euro area, and ODC-Other Developed Countries (excluding EU developed countries).

21

This definition of “innovative products” is only for the purposes of this survey and serves to distinguish these products from the “traditional” means of payment covered in the Global Payment Systems Survey, in the attempt to cover a broad range of products and services across 132 countries. Such definition does not intend to provide a reference for future work in this area by others, and may be subject to change based on market developments. The document “Developing a comprehensive retail payments strategy”, also part of the retail package, includes a non-exhaustive list of terms used throughout the package. 22

For additional details on these classifications, refer to the Methodological Note of the GPSS 2010, available at www.worldbank.org/paymentsystems

18

2.2 Types of Innovative Products

Table 1 presents the products reported by the participating central banks. The products were classified into three categories based on the device and/or channel used.

Card-based products refer to products that use physical cards to access a non-traditional account maintained with an institution, which may not necessarily be a bank. Traditional debit cards and credit cards are excluded as per the methodology described in the previous sub-section. Information was collected separately for card-based products where the account details including balance in the account is stored on the card and for those products where the card just contains some basic identifiers either on a chip or on a magnetic stripe which is read by an appropriate device to access the underlying account in a central system. The former are typically called “stored-value” cards and the latter “pre-paid” cards.

Network-based products refer to products that use a proprietary network or the Internet to access a pre-paid account maintained at a centralized computer system, without the need of any other specialized access device or equipment.

Mobile-based products refer to products designed to access the underlying funds through mobile phones or other mobile devices. As in the case of card-based products, a distinction is made between those cases in which the details of the underlying account and the balance information is available on the phone/device, and other cases where the mobile phone/device is only used to access the underlying account and only the basic information to identify the account is stored on the phone. The Survey also requested information on payment products where the payer has a post-paid mobile phone account with a telecom provider and has given a mandate to some other goods or service providers to submit their bills to be included as part of his overall periodic bill for the underlying post-paid mobile phone account.

Table 1: Innovative Products

Category Sub-types Number of countries

Card-Based Account and balance information stored on a chip card 53

Card used only for access, balance stored in a central system 58

Network

Account and balance information in a central system accessed through various channels

43

Accessed through Internet 51

Mobile

Account and balance information on mobile phone 31

Mobile phone used only for access 33

Billed to mobile phone account 55

Account information available on phone. Information used for initiating transaction. Akin to contactless card.

28

It needs to be noted that some products are being introduced that match one of more of these categories, for example: many issuers offer mobile payment services on the existing payment cards, by mapping the payment card information to mobile numbers or other custom identifiers; and PayPal and other Internet payment products now also allow

19

access to the prepaid account at the point of sale through mobile phones and prepaid cards issued against those accounts.

Electronic payment channels such as ATMs, Internet, mobile phones, interactive voice response (IVR) systems and unmanned kiosks are fundamental to the effective provision of electronic payment products, including innovative ones. Table 2 provides information on the usage of these channels worldwide for initiating payments linked to traditional bank accounts. In the Survey, 91 of 101 countries reported having Internet banking of some form and 76 countries reported having mobile-based access to bank accounts (referred to here as mobile banking).

At a first glance, these figures indicate fairly widespread availability of these electronic channels for conducting payment transactions, in particular retail payments. Relatively high numbers were reported for each of the various country income levels, region and country sizes, with the possible exception of the MNA region for some of the channels like mobile banking and Internet banking.

However, the Survey did not gather information on whether these channels are widely available within each country (that is, if the majority of banking and other payment service providers actually offer these channels to their customers) or the intensity with which they are actually used.

Table 2: Transaction Channels Supporting Innovative Payments

Mobile banking Internet banking ATM* POS

Terminals*

Other non-branch remote

access channels

Countries # % # % # % # % # %

Worldwide totals (101) 76 75% 91 90% 70 69% 71 70% 46 46%

By income

High income (38) 30 79% 34 89% 20 53% 23 61% 20 53%

Upper middle income (23) 18 78% 20 87% 19 83% 17 74% 13 57%

Lower middle income (24) 18 75% 22 92% 19 79% 19 79% 11 46%

Low income (16) 10 63% 15 94% 12 75% 12 75% 2 13%

By region

East Asia and Pacific (7) 6 86% 6 86% 5 71% 5 71% 3 43%

Europe and Central Asia (14) 10 71% 13 93% 11 79% 9 64% 10 71%

Latin America & Caribbean (14) 12 86% 13 93% 9 64% 11 79% 5 36%

Middle East & North Africa (11) 5 45% 7 64% 7 64% 6 55% 6 55%

South Asia (4) 4 100% 4 100% 4 100% 4 100%

2 50%

Sub-Saharan Africa (18) 11 61% 17 94% 15 83% 14 78% 4 22%

Euro area (14) 11 79% 13 93% 6 43% 6 43% 5 36%

Other EU members (7) 7 100% 7 100% 4 57% 6 86% 4 57%

Other Developed Countries (12) 10 83% 11 92% 9 75% 10 83% 7 58%

By population size

>30 million (30) 26 87% 27 90% 27 90% 23 77% 21 70%

20

Mobile banking Internet banking ATM* POS

Terminals*

Other non-branch remote

access channels

>5 million, <30 million (41) 31 76% 38 93% 24 59% 29 71% 13 32%

5 million or less (30) 19 63% 26 87% 19 63% 19 63% 12 40%

* Usage for payment transactions like bill payment and funds transfers

2.3 Usage and Adoption of Innovative Payment Products

Central banks were requested to provide consolidated transactions statistics for their most important innovative retail payment products. Many central banks only partially provided the requested information.

Seventy-six central banks reported qualitative information on usage and transaction trends, which is summarized in Table 3.23 Despite several innovative payment products being already available in many countries, their usage is still quite limited. For example, only 11 countries or 11 percent of the total reported that transactions using innovative payment products represented more than five percent of the corresponding figure for traditional retail payment products. The percentage is slightly higher than the worldwide total for low-income countries, mainly in the SA and SSA regions, and also in ODCs. However, 70 countries reported that usage of innovative payment products is increasing, with 19 countries reporting that innovative payment products usage was increasing faster than that of traditional payment products.

As mentioned earlier, innovations in retail payments are seen as important means of supporting financial inclusion initiatives. Fourteen countries reported that the innovative products in their countries are targeted at first-time users of electronic payment mechanisms.

Interestingly, for the majority of the items in this question, countries with large populations reported greater adoption levels and/or growth of innovative payment products.

23

Nineteen countries reported neither the detailed nor the qualitative information on transaction trends. Eight countries provided only detailed information.

21

Table 3: Usage Trends of Innovative Payment Products

Innovative product

transactions are growing

Innovative product

transactions account for more

than 5% of traditional

electronic retail payments

Innovative product

transactions are growing at a

faster rate than traditional

electronic retail payments

Innovative product

transactions are being used for payments, and

not just for safekeeping of

money

For the majority of innovative

product users, the innovative product is the only electronic

payment instrument they have access to

Countries # % # % # % # % # %


By income

High income (38) 25 66% 4 11% 10 26% 22 58% 3 8%



Low income (16) 11 69% 3 19% 4 25% 9 56% 3 19%

By region





South Asia (4) 3 75% 1 25% 1 25% 2 50% 1 25%


Euro area (14) 8 57% 1 7% 3 21% 6 43% 0 0%

Other EU members (7) 5 71% 0 0% 1 14% 5 71% 1 14%


By population size

>30 million (30) 27 90% 5 17% 10 33% 20 67% 3 10%

>5 million, <30 million (41) 23 56% 4 10% 3 7% 20 49% 8 20%

5 million or less (30) 20 67% 2 7% 6 20% 15 50% 3 10%

2.4 Design Features of Innovative Payment Products

Central banks provided information on the design aspects of specific innovative products/product groups available in their jurisdictions. In many cases, the design aspects for specific products were provided, while in others this information was provided only for the broad product groups (e.g., prepaid cards, instead of individual products). In total, 101 countries reported collectively 173 different products/product groups.

The following specific design aspects are analyzed below:

Types of entities involved

Types of accounts

Types of transactions supported

Interoperability

22

Pricing and charges

Clearing and Settlement arrangements

Security and Fraud Risk

2.4.1 Entities Involved

Traditionally, retail payment services have been seen as being closely linked to traditional banking business and hence only banks were seen as the providers of retail payments services. Recently, however, many non-banking entities, either on their own or jointly with banks, have been able to create fairly successful innovative payment mechanisms in some countries. To a significant extent, the operational model used for the provision of innovative payment mechanisms, which is a key factor influencing whether an innovative product will be broadly adopted or not, will be determined by the legal and regulatory framework.

In the specific case of mobile money two distinct models have been seen: the bank-led model and the Mobile Network Operator (MNO)-led model. In the “bank-led” models, banks are the issuers. Under this model, a bank can still outsource (part of) the services to an MNO or another operator, or use agents; yet it remains responsible for any action by such third party. In the event that a license or authorization is required to provide the service, this is given to the bank. As an opposite model— the MNO-led model—the public authorities decide to open the market also to non-bank providers and give a license/authorization directly to such entities. In this case, the service provider could be a non-bank entity, most often an MNO. The MNO can still be required to be linked to a bank, at least to deposit the money collected from the customers into a bank account. There could be a number of other operating models as variants of these two basic models. One such is the model where a consortium of banks creates a specialized entity, or the like.

Chart 1 shows in percentage terms the number of countries allowing specific categories of entities to offer non-cash retail payment mechanisms and products, based on an analysis of the responses to the survey.

Chart 1: Entities Allowed to Offer Non-cash Retail Payment Services

According to survey results, banking entities were actively involved in the provision of the respective services for around 74 percent of the innovative retail payment mechanisms, telecom companies played an active role for over 26 percent of the

23

mechanisms, and in over nine percent a joint venture between banking and non-banking entities had been formed for the provision of the services.

Broadly speaking, a non-cash retail payment involves the following processes/services:

i. An issuer who issues the payment instrument to the payer or in some cases the

payee;

ii. An acquirer who accepts the payment transaction from the party initiating the

transaction for further onward processing;

iii. A clearinghouse acting like intermediary that comes in between the acquirers and

issuers and manages the clearing and settlement of the transactions made using

the underlying payment instruments; and

iv. Entities that can provide services to one or more of the three entities described in

this list.

Over the last few years it has been broadly accepted that a broader set of entities, and not just entities engaged in the banking business, can provide the services (iii) and (iv) described above. In many jurisdictions there are established licensing requirements for such entities. Decisions about types of entities that can provide services described in (i) and (ii) above have, however, been more contentious. At the heart of the discussion on these two services is the topic of what really constitutes a “deposit taking” activity, which in most jurisdiction is expressly reserved for certain types of institutions—primarily banks; and also in particular, is a prepaid account same as a deposit account? In the Survey, central banks were asked to identify which of the following types of entities and business arrangements were involved in the provision of the reported products/product groups: banks, payment card companies (e.g. Visa, MasterCard), mobile operators, micro-finance institutions (MFI), and joint ventures between banks and non-banking entities.24 In recognition of the fact that a variety of business arrangements are in use ranging from formal joint ventures to contractual arrangements, central banks were requested to select all the entities that play a role in the provision of the product.

In 127 of the reported products, representing over 73 percent of the total reported, banks were involved in the provision of the product/product group. However, only in 57 of such cases were banks solely responsible for the provision of the services, indicating that in more than half the cases they had some form of business arrangements with other non-bank entities. In contrast, while mobile operators were involved in the provision of 45 products, they were solely responsible in only seven of the cases. This analysis shows that while banks are still playing a dominant role in the provision of innovative retail payment products, in most cases they are doing so in collaboration with other entities. As only 16 of the products were identified as being provided through an explicit joint venture between banks and non-banking entities, it appears that the majority of the business arrangements are either formal contractual arrangement for provision of services with one or more entities. One notable example is in the case of mobile money services, where a bank could operate the service and avail customized communication services from a telecom company and engages various entities to act as agents.

24

Provision of a product is interpreted here as involving responsibility for the following: signup of customers,

product management, management of the customer relationship, and provision of all the transactional services associated with the product.

24

The usage of agents for the provision of innovative payment mechanisms, especially those geared towards offering services to hitherto unbanked customers is generally believed to be common. In this regard, central banks reported information for 160 products, of which 68 (43 percent) involved the usage of agents, while 92 (58 percent) did not involve the usage of agents.25

Table 4: Usage of Agents for the Provision of Payment Services

Products using agents Products not using

agents

Products # % # %

Worldwide totals (160) 68 43% 92 58%

By income

High income (79) 23 29% 56 71%

Upper middle income (34) 14 41% 20 61%

Lower middle income (31) 19 61% 12 39%

Low income (16) 12 75% 4 25%

By region

East Asia and Pacific (7) 7 100% 0 0%

Europe and Central Asia (32) 11 34% 21 66%

Latin America & Caribbean (20) 9 45% 11 58%

Middle East & North Africa (9) 6 67% 3 33%

South Asia (4) 2 50% 2 50%

Sub-Saharan Africa (17) 12 71% 5 29%

Euro area (33) 5 15% 28 85%

Other EU members (15) 5 33% 10 67%

Other Developed Countries (23) 11 48% 12 52%

By population size

>30 million (67) 33 49% 34 51%

>5 million, <30 million (50) 23 46% 27 54%

5 million or less (43) 12 28% 31 72%

25

The status for the remaining 15 products was indicated as unknown or not applicable.

25

Table 5: Types of institutions that can be agents

Banks and their

branches

Non-bank financial

institutions (NBFIs)

Retailers (e.g. grocery stores)

Other

Products # % # % # % # %

Worldwide totals (66)* 42 64% 28 42% 44 67% 18 27%

By income

High income (22) 11 50% 7 32% 14 64% 4 18%

Upper middle income (14) 6 43% 4 29% 7 50% 6 43%

Lower middle income (18) 15 83% 10 56% 13 72% 5 28%

Low income (12) 10 83% 7 58% 10 83% 3 25%

By region

East Asia and Pacific (7) 6 86% 6 86% 6 86% 4 57%

Europe and Central Asia (11) 7 64% 5 45% 7 64% 2 18%

Latin America & Caribbean (8) 2 25% 2 25% 4 50% 4 50%

Middle East & North Africa (6) 5 83% 1 17% 1 17% 2 33%

South Asia (2) 2 100% 1 50% 1 50% 0 0%

Sub-Saharan Africa (12) 10 83% 7 58% 12 100% 2 17%

Euro area (4) 1 25% 2 50% 3 75% 0 0%

Other EU members (5) 4 80% 1 20% 3 60% 1 20%

Other Developed Countries (11) 5 45% 3 27% 7 64% 3 27%

By population size

>30 million (33) 21 64% 16 48% 22 67% 13 39%

>5 million, <30 million (21) 15 71% 9 43% 12 57% 4 19%

5 million or less (12) 6 50% 3 25% 10 83% 1 8%

*For two out of 68 products using agents, no further information on the types of institutions that perform the role of agents was provided. Therefore the total for this table is 66. Two additional products were indicated as not using agents; however, information on the type of agents was then provided. This appears to be an inconsistency; therefore, such cases are not reflected in this table.

In terms of the types of entities that function as agents, banks were reported as being the agents for 42 products, non-bank financial institutions were reported as being the agents for 28 products, and non-financial retailers were reported as being the agents for 44 products. There are significant regional variations by region in the types of entities that can be agents. In all the products reported for SSA retailers functioned as agents, whereas this was the case for only 17 percent for MENA and 50 percent for LAC and SA. This is also more common in low-income and lower-income countries.

The increasing reliance of agents for provision of innovative retail payment mechanisms raises the policy issue of how these entities need to be overseen and supervised. On the one hand, the regulators can choose either to authorize such entity itself, or impose on the full liability for the behavior of the agent on the principal entity for which this service is provided. The former implies a direct monitoring by the central bank of the agents/branches; this may be operationally too burdensome and disproportionate in respect to concrete risk. The regulators can also maintain a list of agents and from which an agent or branch can be withdrawn in case of misconduct. On the other hand,

26

conditions can be imposed to limit the use of agents and outsourcing to non-core activities and to ensure continuous control by the principal over the third party.

2.4.2 Protection of Customer Funds

Customer funds are subject to broadly two risks – (i) risk of the issuer of the payment product going bankrupt; and, (ii) operational issues with the issuer’s system that could result in destruction or corruption of records of the customer’s account.

These risks might be heightened in the case where the issuer is a non-banking entity. For payment products based on bank account, this issue is generally addressed as part of the overall prudential and operational requirements for the bank, as well as by deposit insurance and/or other safety net arrangements. Non-bank issuers might not be covered by such arrangements, although other mechanisms to mitigate these risks can be enforced.26 This would need to be coupled with requirements to ensure that transactions in these dedicated accounts are only allowed after due-diligence to ensure that these transactions related to the operation of the product. This however would still expose the customer to the risk of destruction of records, which would need to be addressed by requiring appropriate operational reliability and business continuity procedures for the non-bank providers as well. In some jurisdictions, the non-bank issuer is required to communicate the list of underlying account holders (along with their balances) to the bank maintaining the “pooled funds.” In the Survey the central banks were requested to provide information on the measures applicable for protection of customer funds for the various products/product groups in their jurisdiction. These responses are compiled in Table 6. The strong consumer protection measure of deposit insurance is available for only 36 percent of the products; over 20 percent of products have no form of protection.

Closely related to the issue of protection of funds, is the requirement for these funds to be readily available as per the provisions of the product offering. In the case of payment products offered by banks, there are well-specified requirements such as specific banking hours, operational hours for various services, etc. These also need to be considered for the innovative payment mechanisms.

26

For example, the non-bank issuer might be required to deposit the total pool of customer funds in one or more banks in accounts separate from its regular business account(s), and have adequate mechanisms for sound recordkeeping of individual customer accounts.

27

Table 6: Protection of Customer Funds

No protection

The balance in the account is covered

by a deposit insurance scheme

The issuer is required by the

law or a regulation to fully

back up the monetary value

The issuer is required by the law or a

regulation to partially back up the monetary

value issued with a deposit in an account

or other assets

There are specific capital

requirements for the issuer

Other protection mechanisms

Products # % # % # % # % # % # %

Worldwide totals (173) 34 20% 62 36% 38 22% 25 14% 40 23% 29 17%

By income

High income (85) 12 14% 38 45% 15 18% 18 21% 24 28% 15 18%

Upper middle income (38) 13 34% 16 42% 7 18% 2 5% 2 5% 3 8%

Lower middle income (33) 4 12% 5 15% 10 30% 3 9% 10 30% 7 21%

Low income (17) 5 29% 3 18% 6 35% 2 12% 4 24% 4 24%

By region

East Asia and Pacific (7) 1 14% 1 14% 5 71% 2 29% 4 57% 0 0%

Europe and Central Asia (34) 10 29% 13 38% 5 15% 0 0% 3 9% 6 18%

Latin America & Caribbean (21) 8 38% 8 38% 0 0% 3 14% 3 14% 1 5%

Middle East & North Africa (10) 0 0% 4 40% 4 40% 1 10% 3 30% 2 20%

South Asia (5) 1 20% 0 0% 2 40% 0 0% 1 20% 3 60%

Sub-Saharan Africa (19) 5 26% 2 11% 9 47% 1 5% 3 16% 2 11%

Euro area (36) 2 6% 19 53% 6 17% 12 33% 10 28% 6 17%

Other EU members (18) 2 11% 6 33% 3 17% 1 6% 4 22% 5 28%

Other Developed Countries (23) 5 22% 9 39% 4 17% 5 22% 9 39% 4 17%

By population size

>30 million (68) 15 22% 28 41% 17 25% 12 18% 16 24% 13 19%

>5 million, <30 million (57) 8 14% 23 40% 10 18% 11 19% 11 19% 9 16%

5 million or less (48) 11 23% 11 23% 11 23% 2 4% 13 27% 7 15%

28

2.4.3 Types of Accounts

Electronic payments products need an underlying account against which transactions made by the user are recorded. The nature and type of account has an important bearing on the product characteristics. In fact, one of the innovations underlying the e-money products is the concept of a new type of account created specifically for the purposes of making payments.

Many of the innovative payment mechanisms are typically based on prepaid accounts (i.e., pre-funded accounts from which funds are then drawn-down through payment transactions). The reason that a prepaid account is chosen varies, the most common reasons being:

Ease of servicing customers without having to perform elaborate credit

verifications;

Low-cost mechanism to offer limited payment services in comparison to

traditional bank account;27 and

The entity providing the service is a non-bank which can only offer products

based on prepaid accounts since they are not allowed to take deposits.

Central banks were asked to identify the type of account in which the customer funds underlying innovative payment products are maintained. The options provided were:

A traditional bank account;

A non-traditional bank account like a pre-paid account;

An account in a non-banking financial institution (NBFI);

An account in a non-financial services company like a telecom company; and

Other types of institutions which do not fall into any of these categories.

Responses are presented in Table 7.

Over 60 percent of the products reported use a traditional bank account. To a certain extent the fact that low-income countries, in particular the SSA region, show even higher percentages is surprising since, as earlier discussed, the cost of maintaining a bank account is often cited as an important restriction to open such an account. On the other hand, accounts with non-banking payment service providers in general are still much less relevant than traditional bank accounts with the exception of ODCs, and to some extent also in the EAP region. Interestingly, none of the countries in the MNA or the SA regions reported that the innovative payment products available use accounts with a non-financial service provider.

27

The cost of maintaining a traditional bank account is often cited as one of the reasons for certain segments of the population being unable to open bank accounts.

29

Table 7: Types of Underlying Accounts Used with Innovative Payment Products

In a traditional bank account

In a non-traditional bank

account In a NBFI

In a non-financial services company

Other

Products # % # % # % # % # %


By income

High income (85) 42 49% 14 16% 19 22% 17 20% 13 15%



Low income (17) 15 88% 4 24% 2 12% 4 24% 1 6%

By region





South Asia (5) 3 60% 1 20% 1 20% 0 0% 0 0%


Euro area (36) 22 61% 6 17% 5 14% 3 8% 4 11%

Other EU members (18) 9 50% 2 11% 3 17% 3 17% 2 11%


By population size

>30 million (68) 39 57% 15 22% 9 13% 17 25% 10 15%

>5 million, <30 million (57) 42 74% 7 12% 5 9% 8 14% 4 7%

5 million or less (48) 25 52% 8 17% 13 27% 10 21% 5 10%

Traditional payment products are associated with checking and/or savings accounts at banks; in many jurisdictions such accounts offer interest. The central banks reported information on the interest feature for 149 products, and reported that interest was paid for only 47 of these 149 products.

Central banks were also asked to provide information on the entity that is ultimately responsible for customer funds. It is worth noting, for example, that even if customer funds are deposited at a bank (e.g. due to regulatory requirements), the entity responsible to the customer is likely to be the issuer of the innovative payment product, which may be different from the bank where funds have been deposited. The options for this question were:

Bank;

Non-banking financial institution;

Non-financial services entity;

A designated trust fund account;

30

Other entities not falling in any of the other categories.28

Results are presented in Table 8.

It should be noted that for some products/product groups, there are joint responsibilities for customer funds (e.g. both the bank and the issuer bear responsibility) and in some cases there are variants and hence for the same product/product group more than option was chosen in some cases. Therefore, the figures in this table should be seen only as indicative.

The data in Table 8 shows that in 70 percent of the cases, a bank was ultimately considered responsible for customer funds. These percentages are somewhat higher for lower-middle income and low-income countries, and especially lower in other EU members and ODCs. At the other extreme, the trust fund arrangement seems to be very uncommon as only six products (three percent) were reported to be using this arrangement. Consistent with the information in Table 7, non-financial services companies being ultimately responsible for customer funds is somewhat common only in ODCs and to a lesser extent in the EAP region.

The “other” option was chosen for cases such as where there is no creation of a prepaid or deposit account (e.g. the case of Hal-Cash in Spain, which enables person-to-person transfers where the recipient withdraws cash from designated ATMs using pre-exchanged identifiers between the sender and the recipient), where the entity bearing ultimate responsibility is a credit card companies or a supermarket, and for unique arrangements like a common trust for all innovative payment mechanisms in the case of Malawi.

Central banks were also asked to provide information on the segregation of customer funds/accounts from the funds/accounts belonging to the issuer or service provider. Information was provided for 88 products where the issuer was a non-banking entity. For 58 of these products (66 percent), regulation or law required that customer funds/accounts be kept separate from those of the issuer or service provider.

28

A trust fund arrangement is being observed for some mobile money and other e-money schemes in jurisdictions where non-bank issuers of e-money and mobile money products are required to maintain a consolidated account in a bank in which the consolidated balance of all the customers’ individual accounts are recorded. The ownership of this account is entrusted to a trust fund to ensure that the issuer can use this fund only for servicing customer transactions.

31

Table 8: Entity with Ultimate Responsibility for Customers Funds

Bank NBFI Non-financial

services company

Designated trust fund

Other

Products # % # % # % # % # %


By income

High income (85) 53 62% 22 26% 16 19% 1 1% 15 18%



Low income (17) 14 82% 1 6% 5 29% 3 18% 1 6%

By region





South Asia (5) 4 80% 1 20% 0 0% 0 0% 0 0%


Euro area (36) 26 72% 7 19% 3 8% 1 3% 6 17%

Other EU members (18) 9 50% 4 22% 2 11% 0 0% 2 11%


By population size

>30 million (68) 50 74% 13 19% 16 24% 3 4% 9 13%

>5 million, <30 million (57) 41 72% 8 14% 10 18% 2 4% 6 11%

5 million or less (48) 30 63% 13 27% 8 17% 1 2% 5 10%

2.4.4 Types of Transactions Supported

The survey gathered information on the types of payment transactions supported by the innovative products. The transactions were categorized into: retail purchases (retail), utility bill payments (utilities), person-to-person transfers (P2P), withdrawals, person-to-government payments (P2G), business-to-business payments (B2B), deposits, other banking transactions like loan repayment (banking transaction), business–to-person payments (B2P), cross-border (Xborder) business-to-government payments (B2G), government-to-person payments (G2P) and government–to-business payments (G2B). Chart 2 depicts how many products/product groups support the various transaction types.

32

Chart 2: Transaction Types Supported by Innovative Payment Products

This chart shows that the top three payment transactions supported by the innovative payment products are retail purchases, utility bill payments and person-to-person transfers. The number of innovative payment products supporting other types of transactions like G2P, B2G, and cross-border and deposit transactions are significantly lower.

It needs to be noted that only information on the types of transactions supported by the innovative payment products were collected, and not the extent to which the product is used for such purposes in practice.

Central banks also reported the multi-currency features of the innovative payment products reported. For 25 products, multi-currency support was reported and for 141 products only domestic currency support was reported.29 Central banks also reported that 44 products could be used for cross-border payment transactions. This information collectively shows that, as group, innovative payment products continue to have a predominant domestic payments focus.

2.4.5 Interoperability

Broadly speaking, an interoperable payments system enables the seamless participation of two or more proprietary acceptance and processing platforms, and possibly even of different payment products, thereby promoting competition and also enabling economies of scale.30 In general, lack of interoperability could foster anti-competitive practices. However in the case of innovative payment mechanisms, when and how to impose interoperability is a significant policy issue.

In the context of retail payment, there could be multiple levels of interoperability—system-wide, cross-system, and infrastructure-level. A system that has only system-wide interoperability enables competition among the participants of that system, a system that has cross-system interoperability enables competition between systems; a system that has infrastructure-level interoperability enables the same infrastructure to be used to

29

For the remaining seven products, the corresponding central banks reported that this information was not available. 30

For a detailed discussion on interoperability, see the World Bank document “Developing a Comprehensive National Retail Payments Strategy (consultative report), The World Bank, 2012.

33

support multiple payment mechanisms. For example, an acquirer who has deployed an infrastructure for accepting Visa cards must process all Visa cards (system-wide), and can also additionally use significant components of the infrastructure to process transactions of competing payment card brands like MasterCard (infrastructure-level), and also Visa and MasterCard networks allow routing of transactions among themselves; however an acquirer that is not a member of MasterCard cannot accept a Visa branded payment card, even though his infrastructure can support it, (i.e.) no cross-system interoperability. A bank-operated proprietary payment infrastructure is not inter-operable on any of these dimensions. A system that is inter-operable on all levels would enable an entity deploying acceptance infrastructure for a particular payment instrument to be confident that customers with that payment instrument—irrespective of their banking/partner affiliation—would be able to use the infrastructure, thereby creating a stronger business case for him. This would enable the entities involved in the payment system to compete on quality of services, while collaborating in terms of creation and operation of the underlying system.

There have been arguments that the requirement for interoperability could impact innovation and be too onerous a requirement for new innovative payment products. For example, if a bank develops a new innovative mobile payment service, it might need to invest significant amounts in developing an acceptance network. To protect its investment the bank might want to lock in these merchants in an exclusive arrangement for a long period of time. If this is not allowed, the bank might not find it viable to make the first move in promoting this product, and would wait for an industry-wide collaborative exercise to take effect. While this is a persuasive argument, it needs to be borne in mind that if the innovation is truly novel, the entity could always seek protection of its interests through seeking a patent. That approach with the built-in protection for ensuring optimal social benefit of innovations would, perhaps, be better than relying on setting up barriers using exclusive arrangements and other business arrangements.

Requiring cross-system interoperability when the individual systems are not that well developed could indeed be onerous, and where the systems are independently managed with different membership rules requiring cross-system interoperability might be unviable. One approach to achieve a significant degree of interoperability could be to require, at a minimum, system-wide and infrastructure level interoperability, and to make cross-system interoperability necessary for systems that cross a particular scale of operations; and also require fair, transparent, and non-discriminatory membership criteria to promote cross-membership. A sizeable cross-membership combined with system-wide and infrastructure level interoperability would enable achievement of de-facto cross-system interoperability.

In general, when interoperability is discussed, it is in the context of similar payment instruments, for example the payment card of one issuer being usable at the various payment card infrastructures available domestically or even internationally. In the context of innovative retail payment products, interoperability is not that straightforward as it could mean not just interoperability in the context of the same payment instrument but also with other payment instruments, either traditional or innovative or both. For example, for a mobile money product interoperability could mean one or more of the following: ability of the customers of one mobile money issuer to use the product to make purchases at institutions not directly affiliated with his issuer; ability of the customers of one mobile money issuer to use the product to perform transactions like cash withdrawal at institutions not directly affiliated with his issuer, either at POS

34

terminals or other acceptance infrastructure like perhaps the merchants mobile phone; and ability of the customer to top-up and transfer the balance in his mobile money account from/to various types of accounts, including, for example, another mobile money account operated by another telecom provider or a traditional bank account.31

Innovative retail payment mechanisms in general are at least initially structured as proprietary solutions, typically because they are new developments for which there are no agreed-upon standards in the domestic context, though at times it could also be because of an attempt to block competition, for example by requiring exclusivity from agents.

In the survey, to assess the extent of interoperability of the reported products, information pertaining to the locations where the product could be used and the ability to use the product for transfers to customers of other payment products was collected. The results are summarized in Table 9.

In general, the survey shows that most of the innovative payment products are closed-loop, that is, they are usable only in a limited set of locations, typically only those affiliated with the operator of the scheme. This is the case of 108 of the 173 products reported. Only 29 innovative products (17 percent) were reported as having full-fledged interoperability, while 51 products (29 percent) have some degree of interoperability with existing traditional retail payment products.

31

There could be other aspects, such as the ability of the mobile money customer to seamlessly migrate his mobile money account when he changes his mobile number or when he switches to another mobile phone company. But these aspects should not be confused with interoperability, as they actually refer to the “portability” of access devices and account identifiers. This is akin to bank account portability.

35

Table 9: Interoperability of Innovative Payment Products

Can be used only for transacting with

merchants and customers of the same innovative

scheme

Pay to/receive from merchants and customers of all other innovative

schemes

Pay to/receive from merchants and

customers of a few other (but not all)

innovative schemes

Pay/receive payments made

using other existing traditional payment schemes like credit

transfer, cheque, etc

Other

Products # % # % # % # % # %


By income

High income (85) 55 65% 7 8% 8 9% 25 29% 6 7%



Low income (17) 10 59% 5 29% 6 35% 4 24% 1 6%

By region





South Asia (5) 2 40% 1 20% 0 0% 0 0% 1 20%


Euro area (36) 21 58% 4 11% 0 0% 8 22% 3 8%

Other EU members (18) 11 61% 1 6% 3 17% 4 22% 0 0%


By population size

>30 million (68) 44 65% 7 10% 15 22% 22 32% 9 13%

>5 million, <30 million (57) 34 60% 12 21% 6 11% 19 33% 1 2%

5 million or less (48) 30 63% 10 21% 5 10% 10 21% 2 4%

36

In the case of no interoperability, the percentages for the various country income levels and regions are similar, with the exception of EAP in the higher end and SA in the lower end. Full interoperability of innovative payment products is less common among high-income countries, especially ODCs, and somewhat more common in countries in the ECA and LAC regions.

Achieving interoperability requires a combination of business arrangements among participating institutions, usage of common standards for exchange of transaction data between access devices and acceptance devices of participating institutions, and, finally existence of a central coordinating infrastructure to manage the clearing and settlement and also other business aspects like fees, rules for disputes etc. A payment network such as Visa and MasterCard provides the central coordinating infrastructure for card payments, and ACH does the same for electronic funds transfer. Development of such arrangements is crucial to support interoperability for innovative retail payment mechanisms. Innovative retail payment mechanisms like prepaid cards leveraged existing payment card networks and online banking enabled payments like iDeal leveraged existing ACH infrastructure. In the 2010 GPSS, 54 payment-card switches reported supporting mobile initiated payments.

2.4.6 Pricing and Charges

It has been argued extensively that, in general, financial institutions find it too costly to service most low-income customers using traditional retail payment products. Innovative retail payment mechanisms are therefore often viewed as a way to provide payment services in a more cost-effective manner for certain segments of customers.

In this survey, central banks reported information on the various types of fees and charges for the innovative products charged to the participants. In many of the cases the participants could be the end-customers, though in some cases they could be institutions that offer or service the customers. Table 10 summarizes these responses.

The most common case worldwide (75 percent) and throughout the various country classifications is where customers are charged a fee per transaction. The charging of an entry fee and periodic maintenance fees are much less common on a worldwide basis, though somewhat more so in countries in the ECA and SA regions. The case where the fee charged is similar to an interchange fee for a transaction with a payment card is relatively common in ODCs and especially in countries in the EAP region. Finally, for only 10 percent of the innovative payment products reported worldwide customers are not charged, though the LAC region is an outlier in this particular regard with a 33 percent figure.

Chart 3 shows the types of fees charged by the various entities involved in the operation of the product. An analysis of this chart indicates that where banks and telecom companies are involved, there is a higher reliance on just transaction fees, while in those cases where other types of entities are involved there is a broader structure of fees and charges.

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Table 10: Fees and Charges for Innovative Payment Products

None of the scheme

participants are charged

Participants are charged a

transaction fee

Participants are charged an entry

fee

Participants are charged a

periodic service fee

Transfer payment between scheme participants akin to an interchange

fee for card transaction

Participants are rewarded for

continued usage

Products # % # % # % # % # % # %


By income

High income (85) 9 11% 59 69% 26 31% 24 28% 19 22% 10 12%



Low income (17) 0 0% 16 94% 5 29% 6 35% 3 18% 1 6%

By region





South Asia (5) 0 0% 3 60% 2 40% 2 40% 1 20% 1 20%


Euro area (36) 6 17% 28 78% 8 22% 9 25% 3 8% 1 3%

Other EU members (18) 1 6% 11 61% 5 28% 6 33% 3 17% 2 11%


By population size

>30 million (68) 6 9% 51 75% 22 32% 16 24% 18 26% 9 13%

>5 million, <30 million (57) 6 11% 47 82% 19 33% 15 26% 9 16% 6 11%

5 million or less (48) 6 13% 32 67% 17 35% 19 40% 11 23% 2 4%

38

Chart 3: Fees Charged by Different Entities Offering Innovative Payment Products

2.4.7 Clearing and Settlement Arrangements

According to the data, 92 of the 173 innovative products reported in the Survey (53 percent) settle in the bank account of the issuer of the monetary value underlying the innovative payment product, with higher percentages in the EAP and MNA regions. This indicates that the issuers’ ability to honor its commitments is what impacts the final settlement of the system. Only 41 of the products or 24 percent reported settling in central bank money.

Also worth noting is the fact that almost 40 percent of the innovative products were reported as using domestic interbank payment systems for clearing and settlement. Percentages for this particular issue are similar throughout the various country income levels and regions, with the clear exception of the EAP region where a zero percent figure was reported and also the case of Other EU members with only 20 percent.

A determinant of settlement risk is the time-gap between the moment a transaction is initiated and the final settlement of that transaction. Most of the payment transactions supported by innovative payment products involve the payee expecting the payment to be guaranteed as the payee generally delivers the relevant goods or services upon acceptance of the relevant payment instrument. In the survey, only 61 of the 173 products (35 percent) reported that the settlement for the transactions occurred on the same-day, while for 48 products (28 percent) settlement was reported to be from one to three days. For 42 products the settlement period was greater than T+3 or was variable.

In order to efficiently provide payment services, providers need to be able to access the inter-bank infrastructure to clear and settle payments. This leads to the choice of whether such operators should have direct access to the payment systems of the country. This of course would imply an additional risk to the system, so that only entities able to fully meet the conditions of the system should be permitted to participate directly. In the event that this is not feasible, one alternative solution is to permit the access to the system of such new entities as indirect participants (i.e., under the responsibility of a direct participant). The central bank may either regulate the matter by law or yet decide to leave such a choice to the market, by only imposing rules or regulations that systems must have objective, non-discriminatory and proportionate access rules.

0%

20%

40%

60%

80%

100%

Bank Card company Telco MFI Non-bank Bank-NonBank JV

None Txn Fee Entry Fee Maintenance Fee Interchange Fee Rewards

39

Table 11: Clearing and Settlement Arrangements

Payments are settled in a bank account of the issuer of the

monetary value

Payments are settled among

members of the innovative

scheme through correspondent

accounts outside domestic PS

Payments are settled at accounts

maintained at a particular

commercial bank

Innovative scheme uses

domestic interbank

payment systems as part of its operations

Innovative scheme uses

interbank payment systems in another country

as part of its operations

Payments are settled at accounts

maintained in the central bank

Other

Products # % # % # % # % # % # % # %

Worldwide totals (173) 92 53% 27 16% 39 23% 67 39% 7 4% 41 24% 19 11%

By income

High income (85) 44 52% 9 11% 12 14% 30 35% 3 4% 15 18% 12 14%

Upper middle income (38) 19 50% 7 18% 8 21% 19 50% 3 8% 13 34% 5 13%

Lower middle income (33) 18 55% 5 15% 12 36% 11 33% 1 3% 10 30% 1 3%

Low income (17) 11 65% 6 35% 7 41% 7 41% 0 0% 3 18% 1 6%

By region

East Asia and Pacific (7) 6 86% 1 14% 4 57% 0 0% 0 0% 1 14% 0 0%

Europe and Central Asia (34) 20 59% 8 24% 9 26% 15 44% 3 9% 12 35% 2 6%

Latin America & Caribbean (21) 8 38% 4 19% 5 24% 9 43% 1 5% 4 19% 4 19%

Middle East & North Africa (10) 7 70% 1 10% 1 10% 3 30% 0 0% 5 50% 0 0%

South Asia (5) 2 40% 1 20% 3 60% 2 40% 0 0% 1 20% 0 0%

Sub-Saharan Africa (19) 11 58% 5 26% 7 37% 7 37% 0 0% 5 26% 1 5%

Euro area (36) 17 47% 1 3% 4 11% 15 42% 3 8% 2 6% 6 17%

Other EU members (18) 10 56% 1 6% 2 11% 4 22% 0 0% 1 6% 1 6%

Other Developed Countries (23) 11 48% 5 22% 4 17% 12 52% 0 0% 10 43% 5 22%

By population size

>30 million (68) 35 51% 7 10% 18 26% 23 34% 4 6% 15 22% 12 18%

>5 million, <30 million (57) 27 47% 11 19% 9 16% 34 60% 3 5% 21 37% 1 2%

5 million or less (48) 30 63% 9 19% 12 25% 10 21% 0 0% 5 10% 6 13%

40

2.4.8 Security and Fraud Risks

Innovative payment products are exposed to basically the same security and fraud risks as traditional card-based and electronic funds transfer-based payment instruments.

In the survey, central banks reported their perceptions in fraud risk for only 48 products. Central banks reported fraud as an important concern for only 21 of these products while for 41products central banks assessed the fraud levels to be the same as for traditional payment products.32 Moreover, 111 products (64 percent) were assessed by central banks as having the same level of operational reliability as other traditional payment products.

Central banks were also asked to report information on the security and risk management measures applicable to innovative payment products. This information is summarized in Table 12.

Analysis of this data shows that security and operational risk management aspects might need more attention: for almost 40 percent of all reported products there are no minimum requirements for security and operational risk management measures in place, and only for around one-third of the products the security aspects of the innovative product are certified by an independent third party.33

Survey data indicate that the involvement of regulators and in some cases other self-regulatory mechanisms in setting minimum requirements for security, data integrity and operational reliability is somewhat lower in high income countries as a whole, although in this particular regard there is a significant contrast between EU countries with a percentage higher than the worldwide figure, and ODCs with the lowest percentage across regions. In contrast, regulator involvement in this specific issue is higher across low-income countries, especially in the SSA region.

2.5 Legal and Regulatory Framework

A sound and appropriate legal framework is generally considered the basis for an efficient payments system. In general for payment systems, the legal environment should include:

Laws and regulations of broad applicability that address issues such as

insolvency and contractual relations between parties;

Laws and regulations that have specific applicability to payment systems (such

as legislation on electronic signature, validation of netting, and settlement

finality); and

The rules, standards, and procedures agreed by the participants of a payment

system.

32

For some products both the options were chosen, hence these total to more than 48. 33

The cost of achieving high security standards often comes at a cost, and it is sometimes argued that this cost itself could make the underlying payment service unviable. Security measures should be proportionate to the underlying risks. For example, the risk related to a prepaid card valid only in a particular limited environment is lesser than a general purpose payment card valid at multiple locations.

41

Table 12: Security and Risk Management Aspects

There are minimum

requirements in place for

operational security and data

integrity

Security aspects of the innovative scheme are subject to

certification by a trusted third party

Customers are requested to

provide identification

Other security codes/devices are

used (e.g. “tokens”)

Operational reliability of the

innovative product is comparable to that of traditional

Other

Products # % # % # % # % # % # %


By income

High income (85) 49 58% 35 41% 47 55% 35 41% 54 54 11 13%

Upper middle income (38) 25 66% 11 29% 29 76% 18 47% 25 25 3 8%

Lower middle income (33) 22 67% 10 30% 19 58% 13 39% 22 22 0 0%

Low income (17) 13 76% 5 29% 13 76% 7 41% 10 10 0 0%

By region





South Asia (5) 3 60% 3 60% 4 80% 3 60% 2 40% 0 0%


Euro area (36) 27 75% 17 47% 20 56% 11 31% 21 58% 6 17%

Other EU members (18) 10 56% 8 44% 11 61% 6 33% 12 67% 2 11%


By population size

>30 million (68) 43 63% 24 35% 41 60% 32 47% 47 69% 7 10%

>5 million, <30 million (57) 39 68% 19 33% 39 68% 30 53% 35 61% 4 7%

5 million or less (48) 27 56% 18 38% 28 58% 11 23% 29 60% 3 6%

42

The legal infrastructure should also cover other activities carried out by both public and private sector entities. For example, the legislative framework may establish clear responsibilities for the central bank or other regulatory bodies, for activities such as the oversight of the payments system or the provision of liquidity to participants in these systems. Other relevant pieces of legislation that have impact on the soundness of the legal framework on the payments system include laws on transparency and security of payment instruments, terms and conditions; antitrust legislation for the supply of payment services; and legislation on privacy.

Key legal and regulatory aspects that are of particular importance for innovative payment products include:

What are the applicable laws and regulations, including consumer protection

issues;34

The roles and responsibilities of the central bank and other regulators; and

Licensing arrangements and reporting requirements.

This sub-section analyzes the survey responses to the questions involving each of these areas.

2.5.1 Applicable Laws for Innovative Payment Mechanisms

Central banks were asked to provide information on the various laws and regulations that are applicable in their jurisdictions to the innovative retail payment products reported in the survey. Responses are summarized in Table 13.

Overall, the Banking Law was reported as the most common legal piece that is applicable to innovative payment products. However, it should be noted that the worldwide percentage is only slightly above 50 percent, with no major differences across the various country classifications.

At the worldwide level, the Central Bank Law and associated regulations were reported as being applicable to only 45 percent of the products, percentages being significantly higher in lower-middle income and low income countries, especially in the MNA, SA, and LAC regions. In contrast, those legal pieces apply in much fewer cases throughout the EU and ODCs. Likewise, in the EAP region central bank laws and regulations were reported as being applicable only to 29 percent of the innovative products, but this same region reported the highest percentage (86 percent) of laws/regulations other than the ones included in the survey as being applicable.

Telecom laws and related regulations were reported as being applicable for only 12 percent of the products.

34

The applicable laws and regulations will normally determine what products are allowed and which entities are allowed to offer the associated payment services.

43

Table 13: Legal Framework of Innovative Payment Products

Central Bank Law or Central Bank

Regulation Banking Law

Telecom Law or Telecom

Regulation

AML/CFT Law and Regulation

No specific acts, only standard contract laws

apply

Other

Products # % # % # % # % # % # %


By income

High income (85) 25 29% 47 55% 7 8% 39 46% 14 16% 19 22%



Low income (17) 11 65% 8 47% 6 35% 10 59% 3 18% 3 18%

By region





South Asia (5) 4 80% 2 40% 0 0% 4 80% 1 20% 0 0%


Euro area (36) 12 33% 21 58% 1 3% 17 47% 6 17% 4 11%

Other EU members (18) 5 28% 11 61% 2 11% 6 33% 3 17% 2 11%


By population size

>30 million (68) 26 38% 40 59% 9 13% 47 69% 12 18% 23 34%

>5 million, <30 million (57) 34 60% 32 56% 8 14% 23 40% 7 12% 12 21%

5 million or less (48) 17 35% 21 44% 3 6% 19 40% 10 21% 10 21%

44

With regard to anti-money laundering (AML) and countering financing of terrorism (CFT) requirements, Survey results show that these legal measures are applicable to only 51 percent of the products, with much higher percentages in the SA, EAP, and LAC regions. Interestingly, for this particular issue countries with large populations also show a percentage that is almost twice as much as the one for mid-sized and small countries. This could be an area warranting further analysis, as it could have implications on the potential abuse of innovative retail payment mechanisms to evade AML/CFT checks.35

Central bank responses with regard to the applicable laws for consumer protection matters are presented in Table 14. A specific Consumer Protection Law was reported in 56 percent of the cases. In addition, in 26 percent of the cases a specific legal measure containing consumer protection provisions was reported as being applicable for the innovative payment product/group. The applicability of the general consumer protection legal framework is significantly higher in high-income countries, especially in the EU. Likewise, the applicability of a specific law or regulation is also more common in high-income countries as a whole, although in this particular case the EAP region shows a significantly higher percentage to all other regions. In contrast, a legal framework supporting consumer protection for innovative payment products is least common in lower income countries, especially in the SA, MNA, and SSA regions. In particular, central banks in the SA region reported that only “other” legal provisions are applicable to innovative payment products with regard to consumer protection issues. In 29 percent of the cases, the applicable legal framework was cited as containing out-of-court procedures or mechanisms for dispute resolution. This is clearly more common in countries with large populations. By region, it is also relatively more common in Euro area countries, ODCs, and also in the EAP region.

35

The Financial Action Task Force (FATF) identifies anonymity, high negotiability, and utility of funds, as well as global access to cash as some of the major factors that can add to the attractiveness of innovative payment schemes for money launderers. For additional information see FATF, “Money Laundering using New Payment Methods”, October 2010.

45

Table 14: Applicable Laws and Regulations with Regard to Consumer Protection

There is a Consumer

Protection Law in place which is

applicable to the innovative product

There is a specific law or regulation applicable to the

innovative product

The legal and regulatory

framework contains provisions for out-

of-court procedures for dispute resolution

Other

Products # % # % # % # %

Worldwide totals (173) 97 56% 45 26% 51 29% 45 26%

By income

High income (85) 62 73% 28 33% 31 36% 6 7%

Upper middle income (38) 22 58% 9 24% 9 24% 2 5%

Lower middle income (33) 10 30% 8 24% 9 27% 6 18%

Low income (17) 3 18% 0 0% 2 12% 2 12%

By region

East Asia and Pacific (7) 4 57% 5 71% 4 57% 0 0%

Europe and Central Asia (34) 18 53% 7 21% 8 24% 2 6%

Latin America & Caribbean (21) 12 57% 3 14% 5 24% 3 14%

Middle East & North Africa (10) 2 20% 4 40% 1 10% 4 40%

South Asia (5) 0 0% 0 0% 0 0% 2 40%

Sub-Saharan Africa (19) 4 21% 2 11% 3 16% 1 5%

Euro area (36) 29 81% 11 31% 15 42% 0 0%

Other EU members (18) 13 72% 2 11% 2 11% 1 6%

Other Developed Countries (23) 15 65% 11 48% 13 57% 3 13%

By population size

>30 million (68) 44 65% 25 37% 31 46% 7 10%

>5 million, <30 million (57) 26 46% 10 18% 11 19% 8 14%

5 million or less (48) 27 56% 10 21% 9 19% 1 2%

2.5.2 Roles and Responsibilities of Regulators and the Overseer

Table 15 shows that the central bank is the regulator for most of the innovative payment products reported in the Survey. This is much less frequent across some high-income countries, in particular ODCs. In those countries it is more frequent for another financial regulator such as the banking supervisor to be the regulator of innovative payment products

Only 12 of the products (seven percent) are regulated by a non-financial regulator such as the Telecom Regulator. Interestingly, out of these 12 products, seven were reported in low-income countries, all of which in the SSA region.

Moreover, only 11 (six percent) of the innovative products were reported as being subject to no regulation, all of which were in high-income and higher-middle-income countries.

46

Table 15: Regulator of Innovative Payment Products

The Central

Bank

Other financial regulator (e.g.

Banking Regulator)

Non-financial authority (e.g. Telecommunication Authority)

Products are not subject to

regulation Other

Products # % # % # % # % # %


By income

High income (85) 35 41% 42 49% 4 5% 6 7% 6 7%



Low income (17) 13 76% 2 12% 7 41% 0 0% 0 0%

By region





South Asia (5) 4 80% 0 0% 0 0% 0 0% 0 0%


Euro area (36) 18 50% 16 44% 1 3% 2 6% 1 3%

Other EU members (18) 5 28% 9 50% 1 6% 1 6% 2 11%


By population size

>30 million (68) 33 49% 31 46% 7 10% 6 9% 5 7%

>5 million, <30 million (57) 40 70% 14 25% 4 7% 2 4% 1 2%

5 million or less (48) 30 63% 10 21% 1 2% 3 6% 6 13%

With regard to the overseer of innovative payment products, the figures are in general very similar, as shown in Table 16, with percentages slightly higher for central banks and correspondingly lower for other financial regulators, while the number of products overseen by non-financial regulators is the same.

It is worth noting that six of the products were reported as being subject to collaborative oversight, half of which in the SSA region.

The discussions above highlight the various policy issues and the need to balance often-conflicting public policy objectives that innovative retail payment mechanisms introduce. To effectively steer the development of the market for innovative retail payment mechanisms the public authorities need to ensure availability of effective oversight arrangements. This needs to start with having adequate oversight powers, having the oversight policy framework in place and having well developed oversight tools and procedures in place.

47

Table 16: Overseer of Innovative Payment Products

The Central Bank

Other financial regulator (e.g.

Banking Regulator)

Non-financial authority (e.g.

Telecommunication Authority)

The issuer of the innovative

product is subject to cooperative oversight of

several authorities

The issuer of the innovative

product is not subject to oversight

Other

Products # % # % # % # % # % # %


By income

High income (85) 51 60% 23 27% 6 7% 1 1% 12 14% 1 1%



Low income (17) 13 76% 2 12% 5 29% 3 18% 1 6% 0 0%

By region





South Asia (5) 4 80% 0 0% 0 0% 0 0% 0 0% 0 0%


Euro area (36) 25 69% 2 6% 1 3% 1 3% 5 14% 1 3%

Other EU members (18) 9 50% 5 28% 1 6% 0 0% 3 17% 0 0%


By population size

>30 million (68) 47 69% 21 31% 7 10% 3 4% 7 10% 4 6%

>5 million, <30 million (57) 41 72% 13 23% 3 5% 1 2% 4 7% 0 0%

5 million or less (48) 30 63% 6 13% 2 4% 2 4% 6 13% 2 4%

48

2.5.3 Licensing and Reporting Requirements

Payment service providers would need to be duly overseen by the central bank. In order to reach such goal, a mechanism of either licensing or authorization should be established. This is indeed common practice in all countries having new legislation on retail payments. However, the choice should be made whether a proper licensing mechanism should be put in place that is similar to that of licensing financial institutions, or whether a simplified procedure for authorization would suffice in the early phases. In both cases, both capital/liquidity and operational requirements can be imposed, however an authorization procedure may be less cumbersome and rely less on capital requirements and governance of the new entrant, rather focusing more on its activities and liquidity requirements. Moreover, under certain circumstances, it may be convenient not to impose any license or authorization, but simply require the new operators to be registered. This would apply in those cases where licensing requirements might be felt so cumbersome for certain (small) operators to risk that licensing would take them into the black market rather than incentivizing them to respect new standards of behavior. This has been the policy adopted in many countries for small remittances providers. To this extent, it should be noticed that under a registration mechanism the central bank could still impose some information requirements to permit collection of relevant market data (for instance for statistical purposes).

Specific rules must then be established for outsourcing and agents, since a number of risks are related to the use of third parties (such as strategic, reputational, operational, and compliance risks).

Finally, rules on consumer (user) protection must be envisaged, including transparency of business conditions, protection of user’s data, protection against fraud and misuse of the instrument, report requirements, and redress procedures.

One of the tools used for regulation and oversight of payment systems and services is to require to the operator of payment systems, issuers of payment products, and providers of specific payment services obtaining a license from a designated regulator. In the area of retail payments in general, the Global Survey 2010 showed that 48 percent of central banks surveyed reported that they licensed clearinghouses, 57 percent licensed money transfer operators, and 43 percent licensed payment card companies.

For the survey on innovations, central banks were asked to provide information on the licensing of issuers of innovative payment products/groups. Table 17 compiles these responses.

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Table 17: Licensing Requirements for Issuers/Operators of Innovative Payment Products

Payment service providers have to be registered with

a competent authority

Banks are required to obtain a specific license

to operate the innovative scheme

Banks operate the innovative

scheme under their banking

license

Non-bank payment service

providers are required to obtain

a license to operate the innovative scheme

All payment service providers

need only to comply with AML/CFT

regulations

All payment service providers need to comply with messaging and interface

standards

None

Countries # % # % # % # % # % # % # %


By income

High income (29) 16 55% 1 3% 23 79% 7 24% 7 24% 4 14% 9 31%



Low income (14) 9 64% 2 14% 12 86% 6 43% 4 29% 4 29% 0 0%

By region





South Asia (3) 2 67% 1 33% 2 67% 2 67% 2 67% 1 33% 0 0%


Euro area (11) 8 73% 0 0% 10 91% 2 18% 3 27% 1 9% 2 18%

Other EU members (5) 4 80% 0 0% 4 80% 2 40% 1 20% 0 0% 2 40%


By population size

>30 million (28) 16 57% 10 36% 11 39% 18 64% 5 18% 9 32% 6 21%

>5 million, <30 million (31) 16 57% 3 11% 9 32% 27 96% 10 36% 9 32% 3 11%

5 million or less (24) 13 46% 2 7% 6 21% 16 57% 7 25% 3 11% 7 25%

Note: This table consolidates the responses for various products reported by central bank for their jurisdiction and presents the results on a per jurisdiction/country basis.

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Licensing of non-bank entities for issuance and operation of innovative payment schemes appears to be not a very common practice. 31 percent of the Central banks reported that non-bank payment service providers were required to obtain a license in their jurisdiction and for 54 percent of innovative payment products the payment service providers must register with a competent authority.

Seventy-three percent of central banks reported that in their jurisdiction, if banks were the operator of the scheme/issuers of innovative payment products, they did not need any additional license; however 18 percent reported that even banks were required to take a specific license. Compliance to AML/CFT requirements was mentioned as the only requirement by 27 percent of central banks.

Compliance in specific messaging and interface standards as a requirement was reported by 25 percent of central banks.

The Survey also included questions on the conditions and/or requirements underlying the license granted by a designated authority. Only 38 central banks reported this information for a total of 47 innovative products/product groups. For granting and maintaining a license/authorization as payment service providers should include prudential requirements proportionate to the operational and financial risks faced by such bodies in the course of their business. In this connection, a regime of initial capital combined with ongoing capital is often adopted. Otherwise, liquidity requirements are imposed. Due to the range of variety in the payments services area, various methods may be allowed combined with a certain range of supervisory/oversight discretion to ensure that the same risks are treated the same way for all payment service providers. The requirements for the payment services providers should reflect the fact that these engage in more specialized and limited activities, thus generating risks that are narrower and easier to monitor and control than those that arise across the broader spectrum of activities of banks and other financial institutions. In particular, payment service providers are often prohibited from accepting deposits from users and permitted to use funds received from users only for rendering payment services.

Making this distinction between prepaid accounts and deposit accounts significantly reduces the risk associated with non-banking entities providing prepaid accounts. There are risks related to protection of customer funds that still exist, which is discussed in the subsequent section.

The topic of non-bank entities providing other non-issuance related payment services is also discussed in a subsequent section. Table 18 shows that, in general, there is a fairly light approach with regard to innovative payment mechanisms. Stronger measures like minimum capital requirements and minimum standards for data security and operational reliability are required in only 61 percent and 47 percent of the cases respectively. Such conditions are significantly more common across high-income countries. In fact, all EU countries and all ODCs reported having minimum capital requirements as one of the conditions to grant and maintain a license. These country groups also impose minimum liquidity requirements as part of licensing more than others.

On the other hand, upper-middle income countries, in particular those of the ECA and SSA region, rank at the bottom with regard to including minimum capital or operational requirements for innovative payment products as conditions for licensing. Moreover, no country from SA and MNA regions reported minimum operational requirements being a part of the overall licensing requirements.

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Table 18: Conditions and Requirements Underlying the License

Minimum capital

requirements Bank guarantee

Minimum liquidity requirements

Minimum operational

requirements for information

security and data integrity

Universal access requirement

Technology neutrality

requirement

Restrictions on transactions attributes as

frequency and value

Countries # % # % # % # % # % # % # %


By income

High income (11) 10 91% 0 0% 7 64% 7 64% 1 9% 0 0% 3 27%



Low income (10) 4 40% 2 20% 2 20% 6 60% 2 20% 4 40% 6 60%

By region





South Asia (2) 1 50% 0 0% 0 0% 0 0% 1 50% 1 50% 1 50%


Euro area (4) 4 100% 0 0% 3 75% 3 75% 0 0% 0 0% 0 0%

Other EU members (2) 2 100% 0 0% 1 50% 1 50% 0 0% 0 0% 1 50%


By population size

>30 million (16) 11 69% 3 19% 8 50% 8 50% 5 31% 3 19% 12 75%

>5 million, <30 million (13) 7 54% 1 8% 2 15% 5 38% 1 8% 2 15% 5 38%

5 million or less (9) 5 56% 2 22% 4 44% 5 56% 1 11% 3 33% 1 11%

Note: In line with the approach adopted for Table 17, the responses for individual products have been aggregated into country/jurisdiction-wise responses.

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Table 18: Conditions and Requirements Underlying the License (continued)

Minimum customer disclosure

requirements

AML/CFT compliance

Minimum data security

requirements

Minimum authentication requirements

Right to inspect and audit

Other

Countries # % # % # % # % # % # %


By income

High income (11) 5 45% 9 82% 6 55% 5 45% 8 73% 3 27%



Low income (10) 5 50% 8 80% 6 60% 6 60% 9 90% 2 20%

By region





South Asia (2) 1 50% 1 50% 1 50% 1 50% 2 100% 0 0%


Euro area (4) 2 50% 4 100% 3 75% 3 75% 3 75% 1 25%

Other EU members (2) 1 50% 2 100% 2 100% 2 100% 2 100% 1 50%


By population size

>30 million (16) 12 75% 14 88% 14 88% 14 88% 14 88% 5 31%

>5 million, <30 million (13) 5 38% 9 69% 5 38% 4 31% 10 77% 3 23%

5 million or less (9) 4 44% 7 78% 5 56% 5 56% 5 56% 2 22%

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Requirements such as universal access or technology neutrality are even less common for licensing. A bank guaranteeing the innovative scheme is observed only in six countries in four regions, none of which includes high-income or upper-middle-income countries.

Table 18 also shows that conditions/requirements such as compliance with AML/CFT issues and the issuer or operator being subject to inspections and audits are far more common than financial or operational requirements. AML/CFT compliance is required for 79 percent of the 38 countries, with fairly similar percentages across the various country classifications with somewhat lower percentages in the MNA and SA regions. The LAC, ECA, and MNA rank low with regard to conditioning a license to regulators/supervisors being entitled to inspect and audit the applicants.

Central banks were also asked to provide information on the reporting requirements that have been established for issuers and/or operator of innovative payment products. Eighty-three central banks provided this information, which is presented in Table 19.

Table 19: Reporting Requirements

Required to submit

information to the regulator at least

once a month

Required to submit

information on a regular basis (but

less frequently than every

month)

The information is submitted in a report template

Required to report volumes

on an aggregate basis

Required to submit detailed

information

Countries # % # % # % # % # %


By income

High income (29) 8 28% 16 55% 20 69% 17 59% 10 34%



Low income (14) 7 50% 6 43% 5 36% 5 36% 6 43%

By region





South Asia (3) 1 33% 3 100% 2 67% 2 67% 1 33%


Euro area (11) 3 27% 6 55% 7 64% 7 64% 3 27%

Other EU members (5) 1 20% 5 100% 5 100% 5 100% 3 60%


By population size

>30 million (28) 8 29% 13 46% 19 68% 16 57% 15 54%

>5 million, <30 million (31) 14 45% 11 35% 15 48% 10 32% 10 32%

5 million or less (24) 13 54% 13 54% 13 54% 16 67% 7 29%

Note: In line with the approach followed for Tables 17 and 18, this table compiles responses for products/product groups into country/jurisdiction-wise responses.

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Table 19: Reporting Requirements (continued)

There are no formal reporting requirements, but the regulator/central

bank collects information on an ad-

hoc basis

The regulator/central bank does not collect

any information Other

Countries # % # % # %

Worldwide totals (83) 25 30% 8 10% 12 14%

By income

High income (29) 6 21% 4 14% 5 17%

Upper middle income (19) 7 37% 3 16% 4 21%

Lower middle income (21) 7 33% 0 0% 2 10%

Low income (14) 5 36% 1 7% 1 7%

By region

East Asia and Pacific (6) 2 33% 0 0% 0 0%

Europe and Central Asia (13) 3 23% 2 15% 4 31%

Latin America & Caribbean (12) 6 50% 1 8% 1 8%

Middle East & North Africa (7) 2 29% 0 0% 1 14%

South Asia (3) 1 33% 0 0% 0 0%

Sub-Saharan Africa (16) 7 44% 1 6% 1 6%

Euro area (11) 1 9% 3 27% 1 9%

Other EU members (5) 1 20% 0 0% 0 0%

Other Developed Countries (10) 2 20% 1 10% 4 40%

By population size

>30 million (28) 10 36% 2 7% 4 14%

>5 million, <30 million (31) 9 29% 5 16% 5 16%

5 million or less (24) 6 25% 1 4% 3 13%

The analysis indicates that, for the most part, issuers or operators of innovative payment products are required to submit information on a regular basis to the central bank and/or other regulators. The first two columns of Table 18 show that this is the case for about 87 percent of the countries that provided the information compiled in this table. This requirement is more common across lower-middle income and low-income countries. In addition, 30 percent of the central banks reported that they and/or other regulators collect information on an ad-hoc basis.

The “other” option was chosen by 14 percent of the central banks. This option was chosen by central banks to report certain scenarios for example, where data collection is part of a broader arrangement and not specifically for innovative products, where the data reporting arrangements are being finalized, or where the issuer or operator reports data voluntarily. Finally, according to survey data reporting requirements are not enforced by only 10 percent of central banks.

2.6 Planned Reforms and Future Outlook

For this sub-section, central banks were requested to provide information on the planned legal and regulatory reforms as well as information on the types of new innovative products they are

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aware are being planned in their respective jurisdictions. Central banks were also requested to express their opinions on the impact that the ongoing and planned reforms are anticipated to have. This section presents the analysis of the responses to these questions and also reflects on the future outlook for innovative payment products.

Planned legal reforms were reported by 48 central banks. These reforms range from development of national payment systems laws to focused regulation and guidelines on specific instruments like mobile money. In particular, EU central banks reported planned amendments to their national laws to conform to the new European e-money directive.

In terms of the planned or proposed product launches in their jurisdictions, 17 central banks reported there were plans to launch mobile money or mobile payment services in their jurisdictions. Six central banks reported plans in their jurisdictions to improve the processing infrastructure for innovative retail payment mechanisms. Three central banks reported plans to use innovative retail payment mechanisms for government payments.

With regard to the opinions of central banks on the impact of ongoing and proposed reforms, these were categorized into the following: increased usage of electronic payment instruments, greater financial inclusion, improved efficiency, increased usage of electronic payments for government payments, reduced demand for cash, improved oversight arrangements, increased role of non-bank players and, finally, no impact being anticipated. Table 20 summarizes the opinions expressed by the central banks.

Table 20: Anticipated Impact of Proposed and Ongoing Reforms

Anticipated Impact Number of central banks

Increased use of electronic payment instruments 31

Higher levels of financial inclusion 17

Reduced use of cash and cheques 13

Improved payments infrastructure (e.g., lower costs, interoperability, efficiency, safety)

12

Limited impact 7

Increased role of non-bank players 6

Increased efficiency of government payments 4

Improved oversight capacity 2

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3. Concluding Remarks

The trends in retail payments industry point to the following potential outcomes:

The costs of payment processing will decrease;

The speed of payment transfers will increase until we reach complete real-time and near real-time;

Security features will improve in order to limit losses arising from criminality; and

Ease of use and integration possibilities will improve.

While the trends are clear, the path and pace of these developments are not very clear. It has been generally observed that there is a significant time-period between new innovations in payment systems and its widespread adoption, a notable exception of course have been some of the recent mobile money products. As noted above, while the usage and adoption of innovative payment products are growing, their relative importance at an overall level is still quite modest.

The few specific outcomes appear likely given the present trends in retail payment systems:

Worldwide adoption of smart cards. EMV chip cards are already widespread in many parts of the world, particularly in Europe. The adoption of EMV cards is already substantial in Europe, Asia and Australia; it is now being adopted or being seriously considered in the Americas including the U.S. It likely, though, that the physical card as a payment device would give way to other form factors and also be embedded in other devices, notably mobile phones.

Increasing sophistication of mobile money products and integration with traditional payment systems infrastructure like ACHs and payment card networks.

Confluence of the “apps” trend for mobile applications and mobile money. With the increasing sophistication of the mobile phones in the market and availability of computing power for encryption and authentication in the mobile phone, it is likely that mobile money products and traditional mobile banking could start becoming “apps” that are downloadable from “app” stores.

Increasing use of sophisticated methods for authentication moving from simple PIN to multi-factor authentication.

Increased regulatory attention to the payment card market is likely to bring a change in the business model of that market. Interchange fees are currently a major component of the business models of cards issuers, with the increasing regulatory scrutiny and pressure from merchants the business models that are more broad-based are likely to evolve. The potential power to levy surcharges, or refuse acceptance of particular types of payment cards are likely to create more innovations to make the payment products more attractive to the merchants as well.

As the relevance and importance of innovative retail payment mechanisms increase, the overseers of retail payment systems are likely to become more involved in the oversight of the innovative retail payment mechanisms as well. In particular, in countries with large sections of population financially excluded, the innovative retail payment mechanisms are being seen as a means to further financial inclusion. The other reasons include concerns about security and risk management mechanisms; and increasing involvement of non-bank entities.

The World Bank intends to continue this survey at periodic intervals to track the progress of innovations in retail payments.

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