1.What is the CPMI and what is its role? 2.Recent work of the CPMI in the field of retail Innovations in retail payments (what?) Non-banks in retail payments (who?) 3.Some conclusions and future outlook Potential second round effects (“faster” payment systems?) And what about virtual currencies?

1. Restricted
Innovations and non-banks in retail payments
Carlos Conesa
Member of Secretariat, CPMI
ICCI conference. Sofia, 24 October 2014
* Views expressed are those of the author and not necessarily those of the BIS.

2. Restricted 2
Agenda
1.What is the CPMI and what is its role?
2.Recent work of the CPMI in the field of retail
Innovations in retail payments (what?)
Non-banks in retail payments (who?)
3.Some conclusions and future outlook
Potential second round effects (“faster” payment systems?)
And what about virtual currencies?

3. Restricted 3
What is the CPMI and what is its role?
Committee on Payments and Market Infrastructures :focused on standard-setting activities related to payment and settlement systems and monitoring and analysing developments in domestic payment, settlement and clearing systems as well as in cross- border and multicurrency systems.
Formerly CPSS (until 1 September 2014)
Hosted by the BIS in Basel
Global Committee with 25 member Central Banks
Standard setting body –PFMIs
Monitor developments

4. Restricted
CPMI work on retail payments:
Description and statistics on payment and settlement systems –Red Book (not only retail)
Guidelines, principles, best practices
General Principles for international remittance services (January 2007)
Policy and analytical reports:
Retail payment systems in selected countries: a comparative study (September 1999)
Clearing and settlement arrangements for retail payments in selected countries (September 2000)
Policy issues for central banks in retail payments (March 2003)
Innovations in retail payments (May 2012)
Non-banks in retail payments (September 2014)
4
What is the CPMI and what is its role?

5. Restricted 5
Recent CPMI work in retail: Innovations in retail payments
In the last years, many innovations are changing the way in which retail payments are made: communication channels, choice of payment instruments, payment processing…
To assess those changes and evaluate the implications for central banks, the CPMI carried out an in depth study on the issue: Innovations in retail payments(published May 2012)
Based on a comprehensive survey (122 innovations reported by 30 central banks)
Objectives: In view of the characteristics of the retail payment market,
Classify innovations
Identify drivers and barriers for innovation
Current trends, future outlook

6. Restricted 6
Recent CPMI work in retail: Innovations in retail payments
Drivers and barriers for innovation
Current trends
Retail payment’s ecosystem
Endogenous factors:
•Cooperation among stakeholders (horizontal / vertical)
•Standardization
•Pricing
•Security
Exogenous factors:
New technologies
User behaviour
Public transport
Financialinclusion
Regulation
Special characteristics of the retail payment markets (economies of scale & scope, network effects, two sided markets…)

7. Restricted 7
Recent CPMI work in retail: Innovations in retail payments
Drivers and barriers for innovation
Current trends
Trends:
•Dynamic market, but few innovations have had significant market impact (so far)
•Innovations are usually domestic (but similar innovations have appeared in many markets)
•Speed is becoming an important factor in retail payments processing
•Financial inclusion is one of the driving forces for innovation
•The role of non-banks is significantly increasing

8. Restricted 8
Non-banks in retail payments:
Follow-up to the report on innovations in order to explore in detail the growing influence of non-banks in retail payments and analyse the potential implications: Non-banks in retail payments(published September 2014)
Objectives:
Framework for the analysis: Definition and classification
Factors influencing the increasing presence of non-banks
Implications for efficiency and risk
Regulatory framework
Implications for central bank and other authorities
Recent CPMI work in retail: Non-banks in retail payments

9. Restricted
Definition and classification
Regulatory framework
Efficiency and risk
Clearing & settlement arrangement
Payer’s bank
Payee’s bank
Payer
Payee
Goods or services
d. Non-bank
9
Functional definition: “any entity involved in the provision of retail payment services whose main business is not related to taking deposits from the public and using these deposits to make loans”
a. Non-bank
a. Non-bank
a.Front-end providers
b.Back-end providers
c.Operators of retail infrastructures
d.End-to end providers
b. Non-bank
b. Non-bank
c. Non-bank
Recent CPMI work in retail: Non-banks in retail payments

10. Restricted 10
Definition and classification
Regulatory framework
Efficiency and risk
Recent CPMI work in retail: Non-banks in retail payments
•Non-banks are very diverse: this diversity is reflected in the range of authorities that can potentially deal with them
•Regulatory approaches: Very diverse…
•Banking licence
•Specific licence
•Registration
•Central bank’s oversight
•Indirectly subject to regulation through outsourcing agreements
•No specific regulation or oversight
•Observations:
•Level playing field?
•Need for an increasing coordination of authorities?

11. Restricted 11
Definition and classification
Regulatory framework
Efficiency and risk
Recent CPMI work in retail: Non-banks in retail payments
Efficiency:
Outsourcingmight lower costs through economies of scale and scope
Competitionbetween banks and non-banks) potential…
•… to lower fees
•… to increase range of payment methods
•… to reach new markets or segments
Cooperation: to exploit respective competitive advantages to their mutual benefit
Risk
Similar risks may arise irrespective of whether a bank or a non-bank is providing the service… but potential regulatory differences may lead to differences in risk mitigation measures
That being said:
•Concentration and outsourcing can impact operational risk
•Fraud and other risks related to consumer protection issues
•Potential increased complexity in the payment chain

12. Restricted 12
Faster or instant payment services: Potential second-round effects of innovative services
Innovations
Non-bank players
Traditional providers and systems?
Faster / instant payment services:
EgUK (faster payments) SG (FAST), MX (SPEI), AU (NPP)…
Conclusions and future outlook (1)
Some controversial questions… and some counter-arguments
Are innovations related mainly to non-banks?
Are changes mainly focusing in the customer-to-provider interface?

13. Restricted 13
Are innovations really changing the core mechanics of retail payments?… what about (decentralised) virtual currencies?
Conclusions and future outlook (2)
Yes, it is true…
•Security problems
•High degree of anonymity
•Instability
•Inherently deflationary
•“Hidden” costs (currency conversion)
•Lack of user and merchant adoption
But…
•A decentralisedsystem for peer-to-peer transfers has been shown to work (no intermediaries)
•Lean infrastructure
•Very dynamic sector, many schemes in constant evolution
•Any lesson to be learned?
Your views?

14. Restricted
14
Thank you... … questions?
Information and publications at:
www.bis.org
Innovations in retail payments: www.bis.org/cpmi/publ/d102.htm
Non-banks in retail payments: www.bis.org/cpmi/publ/d118.htm