Conference "Payments of 22nd Century: Future Starts Today"

22.08. 2018. Deniss Fiļipovs, A year of instant payments: achievements and ambitious plans

2.10. 2018. Kristīne Grīviņa, Cards issued in Latvia rarely used in fraudulent transactions

4.10. Egils Kaužēns, Two types of central bank digital currency: which one is better for monetary policy?

Zoja Razmusa, Dr. oec., Deputy Governor of Latvijas Banka

Ladies and gentlemen,

I am pleased to welcome you to the annual conference of Latvijas Banka.

I would like to note that mentioning the 22nd century in the title of the conference is not a typing error. Our conference this year is special because we are celebrating the 100th anniversary of Latvia. We are proud of our country and would like to take a longer-term perspective and try to think about payments over the next 100 years. As economists we, of course, understand that the longer the forecast term, the less accurate they are likely to be. 

Central banks are first and foremost about money and that is also reflected in the title of our today’s conference. Since 2014 the euro has been our money. 

One of the key functions of money is to be a store of value. Euro area monetary policy is aimed at ensuring that the euro remains a reliable store of value as reflected in the aim to keep annual inflation close to but below 2% over the medium term.

However, another equally important function of money is to be a medium of exchange. Payments play a key role in the smooth functioning of the economy and this area has greatly evolved in the recent decades and, in particular, the last several years. Central banks are playing a fundamental role in facilitating a secure, efficient and innovative payment system. This is the focus of our today’s conference. 

Instant payments provide a good notion of what modern financial services should be like. The 21st century consumer expects any service to be available online, here and now. Paying invoices, making purchases or transferring funds to an individual or company can take place at any hour of the day or night and from any location with internet access. It only requires a couple of clicks and seconds for the money to reach the recipient. Instant payments are quick, convenient, secure and user-friendly. 

The progress that has been reached in the domain of interbank transfers during the last generation is impressive. Just a bit more than 20 years ago in Latvia there was one interbank clearing cycle a day, it was paper-based and the transactions between clients of different commercial banks at that time took a few days to be completed. Today instant interbank transfers can be executed within a matter of seconds 24 hours a day 7 days a week.

The 28th of August 2018 marks one year since Latvijas Banka became the first euro area central bank to introduce the instant payments infrastructure based on SEPA Inst. scheme. This is an infrastructure for commercial banks and other payment service providers, which have the task of providing this service to their customers. 

The Eurosystem will launch the TARGET Instant Payment Settlement (TIPS) service on the 30th of November 2018, enabling payment service providers to offer fund transfers in real time and around the clock, 365 days a year in secure central bank money.

At the same time today's conference is about much more than instant payments. Today we would like to discuss the key trends shaping the industry and understand what the path forward is.

The conditions for new developments are very favourable, especially in the payments market. On the one hand, consumers are increasingly looking for fast, convenient and affordable services that suit their changing habits. On the other hand, the advances in technology facilitate the creation of innovative solutions with the potential of causing fundamental digitalisation-led changes in the sector. It will result in a significant switch to contactless, mobile and instant payments solutions available around the clock in the near future. Latest generations of smartphones offer several options to access payments applications using biometrical identity: fingerprint, eye screening and face recognition technologies. Innovations such as distributed ledger technology, cloud computing and artificial intelligence will transform the marketplace over time.

It is clear that in the future further improvements in payment services will not be about speed anymore. In a few years' time, when the completion of payment transactions within seconds will have become the new standard, for all practical purposes further improvements in speed are unlikely to be of importance. Instant payments are now being implemented at pan-European level.

It is equally clear that payments continue to migrate away from cash and become less visible to the customer as consumers shift purchases to online and mobile channels. While we are unlikely to move to a 100% cashless society in the near future, the incompatibility between cash and digital marketplaces or digital platforms means that payments will continue to move towards cashless solutions.

An overview of payment trends would be incomplete without mentioning crypto-assets, even though they remain controversial and are still being debated. The high volatility of crypto-asset value shows that they cannot be a reliable store of value, and their global use as a means of payment remains marginal. 

Nevertheless, they have demonstrated the potential of the blockchain technology behind it. The technology is now being studied and tested by many financial market participants. Central banks are no exception, primarily testing the possibility of adopting the technology in financial market infrastructures and payment systems. 

Even considering the short and medium term outlook, it is impossible to say with certainty how the landscape of the financial services sector will evolve. Digitalisation and fintech, as well as the possibilities offered by big data and artificial intelligence are attracting new providers to the market and fostering the introduction of novel business models. The new Payment Services Directive (PSD2) has initiated a shift in the way payment services are offered and by whom they are offered. The increased competition between Fintech firms, BigTechs and banks contributes to the disaggregation of the established value chains. These developments can clearly have a disruptive impact on the payments market.

When discussing the ample opportunities of payments in the future, we should not forget the challenges that arise concerning regulation and supervision. The increasing digitalisation and technological advancements pose more complex risks, particularly in terms of cybersecurity, financial crimes and data protection. There is a fine line between stifling innovations by regulating too early and failing to protect the customers by regulating too little and too late. A balanced approach is needed to ensure a level playing field for all market participants, at the same time remaining technology-neutral. Closer cooperation between industry participants and regulators across different sectors could be the answer for ensuring the challenges brought about by the digital world are handled in the best possible way.

I'm sure that there are other keywords besides "secure", "instant" and "cashless" that will characterise the payments of the future. However, we have an excellent keynote speaker and two fantastic panels of experts, therefore I would now like to hand over to them to explore further the domain of payments. 

I wish us all a day full of interesting presentations and fruitful debates.

Thank you very much for your attention!

Keynote speech by Yves Mersch, Member of the Executive Board of the ECB, at the Latvijas Banka conference "Payments in the 22nd century: future starts today?"

The future started yesterday 

Predicting what payments will look like in the 22nd century is perhaps better left to science fiction writers than to central bankers. Still, at least one thing I can be sure of is that payments will be instant or cash-like.

And we don’t need to wait for the 22nd century to see this happen. Non-cash instant payments are a reality today in several places around the world. This includes Europe: last year already saw the launch of the SEPA Instant Credit Transfer (SCT Inst) scheme, developed by the European Payments Council at the request of the Euro Retail Payments Board. Banks from the Baltic countries were among the first to embrace instant payments, with a number of them joining the scheme from day one.

However, we are now at a critical stage for implementing instant payments. The number of banks offering instant payment services to their clients is steadily increasing, as is the use of such services by European people and businesses. In November we will launch TARGET instant payment settlement (TIPS): the Eurosystem service for instant payment settlement across Europe in central bank money. With this service, the Eurosystem is addressing the evolving needs of market participants and supporting market integration by facilitating pan-European reach at a time when the issuance of its new series of safe and widely-trusted banknotes is nearing completion.

An opportunity for the European payments industry

The move towards instant payments is not just good news for end users; it is also good news for the European payments industry. Cards are now the most popular and fastest-growing non-cash payment instrument in Europe, and many of the most prominent innovations in payments are card-based. Think of contactless payments and mobile wallets, as well as many online payment solutions.

This area is dominated by non-European players, with international card schemes taking the lead. European players are lagging behind, not least because of the lack of a pan-European card scheme or even interoperable card networks. In this context, we should strive for a truly pan-European instant solution rather than repeat past shortcomings.

Thanks to instant payments, European market players can now become leaders in innovation, based on European standards. The SCT Inst scheme and the infrastructures developed to process instant payments form the ideal basis for innovative payment solutions that meet the needs of today’s and tomorrow’s end users.

Let’s be clear: this is more than just a need for speed. European people and businesses are looking for payment solutions that fit seamlessly into their daily lives and business processes, from person-to-person payments to online marketplaces, and from micropayments to industry 4.0.

Each of these payment solutions [We assume “these” refers back to “payment solutions”] could be enhanced by an instant payment feature, but they also require additional services to create a smooth and secure payment experience. Payment solutions can be integrated into or linked to mobile apps for ordering goods and services, thereby providing vendors with real-time confirmation of incoming payments. And instant payments can be integrated into business software and will undoubtedly pave the way for many other additional services. This is where market players can provide added value and create new business opportunities.

Time to take action

Market players need to take action. Payment service providers around Europe need to start offering their customers instant payment services. And they need to do so quickly.

Experience from other markets, from photography to music to bookshops, shows that when disruption hits, established players can quickly lose their seemingly comfortable position and find themselves struggling to remain relevant.

Thanks to instant payments, the European payments industry can create a pan-European platform for innovation. But only if everyone in Europe can pay each other instantly and the service is not restricted to the customers of certain banks or residents of particular countries. Moreover, payment service providers should not erect any barriers to the uptake of instant payments, for example by only offering them through a limited number of channels or by charging prohibitively high fees. Such strategies will only drive end users to other players. No one owns the customer. Web and technology giants are already knocking at the door, eager to leverage their existing user base to quickly gain market share in payment services.

To achieve economies of scale and benefit from the integrated European payments market, providers of instant payment services should also ensure that their services are truly pan-European. Their customers should be able to send and receive payments across Europe, in line with the principles of the Single Euro Payments Area.

Ensuring this reachability is the responsibility of each individual payment service provider, but the Eurosystem is also doing its part to facilitate pan-European reach. Our new TIPS service is in an optimal position to do so: it has been designed as an extension of TARGET2 with its extensive network of over 1,700 participants and more than 51,000 addressable Business [Bank?] Identifier Codes. Its pricing policy also helps it to achieve a broad reach. There will be no charge for opening and maintaining an account or for receiving payments and reporting. For the first two years of operation, the price per initiated transaction is set at €0.002, with no charges for the first ten million payments settled on each TIPS account by the end of 2019. In addition, TIPS will offer a flexible participation structure, allowing market participants to participate in TIPS directly, to connect as a reachable party or to use an instructing party to send instructions on their behalf. With this flexible structure, we are not only providing a new standalone infrastructure but also allowing the market to leverage existing clearing arrangements – subject to market participants’ choices – in order to maximise the integration benefits of the new service. This approach is consistent with that of the existing Eurosystem TARGET services as well as our new initiatives. To promote euro area-wide, smooth and efficient payment systems in line with our mandate, we might even have to reflect on whether broader access to central bank accounts for retail purposes may be needed.

A clear parallel can be drawn with our aim to foster a true domestic capital market in the euro area via the European Distribution of Debt Instruments (EDDI) initiative. The issuance, trading, clearing and settlement of a security in the EU should not be affected by the location of the issuers, investors or intermediaries. The idea of EDDI is to facilitate a centralised issuance and distribution service for European debt securities, exploring synergies with the other TARGET services and the Eurosystem collateral management system. The Governing Council recently agreed to investigate the next steps for the EDDI service based on the guiding principles of efficiency, safety, harmonisation and neutrality.

Avoid creating new fragmentation

This instant payments network should then be used as a basis for pan-European end-user solutions. There are almost limitless opportunities to design innovative services on top of the basic SCT Inst scheme. In fact, we can already see several initiatives flourishing around Europe: mobile payment solutions for person-to-person and point-of-sale payments, to name just one [or two if you consider them to be separate].

Unfortunately, many of these are limited to one country, or even just a few banks within a single country. Unless this changes, users of these services will not be able to benefit from the pan-European nature of SCT Inst. They will have to look for alternatives when they travel, order goods and services from other countries or do business across Europe, and they will not care whether these alternatives are based on European schemes or not.

It would be a great pity if fragmentation were to be re-introduced at the end-user level. Suppliers should strive for pan-European designs, using common standards and working together with stakeholders.

Take point-of-sale payments, which make up the largest segment of the retail payments market in terms of transaction volumes. Vendors of all types and sizes could benefit from increased cost efficiency and improved cash management if they could accept instant payments at the point-of-sale. Point-of-sale solutions for instant payments could also allow businesses that do not accept cards for cost or practical reasons to offer their customers the choice to pay electronically. Such solutions should not replicate the situation that exists for cards, with non-interoperable national solutions. They should be based on common standards so that consumers can make instant payments at points-of-sale anywhere in Europe.

Conclusions

The SCT Inst scheme and the new instant payments infrastructures have laid the foundation for a future-proof European payments landscape.

Now it is up to the market to build on that that foundation. This means offering instant payment services that meet clients’ needs, at attractive prices. Charging prohibitive fees will not support the take-up of instant payments. On the contrary, it would only drive customers towards other players. Rather than being driven by the services offered by other players, why not drive developments yourselves and reap the respective benefits? Those market participants that take this opportunity to offer innovative payment services to their customers at pan-European level will be ready for the payments landscape of tomorrow and beyond; perhaps even into the 22nd century.
 

Mārtiņš Grāvītis

Latvijas Banka's economic conference of 2018 was dedicated to cashless payments, one of the areas of central bank responsibility, alongside the cash infrastructure. In everyday rush we are unaware of that as long as everything runs smoothly, in line with the provisions of the Law on Latvijas Banka.

Instant payments, a new industry standard, is a result of the winds of change in technologies, habits and European Union regulations observed over the last few years. Soon everyone will feel it: Latvia is the front-runner in this field in the euro area. Three universal banks will provide instant payment services to their customers already at the end of October, thus covering majority of Latvia's inhabitants. The services will be based on Latvijas Banka's infrastructure; soon Latvijas Banka will launch a register where a customer's bank account number will be linked to the mobile phone number, enabling phone-to-phone payments.

The winds of change have come as a sum of factors: digitalisation and mobile communication, and smart devices; desire to handle your money fast and 24x7; and a stronger competition in financial services as the new EU Payments Directive has put an end to the bank monopoly in this industry. Consequently, at this stage cashless payments require full attention from Latvijas Banka, other euro area national central banks, and the European Central Bank (ECB). This requires a change also from businesses; they were represented at the conference by payment service providers and system operators, the big retailers, as well as commercial banks.

According to their mandate, central banks participate in improving the payments sector, initiating new and secure financial services in euro. That meets the public's requirement for faster payments, and at the same time commits them to risk control, e.g. that of cybertheft and money laundering. As reminded by the keynote speakers, payment development is important for the economy: apart from improving the quality of life and reducing costs, it also promotes businesses, primarily in financial services and trade, but also in production.

In the introductory part of the conference, the tandem of the central bank managers: Zoja Razmusa, Deputy Governor of Latvijas Banka, and Yves Mersch, Member of the Executive Board and Member of the Governing Council of the ECB, outlined the subject of the discussion: instant payments in mobile devices. Those will exist alongside cash, the latter never loosing its role, inter alia in cases where one wants to keep one's privacy and also during power outages; and alongside payment cards having served for more than half a century. The conference organisers' invitation to talk about payments of the 22nd century (sic!) obviously was a hyperbole chosen to attract our attention and to make us think about the heaps of near future tasks associated with the change in industry standard.

It was only twenty years ago when electronic clearing in Latvia substituted payment orders carried by couriers where the delivery and entry in paper ledger took from three to five days. Latvia, in parallel with the euro changeover in 2014, participated in harmonising the Single Euro Payments Area (SEPA) system rules and introducing a new form of payments. The pace of development has accelerated as we are currently migrating to instant payments.

The ECB in its turn reminded us not to step on the same old rake in the new standard and develop a single market rather than a fragmented one; and quite directly urged market participants to refrain from subduing competition: the ECB stands ready to consider a more extended access to central bank accounts by licensed service providers for the purpose of retail payments. In November, TIPS, the instant payment settlement service of the EU TARGET2 payment platform, will be launched across the euro area.

Both conference panels made a compact half-day event: the first was envisaged as a visionary one, covering the conceptual trends in the air, while the other was more practical, looking at crucial details, crypto and other digital currencies driven by the god or devil.

Summary of the first discussion: the next big event in cashless payments will obviously be merging the payment itself with the purchase process until it proceeds almost unnoticeably, like any everyday digital service. The payment will be part and parcel of the purchase process.

Meanwhile, the next huge leap for the central banks could be issuing digital currency that we can imagine like a digital banknote. However, the experts calmed us down: it is highly unlikely for anything like that to come true in the first half of the 21st century.

The discussions of the second panel focused on the mobile financial services. Together with the industry players we racked our brain as to whether customer identification will be biometric or otherwise; and we could hear the old story about data security (nothing is unbreakable, but we must take care all together: on the national level, by service providers, and also by the users). The European Commission was concerned about privacy: how to prevent trading it in exchange of profit like in the US or a totalitarian control like in China, and how to retain the European values.

Currently the payments industry is intriguing for both a wider scale of money users and media. Latvijas Banka made the conference available in public format, thereby taking care of its mandate to ensure smooth payments; ensuring secure, fast and efficient payments also during the period of change when adopting new forms of payments.

Conference "Payments of 22nd Century: Future Starts Today" Part I

Conference "Payments of 22nd Century: Future Starts Today" Part II