Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Nonbanks in the Payments System: Innovation, Competition, and Risk-A Conference Summary

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Nonbanks in the Payments System: Innovation, Competition, and Risk-A Conference Summary

Article excerpt

From the early days of automated card sorting to the more recent times of the Internet and check imaging, payments and payments processing have continually embraced new technology. At the same time, the industry has been shaped by its share of entry and exit, through startups, mergers, and the reorganization of businesses seeking the proper scope of horizontal and vertical integration. Many of these changes have introduced new risks to payments. In response, public policy has evolved to help manage these risks.

These changes have enabled nonbank organizations to play a larger role in the payments system. Nonbanks have followed a number of pathways to more prominence: purchasing bank payment processing subsidiaries, carving out niches in the payments market through innovation, and taking advantage of economies of scale made possible by shifting to electronic forms of payment.

The contributions of nonbanks are undeniable. They have introduced some of the most far-reaching innovations to the payments system in recent years, leading to greater efficiencies in payments processing. At the same time, nonbanks have changed the dynamics of competition in payments, leading to a significant change in the system's risk profile.

The Federal Reserve Bank of Kansas City sponsored a conference on nonbanks in the payments system in Santa Fe, New Mexico, on May 2-4, 2007. The conference addressed many of the key questions raised by the growing presence of nonbanks in payments. Have recent payments innovations been more likely to come from nonbanks? Have nonbanks improved or harmed competition in payments? Have nonbanks increased risk or helped to develop tools to manage it? How should public policy respond as increasingly more activity in payments lies outside of the banking system?

Policymakers, industry practitioners, and academics from around die world attended the conference to exchange views on these challenging questions. This article summarizes the contributions of conference presenters and recaps the extensive discussions that followed their presentations.

I. NONBANKS IN THE EUROPEAN AND U.S. PAYMENTS SYSTEMS

The conference began with the presentation of a study jointly undertaken by staff at the European Central Bank (ECB) and the Federal Reserve Bank of Kansas City. Employing a common set of definitions and a uniform analytical framework, this study documents the various activities performed by nonbanks in the European Union (EU) and U.S. retail payments systems. It also assesses the implications of the growing role of nonbanks for central bank oversight.

The study defines a nonbank payment service provider as any enterprise that is not a bank and provides payment services to its customers, primarily byway of electronic means. Nowadays, nonbanks perform functions for various payment types, such as credit cards, debit cards, electronic checks, credit and debit transfers, e-money, and stored-value transactions. Nonbanks also conduct payment activities, such as hardware and software provision, consumer and merchant interaction, backroom processing, clearing and settlement, and post-transaction accounting.

To assess the role of nonbanks in retail payments, two original surveys were conducted. The EU survey was carried out among payments experts of the national central banks of 13 countries-eight from the Euro area (Austria, Germany, Finland, France, Greece, Italy, Portugal, and Slovenia) and five from non-Euro member states (Bulgaria, Cyprus, Czech Republic, Latvia, and Lithuania). Meanwhile, a similar U.S. survey was completed by the Payments System Research staff at the Federal Reserve Bank of Kansas City. The results of the surveys show that nonbank presence in retail payments systems is substantial and growing on both continents. In particular, nonbanks are most prominent in the United States, dominating a large number of payments activities for a large number of payment types. In Europe, nonbanks are very important for card payments and, in certain countries (Germany and Italy), other payment types as well. …

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