«July 2012 THE WORLD BANK Acknowledgements The preparation of this paper was led by the Financial Inclusion Practice of the World Bank. Lead author is ...»
A third-party payment service provider is a generic term that implies a company providing specialized services within the retail payments value chain. This company may be contracted by a bank or another payment service provider to conduct one or more sub-processes, for example by providing specialized software or hardware used to create and send ACH files and/or to act as a sending or receiving point for one of the participants in the ACH system, or to provide authorization, settlement, and merchant services.
In this document, all these three types of players—payment institutions; payment networks, clearing associations and clearinghouses—along with third-party payment service providers are collectively called Retail Payments Service Providers (RPSP).
These three categories in themselves are not mutually exclusive, there are significant overlaps and in some cases the same organization could play different roles in different scenarios. For example, a bank could offer its own payment products and in addition also provide processing services in terms of processing clearing and settlement of transactions to another bank.
II.6 Concluding Remarks on the Observed Trends in Retail Payments It can be concluded from the discussion in this chapter that finding the ―right‖ solution to a nation‘s retail payments needs is not a simple task but one that involves a complex interplay of factors that influence both the demand for and the supply of electronic retail payment instruments.
The demand for a payment instrument is influenced by the latter‘s effectiveness in satisfying the payment needs of the users, and the ease with which the users can adopt and substitute it for the traditionally dominant payment instrument, namely cash. The supply side, on the other hand, in addition to the existence of demand is typically influenced by the extent of cooperation and competition in the market, the availability of infrastructure and technology, as well as by the legal, regulatory, and payments system oversight environment.
The key trends that are observed to be taking place today are summarized below.
Consolidation of payment service providers and emergence of third-party nonbank providers for specialized payment services. Recent changes to payments technology such as introduction of electronic cheque conversion and electronic cheque presentment, introduction of prepaid cards, mobile payment services and virtual wallets have influenced the rapid consolidation of retail payment service providers, credit issuers, merchant acquirers, processing companies, and cheque processors. As a result, some small and mid-sized financial institutions have exited the processing business and outsourced certain functions of the retail payments process to larger financial and non-financial institutions. Non-banks, in particular, are assuming more roles in retail payment systems such as the clearing and settlement functions, and the issuance and processing of electronic payment cards and other devices.
The shift from paper to electronic payment instruments is more pronounced today than previously, however, paper-based instruments and especially cash are still strong in many countries. In many country environments, the shift from paper to electronic payments has gained significant momentum with technological progress and the ever-increasing preference by consumers, merchants, and other payees for convenient and low-cost payment alternatives. The most significant growth is seen in debit and prepaid cards, followed by direct credits and direct debits.
For example, the increasing availability of online banking and automated bill payment, among others, are reducing the number of cheques that flow through the payment system. Likewise, wider availability of modern POS terminals has contributed to growth of payment card programs and added to the convenience for consumers. The use of cash, however, is declining at a much slower rate.45 Emergence of innovative payment instruments and services both to expand payment services to hitherto unbanked and other under-served market segments, as well as to meet new types of payment needs in mature markets, and, in general to improve overall efficiencies in the payments process.
Underdeveloped or missing payment services infrastructure has resulted in relatively high transaction costs and low penetration of payment services for lower-income populations in many countries. Very often, financial institutions find it too costly to invest in the expansion of traditional retail payments infrastructure that is geared towards serving the needs of low-income people. In recent years, however, improvements in technology combined with new product offerings have been adapted mostly, though not uniquely, by non-bank payment service providers to satisfy the payment needs of lower income consumers.
Several other innovative payment instruments have emerged for very different reasons.
For example, new payment needs like the ones created with the emergence of ecommerce and auction websites or the need for transit payments resulted in innovative payment services like PayPal in the United States and Octopus card in Hong Kong. It needs to be noted that even now, traditional payment cards have a majority share of all e-commerce payments; however, innovative payment services like PayPal are quickly becoming significant players in this space.
On a worldwide basis, the World Bank Global Payments Survey 2010 showed that debit cards are the most used means for payments in 32 percent of countries, followed by checks. An analysis by income level shows that checks are the most used payment instrument in 65 percent of low-income countries compared to only 13 percent in high-income countries, 19 percent in upper-middle income countries and 37 percent in lower-middle income countries. In geographical terms, check usage is still substantial in Sub-Saharan Africa, South Asia, and Latin America.
Improving efficiencies has also been a motivation for development of innovative payment services, for example the remote deposit capture service—capturing a cheque image using the payee‘s mobile phone and submitting it to the presenting bank directly.
On the other hand, while several innovative payment instruments have been successful in specific environments, with very few exceptions their success at the global scale has not yet taken place. The results of the questionnaire on innovations in retail payments as part of the Global Payment Systems Survey 2010 provide additional insights on the current status of innovative payment instruments and services around the world. The main findings are presented in Box 4.46 Box 4: Main Results of the World Bank Survey on Innovations in Retail Payments This survey was conducted as part of the World Bank Global Payments Survey 2010. There was a separate accompanying questionnaire to collect information on innovations.
The questionnaire requested general information on the type 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, involved entities, usage of the product, pricing, clearing and settlement, security, and fraud issues). In addition, questions about the legal and regulatory framework were covered and the provision of statistical data was requested. Finally, central banks were asked about planned reforms in the legal and regulatory framework and about plans to introduce new products and processes.
A total of 101 central banks completed the questionnaire and reported 171 innovative retail payment products/product groups. Most of the central banks provided information on a product group basis and not individual products.
The main findings are as follows:
1. In terms of usage, innovative payment products are still much less relevant than traditional retail payment products. However, they are important for financial inclusion in over 10 percent of the countries.
2. While non-banking organizations are playing a significant role in the provision of innovative retail payment products/mechanisms, banks remain a significant player in this field.
3. Customer funds are fully protected in around 60 percent of the cases.
4. Innovative payment products appear to have fairly well developed pricing models.
5. 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.
The accompanying publication, ―Innovations in Retail Payments Worldwide: A Snapshot. Outcomes of the Global Survey on Innovations in Retail Payments Instruments and Methods 2010 (consultative report)‖, provides a detailed analysis of the responses to this survey. This is available at www.worldbank.org/paymentsystems.
6. The majority of the innovative products/mechanisms have very limited interoperability.
7. The traditional clearing and settlement infrastructure is in general not used.
8. Security and fraud risks seem to be getting inadequate attention.
9. 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.
10. 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.
III. Public Policy Objectives in Retail Payments
Retail payment systems have been generally initiated and operated by private entities that come together to try to address collectively recognized payment needs in a market.
In some cases, it has even been suggested that public authorities should adopt a handsoff policy as direct intervention might hinder innovation.
However, as evidenced by various studies and PSDG field work in over 100 countries, it is clear that significant public policy objectives relating to retail payments exist and should be pursued by public authorities in general and the national central bank in particular. This chapter discusses these key public policy objectives, based on which it later establishes the need for a holistic retail payments development strategy to be adopted by any country that lacks a well-functioning retail payments system.
III.1 Overall Safety and Efficiency Standard setters and international financial institutions have already provided a useful framework to guide reforms in retail payment instruments and systems. In particular, in 2003 the CPSS identified a set of overall policy goals for retail payments system (see Box 5).47 This framework identifies efficiency and safety as key public policy objectives for retail payments system.
Box 5: CPSS Public Policy Goals for Maintaining and Promoting Efficiency and Safety in Retail Payments Policies relating to the efficiency and safety of retail payments should be designed, where
1. Address legal and regulatory impediments to market development and innovation;
2. Foster market conditions and behaviors;
3. Support the development of effective standards and infrastructure arrangements; and
4. Provide central bank services in the manner most effective for the particular market.
In the specific context of countries with an underdeveloped retail payments system, in addition to the public policy goals of ―safety‖ and ―efficiency‖ some other public policy goals are typically required to address both ―demand‖ side as well as ―supply‖ side constraints.
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. Affordability and ease of access to payment instruments and services.
2. Availability of an efficient infrastructure to process electronic payment instruments.
3. Availability of a socially optimal mix of payment instruments.
These are described in further detail below.
III.2 Affordability and Ease of Access to Payment Instruments and Services The ―demand‖ for electronic payments is often restricted by limited financial inclusion of the country‘s population. Payment services are a basic component of financial inclusion, which is defined for the purposes of this document as the availability of basic financial products to meet the payment, savings, credit, insurance, and investment needs of a society. The key requirement for accessing non-cash payment mechanisms involves the payer entering into a formal relationship with an intermediary like a bank (or in some cases a non-bank institution) that provides support for electronic payment instruments.
While the types of payment instruments and levels of service may vary across different segments of society based on a host of demand and supply factors, overall there should be reasonably affordable and reliable access to a set of basic electronic payment instruments and services.
If significant sections of a society do not have access to electronic payment instruments, the use of relatively high-cost and potentially growth-limiting paper-based payment instruments payments would remain high. Moreover, adequate access to payment services can positively impact the provision of other financial services. Financial services such as provision of credit, insurance, and investment services all depend on the ability of the institution to disburse funds and/or collect periodic payments from their customers.