Out-Law News 4 min. read
16 Oct 2014, 10:57 am
Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.
Data and technology are at the centre of the transformation of payments markets, but a lack of standardisation and interoperability between different payment systems will continue to cause concerns for businesses that operate on a global scale.
Internet, mobile network and device, and card technologies all need to work efficiently together. In addition to these technical issues, cross-border cultural attitudes and behaviours holding back integration of technical and legal systems must also be addressed.
Customers want mobile payment systems that are convenient and easy to use. They also want assurances that any new system will be at least as secure as the ones they currently use.
Businesses innovating in payments want to leverage off big data, enhance their digital products and distribution channels, integrate payments with social media and benefit from efficiencies that can be achieved through the use of cloud solutions. At the same time, they are constrained by cyber security fears and the knowledge that rolling out payments systems is difficult.
The opportunities that payments innovation presents are too significant to ignore. Below we consider some of these opportunities and the legal and regulatory hurdles that must be overcome before they can be realised.
Payments innovation opportunities
How many bank accounts do you hold? Probably more than one. How many mobile devices do you carry everyday? If you are working in professional services, possibly two, but more likely three or even four.
Readers of this blog, however, are probably not the best sample group for assessing global personal banking and phone ownership rates. While the world's population continues to number around seven billion, it is estimated that only two billion or 30% hold a bank account. But it is also estimated that five billion or 70% currently own a mobile phone, and this figure is set to grow. As has been pointed out there are more mobile phones in the world than toothbrushes.
For banks, technology companies, retailers and others involved in the payments value chain, these figures illustrate that mobile technologies present a huge opportunity, the possibility of capturing 40% of the world's population as new customers. This potential large new customer base is otherwise inaccessible to services dependent on bank accounts.
All payments players must adapt and embrace four transformative developments affecting the market for payments services:
Legal and regulatory obstacles
Regulatory and legal issues remain challenges for businesses engaged in payments innovation. Discussions surrounding the Payment Services Directive II (PSD2), currently undergoing negotiation at EU level, highlight some of these typical concerns, issues which impact on all businesses, wherever they are located, and whatever the legal framework under which they operate.
One of the issues highlighted in the current discussion on PSD2 is that of customer authentication. In an offline world, customers were first authenticated by their presence at a branch, through official documentation and by signatures. With card technology, customers began to be authenticated through a combination magnetic strips and signatures. Pin and chip and tokenisation have now replaced un-encoded magnetic strips in many parts of the world. But as the hacking of point of sale systems, such as that suffered by US retailers Target and Kmart in recent months, effective authentication and cyber security remain major hurdles impacting on the decision of businesses to provide, and consumers to use, innovative payment solutions.
While there is a lot of noise about these issues in the media, there are very few solutions. Effective compliance and legal strategies must be planned and executed in order to prepare for the substantial financial and reputational damage that payments-related security breaches and major identity theft incidents can cause.
As important as these concerns are, for many they are being overshadowed by other commercial concerns, in particular, the proposed regulatory changes to the rules governing interchange fees including the proposal to cap those fees at an EU cross-border and domestic level. Whatever the payment mechanism, there will be always be a cost attached to processing transactions. As the level of interchange fees remain a subject of intense debate,, how the cost of processing transactions will be apportioned in the future between retailers, payments providers, banks and others remains to be seen.
The level of interchange is only one aspect of the policy discussion on regulating payments, for example, there is the related issue of transparency – to what extent should businesses be compelled to help consumers understand the costs involved in processing transactions? Does it genuinely help consumers make better informed choices or are the issues more complex? Is there concrete evidence to suggest that any of these proposed measures, either alone or cumulatively, will lead to a positive net outcome for the consumer? For market participants, a more pressing question remains: how can legislators and the regulators (including the new Payment Systems Regulator) be best helped to understand the complexity behind these issues?
New entrants, competition concerns around access to credit card markets and the extent to which regulatory change could dampen innovation in the future are further issues that need to be considered. Regulators across the globe see efficiency, transparency and competition as key objectives. But will introducing more complexity into payments regulation really lead to more positive outcomes? It is hard to see how a more complex regulatory environment will promote innovation and consumer trust in new ways of transacting.
At the end of 2013 Facebook was said to have 1.2 billion monthly active users making Twitter's 200 million look insubstantial by comparison. Apple has released the iPhone 6 with near field communications (NFC) and a digital wallet – the ability, restricted to the US for now, to touch an iPhone to a terminal to pay in a shop. Many have agreed that future success in payments will come from these capital-rich technology businesses and those like them. It is up to the incumbents to now prove otherwise.
The Global Payments Conference
We are looking forward to our first Global Payments Conference on 12 November where all of these issues will be explored in detail. Key speakers from Google, PayPal, Barclays, the Financial Conduct Authority, the Payments Council and a number of others, including lawyers from our London, Paris, Munich, Shanghai, Singapore, Hong Kong and Dubai offices will provide unique perspectives on the present and future opportunities and challenges that rapid changes in technology and regulation present to payments markets.
If you would like to register for the Pinsent Masons Global Payments Conference you can do so here
For full details of the conference agenda click here