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Regulation and Innovation in an increasingly dynamic global payments market

23 March, 2017Ruth Wandhöfer

Payment legislation as a driver for innovation

Regulatory change, innovation and competition in the international payments market have triggered significant transformation over the last decade.

With technology developments and new business models coming to the fore in the payments market globally, the EU has decided to take further regulatory action in order to promote more efficient payment services, as well as more competition in this industry. To that effect, the European Union introduced a revised law on payments, the second Payment Services Directive (EU 2015/2366)(PSD2) in December 2015.

New actors and services are being introduced. For example, a new type of non-bank payment institution, a third party provider (TPP), is enabled under the PSD2 to offer payment initiation as well as account information services based on open access to bank–customer payment account data. New technologies such as application programming interfaces (APIs) may be used to enable such access, but some existing TPPs prefer to take the bank customer’s security details to directly log on to their account (so-called ‘screen scraping’). To ensure a consistently high level of customer data security, the European Banking Authority (EBA) has the role of defining regulatory technical standards (RTS) in order to specify operational and security related requirements, to ensure secure customer authentication (SCA) and communication. This level of regulatory depth is unprecedented in the global context. However, as several jurisdictions had already been inspired by the predecessor to the PSD2, for example Japan with its Payment Services Act of 2009, it is likely that this regulatory approach may also find broader acceptance over time.

At an industry level, the PSD2 is triggering enthusiasm and focus in the context of innovation and improved customer services. Whilst non-bank TPPs continue to emerge, traditional banks have also taken an interest in the opportunity to expand their services and to build a new set of digital and data driven solutions for their customers, given the PSD2’s encouragement to work with customer data.

Another key area of payments related regulatory development is the space of Anti-Money-Laundering (AML) and Counter-Terrorist-Financing (CTF) legislation.  Based on global principles and recommendations of the Financial Action Task Force (FATF), markets around the world continue to adapt and improve their national regulatory frameworks to that effect. Again, the phenomenon of innovation and digitisation has become very important in this space. Take the example of Bitcoin, which has created significant concerns with regard to AML/CTF as well as on consumer protection grounds. Regulators in the US and Europe have responded to this phenomenon by subjecting new actors, such as Bitcoin exchanges, to AML/CTF and related requirements to ensure that transparency and consumer protection can be managed effectively.

The role of central banks in advancing payment system development

It is important to understand the role of central banks in the context of the evolving payments market. In recent years many central banks have taken an active interest in advancing their learning in the space of technology digitisation. The phenomenon of distributed ledgers and digital currencies is an area of specific interest, which drives many central banks to undertake internal and industry based experimentation with this technology.

In particular, the improvements to central bank payment systems, Real Time Gross Settlement (RTGS) systems, is an area where new technology innovation could be applied with a view to enhancing cyber resilience and efficiency. For example the Bank of England (Bank) is working on establishing a blueprint for the next generation of its RTGS system. The Bank is particularly taking into account the dramatic changes that have happened in the payment space, from both a user and provider perspective. Questions that the Bank has been asking in this regard are:


  1. What should the Bank’s policy objectives be in the delivery of sterling settlement in central bank money?
  2. What functions should the UK high-value payment system have?
  3. Who should be able to access it and how?
  4. What should the role of the Bank be in the delivery of that service?

This year we are expecting to see the launch of the final blueprint, which will be a result of broad industry and stakeholder feedback. The Bank’s work in this space could likely become a model of inspiration for other central banks that are currently assessing how to enable a digital future of central bank systems.

Ruth Wandhöfer is the Global Head of Regulatory & Market Strategy at Citi.

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