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The instrumental role of European Facing Reality: and Settlement Mechanisms The Diversity of in a changing financial landscape Instant Payments in

OPEN APIS: THE NEXT PAYMENTS INDUSTRY GAME CHANGER

A white paper by Table of Content

3 9 12 Executive summary The transformation of the New players entering global financial landscape the European payments landscape The growth of digital, e-wallet 4 and e-commerce payments 9 Big cloud-based technology corporations 12 The current state of the The exploration of new European payments market technology 9 Fintech companies and merchants 14 Standardisation and The advancement of Open harmonisation 4 Banking and APIs 10 The European regulatory reactions 14 Regulatory and The evolution of consumer infrastructural changes 5 expectations 11 The era of the Platform Economy 15 Instant payment development The development of financial and adoption 6 service offerings by big technology corporations 11

16 17 Conclusion Glossary

European Automated Association Executive summary

Boise,

Today, the industry is experiencing unprecedented changes which are gradually shifting the dynamics of financial ecosystems, breaking up value chains, and threatening existing financial services business models. Global developments including an increasingly digitised society, evolving consumer expectations, new collaborative partnerships, advancing technologies, and new entrants are all adding to the impact, evidently reshaping the way payments are perceived, initiated, processed, cleared and settled.

Parallel to these global developments, circumstances in Europe including changing regulatory and legal frameworks, the transition to instant payments, higher demands for interoperability and reach at a pan-European level as well as an escalating competitive environment involving new industry players are all adding additional layers of complexity to its existing financial infrastructure.

These significant changes across regulatory and market dynamics are delineating the needs and expectations of consumers and merchants alike. Consequently, consumers now expect security and consolidation of finances and transactions while merchants (and other service providers) expect payment certainty and speed. With the proliferation of account-based real- time payment systems, the payment account is ideally positioned to serve both ends of the payments value chain through the delivery of security, consolidation as well as fast, final and irrevocable payments.

With PSD2 and the Access to Account requirements, it has suddenly become possible for TPPs outside the traditional financial services industry to fill the role as both PISP (Payment Initiation Service Provider) and AISP (Account Information Service Provider). These developments have become the catalyst for increased integration across the traditional boundaries of financial services, thereby opening the doors for different technology providers to enter the financial services space.

Against this backdrop, this paper argues that local clearing and settlement mechanisms (CSMs) are ideally positioned to serve the specific requirements of local European environments in terms of reach and value-added services and to facilitate the connection between local financial players – including local fintech startups – and global transaction systems, as well as the connection between global service providers and local payment networks and players.

A white paper by the European Automated Clearing House Association GO BACK TO CONTENT PAGE PAGE 3 The current state of the European payments market

Across Europe, circumstances including changing regulatory and legal settlement mechanism (CSM) for cross- frameworks, the transition to instant payments, higher demands border payments in Europe. During this for interoperability and reach at a pan-European level, as well as an time, the service attempted to grow its escalating competitive environment involving new industry players, are reach by acquiring domestic volumes. currently adding additional layers of complexity to the existing financial Following the implementation of infrastructure and to the way payments are essentially conducted. SEPA standards (SEPA Credit Transfer, SEPA , SEPA Instant Credit The significant changes across regulatory and market dynamics have Transfer) by all national community helped to delineate requirements and expectations across both ends CSMs and reciprocal reach extended of the payments value chain. Now, consumers expect security and by these CSMs connecting to a consolidated overview of their finances and transactions while STEP2, the initial PSP vision of SEPA merchants and other service providers expect certainty of payment centralisation gradually dissolved as and fast transactions. With the proliferation of account-based real- local CSMs could then serve local time payment systems, the payment account is an obvious choice as needs and offer SEPA reach through it delivers security, an overview, as well as quick, final and irrevocable these links. Since then, STEP2 has payments to merchants. remained the preferred cross-border CSM for non-centralised clearing and Given these recent developments, it is becoming increasingly evident settlement arrangements and little how local CSMs present themselves as a preferred choice for and SEPA clearing concentration has been PSPs, as they are ideally positioned to serve the specific requirements experienced. of local European environments in terms of reach and value-added services and to connect local players to global transaction systems as Despite the ability by most CSMs well as global service providers to local payment networks. to serve communities at SEPA level by processing SEPA standards and providing SEPA reach, many local Standardisation and However, even with increasingly banks and PSPs still prefer local harmonisation standardised interfaces, the financial clearing and settlement solutions. This Both the first Payment Service services industry is more than anything is explained by a number of reasons. Directive and the Revised Payment network-based and building up entirely Firstly, the majority of European Services Directive – PSD2 – drive a new networks takes time. This is payments are national transactions, pan-European standardisation and why the existing network hubs will with only a small amount crossing harmonisation agenda with the explicit continue to play a central role if the borders to other countries. This in turn, aim of an internal market for financial political visions for an internal market encourages local banks and PSPs to services and the free movement of for financial services are to be fully prioritise the improvement of local money on par with the free flow of realised. The local CSMs are well- payment solutions at the speed of goods and labour across all of the established conduits to all banks in a their market ahead of possible SEPA- European Union. given country, as well as to other local payment infrastructure components An open internal market for financial which are not likely to be replaced by services will allow for increased pan-European solutions any time soon. competition as a harmonised setup enables easier expansion and export of Prior to the advent of SEPA (the Single services across borders. At the same Euro Payments Area), EBA Clearing’s time, the unprecedented increase of pan-European payment service – e-commerce is blurring the frontiers STEP2 – was the default clearing and across countries. These factors provide opportunities for both existing players in the financial services industry as well as for the fast-growing number of fintech companies across Europe.

A white paper by the European Automated Clearing House Association Basel, GO BACK TO CONTENT PAGE PAGE 4 wide solutions. It could be argued that from a PSD2 perspective are treated From a consumer perspective, cross- by retaining the governance of a local equally clearly underlines a more border payments need to follow the CSM, PSPs ensure a closer alignment fundamental change in the payments development of cross-border trade, of product delivery for specific market landscape which is that payment where goods and services seamlessly evolutions. Local CSMs are also well- networks are not only about moving travel across national borders at established and acknowledged entities money but about moving data – and a frequency and speed previously in their local communities due to their this in an equally secure manner as unseen – and to have (electronic) long-standing experience and expertise monetary transactions. money moving slower than physical with local conditions and requirements, goods seems counter-intuitive. including their ability to meet local PSD2 is widely acknowledged as a banking supervision requirements, and major catalyst of the adoption of CSMs are the payments world’s they have a long-standing reputation the platform economy in financial equivalent of the distribution hubs of of security and trust in the local market services and as such PSD2 serves as the logistics industry. These entities are place. In addition, CSMs offer some a benchmark for regulators globally responsible for receiving and sending considerable advantages in terms of to introduce open APIs (Application transfers and thereby connect local costs, reach, governance, flexibility, Programming Interfaces). PSD2 is players to global transaction systems. value-added features and back-office disruptive in a number of ways. Firstly, In this respect, the CSMs could also services. These reasons will probably it imposes both operational risks and serve to deliver the compliance explain why CSM consolidation is costs on banks because they are interfaces needed by the banks in a not happening within the Euro-based responsible for finding efficient and local market. This could both be the CSMs as the delivery of services that secure methods of connecting and full APIs as well as the required fail- meet market diversity further reinforce communicating with TPPs. In addition over mechanisms for TPPs looking to the CSMs position in their markets. – and this is maybe the most crucial integrate to banks. The need for efficient interoperability point – it presents banks with the solutions remains a requirement to risk of losing the direct relationship It is also interesting to notice how a ensure the good functioning of the with their customers and therefore of proposed amendment to regulation SEPA-wide payments ecosystem. being reduced to basic infrastructure (EC) No 924/2009 aims to align the providers in the future. charges of cross-border payments Regulatory and infrastructural in Euro within the EU with charges changes Connecting local players to global of national payments made in any Responding to recent technological transaction systems national currency. The regulation, also innovations as well as the challenges Whether or not PSD2 and Open introducing information requirements of fragmented payments markets along Banking represent a problem or an related to the currency conversion national borders, the full impacts of opportunity for the parties involved charges, will inevitably increase the PSD2 will be unleashed September is widely discussed. Some banks are cost pressure on banks with large 14, 2019, when the RTS (Regulatory using the new directive as an exercise operations in non-Euro EU countries Technical Standards) from EBA become in minimal compliance, while others and, consequently, the need in those mandatory, thereby opening the have recognised an opportunity to countries for efficient Euro CSM banking infrastructure in a standardised increase competitiveness and retain infrastructures¹. manner. customers by entering into new mutually beneficial relationships with One of the most apparent innovations TPPs of all kinds. of the new directive is that banks are required to provide access to payment No matter the approach, it seems that accounts for Third-Party Providers the introduction of TPPs in general (TPPs) as customers can grant – and PISPs in particular – to the access to these TPPs in exchange for European financial ecosystem is set new services. Consequently, this has to alter the payments initiation value introduced two new roles as TPPs in chain to an extent where banks in the the payments ecosystem: Payment future will need to devote considerable Initiation Service Providers (PISPs) and time and resources to evolve their Account Information Service Providers clearing and settlement services (AISPs). The fact that these two roles to meet new market requirements, especially those happening across borders.

1. https://ec.europa.eu/info/law/cross-bor- der-payments-regulation-ec-no-924-2009_en

A white paper by the European Automated Clearing House Association Stockholm, GO BACK TO CONTENT PAGE PAGE 5 frameworks based on the SCT and SDD Figure 1 – CSMs deliver reach to pan-European TPPs rulebooks published by the EPC, which further addressed the specific request

International players from the European acting as Pan-European TPPs (ECB) of delivering an interoperability framework for the SCT Inst scheme. The interoperability framework was Local & initially published in parallel with the Regional CSMs API API API November 2016 release of the EPC’s scheme rulebook and was updated in 2017 to include the AS16 real-time module that enables CSMs to clear and settle instant payments through TARGET2.

At the early stages of planning and Country A Country B Country C roll out there has been no sufficient Source: Norfico case for CSMs to establish bilateral interoperability due to the relatively low demand for cross-border Instant payment development SEPA Instant Credit Transfer scheme payments by PSPs at the time. But and adoption (SCT Inst), enabling Payment Service considering how cross-border instant In Europe, Instant Payments (IP) is Providers (PSPs) to send instant payments volumes are expected to becoming the new normal when payments to all Euro countries under grow in the future, the requirement it comes to payment transactions. the same rules. One year after its from local communities for full reach This de facto status is exemplified launch, the number of PSPs adhering will eventually make the EIPIF a more by the abundance of national to the scheme continues to increase, attractive proposition to all relevant instant payment initiatives and with 2019 expected to see general participants. use cases currently available ramp-up before achieving critical mass to both retail and corporate in 2020. For SCT Inst clearing, there are two customers. However, there is a CSMs currently positioning themselves wide diversity of IP solutions in Available options and pan- as pan-European providers, the Europe, as many countries have European IP reach Eurosystem’s TARGET Instant developed their own domestic At this point in time, a number of Payment Settlement (TIPS) service markets with little need for SEPA local IP initiation solutions – as well and EBA Clearing’s RT1. However, reach and with pan-European as corresponding IP CSMs based on these providers do not propose CSM interoperability initially being a the SCT Inst – have been launched interoperability. For the individual PSPs, secondary concern. in accordance with local market these market multiplicities lead to requirements in both Euro and non- general confusion about whether to Originating as a closed-loop solution Euro countries. Others are currently join: for banks and payment service under development. Most of the providers (PSPs) aimed at clients, solutions already launched can be instant payments evolved into a classified as national IP solutions, community interbank solution that, in as they have achieved a broad local some cases, would continue to develop market reach of more than 85 percent into national IP initiation solutions – like of bank accounts. Swish, MobilePay and Bizum – with In the pursuit of interoperability and comprehensive reach and scope. In processing of cross-border instant the wake of these national-level IP payments within Europe, members solutions emerged an ecosystem of IP of EACHA developed the EACHA schemes and CSM services to support Instant Payments Interoperability the clearing and settlement of such Framework (EIPIF). It was an evolution new payments. to the existing EACHA interoperability In 2014, when the Single Euro Payments Area (SEPA) had been implemented across all Euro countries, the European Payments Council (EPC) started laying the foundation for a pan- European instant payments scheme. By November 2017, it launched the

A white paper by the European Automated Clearing House Association Amsterdam, GO GO BACK BACK TO TO CONTENT CONTENT PAGE PAGE PAGE 6 a pan-European CSM at the risk of Figure 2 – IP Clearing options losing any competitive advantage in their local market. a local CSM at the risk of not being SEPA reachable. a pan-European and local CSM being forced to participate in two systems contrary to efficiency and ERPB guidelines. a local CSM and outsource SEPA reach to the local CSM who will then technically connect to other CSMs for reach (EACHA/EIPIF, TIPS, RT1).

The EACHA Instant Payments Interoperability Framework To expand reach, local CSMs will Source: Lipis Advisors either rely on a pan-European infrastructure or they can exchange cross-border payments ECB’s Target Instant Payment settlement system for Euro instant directly with CSMs in other SEPA System payments, TIPS is technically capable countries. The ECB has positioned TIPS as an of settling transactions in other interoperability model that “aims to currencies. The Swedish Central For banks that are not participants minimise the risk [of fragmentation Bank, Sveriges Riksbank, has already in the same IP-CSM, this can be in the European retail payments announced that it is conducting a accomplished with the EACHA market] by offering a service that can consultation with the purpose of Instant Payments Interoperability help ensure that any assessing the options to settle instant Framework (EIPIF). holder in Europe can be reached”². payments in Swedish Krona through Any European CSM may act as an the TIPS module, with other non-Euro Through EIPIF, banks continue instructing party in TIPS to send and central banks said to consider the to send and receive payments receive SCT Inst payments on behalf same. TIPS is also in the process of using their local CSM without the of its PSPs. By connecting banks with developing a mobile phone number to need for an additional technical TARGET2 accounts and CSMs, the ECB IBAN lookup service. connection to a pan-European plans for TIPS to act as a hub to enable infrastructure. local IP solutions to extend reach to Local IP solutions demand local anywhere in Europe. As many CSMs CSM services The EIPIF conforms to the are expected to join TIPS as instructing Regardless of the intentions by ECB key requirements set by the parties, TIPS is likely to handle mostly of driving competition and efficiency Eurosystem: cross-border volumes, with local CSMs in the European payments market, it acting as the conduit to and from the could well be argued that the pricing No cross-membership in local clearings. structure, public volume projections multiple ACHs is needed for and growing functionalities of TIPS participating banks to receive At this early stage of IP roll-out, it indicate wider scope expectations reciprocal access remains to be seen whether or within for the system as well as increased PSPs and CSMs have a choice what time scale SEPA reach can be competition for value-added services. of models to realise settlement, achieved. The cost recovery pricing with ASI6RT as the common model at the launch of the service may interface to TARGET2. prove unsustainable if volumes are not Interoperability can work with realised in the short to medium term. multiple settlement models (with Beyond delivering an efficient or without the CSM as fiduciary agent) to accommodate the legal 2. https://www.ecb.europa.eu/paym/target/tips/ differences in EU member states. html/index.en.html It can co-exist with other solutions, notably with TIPS, in order to have complete certainty of at least one pan-European solution in place.

A white paper by the European Automated Clearing House Association Leoben, GO BACK TO CONTENT PAGE PAGE 7 So, for those PSPs and (mostly smaller) banks which have yet to flesh out Figure 3a – Payment volumes processed by European CSMs 2017 their instant payment strategies, Billion payments/year

TIPS amounts to a highly attractive 80 proposition. However, they should 70 be aware that there is currently little competition in relation to connectivity 60 to TIPS, and that the price for 50 connectivity is high compared to the 40 actual cost of clearing and settlement. 30

In addition, it should be added that the 20 Eurosystem aims to fully recuperate 10 the costs of TIPS which means that the current pricing is only guaranteed for 0 the first two years. TOTAL EACHA members EBA STEPS2 other local CSMs All things considered, where EACHA members are looking to create full Source: ECB Statistical Data Warehouse reach, TIPS and RT1 may serve useful complementary purposes of helping to build reach across markets. Figure 3b – Payments Volumes Processed by selected European Nevertheless, operational CSMs considerations of cost, efficiency and 16,000 reach have so far turned industry 14,000 players in favour of local instant 12,000 payment solutions. Because most 10,000 payment activities are conducted on a 8,000 national level, it is easier and cheaper

MILLIONS 6,000 for many smaller banks and PSPs to 4,000 maintain one settlement account at their national central bank, rather 2,000 than maintaining multiple settlement 0

KIR (PL) SIA (IT) RPS (DE) SIBS (PT) CEC (BE) (IT) accounts across various systems. STET (FR) NETS (DK) DIAS (GR)Fina (HR) Iber Pay (ES) Bankkart (SI) Bankgirot (SE) Zrt. (HU) TransFonD (RO) The gravitation towards local IP Banca d’Italia (IT) Bankservice (BG) equensWorldline (NL) solutions made, in particular, by smaller Vocalink (BACS+FPS) (UK) SIX Interbank Clearing (CH) banks and PSPs is further reinforced GELDSSERVICE AUSTRIA (AT) by regulatory and legal considerations. Source: ECB Statistical Data Warehouse As local CSMs are regulated by their local central banks and, in effect, One is the fact that local CSMs are part of their clearing and settlement accountable to the local banking capable of providing full reach in all services, including fraud mitigation community and national stakeholders, local environments. Although cross- and liquidity projection tools, time smaller banks and PSPs tend to prefer border instant payments currently duration of end-to-end processing, being represented through them. In receive secondary treatment in R-message matching, duplication of addition, banking communities are very many communities and among checks, handling of local specificities much interested in IP-related overlay PSPs, volumes are expected to grow like different maximum amounts, and solutions tailored to match specific in the future, meaning that local managing of differences in ISO formats local preferences. Local CSMs are often environments will begin to require to address specific local market needs better positioned to accommodate a full reach. Through interoperability to name a few. such demands than a pan-European models like EIPIF, local CSMs are best service, as they are equipped with positioned to meet such requirements. in-depth knowledge of the local technicalities, customs and conditions. In addition to ensuring maximum They also routinely process the bulk reach in local environments, CSMs of European payments (ca. 84% of offer additional value features as European total, based on ECB statistics. See Figure 3a and 3b)

Considering these circumstances, local CSMs have two main competitive advantages.

A white paper by the European Automated Clearing House Association Rome, GO BACK TO CONTENT PAGE PAGE 8 The transformation of the global financial landscape

The global financial services landscape is currently experiencing tectonic countries (the Nordics in particular changes that are impacting existing financial services business models, but also the UK, the Netherlands and infrastructures, and value chains. Trends including an increasingly others), while the Chinese tech giants’ digitised society, technology advancements, evolving consumer payment solutions directly affect expectations, new collaborative partnerships, and new players entering merchants in Europe as the increasing the market are all adding to the impact, evidently redefining the way number of Chinese tourists prefer to payments are perceived, initiated, processed, cleared and settled. pay (and seek special offers) using their preferred solutions for payments when Like most other digital services, payments are becoming increasingly travelling. At the same time, European globalised and European banks, PSPs and – most importantly – European consumers are becoming increasingly consumers look for inspiration and adjust their expectations based on aware of the level of sophistication and what is available anywhere in the world. Currently (and likely to continue convenience of the global tech giants’ in the foreseeable future), the development of financial services in payment solutions, which further could set the standards and expectations for financial services globally, increase their expectations towards including in Europe. their local providers of payments and commerce solutions. The growth of digital, e-wallet and estimates that e-wallet payments e-commerce payments volumes amounted to 41.8 billion We have yet to see the big tech In many areas of the world, cash transactions in 2016, with China alone companies becoming banks in their is becoming increasingly obsolete accounting for 16.3 billion transactions. own right, but most of them are clearly as digital payments and e-wallet Around 71% of the total transactional looking to become the preferred payments gain in popularity. Although volume were conducted via payment interface for different types of financial the shift towards a cashless economy apps offered by big tech corporations services and transactions. As these is, of course, transpiring at different to their customers. players are global by nature, commerce tempos around the world, the trend becomes increasingly internationalised, seems imminent and is currently most At the same time, cross-border and the demand for fast, convenient evident in regions like Scandinavia (in payments are poised for strong and efficient cross-border payments Sweden, only 15% of payments involve growth. According to a 2018 report increases. cash³) and countries like China where by McKinsey and SWIFT, today there digital payments have become the are 0.7 annual cross-border payments go-to method for consumers, led by per capita on average globally – up 3. https://www.riksbank.se/globalassets/media/ near-ubiquitous payment applications from 0.5 in 20144. The growth of the rapporter/e-krona/2017/rapport_ekrona_upp- Alipay (Alipay is owned by Ant industry is driven largely by retail daterad_170920_eng.pdf 4. https://www.mckinsey.com/industries/financi- Financial, an affiliate of Alibaba Group remittances, global e-commerce al-services/our-insights/a-vision-for-the-future- Holding) and Tenpay (Tenpay is owned (which according to a report by Type of-cross-border-payments by Tencent Holdings Limited) and the and Industry is expected to grow at a 5. https://www.researchandmarkets.com/re- immense popularity of the QR code as CAGR of 13.1% over the forecast period search/cq4r28/global_ecommerce?w=12 a payments facilitator. 2018-20255), the growing role of SMEs in international business, and large According to Capgemini’s World corporates. Payment Report 2018, global digital payments volumes are expected to These global trends all affect the increase by an average of 12.7 percent European payments landscape. The through to 2021, with developing movement towards an increasingly markets, led by Asia, expected to grow cashless society is a global trend and at 21.6 percent compound annual very much driven by some European growth rate (CAGR). The same report

A white paper by the European Automated Clearing House Association London, GO GOBACK BACK TO CONTENTTO CONTENT PAGE PAGE PAGE 9 The exploration of new technology With global cross-border payments Figure 4 – The ‘opening up’ of customer transaction data projections indicating a buoyant market, the current cross-border ’Closed’ banking ’Open’ banking payments model is unlikely to Customers Customers Third party providers match future demands. Seeing that no ubiquitous global standard is Bank currently available, most cross-border payments rely on an intricate web of Customer, client, corresponding banks for clearing and bank, product data settlement, which makes them both inefficient and costly.

Customer, client, bank, product data To address these challenges of Bank Price comparison websites cross-border payments, banks and fintechs alike are looking at a Source: Deloitte Analysis number of different new technology alternatives to meet modern customer requirements related to speed, cost, Open banking, or the open API they can use to enhance products and efficiency. Such alternatives economy, is the product of a great and services and thus appeal to a new include various interoperability models, many societal and financial trends demanding generation of financial card scheme initiatives, SWIFT’s happening all at once, most of them consumers. global payments innovation (gpi), described elsewhere in this paper. The and solutions by fintech companies rapid developments in the area have, Many banks feared that Open like Ripple, BTL, and Wyre based on to a large extent, been supported by Banking would lead to increased distributed ledger technology (DLT). progressive regulatory approaches disintermediation, but more and more which have been leading the way and banks have gradually embraced the Regardless of which payment setting the pace. In Europe, PSD2 is a development and consider it a crucial technologies might prevail, all share prime example of a regulatory directive strategic choice which strengthens a common need for access to all that infuses infrastructure innovation rather than weakens their relevance relevant players and entities in the and competition into the industry. as players in the financial services payments ecosystem. Similar to more value chain. For banks to embrace traditional infrastructure development, With 90% of bankers in a 2017 and exploit the opportunities of Open companies looking to improve public Accenture Consulting survey expecting Banking, collaborating with trusted transportation rarely consider building open banking to boost organic partners like the European CSMs is completely new roads or tracks, but growth by up to 10%6, many banks an obvious choice. This collaboration rather optimise the use of the existing are considering open banking an comes with efficient infrastructure, ones. Innovative integration and opportunity to improve innovation pan-European reach and – perhaps alternative use of existing transaction and up their competitive game in an most importantly – with clearly defined infrastructure drives trends like Open increasingly saturated roles and responsibilities, meaning that Banking. where new entrants are coming in fast the banks do not fear that the CSMs, and big technology giants are looming in general, are looking to challenge the The advancement of Open in the periphery. banks’ relationship with their end- Banking and APIs customers. During the last couple of years, open By collaborating with third-party banking has been used as a collective fintechs, which have entered the term to describe the major shift in financial market and are specialised in which has occurred in creating tailored niche products and financial markets all over the world. In value-added services in a digitised short, it can be described as a trend economy, banks can hope to improve amongst banks to open up and share the customer experience and retain account data with Third-Party Providers the customer relationship. One of the (TPPs) through open APIs in an effort banks’ most valuable resources is to better accommodate an increasingly their wealth of customer data, which tech-savvy, digitally native and data- conscious customer base who demand tailored services in return for sharing 6. Accenture Open Banking Pulse Survey 2017 their data.

A white paper by the European Automated Clearing House Association Wrocław, GO GO BACK BACK TO TO CONTENT CONTENT PAGE PAGE PAGE 10 The evolution of consumer All in all, these complementary and compliance. Rather, they are expectations tendencies of evolving expectations looking to collect and analyse as much Driven by technological advancements and advancing technologies are putting data as possible about their customers as well as increased internet and pressure on all players in the financial so that they can further personalise the mobile phone availability, digital and services market, both technology customer experience and provide new e-wallet payments are poised for providers, banks, integrators and and improved (financial) services as growth in the coming years. Following regulators. They are all trying to keep part of a holistic customer engagement in the footsteps of this trend are up with development and expectations strategy. changing consumer expectations. without jeopardising trust, which Just like with every other aspect remains the most important aspect of However, it is reasonable to assume of today’s digital and real-time- financial services of any kind. a situation in which big technology oriented consumer economy, which is corporations would eventually want increasingly defined by big information The development of financial to join settlement systems to offer technology corporations, banking and service offerings by big technology consumers faster and cheaper payment services are now expected to corporations payments. In fact, such a scenario is be convenient, fast and frictionless. As Open banking and its adjacent already playing out in the UK where already mentioned, consumers across trends are also inviting technology fintech corporation TransferWise – as the globe no longer just look to their corporations like Google, Amazon, part of the Bank of England’s mission immediate neighbours when assessing Facebook, and Apple (GAFA) and to improve innovation and competition the quality of the financial services Baidu, Alibaba, and Tencent (BAT) to – has been the first non-bank payment that they are offered by their local restructure their business models service provider to gain access to the financial services suppliers, but instead to accommodate this new financial country’s Faster Payment scheme look across the globe to see what environment. through a new settlement account is technically possible. For example, policy directive8. this means that Chinese or American Today, many of these corporations innovations come into demand in already provide cashless and cardless Should this tendency expand to include Europe soon after launch. ‘one-click’ payment solutions for the big technology corporations as consumers online and at the point- well, they would surely look to build Unsurprisingly, these expectations of-sale (e.g. Apple Pay, Google Pay, reach to their entire customer base, resonate strongly amongst younger Amazon Pay, Alipay, WeChatPay). both regional and global. As such, the financial consumers where there is a Moreover, they are expanding clearing and settlement system would clear demand for new and improved their service portfolio to include an need to evolve from an interbank banking services which are mobile- increasing amount of services (like model to a model consisting of both friendly and mirror the criteria lending, , and bank and non-bank channels. In such related to the ‘Now economy’. These ) once considered exclusive a scenario, CSMs would be ideally demographics are also particularly to the traditional financial sector. positioned to meet the requirements receptive to banking services provided As such, Amazon now operates of those big technology corporations by non-traditional financial services services like Amazon Cash and regarding market reach and local companies7. Amazon Lending; Alibaba offers knowledge. fund management through Yu’e Bao Responding to these circumstances, (“Leftover Treasure”); and Tencent is the financial sector is currently invested in insurance services like 7. https://www.accenture.com/ t20170111T041601Z__w__/us-en/_acnmedia/ developing new payment solutions Weimin Insurance Agency, Zhong An Accenture/next-gen-3/DandM-Global-Re- which aim to fulfil the demands by Insurance, Aviva, and Hetai. search-Study/Accenture-Financial-Ser- consumers for increased convenience, vices-Global-Distribution-Marketing-Consu- speed and more seamless integration. These lifestyle-driven technology mer-Study.pdfla=en#zoom=50 8. https://www.finextra.com/newsarticle/31969/ Consequently, initiatives including corporations are not intruding on transferwise-becomes-first-non-bank-to-open- wearable devices and mobile biometric banking territory to steal customer settlement-account-with-bofe-rtgs payments have started to alter the accounts, which would only expose front-end experience. While Artificial them to heavy amounts of regulation Intelligence (AI) and Robotics Process Automation (RPA) are being applied more broadly to back-end processes to help reduce costs, increase transaction processing speed, and minimise risks and errors.

A white paper by the European Automated Clearing House Association Munich, GO BACK TO CONTENT PAGE PAGE 11 New players entering the European payments landscape

Radical changes to the European financial landscape, most notably the customers in the UK, the company is regulatory push administered by the PSD2 framework, have opened the still ahead of the competition when market to a variety of external disruptive forces. According to Accenture it comes to offering a wider range Research analysis, nearly 1400 new players have emerged on the of financial products and services. European financial services scene since 2005 and captured on average With services like Amazon Cash, between 6-7% of banking and payment revenues9. Amazon Lending, Amazon Gift cards, and Amazon Current Account, the This influx of new competition is gradually shifting the dynamics of corporation is doing exactly what the financial ecosystem, breaking up value chains, and threatening incumbents are worried about: established banking models. With new entrants, come new business reshaping core components of a and partnership opportunities for Europe’s CSMs as well as new bank to fit the specific needs of inspiration to alternative business models and solutions for the existing their customer base. In line with this payments industry. development, a recent survey by Bain & Company of 6,000 respondents Big cloud-based technology Amazon, Facebook and Apple are suggests that 65% of Amazon Prime corporations all devoting some or considerable subscribers would be prepared to open One of the most talked about resources to growing their financial a bank account with the e-commerce movements in modern finance at the services offerings. Through agreements corporation13. moment is the one being made by big with card schemes or individual cloud-based technology corporations banks at a national level, they all have In addition to GAFA, PayPal is also into retail banking. Driven by favourable payments solutions with pan-European deeply invested in the European regulatory circumstances as well as an reach available to their European financial services market, currently urgency to extract additional consumer consumers. Most recently, Google offering online payments that leverage data points that will help them Payment Lithuania UAB10 was granted the pan-European SEPA credit transfer expand and innovate their platform an electronic money institution license and SEPA direct debit schemes. environments, these corporations (e-money license) by the Lithuanian are seen as a great threat to the central bank, authorising it to issue 9.  https://www.accenture.com/ financial establishment and the larger and redeem electronic money, handle t20181010T181446Z__w__/us-en/_acnmedia/ ecosystem that underpins it. digital wallets, and provide payment PDF-87/Accenture-Banking-Rapid-Evoluti- and other financial services across on-Required.pdf 11 10. Google Payment Lithuania UAB is part of This is largely due to the fact that these the European Union . Facebook Google’s parent company, Alphabet Inc. cloud-based, lifestyle-driven platforms obtained its e-money license in Ireland 11. https://www.bloomberg.com/news/ feed themselves on an extensive in December 2016. In early 2017, it articles/2018-12-21/google-pay- ecosystem of services, with financial launched a new payment service in ment-expands-with-e-money-license-from-lit- huania services being just a small part of collaboration with TransferWise which 12. https://www.reuters.com/article/us-trans- their total turnover. As such, they allows users to send and receive ferwise-facebook-idUSKBN1600D0 are able to deliver far more flexible money internationally (US, UK, , 13. https://www.bain.com/insights/can-amazon- pricing structures than for instance , and Europe) through the take-customer-loyalty-to-the-bank banks, sometimes even running on a Facebook Messenger application12. cost-recovery basis or with deficits. Moreover, they are in the privileged Amazon Payments Europe holds position of being able to cherry-pick an e-money license in Luxembourg. the most profitable financial services Although most of its products and without the need to comply with the services are primarily available to same degree of regulation as the established financial services industry.

American GAFA and Chinese BAT At the moment, American-founded technology corporations Google,

A white paper by the European Automated Clearing House Association Copenhagen, GO GO BACK BACK TO TO CONTENT CONTENT PAGE PAGE PAGE 12 Ant Financial and Tencent expand into Europe Figure 5 – International tourism expenditure by country in 2017 In China, online payments are in China 257.7 a league of their own. As such, 135 digital payments and e/m-wallets are rapidly replacing cash as the Germany 89.1 preferred method of payment, to a United Kingdom 71.4 great extent leapfrogging payments France 41.4 with credit and debit cards14. In 2017, Canada the country had a total of 527 million 31.8 users as well as a Korea (ROK) 30.6 domestic mobile payments market Italy 27.7 which generated USD 15.4 trillion Australia 34.2 worth of payment transactions15. The payment applications Alipay and Russian Federation 31.1 Tenpay processed around 95% of those 0 50 100 150 200 250 300 transactions. Billion dollars Source: World Tourism Organization In light of the explosive popularity of mobile payment solutions in China, In 2018, Ant Financial announced that with Alipay at the time), the French the country’s regulators have recently it had signed deals with more than bank BNP Paribas, and more recently imposed tighter regulations on third- 100 European banks and 40 digital Italian payment company Digital Retex party payment service providers, wallets and expected merchants in 20 in collaboration with DOCOMO Digital22. including Alipay and Tenpay. In an effort European countries to accept Alipay 18 14. The rapid transition from cash to digital and to prevent cases of money laundering, transactions by March 2019 . As a part mobile payments in China can partly be fraud and other irregularities, the of the global rollout plan, Norwegian attributed to the low penetration of cards PSPs are now required to route Vipps and Finnish ePassi have recently and card payment point of sale terminals, the their transactions through a new adopted Alipay’s QR code standard, eagerness of tech-savvy Chinese consumers to adopt new technology and to entrust much national clearing house, Wanglian, enabling users to scan QR codes from of their online activity to large technology while transactional limits on Chinese the Alipay scheme and merchant corporations, as well as the popularity of the consumers’ scan-and-go QR code partners to accept QR code payments QR code as a mobile payment facilitator. payments (based on security measures from both domestic customers, 15. https://www.statista.com/statistics/278487/ number-of-mobile-payment-users-in- and user credentials) have been set neighbouring visitors as well as china/ ; https://www.wsj.com/articles/ at 500 yuan (USD 75), 1000 yuan (USD Chinese tourists19. Already holding an china-tech-giants-costly-wars-to-go-cash- 150), or 5000 yuan (USD 750). However, e-money license issued by the UK’s less-1528977600 these new limitations only apply to Financial Conduct Authority, Alipay was 16. Data provided by the World Tourism Organization. Chinese retailers and stores, which most recently granted an e-money 17. https://www.statista.com/topics/4805/chine - means that European stores can still license in Luxembourg, enabling it to se-tourism-in-europe/ offer their (Chinese) customers QR operate across borders in the event 18. https://qz.com/1234758/alipay-dang - code payments for big-ticket items. of a hard Brexit20. Furthermore, Ant les-chinese-spending-power-in-front-of-euro- pes-retailers/ Financial is currently in advanced 19.  https://www.finextra.com/newsarticle/33101/ Following in the footsteps of Chinese discussions to purchase the UK vipps-and-epassi-to-use-alipay-qr-code-for-in- international tourists – who spent currency transfer service WorldFirst for teroperability around USD 258 billion, or almost around USD 700 million21. 20.  https://www.finextra.com/newsarticle/33229/ alipay-awarded-e-money-licence-in-luxem- one fifth of the world’s international bourg tourist spending in 201716– Alipay Tencent began exploring payment 21. https://www.finextra.com/newsarticle/33149/ and Tenpay are currently expanding opportunities across Europe in 2015. ant-financial-in-talks-to-buy-worldfirst their acceptance outside of China by In early 2017, the corporation opened 22. http://www.retail-systems.com/rs/Global_ Payments_Alipay_UK_Partnership.php partnering with foreign banks, payment an office in London to initiate talks with service providers and businesses, major European luxury and fashion initially to serve Chinese tourist abroad brands to accept WeChat Pay at point but presumably with the intention of sale. Since then, Tencent had signed of transitioning to serve foreign agreements with a number of large customers as well. In 2017, around 5.6 European financial institutions, e.g. the million trips were made from China to German payment company Wirecard Western Europe, while the European (which had already made an agreement Commission and the European Travel Commission labelled 2018 the EU-China Tourism Year to promote destinations and improve on tourism experiences17.

A white paper by the European Automated Clearing House Association Valencia, GO GO BACK BACK TO TO CONTENT CONTENT PAGE PAGE PAGE 13 Baidu, the preferred search engine in China, is also expanding its platform to Figure 6 – Collaboration: a win-win situation include finance and banking services. Currently not available in Europe, Traditional Baidu’s Financial Services Group (Baidu Financial Services Firms Fintech Firms FSG) operates Baidu Wallet, the online credit service Baidu Umoney, and a Risk Management Agility wealth management platform. Infrastructure Innovation Regulations Cost Reduction Fintech companies and merchants Customer Trust Customer Experience While banks have been struggling with lower margins, inflexible legacy Economies Scale New products systems, and tightening risk and Brand Name Data Handling regulatory compliance requirements, Capital the financial services market has experienced an influx of new players from across industries. Source: Capgemini © February 2018 The Financial Brand

In Europe, a variety of financial technology (fintech) companies have fees as well as increase liquidity consumed, but they have largely failed emerged to fill gaps unattended by through fast or instant clearing and to disrupt the competitive landscape banks. Primarily, they are focused on settlement. Instant (push) payments in the extent initially anticipated, niche areas of the financial services also reduce fraud risks for e-commerce primarily due to challenges of scale value chain, both front-end and back- merchants as there will be no liability and customer adoption. Rather, a end, where factors like convenience, on the merchants’ side once the new cooperative understanding has speed and cost are easily improved. authorising bank has approved the emerged between the incumbent Those typically include areas like transaction applying strong customer financial institutions and the fintechs, lending, wealth management, cross- authentication – SCA – as required in where the financial institutions are border payments, and payment PSD2. As an AISP, merchants can offer leveraging the innovative qualities of acquisition. However, from the first bespoke customer profiling on much the fintechs, while the fintechs are wave of fintechs emerging on the more comprehensive data sets and leveraging the financial institutions’ European financial market, a second potentially develop and deliver better large customer bases, deep pockets wave of fintechs has appeared, which offers to the consumers. and extensive insight into the financial are more focused on the customer industry. experience and interfaces through The European regulatory reactions mobile devices. In the wake of a changing digital As a result, the sense of urgency landscape, advancing technologies and threat has shifted from local and But fintechs are not the only ones and progressive regulation, fintechs international fintech companies to seizing an opportunity. With PSD2 and were long expected to outperform the focus more on the threat from big the Access to Account requirements, incumbent financial institutions, based technology corporations entering the it has suddenly become possible for on the understanding that fintechs financial services sphere. In Europe, TPPs outside the traditional financial would be better suited in many ways to there is increased attention from services industry – e.g. telecom meet the requirements of modern-day regulators and stakeholders directed at operators, transport companies, public digital consumers. However, the reality this issue. In a speech by Yves Mersch, authorities, and merchants – to fill the has turned out quite differently. role as both PISP (Payment Initiation Service Provider) and AISP (Account According to findings of the 2017 World Information Service Provider). As such, Economic Forum report, fintechs have local and pan-European merchants, no doubt changed the way payments which are already engaged in strong are perceived, processed and and ongoing relationships with their customers, could easily benefit from introducing themselves as PISPs and AISPs to their customers as part of a commerce process. From the merchants’ perspective, becoming (or using) a PISP to facilitate account- based payments can potentially reduce or even remove merchant service charges and interchange

A white paper by the European Automated Clearing House Association Costesti, GO GO BACK BACK TO TO CONTENT CONTENT PAGE PAGE PAGE 14 Member of the Executive Board of the Already mastering the platform European Central Bank (ECB), given economy, the big technology at the European Institute of Financial corporations consider integration via Regulations (EIFR) in 2018, Mersch APIs to be second nature. Their main highlighted the fact that the current objective is to connect to the highest infrastructure is not yet properly number of integration points as it leveraged by European providers has the potential to strengthen the to offer pan-European services. position of their platform (following Instead, he argues, it is exploited by the logic that more integrations big technology corporations to offer and more services relying on these innovative, consumer-friendly solutions integrations will inevitably lead to a to their customers. more entrenched platform).

The era of the Platform Economy Supporting this tactic is the fact that In the last decade, the digital platform payments are one of the most frequent has transformed the way we live, work, types of digital interaction around, travel, and transact. The great success which is why the big technology of the digital platform and the platform corporations have been so eager to economy as a whole can be explained include it in their platform ecosystems. in part by the simple business model It is one of the most effective ways for it assumes as a connector between them to generate valuable customer elements of supply and demand. It data, which they can then use to can also be explained by its inherent enhance their existing services and traits, including its ability to leverage create new ones in line with customer economies of scale, the network effect, needs and desires. and data analytics to continuously improve its products and services. In addition, all successful digital platforms share a common trait of not building every component themselves, but rather to integrate with existing systems to leverage their functionality 23. https://www.accenture.com/fr-fr/_acnmedia/ and reach. PDF-2/Accenture-Platform-Economy-Techno- logy-Vision-2016-france.pdf With the digital economy expected to account for 25 percent of the world’s entire economy by 2020, digital platform business models are ideally positioned to benefit from this development. Already, the top 15 public platform corporations account for USD 2.6 trillion in market capitalisation globally23.

A white paper by the European Automated Clearing House Association Budapest, GO GO BACK BACK TO TO CONTENT CONTENT PAGE PAGE PAGE 15 Conclusion

Santorini,

Looking to address the challenges and possibilities of local CSMs in Europe, this paper has examined how corresponding global and regional financial developments – including Open Banking, evolving consumer expectations, the transition to instant payments, and regulatory requirements under PSD2 – have gradually disrupted the dynamics of the financial ecosystem in Europe and opened up the existing financial infrastructure to a large number of emerging players from across industries.

With local European banks and PSP - and global transaction systems as gravitating towards local IP solutions, well as the connection between global the paper argues that local CSMs are service providers and local payment ideally positioned to serve the specific networks and players. needs of such players through two main competitive advantages: Aiming to grow their integration points as part of a larger platform 1. The ability to provide full reach ambition, big cloud-based technology in local environments. With cross- corporations like Google, Amazon, border volumes expected to grow Facebook, and Apple (GAFA) and Baidu, in the future, local environments Alibaba, and Tencent (BAT) are all will eventually come to require a vigorously expanding their payments full reach. Through interoperability and financial services offerings globally models like EIPIF, local CSMs are and in Europe to capture the valuable ideally positioned to meet such customer data needed to further requirements. enhance their products and services.

2. The offering of additional value The platform economy has more than features as part of their clearing anything proven the value of ‘the long and settlement services, tail’ rather than the traditional benefit including fraud mitigation and of scale models with ‘one size fits all’. liquidity projection tools, duration of Consumers are increasingly demanding end-to-end processing, R-message tailored services, but with seamless matching, duplication of checks, interoperability and wide reach. The handling of local specificities like combination of the CSMs’ local reach different maximum amounts, and and expertise, common standards and managing of differences in ISO interfaces and the development and formats to address specific local data analytics capabilities of the big market needs. tech companies, seems to be a winning formula for the future of payments. The paper also argues that local CSMs are ideally positioned to facilitate the connection between local financial players - including local fintech startups

A white paper by the European Automated Clearing House Association GO BACK TO CONTENT PAGE PAGE 16 Glossary

ACH Automated Clearing House AISP Account Information Service Provider ASPSP Account Servicing Payment Service Provider CSM Clearing and Settlement Mechanism EBA European Banking Authority or European Banking Association EC European Commission ECB European Central Bank EIPIF EACHA Instant Payment Interoperability Framework PISP Payment Initiation Service Provider PSD + PSD2 Payment Service Directive + Second Payment Service Directive PSP Payment Service Provider RT1 Real-Time 1 SCT + SCT Inst SEPA Credit Transfer + SEPA Instant Credit Transfer SDD SEPA Direct Debit SEPA Single Euro Payment Area STEP Straight-Through Euro Payment TARGET2 Trans-European Automated Real-time Gross Settlement Express TIPS TARGET Instant TPP Third-Party Provider

A white paper by the European Automated Clearing House Association GO BACK TO CONTENT PAGE PAGE 17 About EACHA Its membership, currently comprising 27 institutions, gathers twice a year to discuss European developments in retail payments. The philosophy of EACHA is that healthy competition also means teamwork. This is why EACHA believes firmly in developing a common vision for the future, and favoring harmonious implementation of European policies and schemes, including interoperability based on open standards

EACHA aims to: be a forum enabling its members to share information advance the views of its members on issues of general interest resolve specific issues by, for instance, developing common guidelines for the clearing and settlement of SEPA payments

For more information, see www.eacha.org

About Norfico Facing Reality: Established in 2015, Norfico is the first fintech consulting house in the Nordics to combine advisory services across strategy, communication, and technology. This The Diversity of unique combination allows us to serve our clients broadly across the value chain and increase the value delivered. Norfico’s clients include banks, technology Instant Payments providers, government institutions, public authorities, and startups. in Europe Norfico provides advisory services throughout research, design, development and launch phases of new products and services. We analyse and assess the potential of fintech services and companies including payment and digitisation services and offer tactical assistance during launch, with a key focus on strategic and tactical communication. OPEN APIS: THE NEXT PAYMENTS For more information, see www.norfico.net INDUSTRY GAME CHANGER

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