Bank of Lithuania
2015-10-09
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It is a great pleasure for me to open this conference on non-banks in the payment market. In 2007, the Federal Reserve Bank of Kansas City hosted a similarly titled conference. It was at the time when Europe was still debating the modalities of the upcoming Payment Services Directive (PSD) and Steve Jobs had just introduced the first iPhone to the world. Now we have the iPhone 6 and PSD2 and because of another innovation by Apple over that time — Apple Pay — the link between the two is relevant more than ever.

Let me briefly elaborate on two points: what non-banks are and why they are important for us.

In general, non-banks in the payment market mainly refer to financial institutions that facilitate payment transactions for end-users. Sometimes the definition goes even further and includes those entities that provide the technology for banks to facilitate those payments. Both groups are relevant, as they deal with different problems. Overall, these institutions do not engage in financial intermediation or credit risk taking, as opposed to shadow banks, which do.

We could start the list of non-banks with traditional post offices, which have been more or less active in the payment market for ages. Many have turned into banks or quasi-banks by now. Then we have electronic money institutions and payment institutions — they joined the club not long ago. Some of them tried and failed to mimic the banks’ payments model. A new wave of non-banks emerged in the age of smart phones. Equipped with the latest technology and out-of-the-box thinking they made a bold step to implement new business models in sectors where banks were slow to act. Nevertheless, many early initiatives continue to struggle for a number of reasons. Regulators, as well as the industry, need to understand what is still missing. Payment initiation services, as defined in the PSD2, are a good bet.

But the outlook is not all dark. Last year The Economist featured an article on the future of payments, titled “Payments: the end of a monopoly”. The title speaks for itself — banks are losing their grip on the payments market. But, according to McKinsey, the banking industry is making 34 per cent of global profits from payments. Therefore, the question raised by The Economist is: why does the banking industry appear to be taking the back seat and simply observing the new entrants coming in droves? Is this just a clever distraction?

I have been told once by a CEO of a major bank, half joking, that “once they grow, we will buy them”. There is some truth to this statement. A great number of non-bank payment initiatives ended up being developed either in collaboration with banks, via banks directly, or were outright owned by banks. Therefore, when we talk about the increased competition that non-banks can bring into the field of payments, we have to ask ourselves whether that is just wishful thinking or if these new institutions really do have a chance? I hope we will go deeper into this topic during the conference.