From Local to Global: Regulation opportunities and stakes    Patrick  Bucquet  –  Co-­‐Founder  &  COO,  Chappuis  Halder  &  Cie  –  pbucquet@chappuishalder.com  

Executive Summary

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•  There is a general trend towards modernizing payments and banking legislations that are often outdated and not adapted to emerging digital payments and often based on similar concepts

•  This has become more and more important because new entrants have used lower or unclear regulations to take position on the market, providing services to customers which need to be protected

•  Regulators are somehow keen to favor financial inclusion, and therefore ease new entrants positioning. This could become a key driver as far as regulation is concerned

•  On niche services, banks could sometimes hardly compete with new comers (e.g. remittance in the US), but banks can have the benefits of a general competence given by their banking licenses for all banking services (e.g. loans, savings, investment instruments) that other players don’t necessarily have (e.g. payment providers). Banks can use this advantage to launch innovative services or create wholesale platforms for other market players

•  Even if successful product developments in some areas or countries (e.g. M-Shwari in Kenya and Tanzania, mix of mobile loans and mobile savings) could not meet existing regulatory conditions in other countries although being innovative and positive for financial inclusion, it is important to understand the regulatory context in one area (e.g. Africa or the EU), to understand what could happen in an other place

•  Competition policy and consumer protection are two fundamentally important policy aspects and their implementation will increase particularly in an ecosystem going through convergence including structural partnerships between market players, etc.

•  Regulation is not the only topic while being global: UX is key as well, as proved by the latest SEPA project in Europe

Technology has provided a new way to address customer needs, creating new distribution channels

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Devices

Social media

Platforms

The banking environment is changing, pushed by new entrants disrupting the market

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§  Differentiate web and mobile, leverage on smartphone capabilities

§  Integrate innovative services (NFC payment, PFM management, etc.)

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Next Gen Banking Services

Basic Digital Banking

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Improved Digital

Banking

§  Standard offering: copy-paste branch services on digital, either web and mobile

§  User experience as the key driver: useful, simple, intuitive, fun

§  Focusing on usage (context and needs)

Breaking points: •  Digital standards transforming the User

Experience (lead by other industries) •  New technology capabilities (mobile, social media,

NFC, etc.) arriving to mass deployment •  Not provided only by banks (payment, P2P lending,

etc.)

Traditional banking services

Banking is no longer a service but a User eXperience with more than just financial products

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+ ACCESS

+ COACHING

+ PEERS

+ CONTENT

Illustrations

A financial community to fund project / invest money

A social network, where users can follow best practices

A full range of services around payment, from pre-purchase to post-purchase

CUSTOMER

A new approach to help people to achieve their financial needs, with an understandable

approach, step-by-step

Payment has been the most impacted banking service, with a new value chain

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Transaction Acquirer

Acquirer Processing Network Issuer

Processing Issuer

§  Provide service to merchant (front office)

§  Collect transactions from Merchant

§  Manage security, authentication

§  POS provider

§  Route and transfer information

§  Manage Token (e.g. Visa Token Service)

§  Manage fraud

§  Process payment, clearing and accountability

§  Manage account (money or e-money)

§  Provide payment means to customer

§  Contract with Form Factors (Gemalto etc.)

Merchant Consumer

Traditional Model

Paypal 3 points

Square

Bitcoin

Paypal 4 points

Apple

M-PESA

Some new entrants are even completely intermediating the customer, without being regulated in the banking environment

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Transaction Acquirer

Acquirer Processor Network Issuer

Processor Issuer

Service Provider, NOT regulated neither by the bank regulation NOR PSP / e-money regulation

BUT They are managing the customer relationship

Deposit & Settlements Money Transfer Cash-in / Cash-out Distribution

Payment

E-Money

Regulated by local regulation (e-money), for instance to promote financial inclusion (e.g.

Kenya)

New entrants took benefit of unclear regulation to take position on the market, but now it is about to change

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§  New Key Regulatory and Industry Initiatives (KRIIs) have emerged across the world during the past year

§  In North America, most new KRIIs are focused on transparency and customer convenience

§  In Asia-Pac, regulators are more focused on standardization and on bringing new participants into the financial system

§  The KRII agenda in Europe remains dominated by the implementation of the Single European Payments Area (SEPA), the Banking reform, the adoption of the new EU Regulatory framework for Card, Internet and Mobile Payments and the Regulation on Interchange Fees and the new Payment Service Directive (PSD2)

… but now the overall payments industry is getting new governance and regulation

§  Paypal in Canada is still not regulated, because there is no e-money regulation in Canada)

§  Bitcoin has developped with a completely decentralized model, with no governance body at all

§  Emerging markets, in Africa, have seen lots of changes, with MNOs taking the lead on payment (M-PESA in Kenya) and and together with Commercial Bank of Africa on mix of mobile loans and savings (M-Shwari)

Less regulated environment attracted new comers…

Different regulations could apply depending on the positioning in the value chain (illustration with payment)

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Transaction Acquirer

Acquirer Processor Network Issuer

Processor Issuer

§  Must be approved by Network

Standards (PCI/DSS, etc.)

§  Must be approved by Network

Customer Protection

Competition Policy

Banking / PSP / E-money Regulation

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2

4

3

Merchant Consumer

* for instance in Canada, no regulation on e-money yet

Use of Agents 5

Now the banking industry is not only limited to banks

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Strongly Regulated

Not Regulated

E-Money

Client-Centric

Product-Centric

Bank

PSP

Experience Provider

Like-Bank

Bank

New-Bank

Payment for Merchant

US banks withdrawed from the remittance

market, leaving space for retailers and telcos

Global convergence is a challenge for regulators as LOCAL opportunities inspire GLOBAL initiatives

Mobile Financial Services in Africa drove a part of international inovation

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Regulation is already converging, lead by local examples

•  USA: Continuing class actions led by retailers against Visa and MasterCard

•  EU: ECJ decision in the MasterCard case, 9 September 2014

•  EU Regulation on Interchange Fees and new Payment Service Directive with important changes for the Payments industry

•  Canada: Overhaul and modernisation of the Canadian regulatory framework for payment industry before end of 2014

•  UK: Creation of the the new economic regulator for the payments industry in the UK (Payments Systems Regulator – PSR) to be operational in 2015

•  M-Pesa in Kenya for instance demonstrated that a non-bank can manage a banking service, either on its own (M-Peasa) or partnering with a bank (M-Shwari)

•  This has inspired Simple and Moven in the US

•  M-Pesa developments in Kenya including on savings and loans has led to new policy positions by the regulators after 7 years of more informal trials that have just been codified in a new National Payment Systems Regulation (September 2014)

•  Key learning: flexibility in Regulator’s position towards innovation for market access and development

Convergence is now a challenge for regulators as well as for service providers to develop a sustainable business

§  Scope of banking business Banking Act

Local Regulation

Global Regulation

§  Account opening, risk management, etc.

AML / KYC

§  Asset management, liquidity, etc. Prudential

§  Data protection, business plan continuity, etc.

Anti-Fraud / Risk Management

§  Information, Reclamation, etc.

Consumer Protection

§  Standards, Interchange fees,

Competition Policy

Business definition

Client onboarding

Limits and Thresholds

Security Management

Data Management

Interoperability

Hot Topics

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Ban

king

/ PS

P / e

mon

ey

Reg

ulat

ion

Stan

dard

s

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2

4

3

§  Certification, training, etc. Use of Agents Branchless

banking

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Regulation has always to find the right balance to foster business and financial inclusion

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§  Is acceptance of e-money funds (“cash-in”) “deposit-taking”? If so, does it constitute “banking business”?

§  What is the limit between Bank and PSP? Banking Act

§  Transactions conducted by e-money issuers and agents should be subject to AML/CFT regulations, but rules should be flexible enough to avoid excluding low-income customers AML / KYC

§  Ensure solvency of e-money issuers §  Ensure that funds received in exchange for e-money are protected from loss Prudential

§  Limits and threshold to be balanced: §  High enough to allow use of channel for a variety of services: transfers, salary/social payments,

bill payment, safe storage of small lump sums, loan disbursement/repayment, etc. §  Low enough to make the channel unattractive for money laundering/terrorist financing.

Anti-Fraud / Risk Management

§  Right balance between: §  Answer to customer needs, based on customer knowledge behavior §  Customer protection regarding privacy

Consumer Protection

§  Right balance between: §  Maximum freedom during early stages of market development (to encourage innovation) §  Ensuring that anti-competitive practices do not limit market development in the future

Competition Policy

§  Need to allow banks and/or e-money issuers (EMIs) to use agents to provide access to branchless services (cash-in/out, etc.)

§  Need to mitigate risks inherent in outsourcing such services Use of Agents

Some service providers are even not regulated by the same body, depending on the geography

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UK

•  Registration with the Financial Conduct Authority (FCA)

•  Registration to the Office of the Information Commissioner

US

•  Since 2008, P2P Lenders must be registered with the SEC and their services registered as securities

•  Zopla exited the US market in 2012

Banks have actually the chance to be already fully compliant with almost regulations, so they can launch any (new) service

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Bank Governance is already global

•  As organized, banks are used to cope with new and global regulatory requirements (much more than start-ups) •  AML/CFT rules •  Prudential rules (solvability ratios, etc.) •  Stress tests

•  Competition laws are generally speaking getting more similar (in particular also thanks to International Trade Agreements)

Banks can leapfrog technology to support innovative products

•  For instance, mobile technology could help to ease KYC requirement from the customer point of view and reduce costs

•  For banks, the issue to become global is more about User eXperience: building a global cornerstone with local specificities

•  Financial inclusion will push governance bodies to allow more competition, so banks have to move first

Banks can provide all services

•  Banking licenses allow all banking services (e.g. loans, savings, investment instruments)

•  Other players don’t necessarily have (e.g. payment providers)

Illustration of multi-geography regulation supporting global development: SEPA

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SEPA Core principles

•  Integration of the multitude of existing national euro credit transfer and euro direct debit schemes into a single set of European payment schemes ensuring a consistent customer experience when making or accepting payments with cards throughout the euro area

•  Promotion of the use of electronic payment instruments, while reducing the cost of wholesale cash distribution

•  1 August 2014: Existing national euro credit transfer and direct debit schemes will be replaced by SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) (6 months late). Further deadlines that must be met by market participants in euro area and non-euro area countries by 2016

Key benefits for banks

•  Cost reduction

•  New x-borders services for consumer and corporate markets

Next issues will be interoperability and data privacy

Interoperability / Standards

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Data Privacy

•  With interchange fees lowering down, new technology developing, increased regulatory and commercial pressures on banks, payment business model is changing from flows to data management (and lead creation)

•  New Payment Service Directive (PSD2) could impose new limitations to non-bank players and strengthens customer protection and security requirement for all

•  Even if Apple Pay commited not to use data from consumers, the issue is under question

•  EU: Proposed Regulation on Privacy and Data Protection currently under adoption by the EU Parliament and the Council of the EU

•  Market and dominance issues around agents networks exclusivity leading competition/regulatory authorities to act (e.g. Kenya, Zimbabwe, Tanzania, Uganda) and of course in the EU (ECJ decision on MasterCard, 11 September 2014)

•  Interoperability and proprietary standards concerns both emerging and developed countries, spurring Global and Regional policy-makers addressing issues (ITU, EU, ECB, ETSI) to actions

•  EU: European Central Brank proposed standard on security in mobile payments (to be adopted in 2015)