Technological transformation and payment

systemsLorenza Martínez Trigueros, June 2016

Summary

Innovation: existing versus disruptive networks

Innovation brings new participants and services...

…and changes the way we pay

Mexican experience: benefits of innovation

New challenges: regulation

2

1

2

3

4

5

Innovation: existing versus disruptive networks

Incremental innovations have had an important impact

• Network externalities on payment systems: take advantage of critical

mass

3

Innovation

Existing networks

Disruptive networks

Cards

Transfers and others

Virtual assets

Parallel networks of

existing services

10

01 10

01

1

New participants and services

4

Card

Networks

Checks and

Transfers

Befo

reC

urr

ently

New

2

t+1

Devices

Innovation changes participants and services

5

2

Technological

transformation

Reduces

fixed costs

New participants

or systems

New/improved

services and

products

– prices

– barriers to entry

Expands

frontiers

+ competition

+ participants

+ different participants

(non-banks)

+ users (financial

inclusion)

+ use by existent

customers

+ customer experience

(e.g., + trust in non-

banks, - steps to pay for

customers)

+ flexible products

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 06 07 08 09 10 11 12 13 2014

Card payments Direct debits Checks

Credit transfers E-money payments

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 06 07 08 09 10 11 12 13 2014

Card payments Direct debits Checks

Credit transfers E-money payments

The way we pay is changing

6

Distribution of transactions by method of payment

1/ CPMI countries: Australia, Belgium, Brazil, Canada, China,

France, Germany, Hong Kong, India, Italy, Japan, Korea, Mexico,

Netherlands, Russia, Saudi Arabia, Singapore, South Africa,

Sweden, Switzerland, Turkey, United Kingdom and United States.

Source: CPMI

3

2/ EMDEs: Brazil, China, India, Mexico, Russia, Saudi Arabia, South

Africa and Turkey.

Source: CPMI

CPMI countries1/ EMDEs2/

43% Card payments

25% Checks

61%

7%

37% Card payments

26% Checks

70%

3%

Mexican experience: cards systems

7

Reduction of entry barriers for aggregators has brought new benefits and

improvements.

446 447 482548

622682

765

867

41

61

131

400

500

600

700

800

900

1,000

1,100

2008 09 10 11 12 13 14 2015

POS, banks POS, aggregators

Source: Bank of Mexico

Number of POS terminals from banks and aggregators

Mexico, thousands

4

In 2015, one of the largest aggregators affiliated:

+ 8,000 taxi cabs (1% of total POS)

+ 6,500 small merchants

13%

Mexican experience: cards systems

8

Advances in regulation:

However, there are still areas of opportunity in terms of high discount rates and

low penetration.

Source: CPMI Source: Bank of Mexico

POS terminals per million inhabitants

CPMI countries, 2014

Discount rates on debit and credit cards

Percentage

4

2.38%

1.98%

1.80%

2.83%

2.36%2.23%

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

3.1%

2006 07 08 09 10 11 12 13 14 2015

Debit Credit

• Reduce entry barriers for ACHs

• Reduced tariffs

• New cards acquirers (business model: information based)

0

5

10

15

20

25

30

35

40

Au

str

alia

Tu

rke

y

Ita

ly

Un

ited

Kin

gd

om

Sin

ga

po

re

Can

ad

a

Bra

zil

Fra

nc

e

Sw

itzerl

an

d

Sw

ed

en

Neth

erl

an

ds

Belg

ium

Ch

ina

Germ

an

y

Ru

ss

ia

So

uth

Afr

ica

Mex

ico

Sau

di A

rab

ia

Ind

ia

2015

SPEI, the Mexican RTGS and fast payment system, is allowing for system-wide

interoperability and relevant new services such as mobile payments on a 24 / 7

schedule.

Electronic disbursement of federal payments has cut costs by 3.3% of total

annual expenditure.3/

9

1995

SPEUA began operations.

Min. transaction: $38K USD.

Fee: $0.18 USD.

1996

Min. transaction:

$8K USD

1997

Min transaction:

$4K USD2004

SPEI began operations

Min. transaction: $4K USD.

Fee: $0.08 USD.

2005

SPEUA shuts down

Min. transaction: removed

2006

Fee: $0.04 USD

2000: Banxico began

the design of SPEI

1990 2000 2010

2015

24/7 Operation

Mobile payments

2015

Fee = MC = $0

SPEUA SPEI SPEI 24/7

Min. transaction is the minimum amount per transfer on SPEUA/SPEI

Fee is the amount that Banxico charges to commercial banks per transaction on SPEUA/SPEI.

Mexican experience: transfers4

3/ Babatz (2013). “Sustained Effort, Saving Billions: Lessons from the Mexican Government’s Shift,” Better Than Cash Alliance.

Mexican experience: new developments

10

New technologies attack the reasons behind people not having a bank account

(restrictive requirements, high prices, distance to bank branches). Potential: users have

shown increased acceptance of developments such as mobile banking.

Some new products and services might convey lower transaction costs and faster

services. This is potentially beneficial for the remittances market, where users still face

relatively high prices.

4

200 USD 500 USD

Bank 4.68% 3.31%

MTO 5.15% 3.42%

Total 5.09% 3.40%

4q 2015 4.75% 3.15%

Remittance prices in USA-MEX corridor

As % of value sent, 2015

Source: Remittance Prices Worldwide, World Bank247,473

883,657

2,699,378

5,087,915

6,070,183

2011 2012 2013 2014 2015

Number of accounts with mobile banking

functionality

Source: National Banking and Securities Commission

Data corresponds to the last quarter of each year, except for 2015 (2nd quarter)

New challenges: regulation

11

Technological changes pose benefits (+ competition, quality and quantity of payment

alternatives)…

… albeit new risks (e.g., cybersecurity, data privacy, money laundering, financial

instability)

Necessity to create a regulatory framework. Considerations:

Focus on services rather than on particular entities or payment devices

Protect consumers

Give legal certainty to payment service providers

Enough flexibility as to encourage innovation

Degree of regulatory power over payment innovations relies on:

• Type of network innovations are installed on (existing or parallel networks)

• Degree of centralization

• Ability to move internationally

5