selected papers of the 4th international conference on e ... · • payments, the heart of...

BANKING ASSOCIATION FOR

CENTRAL AND EASTERN EUROPE

Mr. István Lengyel, Secretary General

INSTITUTE OF BANKING

EDUCATION OF THE NATIONAL

BANK OF SLOVAKIA

Mr. Peter Szovics, Director

Selected Papers of the 4th

International Conference on

E-money, Cards and Payments

7-8 June 2017, Bratislava

ORGANISERS

BANKING ASSOCIATION FOR CENTRAL AND EASTERN

EUROPE (BACEE)

INSTITUTE OF BANKING EDUCATION OF THE NATIONAL

BANK OF SLOVAKIA

PUBLISHED

INSTITUTE OF BANKING EDUCATION OF THE NATIONAL

BANK OF SLOVAKIA

PRE-PRESS PREPARATION

ANITA NAGY, HUNGARIAN BANKING ASSOCIATION

EDITORS

ISTVÁN LENGYEL, SECRETARY GENERAL, BACEE

PETER SZOVICS, DIRECTOR, INSTITUTE OF BANKING

EDUCATION OF THE NATIONAL BANK OF SLOVAKIA

ISBN

978-80-972810-0-7

Conference Book of 4th International Conference on E-money,

Cards and Payments

2017

Table of Contents Challenges in payment environment in 2017 .................................................................. 1

Directive 2015/2366 on payment service in the internal market (PSD2) .................. 1

RTS on strong customer authentication and common and secure

communication .................................................................................................................... 3

Instant payments ................................................................................................................. 5

PSD2 and RTS – a game changer ..................................................................................... 8

Changing Digital Payments Ecosystem ......................................................................... 10

Increasing security & trust within the global financial community ........................... 13

New Regulations Impact on Traditional Payments Landscape ................................. 16

Introduction ....................................................................................................................... 16

Regulative changes in Europe ......................................................................................... 16

Traditional model of electronic payments market ....................................................... 17

New model of electronic payments market .................................................................. 18

Processor’s impact ............................................................................................................. 18

Bank’s impact ..................................................................................................................... 19

Scheme’s impact ................................................................................................................ 20

Summary ............................................................................................................................. 20

The Advantages of Partnerships in Merchant Acquiring............................................ 22

The acquiring landscape is constantly evolving ............................................................ 22

Partnerships are often a good solution for banks ........................................................ 22

Formation of REVO ........................................................................................................ 23

Key achievements .............................................................................................................. 23

Lessons learned .................................................................................................................. 23

About EVO ........................................................................................................................ 24

The effects of instant payment on the economy .......................................................... 25

The history behind instant payments ............................................................................. 25

The benefits of accelerated payments for companies ................................................. 30

New risks – new challenges ............................................................................................. 34

Summary ............................................................................................................................. 41

Literature: ............................................................................................................................ 43

Solving the challenges with mobile NFC Payments – Part 1 ..................................... 45

The history of contactless payments .............................................................................. 45

Solving The Challenges of Mobile NFC payments...................................................... 46

Solving the challenges with mobile NFC Payments – Part 2 ..................................... 47

Enter wearables.................................................................................................................. 47

Especially two major challenges can be met with wearable payments: iOS

support and speed at checkout. ....................................................................................... 47

What does this mean? ....................................................................................................... 48

Hype or future? .................................................................................................................. 48

Recension of Financial literacy ........................................................................................ 50

Contactless Card and Mobile Payment Adoption in Hungary ................................... 53

Deposit Insurance and Mobile Payments: Disparities on Regulatory

Approaches ......................................................................................................................... 58

Abstract ............................................................................................................................... 58

The Concept of Mobile Money, Deposit Insurance and their Function ................. 59

Oversights of Mobile Payment and Deposit Insurance .............................................. 61

Protection of Customer Funds: Main Types of Deposit Insurance

Approaches for Mobile Payments .................................................................................. 65

Cross-Country Examples on Deposit Insurance and its Regulatory

Approaches ......................................................................................................................... 66

Conclusion and Frontier Issues ...................................................................................... 69

References........................................................................................................................... 71

Curricula Vitae of the Presenters at the Conference ................................................... 77

PROGRAMME

SILVER SPONSOR

EVENT AND COCTAIL SPONSOR

BRONZE SPONSORS

CO-OPERATION PARTNERS

DAY 1: 7 JUNE 2017

13:30-14:00 REGISTRATION

OPENING SESSION

14:00-14:10

14:10-14:35

Welcome Speech Mr. Peter Szovics, Director, Institute of Banking Education NBS, n.o. Dr. Sándor Patyi, Chairman of the Banking Association for Central and Eastern Europe (BACEE); Deputy CEO, OTP Banka Slovensko Keynote Speech PSD 2 RTS - Authentication and security Mr. Ugo Bechis, e-Payment & SEPA Advisor, UB Adv

• EBA RTS highlights • How they will affect the value chain roles • The Gateways’ competition

SESSION 1: 14:35-15:55

NEW AND EMERGING REGULATION, REFORM AND RESILIANCE

The most important changes in payment environment in 2017 from central bank perspective Mr. Rudolf Pataki, Head of Section, National Bank of Slovakia

• Directive 2015/2366 on payment services in the internal market

• Current status of transposition, main

changes • EBA standards • Instant payments

PSD2 Overview Dr. Qazi Jalisi, Senior Legal Advisor, Electronic Money Association

• Payment initiation services • Account information services • Interaction with the GDPR • Sensitive payment information

Thriving in an Open Banking World Mr. Marten Nelson, Co-Founder & VP of Marketing, Token

• Threats and opportunities of open banking • How PSD2 serves as a catalyst • How banks across the EU are responding

API Economy for Financial Institutions Mr. Jan Sehnal, Business Solution

Architect, IBM What it is good for? • How to start • How to monetize • Use Cases

15:55-16:25 COFFEE BREAK

SESSION 2: 16:25-17:50

INSTANT PAYMENTS – THE NEW WINNING PAYMENT PRODUCT Instant Payments in Central & Eastern Europe and PSD2; Current Status and How to Generate Revenue Mr. Domenico Scaffidi, Principal Solution Consultant Immediate Payments, ACI Worldwide

• What is IP and where is the revenue • Status within the whole of Europe and the

ECB • EBA vs EACHA vs TIPS • How PSD2 can help drive innovation and

revenue

Instant Payments – the Hungarian Solution Mr. Kristóf Takács, Senior economic analyst, The Central Bank of Hungary

• Reasons for creating an instant payment

service and potential benefits • The rules of the Hungarian instant payment

service – additions to the European

approach • Additional services and possible use cases

Economic Effects of instant Payments Dr. Levente Kovács, Secretary General, Hungarian Banking Association

• The international development of

clearing/settlement • General benefits of CCP • The evolution of current account

management • Redefining risks

Trends for Instant Payments in Central & Eastern Europe Dr. Jozsef Czimer, Advisor to the CEO, CAPSYS

• Diversity of the region • Options for euro countries -domestic or Pan-

European? Special tasks for non-euro

countries Own system vs. managed service?

COCKTAIL RECEPTION

18:00-19:00

Offered by ACI Universal Payments

Welcome Speech by Mr Domenico Scaffidi, Principal Solution Consultant, Immediate Payments, ACI Worldwide

DAY 2: 8 June 2017

8:30-9:00 REGISTRATION

SESSION 3: 9:00-10:05

CARDS – EU, CEE AND CIS IN SPOTLIGHT Fast Forward to Innovative Payments and Fintech in Eastern Europe

Mr. Luděk Slouka, Product Manager CEE, Mastercard

• Payments, the heart of commerce, in Eastern

Europe • Role of Eastern Europe in fintech innovation • Future of payments and impact on business

models

Key trends in Payments Mr. Marcel Gajdos, Country Manager, Czech Republic and Slovakia, Visa Europe

• Mobile payments on rise • More connected devices • Visa Develop Platform

New regulations impact on traditional payment landscape Mr. Adam Tencza, Central and Eastern Europe Division Manager, SIBS International

• New business models on the payments

market • A competition landscape change • Reshaping of functions • Business impact

SESSION 4: 10:05-10:45

ROUNDTABLE DISCUSSION:

Payments Evolution/Revolution – payment technology for banks and alternative service providers of today and tomorrow - focus on consumer payment experience Moderator: Mr. Peter Szovics, Director, Institute of Banking Education NBS, n.o.

Participants: Mr. Martin Peter, Head of Banking Department, Ministry of Finance of the Slovak Republic Dr. Qazi Jalisi, Senior Legal Advisor, Electronic Money Association Mr. Peter Kvarda, Director of Back Office & Payment Systems Department, OTP Banka Slovensko, a.s. Mr. Julian Tencer, Department Head, Payments, VÚB, a.s. Ms. Anna Maj, FinTech Expert & Mentor, CEO, Payments Visionary

10:45-11:10 SWIFT’S PAYMENT CONTROL Correspondent Banking: Tackling Cyber-Enabled Fraud Ms. Gizem Tansu, Manager Financial Crime Compliance Initiatives, EMEA, SWIFT

• Fraud threats and modus operandi • Introduction to the SWIFT Customer Security

Programme • Mitigating fraud risk through business

hygiene and best practice • Payment fraud prevention and detection • How you can help yourself and your

community

11:10-11:40 COFFEE BREAK

SESSION 5: 11:40-13:05

CARDS, PAYMENTS, FRAUD AND CYBERSECURITY – WHERE ARE WE? Innovations in Payments Mr. Maris Cakste, Director of Sales, MeaWallet

• History • Payment convergence • Customer needs • Case study

Digitalization in modern world of payments cards Mr. Luděk Slouka, Product Manager CEE, Mastercard

• What are the challenges and what is really

behind the word “tokenization”?

• What is the technology, benefits and bottle

necks? • Is this the future for payment cards?

The Advantages of Partnerships in Merchant Acquiring Mr. Edward Strycharczuk, General Manager, EVO Payments International

• Rationale for Partnerships • Keys to Successful Partnerships • Case Study: EVO’s alliances with RBPL and

RBCZ

Monero - Introduction to truly anonymous cryptocurrency Mr. Pavol Luptak, CEO, Nethemba s.r.o.

• Anonymous cryptocurrencies - real digital

privacy • Crypto technologies - significant change

ahead

13:05-14:05 LUNCH

SESSION 6: 14:05-15:25

FUTURE OF PAYMENT SYSTEMS. FINANCIAL INSTITUTIONS AND THE ALTERNATIVE PAYMENT SYSTEMS – HOW TO BE PREPARED?

Changing Digital Payments Ecosystem Ms. Anna Maj, FinTech Expert & Mentor, CEO, Payments Visionary

• Challengers vs Incumbents: What are the

new roles in the value chain? • Customer Experience: How new payment

models transform customer behavior?

(payment platforms, mobile payments, one-click, digital wallets)

• Disruptive Innovation: AI and chatbots in

payments

Case Study by OTP eBIZ: Digital Finance Manager for SMEs Mr. Tamas Josvai, Managing Director, OTP eBIZ Ltd. Blockchain Technology: Basics, Insights and Opportunities Mr. Nikola Korbar, CEO,

DigitalMoneyPulse What is Blockchain and how it works? • Blockchain features and characteristics • Practical application of Blockchain for

banking solutions

The innovative answer to PSD2 - XS2A enabler specially for Banks Mr. Johannes Humbert, Partnerships - Banks & Financial Institutions, figo

15:25 End of the Conference

Mr Rudolf Pataki: Challenges in payment environment 2017

1 V6OF22092017

CHALLENGES IN PAYMENT ENVIRONMENT IN 2017

Mr. Rudolf Pataki

Head of Section

National Bank of Slovakia

The article provides an overview of the main elements of the EU Directive 2015/2366 on payment services in the internal market, broadly known as PSD 2. The author offers

a summary of PSD 2’s goals, the introduction timeline and expected consequences. The study also explains how PSD 2 is expected to open the EU payment markets to new

players and how the regulator intends to defend customers from unexperienced or low quality payment services providers.

In the closing part, the functioning of the TIPS service, designed by ECB for instant payments, is explained.

Directive 2015/2366 on payment service in the internal market (PSD2)

Since the adoption of the PSD, there has been significant technical

innovation in the retail market with rapid growth in the number of

electronic and mobile payments and emergence of new types of payment

services (payment initiation services in the field of e-commerce). This is

also associated with an increased security risk related to electronic payments

and new transparency and information requirements for payment service

providers as well as requirements for neutral definition of payment

transaction to ensure that merchants receive the same protection, regardless

of the payment instrument used, where the activity is the same as the

acquiring of card transaction.

The Directive should aim to ensure continuity in the market, enabling

existing and new service providers regardless of the business model applied

by them, to offer their services with a clear and harmonized regulatory

framework.


2

Timeline:

The Directive defines new types of payment services and payment service

providers: Payment initiation service providers and Account

information service providers.

Payment initiation service means a service to initiation a payment order at

the request of the payment service user with respect to a payment account

held at another payment service provider.

Account information service means an online service to provide

consolidated information on one or more payment accounts held by the

payment service user with another payment service provider or with more

than one payment service provider.


3

RTS on strong customer authentication and common and secure

communication

This standard was developed by EBA according to Art.96 and 97 of PSD2

with the aim to ensure the establishment of adequate security measures for

electronic payments. The standard is in the European Commission´s

approval process.

Strong customer authentication means an authentication based on the

use of two or more elements categorised as:

- knowledge (something that only user knows, such as PIN or password),

- possession (something only the user possesses, such as smart device),

- inherence (something the user is or has, such as biometric characteristics)

These elements must be independent from each other.

Strong customer authentication applies when the payer:

- accessed its payment account online

- initiates an electronic payment transaction

- carries out any action through a remote channel which may imply a risk of

payment fraud or other abuses

The requirements in RTS are technologically neutral in order to foster

innovation.


4

In order to dynamically link the transaction, the following requirements

must be met:

- the payer is made aware of the amount and of the payee

- the authentication code shall be specific to the amount of the payment

transaction and the payee agreed to by the payer when initiating the

transaction

- any change of the amount or the payee shall result in the invalidation of the

authentication code

Payment service providers are exempted from application of strong client

authentication in these cases:

- payment service user accesses payment account information

- contactless payments at point of sale (individual amount of the contactless

electronic transaction does not exceed EUR 50 or the cumulative amount

does not exceed EUR 150 or 5 consecutive individual payment transaction)

- transport and parking fares

- trusted beneficiaries and recurring transaction (payment transaction with the

same amount and the same payee)

- payment to self (the payer and the payee are the same natural or legal person

and both payment accounts are held by the same account servicing payment

service provider)

- low-value transaction (the amount of the remote electronic payment

transaction does not exceed EUR 30 or the cumulative amount does not

exceed EUR 100 or 5 consecutive individual remote electronic payment

transaction)

- transaction with low level of risk according to the transaction monitoring

mechanism


5

Instant payments

Instant payments are electronic retail payment solutions available 24/7/365

and resulting in the immediate or close-to-immediate interbank clearing of

the transaction and crediting of the payee´s account with confirmation to

the payer (within seconds of payment initiation).

This type of payment instrument is already implemented in Australia, Japan,

Brazil, Canada, Chile, India, Korea, Mexico, Singapore, South Africa,

Denmark, Poland, Sweden or UK.

Key feature of instant payments:

- payment in EUR

- up to 15 000 EUR

- a target maximum execution time of 10 seconds

- payments are made for the full Original Amount

- 24/7/365

- Go live 21 November 2017

Work flow of an SCT Inst:


6

TIPS is service for settlement of instant payments, designed by ECB. It

shall support Participants to be compliant with SEPA Instant Credit

Transfer scheme which the European Payment Council has developed for

instant payments in Euro.

TIPS is intended as a harmonized and standardized pan-European service

with common functionality across different countries and jurisdictions.

Actors in TIPS:

- Participant – entities that hold accounts in TIPS. Participants manage their

own liquidity and are responsible for all payments sent or received on their

account.

- Reachable Party – entities that do not maintain TIPS accounts. However,

they have contractual agreements with a Participant to use the Participant´s

TIPS account for the settlement of instant payments.

- Instructing Party – any entity that has contractual agreement with one or

more Participant to instruct on behalf of the Participant. Both, Participants

and Reachable Parties can act as Instructing Parties themselves.

- Central Banks – central banks provides cash account services to

Participants for settlement of instant payments in Central Bank money.

Additionally a Central Bank can act as a Participant in TIPS.

General principles:

- TIPS shall serve as a technical solution for providing instant payments

settlement serviced to Participants without the provision of clearing services

- The primary objective is to provide settlement services in euro, however the

service shall be technically capable of settling currencies other than euro.

- TIPS shall settle exclusively in Central Bank money.

- The settlement shall be final and irrevocable.

- TIPS shall allow operations on a 24/7/365 basis.

- TIPS shall be a lean, harmonised and standardised pan-European service

with common functionality across different countries and jurisdictions.

- TIPS shall follow the participation criteria of TARGET2.

- Participation in TIPS shall not be made mandatory by the Eurosystem.

- All eligible Participants shall have non-discriminatory access condition to

TIPS.


7

- TIPS shall be based on the ISO 20022 message standard.

- The Eurosystem shall take on the responsibility of developing and operating

TIPS by assuming full ownership.

- TIPS shall operate on full cost-recovery and not-for-profit basis.

Mr Ugo Bechis: PSD2 and RTS – A game changer

8

PSD2 AND RTS – A GAME CHANGER

Mr Ugo Bechis

e-Payment & SEPA Advisor

UB Adv

The PSD2 Directive adopted by the European Parliament and the Council of the EU sets the basic outline of the new payments ecosystem within the EU.

The Directive is to be completed by detailed technical requirements (RTS – Regulatory Technical Standards), issued by the EBA Authority, regulating the security requirements between TPPs (Third Party Providers) and the Banks, as well as the information, limited

to the payments, which can be given to them. The missing element, as the author points out, is a set of standards for PSD2 APIs,

which is expected for publication before RTS enters into force.

The payments development has to be seen in the wider perspective of an

overall ecosystem where payment, e-Commerce and the big web players are

active and competing with each other.

A recent e-Commerce feature to consider is also the convergence of the in-

App and the in-Store, where the transaction can be originated in a physical

environment and finalized on-line or the other way around; this practice

gives a critical role to the subject or subjects which are able to consolidate all

the information relevant to make the overall transaction quick and easy.

The wallet as a point of entry to conceivably access all these steps becomes

a critical service.

The banks and the card providers would be a priority choice but they

seldom are able to meet the usability ‘golden rule’ which is ‘sixty seconds, six

clicks’ to do all the steps from the end of the pure commerce transaction to

the payment phase, ie. information on and choice of the payment options

available, access to the chosen instrument, decision whether to redeem an

incentive programme, payment initiation and confirmation.

On the average this key metric, the ‘check-out time’, takes more than two

minutes leading to an abandon rate (loss of sales) of around 40%; the

subjects that are able to satisfy such a critical usability metric will be

Mr Ugo Bechis: PSD2 and RTS – A game changer

9

preferred as a point of access, so being the preferred points of entry who da

facto have the ownership of the customer, regardless who they are.

The PSD2 has introduced new key provisions for the subjects operating on

the last mile, the point of entry, so to have some rules of the game common

to all the subjects active at this step.

The EBA Authority has published its final draft of the RTS (Regulatory

Technical Standards) which qualify the security requirements between these

TPP (Third Party Providers) and the Banks, as well as the information,

limited to the payment, which can be given to them.

At implementation level the EBA also calls for the banks to publish un their

web sites the technical documentation so to allow to these TPP to plug-into

the banks, to retrieve information and to execute the payment.

An bank IT structure which defines such interfaces with Open APIs will be

an ideal approach.

Open APIs though require a comprehensive and well managed process

including: adeguate functionalities, security features, a structured and

monitored interface with the TP developers, testing of the TP interfaces

/APPs and their secure downloading to the customers.

There are not yet standards for PSD2 APIs; some organizations in Europe

are though working on them.

The final version of the RTS, approved by the EU Council and by the EU

Commission should be released next Fall, coming into force eighteen

months later, e.g. Q.2 2019. A sensitive aspect will be how strict the security

provisions will be; the trade-off between security and usability is not easy to

solve since it depends from rules and technical requirements (i.e. PSD2 and

RTS) as well as on the customers’ behavior.

The point to be seen is to what extent players will prefer to ‘handle the

money and act within the EU jurisdiction and the PSD2/RTS rules or the

preference to play a non-money role as some of them already do out-of the

EU jurisdiction.

Ms Anna Maj: Changing Digital Payments Ecosystem

10

CHANGING DIGITAL PAYMENTS ECOSYSTEM

Ms Anna Maj

FinTech Expert, Advisor & Mentor

Country Manager, PayTech Consulting

The author analyses how the payments infrastructure in the EU and in particular, in the CEE Region, has been changing and what can be expected with the introduction of new

technologies (e.g. blockchain) and new regulations (PSD2). As the ongoing process threats the banks’ franchise as main payment service providers, in order to defend their business, traditional payment agents should take advantage of the innovations introduced by their fintech challengers. They may either build partnerships with their fintech competitors or invest in new ventures just as fintechs are doing. The example of Polish banks proves, notes the author, that such defense strategies may be

successful and serve as example for other EU banks.

Payments have traditionally been the domain of banks. Today we can

observe how dynamically this paradigm is being transformed, especially due

to the participation of new players in the payment industry who develop

new products and new technologies. The models and the roles known so far

in the payment ecosystem are also being changed.

On one hand there is a shift in the scope of liabilities of the stakeholders as

well as their roles in the payment value chain, namely: banks, acquirers,

payment processors, money operators, payment schemes, resulting from the

introduction of new technologies (e.g. blockchain) or new regulations

(PSD2). There is either no payment intermediary inolved, so the parties are

able to make transactions directly between each other, like in the

blockchain-based payment solutions, or there is a room created for new

entrants, such as TPP (third-party providers) including non-bank entities

who gain access to a bank account information and payments, just to

mention PSD2-related models. According to PwC, payment companies have

carefully monitored the rise of FinTech and the implications to their

industry, and are investing in technologies, (blockchain technology being a

major investment), with 77% planning to adopt it as part of an in

production system or process by 2020 (PwC Global FinTech Report;

„Redrawing the lines: Fintech’s growing influence on Financial Services”,

March 2017).


11

On the other hand, all those technologically and regulatory driven changes

impact not only the payment ecosystem and its internal players, but

obviously result with the significant transformation of the customer

behaviour in payment services. Taking into account five billion unique

mobile users wordwide (according to the social media agency We are social)

and 2.7 billion active mobile users of social media (June 2017), as well as a

very dynamic growth of the latter ones (30% year-to-year), payments and

financial services in generally become mobile and social. Payments are not

standalone any more. They are being integrated with other value added

services, such as PFM (personal finance management) or consumer finance

and instant crediting. This again creates a new ecosystem of payment-related

solutions aimed towards seamless and eventually invisible payments in the

future.

Till 2020 payment solutions such as money remittances and funds transfers

will be changing the most significantly among other financial services, along

with consumer banking. (PwC Report: „Financial Sector – More and More

FinTech” Dec, 2016). Polish fintech startups are also very much focused on

digital payments, as „Fintech in Poland. Threaths and Opportunities”

Report conducted by Fintech Poland Foundation (Dec 2016) indicates. In

line with global trends new players come up with payment-related solutions,

such as payment platforms, payment aggregators, cross-border payments,

digital wallets. Although consumer payment services (e.g. P2P money

transfers) are predominant, the growing interest of some fintechs in the B2B

segment may be observed, particularly in SMEs, which have been

underserved by banks so far.

The value of the investments in FinTech amounted for EUR 2.2 billion in

CEE region (Deloitte „CEE FinTech Report”, Dec, 2016) with Poland

being on top with EUR 860 million. Top FinTech companies at Warsaw

Hub listed by Deloitte in the other report: „A Tale of 44 cities” (April 2017),

such as among others: PayU, BlueMedia, BLIK, Cinkciarz.pl are all dealing

with digital payments: e-commerce, instant payments, mobile payments, FX

payments, respectively. BLIK (PSP – Polish Payment Standard) founded by

six major Polish banks is an example of the successful mobile payment

scheme built from scratch by the banking sector two years ago (2015). BLIK

mobile banking application is a popular e-commerce payment method,


12

followed by ATM cash withdrawals, POS payments as well as P2P money

transfers.

E-wallet is another example of the digital payment method, which is

growing on its popularity. Besides international wallets like MasterPass,

PayPal or Visa Checkout (the latter was launched in April 2017 in Poland as

the first country in Europe), Poland is a place for homegrown solutions,

such as G2A Wallet. G2A is a gaming platform with its own online payment

gateway that aggregates over 200 different local and global payment

methods – both card and bank account based – as well as digital wallets.

While talking about changes in the customer journey all over the payments

world we can’t ignore AI-based solutions, such as chatbots who are virtual

assistants communicating with users (both individual and business) via

different voice and text channels, messengers being one of the most popular

(e.g. Facebook Messenger, Slack, WeChat). Payments are a part of

conversational finance that is being intesively explored by the companies

providing chatbot solutions, particularly in cross-border transactions, e.g.

TransferWise, Azimo.

To better meet the needs of clients – both consumers and businesses –

incumbents should take advantage of the innovation that is being brought

to the table by the FinTech industry. Based on already-proven cooperation

models worldwide, banks in CEE countries can either build partnerships

with challengers (ING, BGŻ BNP Paribas) or invest in new ventures to

provide faster and less expensive services just as fintechs are doing – mBank

has recently set up its own mAkcelerator fund (Feb 2017) and PKO BP, the

largest Polish bank, at the beginning of 2017 acquired ZenCard – a startup

providing digital loyalty based on card payments. That is why 82% of

incumbents expect to increase FinTech partnerships in next three to five

years according to PwC (PwC Global FinTech Report). Payments are the

business of scale, therefore innovators can also benefit from banks’ assets,

having access to their customer base.

Ms Gizem Tansu: New Regulations Increasing Security & Trust within the Global Financial Community

13

INCREASING SECURITY & TRUST WITHIN THE GLOBAL FINANCIAL

COMMUNITY

Ms. Gizem Tansu

Manager Financial Crime Compliance Initiatives, EMEA

SWIFT

Cybercrime is a major concern for banks around the world. Criminals are increasingly targeting not only clients but also banks and the payments infrastructure – a new strategy

that requires adequate defensive measures from payment service providers. Ready to the new challenges, SWIFT, a central player of the global payments

infrastructure, launched its Customer Security Programme in 2016. An important part of his project is the newly launched Payment Controls Service, which, together with other

solutions offered by SWIFT (RMA Plus, Sanctions Screening, KYC Registry and others) should substantially increase the security level of global payments.

Gizem Tansu from SWIFT’s Financial Crime Unit spoke about the

increasing threat of fraud and cybercrime and how SWIFT is supporting the

financial community to strengthen their defences against cyber criminals.

Cybercrime is a major concern for banks around the world. Criminals are

becoming more and more sophisticated. While in the past they tended to

focus on banks’ customers through card and account details, they are

increasingly targeting the payments infrastructure.

The shift from targeting banks’ customers to targeting banks themselves

represents a significant change and a threat to the correspondent and the

wider banking community. However, it is important to note that while

compromises have taken place in banks’ local environments, there is no

evidence that the SWIFT network and core messaging services have been

compromised in any of the attacks.

As cyberattacks become more prevalent, the industry and regulators are

taking steps to understand, address and mitigate the risk. In May 2016,

SWIFT launched its Customer Security Programme to help its customers to

reinforce the security of SWIFT-related infrastructure and provide a

collaborative framework for its 11,000+ member institutions to manage

evolving cyber threats. The Programme focuses on the need for institutions

Ms Gizem Tansu: Increasing Security & Trust within the Global Financial Community

14

to secure and protect their own environments, share information within the

SWIFT community and effectively manage relationships with counterparts.

Tansu highlighted a new solution that SWIFT will roll out as part of the

Customer Security Programme: the Payment Controls service. The service

aims to complement and strengthen existing fraud controls. Once launched,

the service will screen SWIFT customers’ messages according to their own

chosen parameters before the messages are sent, meaning that suspicious or

potentially fraudulent messages will be blocked for further investigation, or

stopped completely. ,

The payment controls service also further expands SWIFT’s growing

portfolio of community-inspired financial crime compliance solutions. It

complements SWIFT’s Daily Validation Reports tool, which is already being

used by smaller institutions to supplement their existing fraud controls and

provide an independent daily overview of their SWIFT transaction activity.

Tansu also outlined other SWIFT tools and services that can help to reduce

transaction and financial crime compliance risks and costs including:

• RMA Plus - an important tool to manage payments fraud risks by

helping banks manage which institutions they exchange messages with, and

what types of messages can be exchanged

• Sanctions Screening - an innovative SWIFT-hosted screening engine

that combines a best-in-class filter with a comprehensive database of

automatically-updated sanctions lists to deliver a highly effective sanctions

compliance solution

• Name Screening - secure online lookup tool which allows banks and

corporations to screen single names against sanctions, PEP and private lists.

Batch screening of databases will be added later in 2017.

• Sanctions Testing - a secure web-based service that leverages

SWIFT’s compliance expertise to test, fine-tune and optimise transaction,

customer and PEP filters, delivering independent verification of sanctions

screening processes

Ms Gizem Tansu: Increasing Security & Trust within the Global Financial Community

15

• The KYC Registry -a global Registry of data and documentation that

institutions can use to establish and strengthen correspondent banking

relationships while ensuring they perform the necessary due diligence to

achieve best practice in regulatory compliance

• Compliance Analytics - leverages SWIFT message data to provide an

unparalleled level of insight into institutions’ banking flows, enabling them

to monitor and address financial crime risk with pinpoint precision

• Payments Data Quality Service - helps banks comply with FATF

Recommendation 16 and enhances transparency and straight through

processing by helping banks analyse the quality of originator and beneficiary

information in their payment messages.

Mr Adam Tencza: New Regulations Impact on Traditional Payments Landscape

16

NEW REGULATIONS IMPACT ON TRADITIONAL PAYMENTS

LANDSCAPE

Mr Adam Tencza

Central and Eastern Europe Division Manager

SIBS International

The author provides an indepth view on the changing European payments landscape, comparing the traditional and the new model of electronic payments market. The

fundamental changes, as Mr Tencza emphasises, will effect all market participants, including clients, issuers and acquirers as well as payment processors and scheme

organisations. After 2018, a completely new payment marketplace may appear, with less legal entry

barriers but potentially more capital and technology barriers. Banks must keep up with the technological changes to stay in the game but their financial

strength should be a great advantage. Nevertheless, probably not all of them will be flexible enough to adapt and a number of them may lose their traditional payment

franchise.

Introduction

In the last years global payments market has been facing significant changes

and shifting many relevant business models. European market especially, is a

witness of regulations imposing new rules and conditions, which impact all

areas of payments industry.

Regulative changes in Europe

European payments market is on a ride to the new. Among the multiple

regulatory alterations that has happened recently or will happen soon, I will

mention only the one having utmost impact for traditional payments market

players, which will be defined later on:

• Payments Services Directive 2, further called PSD2. It has been

adopted by European Parliament in 2015, and has entered into force at the

beginning of 2016. Till January 2018, it shall be adopted into local legislation

of member states.


17

• Strong Customer Authentication (SCA) will be mandated by

PSD2 for certain types of payments. This method is not completely new for

the market as a whole, but will significantly impact specific players,

especially ones providing payment services remotely.

• Regulatory Technical Standards (RTS) are the indications to the

market about Strong Customer Authentication and common and secure

communication under PSD2, being prepared by the European Banking

Authority (EBA).

• Interchange Fee Regulation (IFR) adopted in 2015, has capped the

interchange fee levels on debit and credit cards transactions. Additionally,

IFR has forced more transparency on pricing offered by card acquirers to

merchants, with application from June 2016 on.

• General Data Protection Regulation (GDPR) has been approved

by European Parliament in April 2016, and will be enforced to the market

from 25th of May 2018. It reinforces very strict rules for personal

information handing, targeting among others such entities as banks and

payment institutions.

• SEPA Credit Transfers - European Payments Council has

prepared implementation guidelines for a new interbank scheme of Instant

Credit Transfers, and a first version was published in November 2016.

Traditional model of electronic payments market

The payments market get used to work in a relatively stable environment,

facing more dynamics in technological changes and clients behavior

modifications than in the operational and business models itself. The

traditional players are defined by me as:

• Clients - a group consisting of payments initiators (e.g.

cardholders, payments application users) as well as merchants;

• Issuers and acquirers, which provide services to its clients, and

therefore I will call them “clients relationship layer”;


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• Processors and scheme organizations, which are the providers of

issuers and acquirers.

Since tens of years these three main layers of payments market coexisted

and no major disruption has been observed. One of important changes has

resulted from e-commerce development, which allowed expansion of

payments gateways, but keeping the status-quo of general model.

Since 5-10 years, more dynamic expansion of non-bank and non-traditional

players is slowly impacting the payments market, which PSD2 and other

new regulations might be designed anew.

New model of electronic payments market

The payment initiators and merchants are looking for most efficient and

simple payments methods, at the lowest costs and of highest quality. Their

behavior and expectations are changing jointly with purchasing habits and

trends.

The new regulations will mostly influence the client’s relationship layer, by

creating conditions for new type of players, such as Payments Initiation

Service Providers (PISP). The new players will have conditions to replace

the currently existing players in this field. It doesn’t mean that traditional

players will disappear from that layer, but rather will co-exist or change their

roles and adapt the activity.

Processor’s impact

Processor in this case is defined as provider of services to different entities

of a payments market, such as issuing bank, acquiring bank, payments

scheme and sometimes even to a specific merchant. Traditional processors

handle complex IT infrastructure, in order to assure reliability of its systems

and stability for provided services. Main risks for processors coming from

new regulations are:

• Appearance of new operational models might force processors to

adjust the messaging standards with existing client, adapting new procedures

or even refocus its services to other clients groups;


19

• Traditional clients will face reinforced competition and will

require from its providers a completely different dynamic of technological

changes and adaptation, which can also require the full infrastructure

revision;

Challenges might be transmitted into opportunities, among which I will

name:

• API management - RTS shall define a way of accessing the

payments initiation service and propose some level of standardization. This

creates an opportunity for processors to take leadership for this process and

intermediation between issuing bank and PISP. This approach shall allow

processors to develop value-added services both sides of the process.

• It is becoming more common for processors to take opportunities of

providing services directly to clients, by offering new payments methods to

payment initiators or entering into payments acceptance business (i.e.

acquiring) to merchants. This strategy might shift the role of a processor to

become payments services provider (PSP).

Bank’s impact

Banks are the most complex players on the traditional payments market,

having multiple roles, from issuers, acquirers, scheme members, and in some

cases even merchants. Since the IFR introduction in 2015, the issuers have

felt very significant reduction of revenues from the payment business, as the

reduction of Interchange Fee in some of member states was dramatic (for

example in Germany the debit card rate for Visa drop from 1,58% to 0,2%).

Banks have had a difficult time, defining new strategy and business cases for

payments business lines. Currently, new challenges are coming, and among

them:

• PISP will increase the competition for clients. This will demand

from banks a new approach in order to keep their position and role on the

market. The industry will be more open, allowing to provide initiation


20

services to very light organization with limited traditional “infrastructure

barriers”.

• Banks will be obliged to allow PISP and AISP (Account

Information Services Providers) access to payments and account

information. The PISP and AISP will be able to provide a full spectrum of

services to the bank’s clients being a serious competitive threat for

traditional issuers and acquirers.

The bank might also enter directly the competition and become the PISP

and AISP. It’s a very tempting idea but banks will must understand and

change the procedures jointly with processes in order to be able competing

with new players.

Scheme’s impact

The IFR regulations has introduced very important change for payments

schemes. Opening of co-badging capabilities and regulating its conditions,

has challenged both international and domestic schemes on protecting their

existing positions and improve them. It had also created the “space” for

new domestic schemes creation, both on cards and non-cards, such as

mobile schemes.

Introduction of PISP institution, together with works on pan-European

instant transfer scheme will be a great threat for card business. In a worst

case scenario, card infrastructure and schemes might be replaces by new

payments methods and systems, which will result with even more

competition.

International payments schemes especially, are changing their profiles and

introduce multiple value-added into the services portfolio, such us wallets,

loyalty products, and in some cases very aggressively enter into new business

lines, (ex. MasterCard has acquired a few local processors in EMEA region).

Summary

The payments market is being disrupted and it will reshape anew after 2018.

All regulative changes mixed with technological development shall end-up


21

with an interesting payments landscape, connected with less legal entry

barriers but potentially more capital and technological barriers.

Traditional players will must evolve to keep a position in the new market

game together with newcomers and financial strength will become even

more relevant in this game.

Summarizing, probably not all of the traditional players will be strong and

flexible enough to adapt in this new reality but definitely the traditional

market landscape will have a great impact on the future.

Mr Edward Strycharczuk: The Advantages of Partnerships in Merchant Acquirimg

22

THE ADVANTAGES OF PARTNERSHIPS IN MERCHANT ACQUIRING

Mr Edward Strycharczuk

General Manager

EVO Payments International

Banks may become winners in the current payments marketplace characterised by disruptive technologies and challenging new players, if they properly select their partners in

merchant acquiring – states the author. Setting up partnerships with acquirers creates a win-win situation for both banks and

their partners, as the experience Raiffaisen in the Polish and Czech market proves. The joint venture created under the brand name REVO with EVO Payments has been a great success, improving the efficiency attractiveness, and profitability of the bank’s card

business.

The acquiring landscape is constantly evolving

Changes in the scheme fees impact profitability. The borderless

marketplace is expanding. Regulatory requirements are increasingly

sophisticated and tougher. These changes are driving banks to increase

investments to stay competitive with disruptive technologies and new

market players.

Partnerships are often a good solution for banks

Merchant acquiring can add tremendous value to a bank…

Card acceptance is a “core, non-core” service. Acquiring is

needed by most businesses and is fundamental to the current account

relationship. Merchants who also take acquiring services from their bank are

significantly more loyal and typically have 5 times larger deposit balances.

…But partners are often better suited to manage the ongoing details of an

acquiring business

Monoline acquirers have deep experience in the constantly

changing acquiring industry, a business which is not always a core

competency of retail bankers.


23

Monoline partners offer their bank partners the ability to offer

integrated payment solutions across multiple geographies, regulatory

compliance and the benefits of economies of scale.

Formation of REVO

Raiffeisen sought a monoline partner for its under-scaled acquiring

businesses in two small, but growing markets, Poland and the Czech

Republic. Raiffeisen felt that it lacked a competitive product and value

proposition in those markets and believed that without dedicated sales

capabilities, it would not be able to effectively compete with larger domestic

players. The Bank decided that aligning with a partner capable of filling

these gaps would improve its overall customer value proposition to its

business clients. Raiffeisen selected EVO Payments as its partner and in

April 2015 a new partnership under the REVO brand was formed.

Key achievements

Since its formation, REVO has made great strides to enhance the Raiffeisen

acquiring offering:

1. Organization & Operations – The businesses were migrated to

EVOs high-performing and low-cost processing platform in Poland

2. Sales & Distribution – Dedicated sales networks were formed,

with incentive schemes offered to spur high-performance

3. Product Development & Marketing – REVO introduced a

simpler and more attractive value proposition and enables paperless

merchant on-boarding

Lessons learned

Based on its experiences with REVO and its other alliances in Europe and

North America, EVO has gained valuable experience in maintaining high-

functioning relationships with Banks. These lessons include:

Get clear commitment from the top management of both Alliance

partners to properly invest in the business


24

Maintain strong sponsorship from the Bank partner – ensure they

provide dedicated resources to manage the day to day Alliance business

Gain a strong understanding of your partner – the acquirer must

soak up the culture of the Bank and all Bank employees who interact with

customers must be well-trained on acquiring and its value to all stakeholders

Be disruptive – offering the same products and service at the same

prices as the competition is

a recipe for poor performance

Focus on service – quality and speed makes the difference

Set up adequate sales and distribution – this is vital for a success

of the business

Hold regular operational meetings

Make sure that the employees maintain a start-up mindset. And

plan your (key) hirings in advance

Get agreement among the partners on an appropriate incentive

scheme and minimum sales targets – this is vital to achieving goals and

maintaining a strong relationship

Don’t expect everything will go smoothly from the 1st minute:

constantly strive to learn from each other and continuously improve

About EVO

EVO Payments International is a leading payments service provider of

merchant acquiring and processing solutions for merchants, Independent

Software Vendors (ISVs), financial institutions, Independent Sales

Organizations (ISOs), government organizations and multinational

corporations located throughout Europe and North America. A principal

member of Visa and MasterCard, EVO offers an array of innovative,

reliable and secure payments solutions and merchant services, backed by an

uncompromising commitment to exceed the expectations of our customers

and partners.

For more information, please visit WWW.EVOPAYMENTS.COM

http://www.evopayments.com/

Mr Levente Kovács: The effects of instant payment on the economy

25

THE EFFECTS OF INSTANT PAYMENT ON THE ECONOMY

Mr Levente Kovács

Secretary General

Hungarian Banking Association

Historically, settlement of payments through clearing centres took several days. The application of computers helped to speed up the process to several hours, providing for next

day settlement. Intra-day settlement started slightly later, followed by real-time gross settlement for high value payments, during working days during opening hours of the

banks. Today, low-value transfers are also settled in real time, and in addition to that, 24 hours

a day, 7 days a week, including bank holidays. The introduction of instant payment puts a substiantial pressure on banks’ IT systems and raises a number of technical, liquidity and risk management issues. On the other hand, as the example of Hungary shows, instant payments have a number of positive effects on the economy, mainly in the corporate sector, including lower working capital

needs, elimination of „debt carousels”, better current account management by companies. Overall, as expected instant payment will reduce the use of cash and help the „whitening”

of economics in Central/Eastern Europe.

Since the emergence of ICT, there has been continuous development in

payments. Clearing houses are currently focusing on the switch to instant

payments. The present study analyses the potential effects of the switch to

instant payments on the economy, including its impact on the management

of corporate current accounts, the forms and potential management of risks

occurring in processes and on the side of the various participants of

payment traffic, as well as any economic benefits expected as a result of

developments. For the purpose of investigating these issues, we have also

incorporated in the study the instant settlement project launched recently in

Hungary, as well as any expectations and information that exists in respect

of the project.

The history behind instant payments

We typically split the development of clearing traffic into four stages. In the

first one, up until the mid-1980s, before the commercial use of ICT, inter-

bank payments were processed manually. The way it worked was that every


26

bank took the day’s payments to a central place, which in Central Europe

was mostly the central bank. There they sorted payments in cabinets with

‘pigeon holes’ like the ones we can still see in post offices. One box

contained all the payments coming from bank ‘X’ and heading to bank ‘Y’.

So, one line contained all the payments to be sent from bank ‘x’, while one

column contained all the items to be received by bank ‘Y’. Once the items

were sorted manually and the payment values were added up, the central

bank executed the actual clearing. Then banks credited the items, also

through a manual process. The entire payment process took several days

(Prágay, 2012).

The application of computers in clearing traffic (clearing and settlement)

started in the 1980s. From this point onwards, payments were received by

electronic clearing houses (ACHs) . They collected, sorted and then sent out

payment transactions to banks, forwarding information on the settlement

value to the central bank. (We note at this point that the arrangement

followed in the manual sorting process is also reflected in the electronic

clearing process, in the so-called IBI matrix .) Payment transactions were

processed in a few hours, typically overnight. From this point onwards,

inter-bank transfers were typically executed in 1 day; i.e. by the next day. In

socialist countries, due to the establishment of the two-tier banking system

and the COCOM list, this evolution took place one decade later. However,

in these countries the decade’s delay resulted in relatively more up-to-date

and faster ICT systems, as they were relying on automation levels and

payment traffic experience prevalent at the time of introduction.

The continuous development of clearing houses was determined by

innovation in payments and the strive to boost competitiveness

(Kemppainen, 2003). Accordingly, approximately one decade ago D+1

clearing systems were replaced by SEPA standard (Mai, 2009) and intra-day

payment systems. Fast proliferation was primarily driven by the needs of

large corporations; the shift happened relatively fast, and the market also

received developments positively. From the aspect of clearing houses, real

development was brought about by clearing and settlement cycles executed

faster and several times a day. This was facilitated by faster data

transmission channels, higher-performance computers and an incremental

increase in the availability of ICT systems. (Khiaonarong – Liebenau, 2009)


27

In the European Union, the introduction of the TARGET system, a system

developed for instant inter-bank and very high value payments, which also

incorporates national RTGS systems, took place one-and-a-half decades

ago. Now low-value payments are also added to this pool, which means that

the new clearing system to be established must be one that is capable of

processing large volumes of payments instantly. From now on, new systems

will not only operate on working days and during working hours, but

constantly, 24/7. This poses new challenges in terms of the banks’ IT

systems, data transmission processes and availability, while the instant

nature of transactions brings new challenges in the areas of risk

management and fraud prevention. When it comes to the operation of

clearing houses, one consequence of instantaneity is that instead of the

previously used batch settlements, now settlement information must be

provided individually, item-by-item; i.e. each clearing item has a settlement

item attached to it straight away.

The instant payment service – as explained by the National Bank of

Hungary (MNB) in its concept paper titled ‘A new dimension in payments’

affects the operation of all players in the payment cycle, as it introduces a

new, widely usable electronic payment method in the world of payments.

‘Residential customers and merchants will be able to use instant payments in

numerous situations where so far mostly cash was used. It is a general

expectation of the regulator that more advanced services using the single

infrastructure cannot be more expensive for customers than the services

offered till now.

The new technology will/may result in the establishment of new, potentially

still unknown payment products and services. It is a general expectation that

the costs of new payment solutions should not significantly differ from the

payment methods widely used today, e.g. payment by bank card. New,

primarily mobile phone-based solutions that allow people to pay in a

simpler, more convenient and faster way than before may also be

introduced. This could be helped by modern data entry solutions such as the

QR code or NFC (Near Field Communication), which not only simplify the

payment process, but also facilitate the connection of additional services to


28

the payment process. With the emergence of new products, digital

technology will also boost customer experience.

One important change for corporate customers can be that transactions

where execution by the partner company (e.g. delivery) is subject to on-site

payment, can be completed faster, and, as a result of items being credited

sooner, the liquidity management efficiency of businesses can improve. The

acceleration of the clearing process was a market demand, while intra-day

clearing was primarily a requirement coming from large corporations, which,

in a number of countries gained the support of authorities supervising

payment traffic.’ (MNB, 2016)

The enforcement of market requirements has been and is being supported

by the assumption that faster payments boost the economy in themselves,

and that the acceleration of payments can be interpreted as some kind of

social benefit, which, in turn, boosts the reputation and credibility of the

relevant authorities. It must be mentioned that in view of Central European

habits, increasing numbers of cash transactions may turn into electronic

ones, due to the new, convenient payment products and instantaneity. The

expansion of electronic payments is beneficial for the whitening of the

economy and also for tax purposes, as individual payment transactions are

instantly credited to bank accounts, and are therefore also fully booked.

When it comes to the acceleration of payments, one typical question that

arises concerns the distribution in time of transactions launched by

customers. Figures from Hungary show a distribution pattern seen on

Chart 1. This shows that bank customers send in transactions via e-banking

systems continually, 24 hours a day, with peaks at noon and at the end of

working hours.

Chart 1: The distribution in time of the acceptance by banks of electronic

transactions


29

Source: Helmeczi (2010)

In terms of intra-day and instantaneous transactions, experts typically

highlight the following benefits:

a) Economic competitiveness improves as a result of better current

account management by companies.

b) Due to the disappearance of hidden income in respect of float

(interest expenditure for sight deposits and interest income for overdraft

facilities), the fee structure becomes more transparent, which in itself boosts

competition in bank fees/charges, especially in the (currently extremely) low

interest rate environment.

c) Due to the acceleration of payments, in-depth subcontractor

networks can be paid much faster, which is one key factor in eliminating

debt carousels. (Although debt carousels are not caused by reasons to do

with the management of payments!)

d) The float is practically eliminated, as money is instantly credited to

customer accounts, thus entering the economy in a cost-free, direct and

prompt manner, potentially resulting in a lower working capital need.

e) The management of current account balances becomes more

economical, as the components of the ‘just in time’ stock management

methodology become increasingly applicable. For current accounts, the


30

continuous, highly reliable and precisely regulated operation of clearing

houses offers the right background. (Felföldi – Kovács, 2011)

f) Instant clearing may bring about a significant change in habits,

and the role of electronic payments may grow significantly, to the detriment

of cash usage. The single and widely used instant payment system may push

our parallel or riskier alternative payment systems from the market.

Several of the benefits are theoretical only, as these assumptions typically do

not take into consideration the degree of potential benefits compared to the

one-off cost of ICT development and the continuous cost of operation. It is

also ignored that due to the reduction of some income items, the revenue

level required for the healthy operation of the financial intermediary system

will have to be found by financial institutions elsewhere, via other channels.

Nevertheless, there is widespread agreement that benefits outweigh

disadvantages.

The benefits of accelerated payments for companies

Intra-day payments primarily show benefits for corporate customers. We

must also note here that the majority of payment transactions are also

initiated by such customers.

The acceleration of clearing traffic allows business customers to manage

their current accounts more efficiently. Chart 2 shows how much more

efficiently the Hungarian business sector could manage its current account

balances during the usual end-of-year boom in the years of switching from

the D+1 day system to the intra-day clearing system. (Kovács, 2013)

Chart 2: The evolution of corporate current account balances in the first

year of intra-day payments and in the preceding year


31

Source: National bank of Hungary (MNB). Chart edited by Péter Vass

(Hungarian Banking Association - HBA) – figures in billion HUF

In order to bring the starting values in line, the ranges of the two curves

have been shifted by 50 billion HUF. As you can see from the divergence of

the curves, corporate clients already exploited the benefits of intra-day

payments in the first two months following their introduction. The similar

arc of the two curves shows that economic activity changed along the same

pattern in both years, i.e. when interpreting the chart, no other significant

distortive impact needs to be considered apart from the intra-day nature of

payments. (Kovács, 2013)

Using the anonymised current account bank statements and transaction

details provided to us, we have conducted the following analysis: we looked

at 50 million HUF ranges of current account transactions per year for

companies without an overdraft facility, and analysed the value of average

current account balances falling into the same category in the February to

June and July to November periods (we left out the months of January and

December in order to eliminate the distortion resulting from annual cycles).

Then we placed these values on a curve. The first stage, where volumes,

and, consequently, the number of transactions were both low, could be well

managed with a linear approach. One reason could be that when volumes

are low, incoming items are not used on the same day or close to the same


32

day, so volumes that are twice as high require twice as large an account

balance. As volumes and consequently the number of transactions both

increase, there comes a point where incoming transactions can be used ever

faster (sometimes even on the same day) to launch transactions, and at times

like this the curve is similar to an exponential curve, which can also be

justified theoretically due to the number of received/launched transactions

and the assumed independence of their values. One very important result is

that the introduction of intra-day clearing did not change the current

account management of customers with low volumes, which, in turn, is

logical, as they do not transact daily. However, for regularly transacting

customers the curve rises less and less, which is also a logical consequence,

as the fact that there are several credit cycles through the day facilitates even

more efficient transaction and therefore balance management. In other

words, in the 21st century current account balances are not determined by

the classical statement of the professional book titled ‘Modern corporate

finances’ by Brealey-Myers, but by ‘just in time’-style current account

management practices. (see also: Felföldi – Kovács, 2011 and Kovács,

2010.) In the samples, the average corporate current account balance

reduced by 10.73%, weighted by payment traffic, as a result of intra-day

clearing, while the costs of deposit management did not change in the

period looked at. (Kovács, 2013)


33

Chart 3: Interconnections between corporate current account volumes and

balances (in the case of companies without an overdraft facility)

Source: Erste Bank – Hungary (year 2012 current account balance and

transaction volume figures of 1000 representatively chosen corporate

customers). Chart edited by Péter Vass (Hungarian Banking Association -

HBA) – figures in million HUF. (Kovács, 2013)

The reduction of float and the more efficient management of corporate

current accounts have resulted in a significant drop for the banking sector in

cheap sight balances and expensive overdraft facilities. These are the sums

that are split between numerous economic players on the customer side; i.e.

each transacting customer has a little bit more of these, in proportion to the

size of their volumes. (Kovács, 2013)

The introduction of instant payment systems clearly boosts these benefits,

as it facilitates the even more efficient management of account balances; i.e.

individual companies will need even less cash to be able to manage their

own corporate current accounts. This means that the trend line expected in

the wake of the introduction of instant payments, shown by Chart 3, is

expected to become even flatter.


34

Due to the way the system works, the ideal application of ‘just in time’

methods in the management of current account balances will become a real

possibility, as delivery time is practically zero (a few seconds), delivery costs

(payment fees) are marginal, stock-piling due to uncertainty is also around

zero due to the predictable and stable operation of clearing houses, and the

unit of delivery is a unit of money; e.g. 1 Euro cent.

New risks – new challenges

Players of core clearing processes: the customer initiating the payment –

initiating bank – clearing house – accepting bank – beneficiary customer.

I.e., in default cases the process has five players.

Chart 4: The Hungarian operating model and liquidity management

Source: Source: National bank of Hungary, Bartha (2017). Edited by Anita

Nagy (Hungarian Banking Association - HBA)


35

In the instant payment system, the clearing and settlement of payment

transactions takes place in the following steps:

Payment service providers (PSPs) send the sum earmarked for the pre-

financing of instant payment transactions to a single, dedicated account.

GIRO (the Hungarian ACH) holds the individual balances of PSPs in real

time, on the payment accounts managed by it. Parallel with clearing,

settlement also takes place transaction by transaction, in a gross fashion.

(Bartha, 2017)

The required liquidity is ensured as follows: PSPs have to transfer the sum

covering instant payments to a shared account held by the National Bank of

Hungary (MNB). GIRO has disposal of this shared account. PSPs have to

estimate the sum they need to keep on this account. Any sums requested by

PSPs to be transferred back, will be sent back from this account, subject to

GIRO’s transaction order, to the PSP’s VIBER (the RTGS between

Hungarian banks) account. As VIBER is not going to operate 24/7, PSPs

will have to estimate volumes on non-banking days in advance. (Bartha,

2017)

Customers run a credit risk in respect of their own banks up to the balance

of their deposits. Deposit holders can deposit/withdraw their money

to/from their bank in cash. Inter-bank clearing involves orders where the

paying party and the beneficiary party are customers of two different banks.

As part of the payment order, clearing takes place between the paying

party’s and the beneficiary’s banks, so an accounts payable/accounts

receivable relationship is created between the two institutions. As in the

payment system a lot of money of many-many customers moves between

payment operators, banks may develop a significant degree of unintended

exposure against each other. In a given payment transaction, the size of the

exposure is in direct proportion to the value and duration of the exposure.

Exposure can take a number of different forms, and therefore the approach

to reducing and managing it can also vary widely. One of the key features of

clearing systems is their financial architecture – the method they apply in

processing orders in view of financial considerations.


36

When it comes to knowledge, it’s worth reviewing the ‘classical’ risks

involved in clearing (Kovács et al., 2017), and where necessary due to the

instantaneity of the new system, re-interpret and/or supplement these

definitions.

In the context of the clearing system, financial risks may emerge in different

forms, such as so-called credit, liquidity, execution (settlement) or system

risk.

‘Credit risk occurs in clearing systems where orders are forwarded to the

beneficiary bank before financial settlement. Market competition encourages

the beneficiary bank not to wait for the arrival of the credit item and the

notification of financial settlement issued once the sum is made available for

use by the beneficiary, but to do everything in its power to make sure the

beneficiary can dispose of the amount received as soon as possible. This

behaviour can cause serious issues in situations where the paying bank

(which can be an intermediary or also the beneficiary’s business partner)

becomes insolvent and cannot meet its payment obligations then or later.’

(Kovács et al. 2017, p. 35.) In terms of the instant payment system, the

credit risk, as such, does not change, but the customer may have such

perception because of the increased difficulty of liquidity management.

‘Liquidity risk is potentially just as dangerous as credit risk. Liquidity risk

arises in systems which are protected from a financial aspect. That is

because in such systems the continuous processing of orders is based on the

assumption of liquidity or the existence of bilateral or multi-lateral credit

lines. In cases where some banks try and fulfil orders on time, potentially at

a specific point in time within the day, but another bank is unable or

unwilling to do so, conscientious banks (or financial service providers) can

get stuck in a bad situation. Liquidity risk means that the insolvent bank may

only meet its payment obligations late. The delay, however, may push the

other bank, dependent on the defaulting bank, into being late, and therefore

a large number of banks may be affected by the delay. For some banks,

liquidity risk may become fatal, as their temporary insolvency may be

perceived by others as long-term insolvency, which, in turn, may seal the

fate of the bank in question.’ (Kovács et al. 2017, p. 35.) In order to

maintain the continuity of operation, in the instant payment system


37

members must be able to precisely estimate and pre-fund their volumes for

periods beyond opening hours.

‘Execution risk occurs when financial execution does not take place at the

originally scheduled time, due to non-payment by one or more participants.

Execution risk also carries credit and liquidity, as well as operating risks.’

(Kovács et al. 2017, p. 35.

‘We can speak of system risk when, due to occurrence of credit, liquidity

and/or execution risk, a domino effect forms, causing serious liquidity and

lending difficulties across the entire financial system. The starting point of

system risk can also be an operating risk event. Therefore, when it comes to

system risk, the primary objective is not reduction but avoidance.’ (Kovács

et al. 2017, p. 35.) When estimating liquidity, latency must also be taken into

consideration.

‘Membership risk. When it comes to the safe operation of clearing systems,

the solvency and creditworthiness of the institutions participating in such

system cannot be ignored either. The number of participants and their

relationship with each other also matter; i.e. whether they trust each other

and are prepared to engage in a business relationship with each other. The

criteria of system membership and the requirements members have to meet

at all times have a significant influence on the system’s operation. The

conditions of system membership are risk management tools, and are

typically based on risk assessment, but they can also take the form of

technical requirements. To make sure that a given participant of the clearing

system does not pose any risk to the rest of the participants, in addition to

being solvent it must generally also be fully aware of and able to assess the

risks it takes on, and act accordingly. Those who safeguard these systems,

typically expect clearing systems to make the conditions of system

membership public and objective, and differentiate between applicants on

risk grounds only.’ (Kovács et al. 2017, p. 41-42.) In instant payment

systems, this risk gains special significance, as a partially assumed liquidity

buffer can result in the tightening of membership conditions.

‘Operating risks: The most complex of risks. They include hardware or

software faults, communication issues, disaster events and security/fraud

risks. I.e. they cover all human (negligence, error and wilful damage) and


38

technical risk components, which, when they occur, temporarily disable the

operation of a critical component of the clearing system. However, they can

also occur as a result of the loss of a key infrastructural component keeping

the system in motion (e.g. power or communications channel), caused by a

natural disaster.’ (Kovács et al. 2017, p. 42.) When it comes to instant

payment systems, every impact manifests itself in a way that’s visible to

customers, which can trigger panic, and shake their trust in the system.

When it comes to management and governance risk, it must be understood

that the instant system is a new product not only for customers and

payment operators, but also for the AChs responsible for clearing and the

central banks taking care of settlement. All stakeholders must therefore

obtain the right experience.

‘Legal risk. As the instant payment system is a brand new system to be

introduced from scratch, the classical regulatory toolkit must also be

renewed and adjusted, including the clearing process, the general provisions

of law pertaining to both the clearing system and its members, such as

provisions of law governing the definitive nature of execution, the

bankruptcy procedure and payments; decrees issued by the Central Bank, as

well as contracts and system regulations (e.g. internal regulations and

operating procedures).’ (Kovács et al. 2017, p. 33.)

Finally, country risk must also be mentioned, which covers the management

of fraud and general cyber threats affecting a given country’s financial and

payments system and electronic payments. As a result of the proliferation of

digitalisation, the threat of this risk will most probably grow.

Out of the risks listed, the introduction of the 24/7 payment system affects

two areas most. The increase in liquidity risk is apparent, as, in order to be

able to manage payment volumes, clearing members need to hold balances

that most probably will suffice for covering expected debits, with the

anticipated level of credits. High probability, however, cannot mean

absolute certainty, as several members of the clientele or certain large

deposit holders may have a concentration in payments that a bank cannot

prepare for in advance. Previously, they had the option of raising short-term

funds from money markets until settlement took place at the end of clearing

cycles. The usage of instant payment systems and the lack of experience


39

particularly at the time of its introduction may turn this risk into reality,

which can shake trust in the new system. This could be prevented if clearing

membership conditions were tightened up, and, at the same time, central

banks provided an unlimited credit line to clearing members during the day

and also in non-banking periods.

A special mention must be made of fraud risks, as the invisibility period will

dramatically reduce. A number of studies deliver specific examples for

recent fraud cases (e.g. Kovács – Dávid, 2016). In part of these, the period

between clearing cycles still allowed for catching up with identified fraud

cases, making them still reversible. That’s because if fraud was identified

within a short period of time, the manual alarm chain could still catch up

with the float in transit. With the instantaneity of the new system, there is no

chance of this; i.e. the chance to reverse fraudulently taken funds is reduced

to zero.

This risk can be reduced by keeping the upper limit of instant payments low,

and by boosting the security components for both clearing members and

customers. Further methodological support can be provided by the EBA

Decree (2017) currently under preparation, which focuses on the

management of operating and security risks linked to payment services.

Practical questions concerning the feasibility of instant payment systems

Feasibility raises a number of questions, which primarily concern speeds that

exceed the speed of all manual processes. In Hungary banks and other

financial service providers have raised the following issues (derived from the

correspondence between the Hungarian Banking Association and its

members banks in May, 2017):

First of all, to ensure the security of transactions, which covers all checks

aiming to prevent misuse, fraud, money laundering and the financing of

terrorism, they consider it important that the system is regulated in such a

way that the relevant legal provision should give the right to financial

institutions participating in the system to handle certain transactions

separately, subject to a well-defined set of conditions. This means the

execution of the transaction in a non-instantaneous manner, but within a

reasonable time period; or, if a risk involving security issues, money


40

laundering or the financing of terrorism is identified, the suspension or

rejection of the transaction. The relevant provision of law should also

guarantee that payment service providers cannot be held liable for executing

instant payment transactions late or rejecting them for the reasons listed

above, and that in such cases customers cannot claim damages. There

should also be clear and precise regulation in place for how and what

payment service providers should communicate to customers in the

aforementioned, exceptional cases.

The strong protection of secondary IDs is also a key issue, as their

manipulation can represent an outstandingly risky area in potential future

fraud. They believe that for this we need regulations that clearly stipulate

how and subject to what conditions payment service providers should be

allowed to enter secondary IDs for a given customer account, and what

procedure is to be followed when modifying or deleting such IDs. The

provision of law must also stipulate what security solutions payment service

providers and the operator of the central registry system will have to offer in

order to safeguard the integrity of secondary IDs. The regulation must also

extend to the type of protection to be provided to safeguard the database of

secondary IDs from unauthorised access. It should stipulate that one

secondary ID should only be linked to one customer, irrespectively of which

payment service provider the given customer belongs to; and it should also

cover the way the originator of the financial transaction should be able to

check the identity of customers linked to the secondary ID, from the central

database.

Identifying the booking value date of transactions is of key importance for

both system members and their customers. It makes sense to aim for a

single solution nation-wide, as any customer, be it a private individual, a

business or an institution, can have accounts with several banks or financial

service providers. The regulation would ensure a single, shared approach to

tracking and processing, which, in turn, could reduce the resources required

for complaints management and the costs of service providers. Regulations

would also be needed for timeout cases occurring for a variety of reasons

(e.g. an error by the service provider of the paying party, the lack of

available funds on the customer’s payment account at a given moment in

time, or some kind of error occurring in respect of the infrastructure used).


41

Payment service providers are of the view that standard, shared regulations

are needed to govern the management of impacts resulting from the not

entirely smooth operation of IT communication, as well as the maintenance

of their own connecting systems.

In addition to these mainly legal and technical requirements, further

questions were raised about some already known characteristics of the

system to be introduced; i.e. the feasibility of new convenience services,

such as ‘Pay when there is enough money on my account!’. The

incorporation of high-volume payments by the State (e.g. pensions and

benefits) in the instant payment system is also an open issue for payment

service providers.

Summary

Over the past years, intra-day clearing has become a basic expectation of the

corporate sector, constantly present on money markets; of the SME sector,

which is also active from this aspect, and also of the retail sector. There is

market demand for the further acceleration of payments, which could be

ensured by clearing houses as a result of their use of up-to-date IT systems.

Clearing houses that delay or refuse the introduction of instant clearing can

easily lose their markets.

Instant clearing requires new processes and regulations. It also offers the

opportunity to develop new payment products. Therefore, if we look at the

impact of the current transition and the tasks involved, we cannot speak of

an upgrading of the previous intra-day system, but the establishment of an

entirely new system.

The unique characteristic of the instant clearing system is speed that

surpasses all manual processes, which, in turn, brings new challenges in all

areas of risk management. The prevention of fraud, the on-going provision

of liquidity and the availability of ICT systems must be given more focus

than with any previous method. However, all these tasks will cost money. In

the meantime, the classical revenues of the banking sector will reduce, as the

market and supervisory authorities would not go along with increasing the

rate of payment commission, while the ‘Just in time’-style current account

management reduces the value of current account balances; and the


42

development and continuous (24/7) operation of the new system will

involve significant costs. These can be partly off-set by the expected

increase in transactions numbers in the wake of the introduction of new

payment products.

Organisations responsible for the introduction of instant payments trust that

in the medium run, with the proliferation of electronic payment products,

there will be a clear reduction in cash usage, and economies will whiten,

which, in turn, will support the competitiveness of national economies.


43

Literature:

Lajos Bartha (2017): Instant payment - presentation, The establishment of

an instant payment system – forum, National bank of Hungary, May 24,

2017

EBA (2017) Draft Guidelines on the security measures for operational and

security risks of payment services under PSD2, EBA Consultation Paper

EBA/CP/2017/04

https://www.eba.europa.eu/documents/10180/1836621/Consultation+Pa

per+on+the+security+measures+for+operational+and+security+risks+of

+payment+services+under+PSD2+%28EBA-CP-2017-04%29.pdf

Felföldi – Kovács (2011): Analysis of corporate current account balances,

Hitelintézeti Szemle [Financial and Economic Review], 2011/1. pp. 61-69.,

ISSN 1588-6883

István Helmeczi (2010): Payments map in Hungary, MNB studies 84., Press:

MNB, ISSN 1787-5293

Kari Kemppainen (2003): Competition and regulation in European retail

payment systems, Discussion papers 16., Bank of Finland, ISBN 952-462-

066-9

Khiaonarong – Liebenau (2009): Banking on Innovation – Modernisation of

Payment Systems, Press: Springer, e-ISBN: 978-3-7908-2333-2

Levente Kovács (2010): New model of the current account balances,

Theory, Methodology, Practice, December 2010. Vol. 6./No. 2. pp. 31-35.,

Press: Miskolc University, ISSN: 1589-3413

Levente Kovács (2013): The impact of intra-day clearing on the economy;

Intra-day payment project 2010-2012 study collection pp.31-38., Publisher:

GIRO Zrt., ISBN 978-963-86819-5-9

Kovács - Dávid (2016): Fraud risk in electronic payment transactions,

Journal of Money Laundering Control, 2016/2. Vol.: 19., pp. 148-157. Press:

Emerald Group Publishing Limited / UK, ISSN 1368-5201


44

Kovács – Divéki - Dávid - Pál - Kada (2017): Low value payments and their

clearing systems, pp. 134. Press: Miskolc University, ISBN 978-615-5626-

14-2

Heike Mai (2009): SEPA: Changing time for payments’, Financial Market

Special / EU Monitor 64., Press: Deutsche Bank Research, Frankfurt am

Main. ISSN: 1612-0280

MNB (2016) A new dimension in payments – Options to introduce instant

payments in Hungary, MNB concept paper (April 19, 2016)

https://www.mnb.hu/letoltes/az-azonnali-fizetesi-szolgaltatas-mukodesi-

modellje-magyarorszagon.pdf

István Prágay (2012): The past, present and future of payments and clearing,

The Hungarian banking sector is celebrating its 25th anniversary – study

collection, Press: Hungarian Banking Association, p. 217-231, ISBN 978-

963-08-484

Mr Maris Cakste: Solving the Challenges with Mobile NFC Payments

45

SOLVING THE CHALLENGES WITH MOBILE NFC PAYMENTS – PART

1

THE HISTORY OF CONTACTLESS PAYMENTS

Mr Maris Cakste

Director of Sales

MeaWallet

Mobile contactless payments look „user-friendly” in many ways - the mobile phone is the last thing to be forgotten at home and the holder may have several cards in one device.

However, traditional answers to the contactless challenge left a number of issues unsolved- iOS support, merchant acceptance, speed at the checkout counter, the SWW (something

went wrong) experience, just to name a few. Are wearable gadgets the answer to the challenges? The author gives a positive answer,

forecasting that 2018 might be the Year of Wearable Payments.

Payments using NFC is nothing new – it is something we have been talking

about since 2003/2004.

NFC is often referred to as The radio frequency standard that could solve

all problems, removing any friction from payments and removing all of the

world’s checkout queues.

NFC has slowly grown popular in the form of the plastic card, but when we

talk about NFC payments, I bet the average industry veteran will drift his, or

her, mind to mobile NFC payments.

Mobile payments using NFC has almost been considered the Garden of

Eden or the fountain of youth. And boy, has it been long expected; try do a

search for “year of mobile payments”, and you will find no less than 35+

million results!

If I had a dollar for every time I heard that this year/next year will be the

year of mobile payments, I’d rather be drinking Piña Colada at my private

beach, rather than writing this blog post.


46

But something has happened. After the launch of HCE in 2013, Apple Pay

and Android Pay in 2015, the avalanche of Issuer-HCE solutions launched

in 2016, in 2017 to date, I think we finally can say that mobile payment

based on NFC has reached some sort of a maturity and market acceptance.

Alas, the offering and acceptance vary from market to market, but the

standards are set and the world is moving unified in one direction.

Solving The Challenges of Mobile NFC payments

Mobile contactless payment is in many ways a great answer to several

challenges: the user “never” forgets his/her phone at home, you can

combine multiple cards in one device, it makes the Issuer look forward-

leaning and modern, and it provides a sense of coolness for the one using it.

But even as mobile contactless are being spread, it still comes with some

challenges.

Personally, I’ve been meeting with Issuers countless times the last five years,

and I’ve also had first-hand experience with the eight different wallets I’ve

installed and use on a regular basis. In short, the issues and concerns I’ve

heard about or experienced are:

•iOS support – only for the selected few in the selected markets that are

willing to accept Apple’s terms

•Merchant acceptance – for the user to trust the solution he must trust that

it is accepted. In most markets, albeit growing, contactless acceptance is still

under par.

•SWW – SWW, or “Something went wrong” is unfortunately still a problem.

With a myriad of devices, standards, payment terminals and user

expectations to the speed of tap & pay, the user still ever-so-often will

experience that “something went wrong”.

•Speed at checkout counter – Some Issuers require the user to unlock their

phone, find and open app, select card, and type in PIN before they can tap

– it’s not always as easy as just tap-and-pay with your contactless plastic

So how can these challenges be solved? This will be discussed in Part 2 of

this blog post about wearable payments.


47

SOLVING THE CHALLENGES WITH MOBILE NFC PAYMENTS – PART

2

As discussed in Part 11 of this blog post, mobile NFC payments have some

challenges. This post will look at how wearable payments work and how

they can meet these challenges.

Enter wearables

In October 2015, Mastercard and NXP announced something that might

have been the start of the solution: New Program that can Turn any

Wearable into a Payment Device2. Following this, several announcements

have been done on wearable or IoT payment (like this3, this4, or this5).

While several of these are quite distant for the average consumer, the

wearable device payments are already here.

Especially two major challenges can be met with wearable payments: iOS

support and speed at checkout.

Payments using wearables basically works by provisioning the payment

credentials onto the wearable device. This can be done during production,

but only allows for simple, static, pre-paid solutions. However, by

connecting the wearable to a mobile app and use the app as a proxy for

credential provisioning, there are (almost) no limits to what cards possible to

add. In addition, this allows for real-time lifecycle management of the

credential stored on the device.

1 https://www.meawallet.com/2017/07/06/397/ 2 https://newsroom.mastercard.com/press-releases/mastercard-launches-new-program-that-can-turn-any-consumer-gadget-accessory-or-wearable-into-a-payment-device/ 3 https://globenewswire.com/news-release/2017/01/04/903067/0/en/NXP-Drives-Innovation-for-Future-Wearable-Technologies.html 4 https://kerv.com/en/news/news/kerv-wearables-launches-contactless-payment-ring-at-wearable-technology-show-2017/ 5 https://www.otiglobal.com/pr-news-events/oti-launches-breakthrough-wearable-payment-device-beautiful-silver-ring-smart-payment-bling/


48

What does this mean?

1. Remove the NFC block on iOS device. Even if your customer is

using an iPhone, she/he can deploy payment cards on his wearable device

through the open Bluetooth channel. During payment, she will use the NFC

channel on his wearable, circumventing the close control Apple has put on

their devices.

2. Always at hand – literally. Paying using a wearable device, such as a

smart watch, bracelet or even a ring6, removes the need of finding the device

in the first place. Tap your wrist or hand towards the payment terminal, and

the purchase is performed within milliseconds. You can’t do it cooler – or

faster!

Hype or future?

Obviously, payment through wearables has its advantages. The big question

that remains whether it is only a hype, or if we actually will see people

tapping their wrists to get their favorite sub on their way home from work.

Apple Pay through Apple Watch has been around for about three years.

Even so, analytics report of a slow start7. Similarly, Samsung Pay has been

available on Samsung Gear devices since 2015. These solutions have had a

limited list of supported Issuers, but as the list of supported Issuers is

growing8, the use is growing at high speed9.

A user research conducted by Seqr10 showed that 61 % of all users wanted

to pay with a wearable device. Furthermore, it showed that more than 70 %

would have no worries about the security of such a solution.

6 https://kerv.com/en/ 7 https://www.wsj.com/articles/apple-pay-promised-to-make-plastic-obsolete-then-came-wary-shoppers-confused-clerks-1491384606?mod=rss_Technology 8 https://support.apple.com/en-us/ht204916 9 http://www.pymnts.com/news/payment-methods/2016/contactless-payments-card-usage-in-europe-exploding/ 10 https://www.seqr.com/int/


49

MeaWallet has seen an increase in OEM vendors – well established as well

as small start-ups – that reaches out to us to learn more about our offerings

for wearable payments.

In summary, we see that wearable payments are coming, and we believe they

are coming fast. We might be too far into 2017, but 2018 might prove to be

the Year of Wearable Payments.

Mr István Lengyel: Recension of Financial Literacy

50

RECENSION OF FINANCIAL LITERACY

Mr Istvan Lengyel

Secretary General

Banking Association for Central and Eastern Europe (BACEE)

Levente Kovács & Elemér Terták: Financial Literacy

ISBN: 978-80-8178-016-5

Published: Verlag Dashöfer,

Bratislava 814 99 Slovakia

In their publication, the authors cover the issue of financial literacy from the

point of view of Central Europe, using examples from the region.

As they point out, the lack of financial literacy, it was one of the main

reasons of the 2008 economic crisis. Central Europe, despite the relatively

low level of penetration of the financial sector, had its faire share of the

crisis, mainly through a wave of currency devaluations and consequently, a

very high level of non-performing retail mortgage loans (with the exception

of the Czech Republic and Slovakia). As the authors emphasize, following

the crises, according to the global experience, it usually takes 5 to 10 years to

regain confidence and forget the blows Central Europe is no exception and

offer nearly 10 years we witness recovery of banks’ profitability and increase

of lending activities.

These years following the crisis have been a golden period for dissemination

of financial knowledge – political leaders, professionals and practicing

economists have been keeping financial literacy on top of the agenda and

people, suffering from the crisis are more open to information helping them

to avoid similar losses in the future.

It is fair to ask the question if this period has been used properly to educate

the population in financial matters and would be current level of financial

literacy guarantee avoiding the next crisis?


51

As far as Central Europe is concerned, the answer is quite disappointing.

We have witnessed the appearance of new Ponzi schemes, resulting in large

losses for the population – small-scale investors seen not to have learned

much from the crisis. In Hungary, according to a research carried out in

2015 by the authors, even university and college students studying

economics, had only a slightly better understanding of financial issues, not

directly related to their mandatory curriculum, than their peers studying

other disciplines.

What could be a solution? The authors advocate that teaching of financial

skills should be made an integral part of the mandatory school curriculum,

leading to an increased level of financial awareness.

However, as the authors point out, European education systems are mostly

conservative and react too slowly to challenges. In the era of digitalization

of financial services it may easily happen that a large part of traditional

financial knowledge found in textbooks, become quickly outdated.

Nevertheless, despite all technical developments, the basic task of increasing

financial literacy of the population remains unchanged, even if the way

financial services are delivered develops quickly: in a market economy,

citizens must take care of their finances and should be able to manage their

financial assets and liabilities reasonably. One should learn at an early age

that, in whatever form money appears, it needs to be managed carefully. It is

not too early to speak in schools about the dangers of overleveraging (using

probably more simple expressions) and about the risks of “incredibly

profitable investments”.

As the authors emphasize, similarly to a driving license that is obligatorily

obtained by the adult population, managing one’s finances (mostly through

digital channels) should be also considered a necessary skill.

The authors build their conclusions on a thorough analysis of available

literature, adding the results of their own research. The basic materials used

also include surveys carried out by different research institutes,

consultancies and state organisations in Hungary in the period of 2011-2016.

The authors start with analysis of the different approaches to the concept of

financial literacy, pointing out at the difficulties of international comparison


52

of financial knowledge. They also note the changing content of FL which

more and more includes the ability to use digital financial services.

Introducing the concept of cyclical character of FL, they emphasize the link

between the level of financial knowledge and the economic and financial

crises. They also note the difficulties of designing financial education

programs, referring the trap of “fighting the last war” – preparing people

against risks, characteristic for the previous crises.

In order to define a strategy of financial literacy, the authors show the

different levels of financial knowledge on an ascending scale, from knowing

simple financial concepts to the ability to reach well-founded and conscious

financial decisions, and propose corresponding solutions to reach higher

level of FL.

The authors complete their analysis with a survey on the new challenges of

the digital era and on how banks react to the changing customer behavior.

Their conclusion is clear – clients should understand not only how to use

the new distribution channels but also the opportunities provided by

modern online banking. In a way, technology may support better

management of personal finances, but the final responsibility will always

remain with the individual customer.

Ms Shangxia Li: Deposit Insurance and Mobile Payments Disparities on Regulatory Approaches

53

CONTACTLESS CARD AND MOBILE PAYMENT ADOPTION IN

HUNGARY

Mr Zsolt, Pál

Assistant professor

University of Miskolc

Electronic payment transactions can be classified as „proximity”/„remote” payments or Consumer-to-Consumer (C2C), Consumer-to-Business (C2B) or Business-to-Business

transactions. As VISA’s 2016 survey shows, within proximity payments, the most promising growth

area is that of payments using NFC (contactless) technology. In Hungary, electronic payment methods should compete with cash which still has an 80%

market share but card payments are quickly gaining market share, in particular in the contactless segment.

A number of providers, including Gránit Bank, OTP, MKB, Telenor, Cellum offer this service and the number of avaible opportunities should quicly grow in the coming years,

together with the number and volume of NFC card transactions.

Visa’s 2016 Digital Payments study, for which more than 36,000 online

consumers in 19 European countries were surveyed shows that 54 percent

of European consumers regularly use their mobile device to make payments.

The number of consumers making mobile payments has tripled in the past

year, as 18 percent used mobile payments to pay for goods and services in

201611.

The most current classification of mobile payments is about the distance of

the transaction. According to this, we can speak about “proximity

payments” or “remote payments”. For “proximity payments” the consumer

and the merchant (and their equipment/devices) communicate directly using

a proximity technology (in most of the cases NFC or 2D barcodes), as they

are in the same location and. For “remote payments” the transaction can be

made independently of the payer’s location and it is conducted over

telecommunication networks such as GSM or internet. Sometimes these two

categories are overlapping, when information for the transaction is gathered

11 Digital Payments study – VISA Europe (2016)


54

via a proximity technology, but the actual payment initiation is done

remotely via the mobile device.

Mobile payments may be also classified as Consumer-to-Consumer (C2C),

Consumer-to-Business (C2B), Business-to-Consumer (B2C) and Business-

to-Business (B2B) payments, considering the type of the payer and

beneficiary (being a consumer or a business).

Proximity Remote

C2C

C2B typical

B2C

B2B

C2B proximity payment is the most typical card transaction

“A typical payment card transaction is C2B, with the beneficiary usually

being a merchant. The payments card industry has been developing the

concept of contactless cards based on NFC technology which offers a viable

alternative to cash for low value transactions. This allows the cardholder to

simply wave or tap the card close to the merchant’s payment terminal for

the payment to proceed. Mobile devices are capable of supporting the same

technology and therefore can be used by the cardholder instead of the

physical card itself. This offers a great opportunity for the development of

interoperable mobile contactless payments.”

Surveys have shown that for proximity payments whereby cards are the

underlying payment instrument, the NFC technology is by far the one with

the best market take-up. 12

The most common payment method In Hungary is still cash (about 80%),

but in the last few years we experienced a significant growth in card

payments, and in the proportion of contactless (MasterCard PayPass)

transactions. In the Hungarian payment card infrastructure, now contactless

payments became dominant. In the first quarter of 2017 63 per cent of

transactions were conducted using the contactless technology. This

accounted for nearly a half of the value of total domestic purchase

12 EPC White paper on mobile payments


55

transactions conducted with payment cards.13 This means a strong base for

the introduction of proximity mobile payments, as “contactless card

payment is the predecessor of (proximity) mobile payments.14

According to OTP figures, there are 1.2 million smartphones in Hungary

able to use NFC for transactions. Smartphones with iOS are only able to be

used for mobile payments with Apple Pay, which is in Europe only available

in some banks of France, Ireland, Italy, Spain, Switzerland and The United

Kingdom.

Hungarian bank account holders have the following opportunities to pay

with their smartphones at the moment.

In September 2016 GRÁNIT Bank in cooperation with MasterCard

introduced GRÁNIT Pay, a new generation mobile payment solution.

GRÁNIT Bank clients need an NFC-enabled Android smartphone and the

mobile app of the bank on it to digitalize their bank cards and be able to pay

with their devices.

In the recent past OTP Bank also launched contactless NFC payments on

its Android mobile wallet application. The upgraded Simple Android app

incorporates NFC point of sale payments, which are running alongside the

QR code system previously in place. The NFC payment functionality of the

app is currently only available to OTP customers. MKB Bank has launched

a similar solution too.

There are some other alternatives such as Telenor MobilPass or Cellum

Connected Card. To use the solution of the telecommunication company,

customers also need an NFC-able SIM-card. Cellum’s solution is based on a

prepaid card.

We can state, that our country is not the epicentre of mobile payment

adoption. However, there are some trustworthily working and quickly

developing solutions. These can be supplemented with FinTech companies

now offering a lot of cashless payment services and neobanks supplying

bank accounts compatible with services like Apple Pay, Anroid Pay, or

13 MNB Information Release – 15 June 2017 14 Eölyüs Endre: Innovations and the future in the world of digital payments


56

Samsung Pay.15 Instant bank transfers will be launched in Hungary16 on 1

July 2019, which also could be an important milestone17.

I think Hungary can expect a rapid development in the spread of proximity

mobile payments and other cashless payment solutions in the next few

years. I expect a lot of coexisting infrastructures resulting better user

experience, and a dynamic, secure payment system.

15 KOVÁCS, Levente – TERTÁK, Elemér: Financial Literacy 16 Instant Payments – Magyar Nemzeti Bank 17 KOVÁCS, Levente – DÁVID Sándor: Fraud risk in electronic payment transactions


57

References

Digital Payments study – VISA Europe (2016)

Eölyüs Endre: Innovations and the future in the world of digital payments

(Mastercard, talk, University of Miskolc, Financial Literacy Conference, 8th

March 2017)

Contactless payments account for nearly two-thirds of total card payments

(Information Release – Magyar Nemzeti Bank, 15 June 2017)

EPC White paper on mobile payments (version 5.0) – European Payments

Council (2017)

KOVÁCS, Levente – TERTÁK, Elemér: Financial Literacy – Panacea or

placebo? - A Central European Perspective

Instant Payments – Magyar Nemzeti Bank

www.mnb.hu/en/payments/instantpayments

KOVÁCS, Levente – DÁVID Sándor: Fraud risk in electronic payment

transactions

JOURNAL OF MONEY LAUNDERING CONTROL (ISSN: 1368-5201)

19.: (2.) Paper 5. (2016)


58

DEPOSIT INSURANCE AND MOBILE PAYMENTS: DISPARITIES ON REGULATORY APPROACHES

Ms Shengxia Li

PhD student

University of Miskolc

Deposit insurance (DI) is a widely accepted global concept, with 125 jurisdictions where explicit DI systems have been introduced. Do these schemes also cover mobile money

(MM)? To answer this question, the author first provides definition of MM and short description of the three main types of the existing DI systems (direct, pass-through and

exclusion). MM is different from traditional money and this is a specific challenge for regulators. MM issuers have different status around the globe and the legal requirements for issuing MM

also differ across jurisdictions. When extending DI to MM in order to defend the poulation, regulators should consider the specific risks characteristic for MM – the

liquidity risk, risk of insolvency of the issuers and their banks. In order to meet these challenges, regulators should apply a country-specific approach,

considering the local legal environment, level of financial incusion and public awareness and the cost of deposit insurance, emphasizes the author.

Abstract

With the increased deployments of Mobile Network Operations (MNOs)

and mobile device market penetration, there is a broader number of

financial services provided to the customer. Along with the booming of

mobile money, there are emerging risks: Do the mobile money providers

have enough money to liquidate and meet customers’ needs? Are they

solvent enough to reimburse their customers? When there is a bank failure,

are mobile money users protected? This paper investigates mobile money

risks and how deposit insurance can be involved to protect customers in

different jurisdictions.

Most nonbank mobile money issuers are requested to have initial capital

requirements to meet the liquidity limits for their customers. What’s more,

in different jurisdictions, there are a variety of provisions on how to separate

customers’ funds and the providers’ assets, in countries applied with


59

common law, there is a trust law to regulate related participants, and under a

civil law, such law may be ambiguous and more indirect.

Even if the mobile money issuer is well organized, customers’ funds may

still be at risk when a bank fails. To address these issues, there are three

main approaches to deposit insurance for digital payments: direct coverage,

under which regulation is adjusted as needed to bring mobile payments

within deposit insurance coverage; “pass-through” or indirect coverage,

which allows for customer funds held in pooled custodial accounts to be

insured, and the insurance is “passed through” to individual account

balances managed by a third party; as well as the exclusion approach. In this

paper, the author presents cross-country examples on the disparities of this

issue and its different deposit insurance scheme characteristics.

The Concept of Mobile Money, Deposit Insurance and their Function

Mobile Money and its function

Mobile money is defined as a digital equivalent of cash which is transmitted

and stored on electric devices or some mobile communication networks

(CPSS,2012). It differs from traditional payments in that it requires the payer

to possess a digital instrument to interact and initiate a transaction via their

devices with the related information routed.

Most mobile payments transactions are small in value but more

approachable for the customer, especially among the unbanked and remote

residents. Its foremost and predominant role is to act as a payment channel

to more customers. With the potential prospective of reaching billions of

new customers, there are many banks and financial institutions that desire to

provide more innovative and accessible financial services to their customers,

who come from among more than 80 countries (GSMA, 2014). Through

the expanded digital connectivity ensured by MNOs, there is an exponential

growth in mobile transactions and mobile money accounts worldwide. This

is most visible in developing economies: mobile penetration in the

developing world increased from 24% in 2007 to an estimated 47% in 2017,

with the number of mobile subscribers reaching 3.2 billion, and the number

of mobile connections doubling during the last four years in Africa and

South-East Asia, and more than tripling in South Asia (GSMA, 2013). Its


60

repaid diffusion shows mobile money’s immense potential to extend

financial inclusion.

The priority function of mobile money is to act as a tool for payment and

transfer; with the development of MONs, a myriad of financial services and

unpracticed players are involved to form a new landscape, such as mobile

device producers, application providers and third-party agencies. Another

role for mobile money is value store functional (GPFI, 2014). It can be

post-paid or pre-paid, through different methods which also help to reduce

transaction cost during the delivering of financial services.

Interaction between Deposit Insurance and Mobile Money

Deposit Insurance, designed to protect customer’s deposits when a bank

fails, plays a significant role in promoting confidence among customers,

promotes financial stability and prevents chaotic depositor runs. There are

125 jurisdictions in the world that have established an explicit deposit

insurance system prior to 2016 (IADI,2016). Meanwhile, the involvement of

deposit insurance in the promotion of financial inclusion should adequately

be addressed by determining what types of deposits and other money

transfer vehicles are covered by the deposit insurance (IADI,2014).

Allowing both banks and nonbanks to issue mobile money will foster

financial inclusion, however, there are also emerging risks presented:

liquidity risk rises when customers are unable to access their funds upon

demand and thus lose funds stored on the electric account; solvency risk

appears when the issuers fail to pay back the money. Mutual trust is the

basis of the whole banking sector; banks provide a collateral support for

customers’ deposits, and when there are any disruptions to mobile banking

services and telecommunication networks, the public confidence will be

undermined (Kovács, Levente 2015, and Kovacs, Levente 2016). The most

important purpose of deposit insurance is to protect its customer against

loss, and when confronted with the disruption, if the MON platform is

offered by members of the deposit insurance, its customer will be

reimbursed. Vice versa, if the digital platform is provided by nonbank

financial institutions, the number of small depositors could lose all they have

if one or more providers of digital transaction platform fail, more severely, it

may lead to systematic chaos (GPFI,2014). Even if the mobile money


61

issuers store customer funds in a licensed bank, it is insufficient to ensure

that customer funds are protected (GSMA,2016). Deposit insurance systems

are seeking to shift the financial burden of protecting smaller, retail

depositors to the government, and to mitigate the possible riskiness,

countries and jurisdictions have followed new developments on coverage

approaches to protect their customers. These are mainly: the direct

approach, the pass-through approach and the exclusion approach. There is

no worldwide universal benchmark concerning the approaches that a

specific country should adopt, namely there are still large disparities

concerning the deposit insurance approach for mobile payments.

Oversights of Mobile Payment and Deposit Insurance

Legal Regime

Legal uncertainty comes from the insufficiency of licensed providers.

According to a World Bank survey, less than half of the operators or

providers are licensed. These unlicensed providers may potentially abuse

mobile money. To mitigate the abuse of electronic money, virtually all

jurisdictions have set an initial capital requirement for nonbanks, which

varies greatly among different countries: the European Union’s is at 350,000

Euros under Directive 2009; India at INR 1 billion, which is approximately

USD 15.8 million, with an ongoing requirement at a minimum 15 percent of

risk-weighted assets and liabilities may not exceed 33.33 times net worth;

Kenya’s initial requirement is at KES 20 million (USD 198,000); and the

requirement int he Philippines is PHP 100 million (USD 2.2 million)

(GSMA,2016). There is a lack of consensus on how to establish appropriate

initial minimum capital requirements for nonbank mobile money issuers.

The initial capital requirements are designed to address bank insolvency and

remain sufficient as mobile money grows.

Even though there is a requirement for the initial capital, customer funds

may still be at risk. In most nonbanks, mobile money collected from many

customers is put in pooled accounts that are kept at one or more

commercial banks, while each pooled account is just treated as one single

account in the deposit insurance scheme. As a result, each customer may

have less percentage of their actual value guaranteed. One way to address


62

the problem is the pass-through deposit insurance, which is applied in

limited jurisdictions.


63

Possible Risks

Liquidity Risk: regulators mostly tend to require that providers maintain a

1:1 ratio between e-money and customer’s funds, to promise timely

payback. In case of non-bank e-money issuers, they also request them to

hold 100% of the float in safe, liquid investments (IMF 2014). However,

there also some exceptions, such as in the European Union, where this

requirement doesn’t apply if customers’ funds are protected by private

insurance. (Financial Inclusion Watch, 2016). Regulations on these issues are

not harmonized and vary in different jurisdictions, which leads to disparities

in this key issue.

As for mobile money fund diversification, cases are also different from

country to country. For example, markets like Afghanistan, Colombia,

Indonesia and Turkey are not sufficiently developed and only permit mobile

money put in banks; countries like Kenya which have a significant booming

of mobile money, are more diversified by allowing investments among

several credit institutions, but with a requirement from the mobile money

issuer to set aside funds equal to or greater than their obligations to

customers. Brazil and the EU, India, US, and the Philippines are diversified

among several asset classes by letting some government securities and other

authorized assets be invested (BBAV, 2016). It is obvious that different

regulations are largely influenced by country specific characteristics and

considerations, which is combined with the market development of mobile

money and the sophistication of their financial stability and sufficiency.

Risk of insolvency of the mobile money issuers: In the event of the

insolvency of a mobile money issuer, even though the regulator requires

100% of mobile money to be put in safe, liquid assets, the customer still is at

risk to not get all his or her money back; without any provision to protect

customers’ funds, they may only have an unsecure claim on the issuer’s

assets instead of a full value reimbursement. As a result, most regulators

require mobile money to be separated and ring-fenced from other assets of

the provider. The legal regime used to isolate and ring-fence customers’

funds once again varies by jurisdiction, which will largely be determined by

that jurisdiction’s legal law systems. Countries adopt common law based on

the concept of trust. Trust is a legal instrument whereby the provider


64

transfers the money to the trustee, who will manage their property for the

benefit of one or more beneficiaries. Under this regime, the trustee holds

the funds only on behalf of its customers and these customers’ funds are

not considered the providers’ assets and should be isolated from the

trustee’s other assets. Countries like India, Kenya, the Philippines, and

Uganda are under the applicability of trust law protection.

In civil law jurisdictions, on the other hand, the isolating of mobile money is

less evident. In the context of mobile money, there are also three

participants: the issuer, the financial institution, which serves as the fiduciary

and the customers, who are beneficiaries. While these contracts have been

adopted in several civil law countries, they still lack the legal construction,

since as common law countries, regulators are driven to take more steps in

order to mitigate further risks. The application of fiduciary protection has

mostly been used in Latin American countries, such as Paraguay, Colombia,

Peru, Uruguay (Figueroa, 2007).

The risk of insolvency of banks: Even if a mobile money issuer set the ring-

fenced funds to repay its customers, customers’ funds may still be lost in the

event of a bank failure. If the country does not yet have an operational

explicit deposit insurance, in such countries, mobile money customers

would not be entitled to priority status in terms of reimbursement in the

event of bank insolvency, and as a result the holders of mobile money may

receive less value deposits than their funds. Considering a country with

explicit deposit insurance system, regulators are exploring options for fully

insuring individual mobile money accounts. Pass-through deposit insurance

has been introduced in the United States and Kenya; direct insurance

approach has been applied in India and Colombia; and a majority of deposit

insurance schemes choose the exclusion approach, such as Brazil, the EU,

Indonesia, Malaysia, the Philippines, Turkey, and Peru. Deposit insurance

approaches are not harmonized worldwide and are largely influenced by

country specifics.


65

Protection of Customer Funds: Main Types of Deposit Insurance

Approaches for Mobile Payments

Pass-through Deposit Insurance

Accounts that may be covered by pass-through deposit insurance are

fiduciary accounts. These accounts are established and maintained by the

mobile money issuers on behalf of their customers. The FDIC, for example,

will insure the funds deposited by a fiduciary on behalf of their real owner as

if the actual owners had established deposit.

The pass-through approach allows customer accounts to be covered even if

they are not members of the deposit insurance system. Funds collected by

the mobile money provider and placed in a pooled account must be

qualified as “insured deposits” and individual customer accounts must be

eligible for “pass-through” treatment. Even though, the pass-through

approach is not widely recognized, it is already applied by the United States,

and is under the process of Kenya deposit insurance scheme.

Direct Coverage Insurance

Direct coverage insurance was established in India and Columbia in 2014.

Both countries claim that customer funds held by these nonbank mobile

money issuers will be under the protection of the deposit insurance system

in the event of bank insolvency.

Under this approach, a single entity may be both e-money provider and the

insurance system itself and funds are insured through specialized regulation

schemes. Through this approach, individual customers’ mobile money is

directly insured up to the coverage limit according to its jurisdictions. For

this approach, it is obvious that adequate and prudential regulation, together

with an efficient supervision and resolution framework must be in place,

aimed at mitigating potential risks.

Exclusion Approach

The exclusion approach, namely, to state that electric money is not covered

by the deposit insurance system, nowadays is adopted by most countries


66

around the world. There are some foreseen challenges for the existence of

this approach: inclusion tradeoffs associated with extension of deposit

insurance via digital platforms should be narrowed significantly; practical

feasibility for the whole society and the financial market may be challenging;

customers and the public should be acknowledged and customer awareness

should be enhanced properly about the exclusion of mobile money; the

definition of deposit should exclude e-money and any other digital

transaction platforms. There are also countries that have decided to extend

deposit insurance to individual e-money accounts, either directly or

indirectly.

Cross-Country Examples on Deposit Insurance and its Regulatory

Approaches

United States: The link between deposit insurance, banking supervision and

bank failure in the United States is the strongest in the world (Calomiris and

Gorton, 2000). The Federal Deposit Insurance Corporation, is a politically

independent entity which insures its members’ deposits, it is completely in

charge of the bank resolution process, administratively as well, and may

execute the process without involving the court, trying to resolve the bank

at its least cost criterion (Thorsten Beck and Luc Laeven, 2008). In 2008,

the FDIC establishes that all funds underlying stored value products and

other non-traditional access mechanisms will be treated as “deposit”. As a

result, all such funds including mobile money will be subject to FDIC

protection and insured up to the deposit insurance limit. Requirements for

this pass-through deposit insurance indicate that funds must be owned by

the principal and not the mobile money issuer who set up the account, to

confirm the actual ownership of the deposit funds, FDIC may review the

agreement between the mobile money providers establishing the account

together with the state law.

EU Countries: the EU requires all its members to establish an explicit

deposit insurance institution. All its member are regulated under specific

directives to be more harmonized. Some of the countries in the EU

developed multiple deposit insurance schemes such as Germany. Germany

Bankers Association has the right to cancel the membership of weak banks

and demand a regular audit, whereas the Federal Financial Supervisory


67

Authority is mainly in charge of the resolution of failed banks. The German

deposit insurance system is also strongly linked to bank resolution. For the

issue of mobile money, the EU offers two options: 100% percent of

customer funds must be isolated from the mobile money issuer’s other

funds and deposited in a separate account at a credit institution or invested

in “secure and low-risk assets”, or the mobile money must be covered by

insurance. India requires at least 75% of customers’ funds to be invested in

short-term government securities and up to 25% of customers’ funds may

be held in commercial banks. Mobile money issuers in the Philippines must

always have “liquid assets equal to the amount of outstanding mobile money

issued” and these funds may be invested in bank deposits, government

securities or other permitted liquid assets. Hungary, also has separated DIS,

and financial corporations are obliged to pay surtax in Hungary; the financial

institutions must pay the surtax based on their activities. Domestic

electronic money steadily increased, and the rapid development of

contactless technology gave birth to the improving efficiency of payment

transactions for Hungary, but households’ use of electronic payments

instruments still lags a little behind EU average. Hungary also introduced

the widest scope of the financial transaction levy, together with the

overburdened banking sector (Kovács Levente 2013.), it may also bring

additional challenges for the implementation of newly developed guidelines

at EU level, such as the minimum requirements for internet payments.

Brazil: The deposit insurance agency in Brazil is independent and privately

managed. It is not involved in bank supervision or the resolution of any

failed banks, but will intervene in the case of problematic banks. The central

bank is in charge of liquidation, so the role of deposit insurance and bank

supervision is institutionally separated. As another example, in the case of

Uganda this is different. Uganda’s deposit insurance was administrated by

the central bank, which is also the bank supervisor. Thus, in this case, the

housing of depositors’ funds and the supervision of banks is not separated,

which does not seem to ensure high efficiency in mitigating risk and

minimizing customers’ funds in the event of bank insolvency. When it

comes to mobile money requirements, Brazil applied an exclusion approach,

digital money is not covered by deposit insurance at all.


68

Kenya: Kenya’s deposit insurer plays a significant role in bank failure

solution, but this role is limited to a certain extent. The Deposit Protection

Fund is housed in the central bank of Kenya, and the decision of bank

resolution is made by the central bank even though the DPF is also involved

in the liquidation of closed banks. Kenya enacted an act in 2012 which

provides for pass-through deposit insurance. Payment service providers,

including mobile money issuers must establish a trust for customer funds

and ensure these funds are segregated from other funds.

Countries selected on mobile money provision and its deposit insurance

characteristics are presented as table 1.

Table 1. deposit insurance characteristic and its mobile money

provisions

Countries Link between

DIS and bank

supervision

Liquidity Requirements for

Mobile Money Funds

Initial

Capital

Requiremen

ts

Deposit Insurance

Approach to Mobile

Money

US Strongly

linked

All funds should be

held in a trust

Not

Specified

Pass- through

EU Legally

separated

100% of funds must be

in a bank account or in

low risk assets; or

protected by private

insurance

EUR

350,000

Exclusion

Approach

Kenya Role of DIS

limited

Funds must be held in a

trust and placed in

licensed banks

KES 20

million

approx.E

UR

176,000

Pass- through

Uganda Not

separated

Funds must be placed

by issuers in a licensed

Not

Specified

Not Specified


69

DIS financial institution.

Brazil Separated

DIS

Funds must be deposit

in the Central Bank on a

target balanced ratio

BRL 2

million

approx.E

UR

550,000

Exclusion

Approach

India Legally

separated

75% of funds should be

invested in government

securities.

INR 1

billion

approx.E

UR 13.4

million

Direct Coverage

Philippi

nes

Legally

separated

Funds should be

invested in government

bonds or other

authorized liquid assets

PHP 100

million

approx.E

UR 1.8

million

Exclusion

Approach

Source: own contribution based on Asli: database, GSMA research and

BBVA research.

Conclusion and Frontier Issues

Regulators are striving to follow approaches to ensure that mobile money is

effectively safeguarded against the potential risk of liquidity and insolvency

of the mobile money issuers as well as the insolvency of banks. However,

the approaches are not being tested in practice to approve which one is the

best. Disparities are due to the country specifics among jurisdictions.

The pass-through deposit approach is in place in limited countries even

though surveys show that mobile money funds could benefit from the

approach, though in the long run, such an approach will reduce risk in the

event of bank failure and bolster confidence among customers. Direct

coverage, which is also rarely adopted by regulators, may increase the cost of

deposit insurance in terms of its higher rate of reimbursement. The

exclusion approach is currently the most widely used. It seems that for


70

prudential steps regarding mobile money, there remain some challenges,

such as public awareness, and trust between customer and mobile money

issuer, and will sooner or later be driven to a more diverse and inclusive

approach.

There is no one size fits all approach to extending deposit insurance to

mobile money. Taking into account all the risks, from liquidity to insolvency

risk on mobile money issuers to bank failures, the optimal approach will

most likely be country-specific, and will consider the extension of mobile

money platforms, financial inclusion, feasibility of possible novel

approaches and the cost of deposit insurance, and public awareness.


71

References

[1] BBVA. “Protection of Customers’ Funds in Electronic Money: a myriad

of regulatory approaches. BBVA finnaical inclusion watch.”,2016.

[2] Tanai Khiaonarong. “Oversight Issues in Mobile Payments”, IMF

working paper, 2014.

[3] Committee on Payment and Settlement Systems and Technical

Committee of the International Organization of Securities Commissions,

2012, Principles for Financial Market Infrastructures, Bank for International

Settlements, April.

[4] Kovács, Levente: A pénzügyi kultúra és aktuális feladataink (Financial

Literacy and the Tasks at hand in Hungary). Gazdaság és Pénzügy 2015/1.

[5] Kovács, Levente, and Elemér Terták. "Financial Literacy.",2016b, Verlag

Dashöfer 2016.

[6] Demirgüç-Kunt, Asli, et al. "The global findex database 2014: Measuring

financial inclusion around the world." (2015).

[7] Demirgüç-Kunt, Asli, Edward J. Kane, and Luc Laeven. "Deposit

insurance database." (2014).

[8] International Association of Deposit Insurers: Financial Inclusion and

Deposit Insurance Research Paper, June 2013.

[9] IADI (International Association of Deposit Insurers). “Revised IADI

Core Principles for Effective Deposit Insurance Systems.” Basel, November

2014.

[10] Beck, T. H. L., et al. "Deposit insurance and bank failure resolution:

Cross-country evidence." Deposit Insurance Around the World (2008): 149-

178.

[11] Shengxia Li. "Deposit Insurance and Mobile Payments: Disparities on

Regulatory Approaches. ” 2017, July.


72

[12] Kate Lauer and Timothy Lyman. “Digital financial inclusion:

Implications for customers, regulators, supervisors, and standard-setting

bodies.” Working Paper, CGAP, October,2014.

[13] Camilo Tellez and Peter Zetterli. “The emerging global landscape of

mobile microinsurance.” Working Paper, CGAP, January 2014.

[14] Basel Committee on Banking Supervision and International Association

of Deposit Insurers, 2009, Core Principles for Effective Deposit Insurance

Systems, Bank for International Settlements, June.

[15] Kovács, Levente. A bankszektor helyzete és kihívásai 2013-ban (The

Position of the Banking Sector in 2013 and the Challenges Faced by it).

MAGYAR PÉNZÜGYI ALMANACH:(2013-2014) pp. 71-76. (2013)

[16] European Payments Council and GSMA, 2010, Mobile Contactless

Payments Service Management Roles, Requirements, and Specifications,

Document No. EPC 220-08, Version 2.0, October.

[17] Global Partnership for Financial Inclusion: Deposit Insurance and

digital transaction platforms- a frontier issue. 2014, October.

[18] Groupe Speciale Mobile Association, Safeguarding Mobile Money: How

providers and regulators can ensure that customer funds are protected.

January,2016.

[19] Peter Gross. “Microinsurance: Delivering microinsurance through

innovative channels.” November 2012.

[20] Accessing Risk in digital payments, Special report financial service for

the poor. February,2015.

Curriculum Vitae

77

CURRICULA VITAE OF THE PRESENTERS AT THE CONFERENCE

Anna Maj

FinTech Expert, Advisor & Mentor

Country Manager, PayTech Consulting

Anna has been involved in the financial and payment services sector since

2000. She acquired experience in the banking and telecommunications while

working in Polish and foreign corporations (Citigroup, T-Mobile) as well as

a consultant and advisor. She was a CEO of one of the leading Polish

payment institution and acquirer – PayTel SA. She is a Board Member of

the Coalition for Development of Cashless Payments. She is involved in

fintech advisory projects and programs (e.g. PwC Startup Collider). Featured

in the TOP 20 Women in FinTech Report (IIG, March 2017). She is a

speaker at industry (fintech and paytech) conferences in Poland and abroad.

Anna graduated of Interdepartmental Individual Studies in Humanities at

the University of Warsaw and International MBA program at the Warsaw

University of Technology accredited by the London Business School. She is

a PhD candidate in the Collegium of Management and Finance at the

Warsaw School of Economics.

Domenico Scaffidi

Principal Solution Consultant Immediate Payments

ACI Worldwide (EMEA) Ltd

EDUCATION AND TRAINING:

From 2015 to 2016

From 2000 to 2005

Master in International Project Management at the LSBF (London School of Business and Finance - London)

Payment Infrastructure Researcher at the Catholic University in Milan – Italy

Curriculum Vitae

78

From 1988 to 1991

From 1982 to 1986

Cagliari Mathematics University – Italy

Accounting and Information Technology Degree - Commercial and Technical Institute P. Martini, Cagliari – Italy

ACHIEVEMENTS

•Italian Banks representative at the ”EBF TARGET2 Working Group” -

European Central Bank – TWG Frankfurt

•Member of the European Payment Council – Brussels

•Iccrea Banca Representative at ABI - Rome

•Italian Banks Representative at EBA STEP1 and Euro1 UAG –

Paris/Brussels

•Italian Banks Representative at EBA STEP2 BWG - Paris

•European STEP1 Banks representative at EBA OTC UAG - Brussels

•European Association of Co-operative Banks Member – Brussels (EACB)

•Future Development Group EBA STEP 1 Member – Paris.

WORK EXPERIENCE

2016-now Principle Consultant Instant Payments

2010 – 2016: Head of Payment Systems and International Business

Applications Department

2006-2010: Program Manager of the SEPA Migration Project

2008-2010: Demand Manager for System Payment Platform

2005-2008: Operative Desk TARGET2 Project Manager

Curriculum Vitae

79

Dr. Jozsef Czimer

Advisor to the CEO

CAPSYS

Jozsef started his career in the National Bank of Hungary working in

international money market operations. Later he joined the regulations

department where he had the opportunity to manage a considerable part of

the country’s banking devolution reform by organizing the handing over of

foreign currency operations by the National Bank to the new commercial

banks.

Still as a regulator he started to deal with bank card operations. Later, as a

deputy CEO of the new IBUSZ Bank he had the opportunity to manage the

country’s then largest card acivity. Having an innovator’s view he started to

deal with e-money operations already in the 1990s by exploring possibilities.

Later he became to be an expert of this subject lecturing in the Central

Europen University on it and advising several companies including the

Hungarian Post and SenseNet Ltd. The latter later became to be the issuer

of the first and only Hungarian e-money, Barion. Applying his expertise

Jozsef took part in the working out of the European E-money Directive as

well.

In 2010 as the CEO of HFR, Budapest he started to work on a kiosk based

payment system which was implemented in 2013 in the country. Having

successfully finished the project he moved to London to manage Intersoft

London Office working together with VocaLink on different projects

including the marketing of the Immediate Payments System and mobile

payment systems based on the instant payment solution.

Curriculum Vitae

80

For the time being he is the manager of the Capsys Informatics London

Office and responsible for instant payments services professionaly and also

or the VocaLink and ACI Worldwide partner relationships.

Dr. Levente Kovács

Secretary General

Hungarian Banking Association

Levente Kovács became in 2011 Secretary General of Hungarian Banking

Association. Prior taking up his assignment he served for 6 years as Group

Head at KDB Bank. For more than one and a half decade he worked in

high ranking positions in banking industry. He had been Managing Director

at GIRO Ltd. from 2002 to 2006, Managing Director at Budapest Bank

from 1999 to 2002, beforehand he had been Managing Director at

HypoVereinsbank for 2 years and different positions at CIB Bank for 3

years.

In addition to his professional functions he holds several honorary, high

level positions in financial industry and educational field. He is assistant

professor and head of International Finance Department in University of

Miskolc. He is a member of various other Boards including Asian Financial

Cooperation Association, European Banking Federation, Hungarian

Automated Clearing House, Hungarian Credit Guarantee Ltd., Hungarian

Deposit Insurance Company and he is a member of editorial boards of

several scientific publications.

He is a Master of Science in Mathematics and Physics, Master of Business

Administration, Ph.D. and Habilitation.

Curriculum Vitae

81

Dr. Qazi Jalisi

Senior Legal Advisor

Electronic Money Association

Qazi is a dual-qualified multi-specialist lawyer advising on regulatory matters

concerning financial services, money laundering and data protection. He is

admitted as a solicitor in England and Wales, and in Ireland.

Qazi has worked on a variety of projects in the financial sector, including

advising on multi-jurisdictional regulatory requirements, the negative scope

of the EU e-money and payments regimes, the regulatory and VAT

treatment of virtual currencies in the EU, and structuring crowdfunding in

the UK.

Prior to his legal career, Qazi was a physicist and research engineer.

• Senior Legal Advisor to the Electronic Money Association (Trade body)

• Partner at FM Legal (English law firm)

• Senior Regulatory Consultant at Flawless Money (Regulatory

consultancy)

E: [email protected]

T: +44 20 3372 9045

W: www.linkedin.com/in/qazi-jalisi-3543b19

Dr. Sándor Patyi

Chairman of BACEE

http://www.linkedin.com/in/qazi-jalisi-3543b19

Curriculum Vitae

82

Member of the Board of Directors and Deputy CEO

OTP Banka Slovensko

Dr. Patyi graduated from the Marx Károly University of Economics,

Budapest, Faculty of Foreign Trade. He got PhD from the same university

in 1987. He started work at Hungarotex Foreign Trade Company as sales

representative and joined Magyar Külkereskedelmi Bank Rt. (MKB) as Bank

economist in 1981. He held different positions at MKB at the International

Department, International Banking Relations Directorate and MKB

Corporate and Financial Institutions Directorate. He became responsible for

MKB Sales and Customer Relations as Deputy CEO in 2001 and in 2005

became MKB Wholesale Deputy CEO.

In 2010 he joined to OTP Bank Plc. as a Director and in 2012 he became

Member of Supervisory Board, OTP Banka Slovensko. Since 2013 he has

been Member of the Board of Directors and Deputy CEO of the bank.

He is Chairman of the Banking Association for Central and Eastern Europe

(BACEE) from its foundation in 1996.

Language skills: German, English

___________________________________________________________

Mr. Adam Tencza

Central and Eastern Europe Division Manager

SIBS International

Adam is the Head of CEE Region at SIBS International, a part of SIBS

Group, which is one of largest payments processors in Europe, and globally

recognized as case of highly succesful payments system.

Curriculum Vitae

83

Adam has collected its expariance working among others in Bulgaria,

Greece, Poland, Portugal, Romania and Kazakhstan. He participated and

coordinated multiple projects, inlcuding among others: integrated ATM

networks on national level, domestic card schemes, antiraud systems,

internet and mobile payments, as well as central card and processing

systems. Previous to current position, he held a position at Nowa France

and was seating at Management Board of PBDA Consulting. Master of

Economics, graduate of Poznan University of Economics, currently PhD

candidate at University of Warsaw.

Mr. Edward Strycharczuk

General Manager

EVO Payments International

Mr Edward Strycharczuk – since June 2015 is the General Manager at EVO

Payments International for Poland and Czech Republic holding the overall

responsibility for the newly formed Alliance REVO between Raiffeisen

Polbank in Poland and the Czech Republic Raiffeisen Bank (both part of

Bank International AG), and EVO Payments International- a global market

leader in the Electronic Clearing and payment card services.

Mr Strycharczuk has more than 15 years’ experience in banking, financial

industry, cards & payment business and merchant services. Since November

2008 till May 2015 as the Head of Card Acquiring at Raiffeisen Bank

International AG he was responsible for the POS and ATM acquiring

business in the RBI group. In his role Mr. Strycharczuk was responsible for

the card acquiring strategy in the RBI group, which includes sales and

marketing, product development and management, risk policy development

Curriculum Vitae

84

and implementation as well as the coordination of organizational changes in

the RBI network banks.

Before joining Raiffeisen group Mr. Strycharczuk worked for Citibank Card

Acceptance, Frankfurt and Elavon Merchant Services, Frankfurt (USBank

subsidiary) holding different management roles. As Head of Sales he was

responsible for acquisition of new merchants in Germany and Austria and

Switzerland.

Mr. Julian Tencer

Department Head, Payments

VUB, a.s.

Mr. Julian Tencer works in VUB Banka since 1991 – covering complex

management in processing, product development and processes design in

payments area (domestic and cross-border, foreign cheques). He

participated on implementations of new payment systems, remote banking

applications, automation of the international payments processing, in the

projects admission of Slovakia into EU, Euro introduction, SEPA, back-

office centralization in VUB, CBA/BACEE payments solution, and projects

within IntesaSanpaolo group.

Since 2005 he is deputy chairman of Payments Committee at Slovak

Banking Association. Within 2006-2014 he has been representative of the

Czech Banking Association and Slovak Banking Association in European

Payments Council WG – Program Management Forum and Roll-out

Committee in SEPA project

Mr. Luděk Slouka

Product Manager CEE

Curriculum Vitae

85

Mastercard

Luděk has worked for Mastercard, as a Senior Product Manager for Central

and Eastern Europe markets with a focus on mobile payments since 2014.

He is primarily responsible for MDES and Masterpass.

From 2005 to 2014 he worked in the telecommunications sector at O2

Czech Republic as a product manager for fixed internet services, voice-over

IP and contactless payment by mobile phone.

Luděk has been focusing on payment services since 2011, when he

participated in the launch of the first commercial payment card with a SIM

in the Czech Republic. In 2012, he successfully introduced the first TSM

solution in the Czech Republic with over-the-air payment card distribution

into a mobile phone.

Mr. Marcel Gajdos

Country manager for the Czech Republic and Slovakia

Visa Europe

Marcel Gajdos was appointed Multi-region Country manager for the Czech

Republic and Slovakia in 2012. He is responsible for developing Visa

Europe’s relationship with Czech and Slovak members. Prior to this

position he was Multiregional manager for Visa Europe.Marcel is an

experienced card expert who joined Visa in 2006 from UniBanka Slovensko

where he spent three years in Corporate banking division.

Prior to joining UniBanka, Marcel worked at Wells Fargo Bank in retail

division. Marcel began his career in the family business, where he worked in

sales division.

Curriculum Vitae

86

Marcel completed his MBA studies at City University Bellevue and was part

of UniCredit banking programme at Bocconi University.

Mr. Maris Cakste

Director of Sales

MeaWallet

Maris Cakste is Director of Sales at MeaWallet. Passionate about digital

payments, Maris gains more than 10 years of experience in sales of

payments, cards and mobile solutons in Europe. He holds a MSc degree in

International Management at Flensburg University, Germany.

Mr. Marten Nelson

Co-Founder & VP of Marketing

Token

Marten Nelson is co-founder and VP of Marketing at Token, a Silicon

Valley based technology company, focused on building a global open

banking platform that addresses PSD2 and helps bank generate new

revenues from open banking. Marten is a technology

entrepreneur/executive who has been getting things done in startups and

Fortune 100 software companies for over 20 years. His experience spans

Product Development, Business Strategy, Business Development and

Marketing. Token is his third company to found. Abaca, a leading email

Curriculum Vitae

87

security company was sold to Proofpoint and the edtech LearnCentral was

sold to Blackboard.

Mr. Nikola Korbar

CEO

DigitalMoneyPulse

Nikola Korbar is Founder and CEO of DigitalMoneyPulse, online

cryptocurrency education platform and Founder and Owner of Crypto

Telegraph, cryptocurrency and blockchain technology news website with a

particular focus on centralised cryptocurrencies, as well towards news from

banking, merchant, regulatory, security and technical news from the world

of cryptocurrencies and blockchain technology.

Prior to founding DigitalMoneyPulse, Nikola’s expeirence includes various

positions in middle and top management in several companies, trading on

Forex markets and one e-commerce startup. Nikola’s first business steps

were in his father’s family business, NiNa Trade – car parts import/export

business for Yugoslavia, Bosnia and Herzegovina, Hungary and Austria.

Nikola has a degree in Economy at Belgrade Business College

________________________________________________________

Mr. Pavol Luptak

CEO | Certified IT Security Professional

Nethemba s.r.o.

Curriculum Vitae

88

He gained his BSc. at the FEI-STU in Bratislava and MSc in Computer

Science at the Czech Technical University with master thesis focused on

ultra-secure systems. He holds many prestigious security certifications

including CISSP and CEH, he is Slovak OWASP chapter leader, co-founder

of Progressbar and SOIT organizations where he is responsible for IT

security.

Pavol uses to have regular presentations at various worldwide security

conferences (in Netherlands, Luxembourg, Berlin, Warsaw, Krakow,

Prague). In the past, he demonstrated vulnerabilities in the public transport

SMS tickets in all major cities in Europe, together with his colleague

Norbert Szetei he practically demonstratedvulnerabilities in Mifare Classic

RFID cards. He has 14 years experience in IT security, penetration testing

and security auditing including social engineering and digital forensic

analysis.

He is co-author of the OWASP Testing Guide v3, has a deep knowledge of

the OSSTMM, ISO17799/27001 and many years experience in seeking

vulnerabilities. He has a knowledge of many programming languages (ASM,

C, C++, XSLT, Perl, Java, PLSQL, Lisp, Prolog, scripting languages) and

operating systems. He is also focused on VoIP and interesting IT security

research.

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