Innovations are changing the payment system. You can now access online banking through a user-friendly app on your mobile phone or tablet, you can pay 'contactless' with your debit card, and the European payment systems have migrated to a single European set of standards, including international bank account numbers (IBAN). These developments do not touch on the traditional foundation of the payment system, as they mostly involve the existing market parties (i.e. the banks), which adapt their traditional payment instruments (debit cards and funds transfers). However, there are signs that the payment system is now on the eve of more far-reaching and fundamental changes, as internet companies, telecom operators and a multitude of payments start-ups are developing new initiatives that could pose a serious threat to the banks' central position in the payment system.
The revolution is long underway
Although bank accounts are still central to most payments, many non-banking parties are now also involved in the execution of the payment process: hardware suppliers, software developers and other specialised service providers. In its most recent inventory of payment system operators, DNB identified more than a hundred companies that were involved in providing payment services in one way or another. Some of these services are considered so important that the organisations providing them must apply for authorisation as a payment institution under European legislation. This applies to payment service providers facilitating webshop payments, for example, a market that is mainly dominated by non-banking parties rather than banks. The innovative aspect of these initiatives is that they focus explicity on consumers making payments.
DNB welcomes these innovations, while keeping an eye on the risks involved
Innovations can help to make payments easier, quicker and safer, and obstacles for developing such products should be removed. Still, there are also risks to consider. The security and reliability of new products is not always at the same level as that of existing products, and it is not always clear who is responsible in the event of fraud or technical malfunctions. Too many concurrent payment methods that are not fully compatible will lead to inefficiency and intransparency for consumers. DNB analyses payment system innovations and takes action where necessary.
The National Forum on the Payment System (Maatschappelijk Overleg Betalingsverkeer, MOB), a consultative body representing both users and providers of payment services, monitors the needs in society that drive innovations in the payment system and bottlenecks in their development, and helps to bring relevant parties together if innovative developments are hampered by a lack of cooperation.
This is how DNB and the MOB encourage innovations that can promote the smooth operation of the payment system and mitigate the risks. In addition, DNB and the MOB also support cooperation at the European level in order to realise innovations on a European scale to ensure a properly functioning European payment market and leverage benefits of scale.
Regulatory framework update
The Payment Services Directive regulating the authorisation requirements for payment institutions dates back to 2007. Agreement has now been reached at the European level on a revised Directive, increasing the number of activities requiring authorisation and tightening the security regulations governing payment transactions. Processing payment transactions at the request of consumers with direct access to their bank accounts is one of the activities that will be subject to an authorisation requirement under the revised Directive. This may encourage non-banking parties to start offering more consumer-targeted services. The new rules will be implemented in the years ahead. At the national level, the Financial Supervision Act (Wet op het financieel toezicht – Wft) has also been supplemented with the stipulation that payment service providers subject to an authorisation requirement must comply with specific standards to safeguard the smooth operation of payment systems. For this purpose, DNB has drafted its Regulation on oversight of the smooth operation of the payment system, which is expected to become effective by the end of this year. The Regulation sets standards for the availability of the payment system and introduces new security standards. In anticipation of the European directive, the EBA Guidelines on the security of internet payments came into effect on 1 August 2015. They stipulate that payments must be subjected to 'strong customer authentication', which means that they must be secured by a combination of two or more of the following elements: something only the user knows (such as a PIN code or password), something only the user possesses (such as a debit card) and something the user is (a biometric characteristic, such as a fingerprint).
A more detailed analysis of innovations in the payment system, a description of DNB's assessment framework and an explanation of the role of the MOB can be found in the following documents on DNB's website.