Chapter 1: A Market for Payments – Payment Choice in the 21st Century Digital Economy
Jürgen Bott and Udo Milkau: A market is described as an abstract mechanism whereby supply and demand confront each other and adjust in search of a compromise. In the current payments landscape, customers perceive a variety of different options to pay: from cash via credit transfer and credit cards to PayPal, iTunes, iDEAL, Swish, Alipay, or virtual currencies based on decentralised ledger systems. The current digitalisation with Internet-based applications and smartphones provides technical solutions at marginal differential costs and literally in the hand of the consumers. For a closer look at the development from cash to interoperable networks, centralised business platforms and decentralised ledger systems, this paper starts with the transition from a cash-based economy to the payment systems based on (salary) bank account. With the raise of digitalisation, disruptive innovations took place also in the payments industry. The result of this development since 2000 is an intermediation by new entrants in the payments landscape. New intermediators entered into the traditional relationship between banks and payment institutes and clients (merchants or consumers). Today, a new structure of the payments landscape can be identified: There are three different approaches in an ecosystem with meta-competition between interoperability (traditional payments industry with competition in the market), centrality (new business platforms with competition for the market) and decentrality (peer-to-peer systems without traditional competition). All in all, the current market for payments is in a tremendous transition triggered by the disruptive power of digitalisation. This is an exciting “real world” experiment about the dynamic development of a multilayered, two-sided market far from equilibrium.
Chapter 2: Europe: The Shift from Cash to Non-Cash Transactions in Europe
Janina Harasim: Today in Europe there is a need to find a substitute for cash which is still often used in low-value payments. Focusing on the main challenges to overcome in order to reduce cash usage, Harasim draws attention to financial inclusion, which is a preliminary condition for development of non-cash transactions. She shows changes in payment mix and explores the relationship between general changes in consumer habits, e-commerce expansion and development of electronic payments (including payment innovations). The chapter also discusses factors which could be drivers for, or barriers to, development of contactless payments, which offer a viable alternative for cash, taking into account different points of view: consumers and merchants, payment services providers and government (regulation).
Chapter 3: Could “Nudges” Steer Us towards a Less-Cash Society?
Leo Van Hove: A growing body of central bank studies shows that cash payments are costly for society and that electronic payment instruments are more efficient. This chapter tries to find out whether libertarian paternalism can offer novel ways to discourage the use of cash by consumers. Libertarian paternalism, or “nudging”, relies on insights from behavioural economics to assert that subtle changes to the choice context can alter people’s behaviour and steer them in the “right” direction. The chapter finds that the payments sector is not new to nudging, comes up with a number of possible actions that seem to hold promise, but also warns that the limited empirical research so far is not so encouraging.
Chapter 4: Cash Holdings in Germany and the Demand for “German” Banknotes: What Role Is There for Cashless Payments?
Nikolaus Bartzsch and Franz Seitz: This paper models the demand for banknotes issued in Germany. It highlights that all motives for holding banknotes are present in this case. Inter alia, special attention is paid to the role of card payments. The results suggest that the long-run demand for small-denomination notes is mainly driven by domestic transactions and demand from outside the euro area. The transaction motive in the rest of the euro area and non-cash payments are part of the short-term dynamics. The long-run demand for large denominations is mainly driven by foreign demand both from the rest of the euro area and outside the EMU. The global financial crisis led to a one-time increase in the demand for these notes. The medium denominations are the hardest to model. Card payments do not play any role for the medium and large denomination categories.
Chapter 5: Regulating Interchange Fees for Card Payments
Nicole Jonker: The European card payment market is fragmented. Payment instruments were often developed for domestic usage, not for usage abroad. Consequently, card usage differs between countries. Furthermore, new players that wanted to offer pan-European payment solutions faced difficulties when entering the market. The Regulation on Interchange Fees for Card-Based Payment Transactions in the European Union, which entered into force in June 2015, is intended to solve these issues by removing barriers which hinder the completion of an internal EU-wide market for card payments. A key element of this regulation is the harmonisation of interchange fee arrangements, which should reduce the cost of card payments for merchants. The impact of earlier regulations by public authorities indicate that it is to be expected that this regulation will indeed lead to cost reductions for merchants, higher card acceptance and higher card usage by consumers in countries where card acceptance is currently low. Regarding payment habits, it is therefore likely that the regulation will reduce cross-country differences. However, it is unclear whether it will also foster cross-border competition between payment service providers and the entrance of payment service providers that offer pan-European payment solutions. Further legislation may be necessary to achieve that as well.
Chapter 6: IBANs or IPANs? Creating a Level Playing Field between Bank and Non-Bank Payment Service Providers
Jakub Górka: Payment institutions and electronic money institutions – new categories of payment service providers – designed to spur innovation and competition, reduce payment costs and leverage user experience, have to rely on the existing payments infrastructure and intermediation of incumbent players – banks.
This chapter discusses challenges to be overcome in order to make the competitive position of newcomers equal to that of banks. A short question “IBANs or IPANs?” encapsulates an array of issues which are pivotal to accomplish this goal, including the right to assign account numbers compliant with the IBAN standard, access to designated payment systems and to central banks’ infrastructure, and access to bank accounts. The European regulators strive to support the expansion of functionality in the retail payments domain by setting an adequate legal framework. The chapter analyses the policy approach and respective provisions of the revised Payment Services Directive (PSD2) and other European directives and regulations.
Chapter 7: Mobile Payments: The Second Wave
Malte Krüger: Currently, we are witnessing the second mobile payment wave. The first wave roughly went in parallel with the dotcom boom. The dotcom crash in the year 2000 also marked the end for many m-payment initiatives. Subsequently, it took more than ten years for m-payments to recover. Today, m-payments are, once again, grabbing the headlines and attracting a lot of investment. Given the boom-and-bust history of m-payments, it is instructive to consider what lessons can be drawn for today’s initiatives from past failures. As the subsequent analysis will make clear, some important changes have taken place which are improving the likelihood of an m-payment success. However, some of the problems of the past have persisted to the present day. Thus, success is not a foregone conclusion.
Chapter 8: Decentralised Blockchained and Centralised Real-Time Payment Ledgers: Development Trends and Basic Requirements
Harry Leinonen: World-wide immediate reach is the norm in Internet-based services like e-mailing, Facebook, Twitter, etc. Why do payment developments lag behind in e-developments? The current batch-based hierarchically centralised payment infrastructure has been challenged by virtual currencies, a new flat payment network technology based on decentralised accounts maintained in blockchained common ledgers. This chapter focuses on the main elements needed in a well-functioning payment network and then describes the differences and similarities in traditional and blockchained systems. The outcome of the analysis is that currently available virtual currencies lack several important elements. The regulatory setups differ also greatly. The settlement media or asset used in virtual currencies characterised as non-interest bearing perpetual electronic bearer bonds without real asset backing is rather weak. The analysis points to a clear possibility for traditional service providers to employ blockchain technology to transfers based on traditional currencies and thereby becoming competitive with current virtual currencies.