[Dave Birch] The Berlin round table was excellent, with knowledgeable panelists (Will Judge of Transport for London, Nav Bains of the GSM Association and Niklas Bartelt from DZ Bank), an engaged audience and a good topic: the role of non-banks in the future of European payments. I thought that I'd highlight a few of the key points that were raised in the discussion, as I think we're going to have come back to some of them later in the year. Note that, to understand a couple of the comment, you need to know that I began by talking about disruptive innovation using the standard business school example of Kodak as an input: Kodak tried to develop digital photography that was as good as film photography, but was attacked by competitors who provided "good enough" digital photography which is what it turned out the market wanted. The case study is used to highlight how incumbents can be vulnerable to innovation from competitors to attack "oversold" customers, and I used to it flag that (what with the PSD on the horizon) bank offerings in the payment sector may be focusing on traditional competition points (eg, safety and security) and missing others that non-banks could deliver (eg, speed and flexibility).
The panelists all brought different dimensions to the topic. Will Judge explained Transport for London's decision against entering the retail payments space and put forward some ideas about the needs that have to be addressed by a payment system -- trust and security, availability, convenience and brand -- reminding us that it's about a lot more than getting the technology out there. This led to some later discussion about what exactly "trust" might mean in a payment context and the extent to which bank brands have it.
Nav Bains from the GSMA focused on explaining how the working relationship between banks and operators had been evolving: the operators have no desire to be banks and no intention of extracting transaction fees (they now have a business model based on provisioning), so he thinks that they now have the basis for a co-operative future. He did concede, in questioning, that some of his members have begun to run their own money transfer systems without banks but thought that these added to the retail payments world rather than competing with cards.
Niklas Bartelt had, I thought, a clear view from the bank perspective. He said that within the "jungle of payment animals" banks had a unique position because of the key synergies between payments and two core competencies: managing the current account and managing credit risk. These synergies are strong, so banks have to reinvent products to be "good enough" (drawing on the Kodak example) . He also made a point that I have been thinking about introducing over on the Digital Money Blog (and now will), which is that if retail payments go wrong on a large scale then that represents a serious threat to society and therefore regulation should be tightened, not loosened, and this would (I think) make it more difficult for non-banks to take bank business.
Once the questions from the floor got going, the focus shifted to the ability of banks and the payment sector to innovate effectively, presuming (I suppose) that non-banks will be innovating more and since there are more non-banks then banks they will have if nothing else a statistical likelihood of coming across a "next big thing" in perhaps Internet or mobile payments. One or two of the delegates expressed disappointment at the pace of innovation in our sector, and we ended by asking that direct question: why is innovation so limited in this space. To tell the truth, I was very surprised by the answer that came back from around the table: the regulatory structure in Europe. The kind of innovations we see around the world -- ranging from Tencent's QQ coins in China, to M-PESA in Kenya and Octopus in Hong Kong -- are just not possible in Europe because of the way the industry is being regulated and I got the feeling from the participants that they regarded this as a much bigger roadblock on our roadmap than bank conservatism or IT budgets.
As an aside, one of the participants said to me afterwards that despite regulatory constraints the amount of innovation from incumbents in the payment space is lamentable, and it cannot be explained purely by the conservative nature of the 2-sided payments marketplace. Perhaps there is a lack of vision about the role payments could play, a lack of a story that regulators can understand and buy into. If this is true, then what the academics would call "the narrative" is missing. I'm going to think some more about this, but I suspect there is some truth in it.
I was very surprised by the depth of feeling from the bankers present when the topic of regulation was raised. They seemed genuinely concerned that the existing and impending regulatory environment not only served to discourage innovation in the payments sector but might stop it all together in the future. I have to say that I had no expected this, and it makes me glad to have included a round table on regulation in the schedule because we need to understand the dynamics here Is the regulation really discouraging innovation or is it the perception of regulation? It is the nature of the regulation or the degree of regulation? Will Judge from Transport for London was clear that compliance costs, even given the "light touch" provisions of the Electronic Money Institution (ELMI) in the UK, were a major factor against them entering the retail payments marketplace as a non-bank with million of cards in circulation.
My personal feeling is that the Commission lacks strategic clarity around payments -- it doesn't have a clear goal shared by the stakeholders -- and as a consequence regulatory activity gets directed by producer groups rather than principles. So, for example, the Commission might decide to force down interchange to reduce the charges paid by merchants even if this increases the overall costs to consumers. Why? Well a critic would say that it because retailers are an organised and visible lobby with a specific goal and a superficial message that it is easy for regulators to understand. What story should the payments industry be telling about this? As an informed commentator (eg, Prof. Leo van Hove from the Free University of Brussels) would say, it's because the private costs need to be aligned with the social costs: the aim of regulation should be to increase the net welfare, not transfer resources from one sector to another. All in all, plenty to think about from Berlin.
Perhaps the most important use of money - It saves time.
Author W. Somerset Maugham (1943).
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