Abstract
This chapter documents the importance of nonbanksin retail payments in the United States and in 15 European countries and analyses the implications of the importance and multiple roles played by nonbanks on retail payment risks. Nonbanks play multiple roles along the entire payment processing chain. They are prominent in the United States and their presence is high and growing in Europe as well, although there are differences among the various countries and payments classes. The presence of nonbanks has shifted the locus of risks in retail payments towards greater relevance of operational and fraud risk. The chapter reviews the main safeguards in place, and concludes that there may be a need to reconsider some of them in view of the growing role of nonbanks and of the global reach of risks in the electronic era.
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Notes
- 1.
In Europe, e-money is defined as “monetary value as represented by a claim on the issuer which is: (i) stored on an electronic device, such as a chip card or computer memory; (ii) issued on receipt of funds of an amount not less in value than the monetary value issued; (iii) accepted as means of payment by undertakings other than the issuer” (EC 2006). Thus, strictly speaking, e-money is not a payment instrument but a means of payment, that is, a substitute for cash and deposits. E-money issuance is usually accompanied by the service or device needed to transfer it, and for simplicity in this survey with the term e-money we refer to the payment devise or instrument used to transfer e-money. E-money can be issued only by banksand by e-money licensed institutions (ELMIs), entities subject to a simplified prudential regime, which is however, modelled on that of banks, and are subject to certain limitations (for instance in terms of activities they can carry out, and investment of the funds).
- 2.
Examples of bank-controlled nonbank payment service providers include subsidiaries of banks, for example, TSYS, a large U.S. processor owned by Synovus Bank (although about to be spun off), and bank associations, for example, Visa Europe, the large European credit and debit card network. Nonbank-controlled service providers are firms without a governing bank affiliation, for example, First Data Corporation, PayPal, Hypercom, Vodafone, etc.
- 3.
ECB, FRBKC (2007a) includes two additional instrument categories: money remittance and transfer transactions; and other payment instruments. They are not considered here because of insufficient data in some of the surveyed countries.
- 4.
For Belgium an assessment of the importance of nonbankswas available only for cards and e-money payments.
- 5.
The percentages provided are based on 2003 data and include the countries that joined the EU in 2004 (that is, excluding Bulgaria and Romania who joined in 2007).
- 6.
See ECB (2005), where reporting the results of a survey on payment innovation (with a scope wider than e-money products only), it is concluded that “two-thirds of the (surveyed) companies are related to the banking sector, either by license or by ownership and, as a consequence, most of the e-products include a link to settlement.” This is also consistent with what was reported by Masi (2004), who notes that “the greatest part of the new payment initiatives does not modify the clearing and settlement phases of the payment cycle which are managed and regulated by banks.”
- 7.
Tables for the other four broad payment types are shown in ECB, FRBKC (2007b).
- 8.
An e-cheque is created when a written cheque is either truncated and becomes an ACH payment at some point of cheque processing or is used as a device to capture information to create an ACH payment at the point of transaction.
- 9.
This also is a principal finding of Bradford, Davies, and Weiner (2003).
- 10.
The definitions used in this section derive from various sources: for definitions of risks in the context of payments clearing and settlement (credit risk, liquidity risk, operational risk, settlement risk, and systemic risk) see CPSS (2003) and the glossary annexed to ECB (2007b). On various aspects of settlement risk, see also Basel Committee on Banking Supervision (2000). On risks concerning, more specifically, retail payments (e.g. fraud risk, risk of a system-wide impact and reputational risk) see ECB (2007a) and CCBS (1996).
- 11.
A cheque that bears a false signature or has been altered is properly called forgery. For our purposes, we include forgery with counterfeit risk.
- 12.
Similarly, manufacturers of point-of-sale payment terminals and ATM manufacturers are not directly obligated by contractual relationships with payment networks, but must comply with network security standards if they hope to successfully market their products.
- 13.
Settlement agent risk is a variation of settlement risk. We include settlement agent risk because settlement agents are used principally in retail payment systems.
- 14.
The standards were developed as collaboration between American Express, Discover Financial Services, JCB, MasterCard Worldwide, and Visa International.
- 15.
As required by the Bank Secrecy Act (1970) and the USA PATRIOT Act (2001).
- 16.
Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing is applicable to the financial sector as well as lawyers, notaries, accountants, real estate agents, casinos, trust, and company service providers. Its scope also encompasses all providers of goods, when payments are made in cash in excess of €15,000.
- 17.
This serves as a reminder that the purpose of Table 4 is to help identify where risk occurs in the many activities that underlie payments, not their severity.
- 18.
This method of containing risk in retail payments is common, in part because methods such as pricing for risk or insurance have proven inadequate to bring the level of risk in retail payments to tolerable levels (see Braun et al, forthcoming 2008).
- 19.
Comparative tables of the national regimes in place in the various Member States are available at ec.europa.eu/internal_market/payments/framework/comparison_en.htm.
- 20.
An operational function shall be regarded as important if a defect or failure in its performance would materially impair the continuing compliance of a payment institution with the requirements of its authorization or its other obligations under the Directive, or its financial performance, or the soundness or the continuity of its payment services (Article 11).
- 21.
As required by the Gramm-Leach-Bliley Act of 1999.
- 22.
Examples include the retailer DSW, the credit agency ChoicePoint, and software vendor Guidance Software.
- 23.
Sullivan (2007). At year end 2004, 87 payments processors were supervised, while news reports suggest that there are roughly 500 companies that process credit card payments (Dash 2005).
- 24.
Sullivan (2007), based on publicly disclosed data breaches listed by the Privacy Rights Clearinghouse (www.privacyrights.org/).
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Bradford, T. et al. (2009). Nonbanks and Risk in Retail Payments: EU and U.S.. In: Johnson, M.E. (eds) Managing Information Risk and the Economics of Security. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-09762-6_2
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