Payments: does regulation help or hinder innovation?

The impact of regulation on payments innovation very much depends on the country, law and new idea involved. But analysis conducted for the latest World Payments Report (WPR) showed that half the global regulations and initiatives analysed had a positive effect on new thinking.

Regulations designed to promote competition, create a level playing field through standardisation or boost social inclusion were most likely to be pro-innovation. Whereas those that put business models under pressure, by targeting market entry or price regulation for example, tended to create less opportunity to innovate.

It is vital that banks and their clients stay on top of regulation so that they can maximise scope for innovation and remain competitive.

The WPR analysis looked at 32 different regulatory initiatives including Basel III, the FSA Liquidity Regime, the Dodd-Frank Act and the Japanese Payment Services Act. Sixteen of them were considered positive towards payments innovation in one way or another.

A good example of regulation fostering innovation is the Single Euro Payments Area (SEPA) initiative.

SEPA, which now has a deadline of February 2014, is designed to make the market move to a set of common, standardised payment schemes, simplifying how payments are processed across Europe.

This provides a strong foundation to support new ways to process payments across the continent, such as electronic and mobile payments.

For example, SEPA will act as a catalyst for e-invoicing, which is faster and cheaper than traditional, paper invoicing and could lead to more automated processes – bringing efficiencies to clients and providers.

The industry can use SEPA as a platform to launch compatible e-invoicing schemes across Europe.

Another example of regulation triggering innovation can be found in the intraday liquidity rules introduced by UK regulator the Financial Services Authority. These rules require more detailed information on payment flows.

Part of the response to these requirements has seen the development of real-time payment solutions which help banks and their clients to manage their payment flows and liquidity more efficiently and identify any unusual payment flows quickly – all thanks to, not in spite of, regulation.

It is important to understand the true reach of regulation since the extent to which rules in one region impact elsewhere is not always clear.

An example is Section 1073 of the Dodd-Frank Act, which concerns cross-border, consumer payments made from the US of more than USD15 – so the vast majority. Although it’s a US regulation, the impact will affect the payments industry across the globe.

One aspect of the proposed regulation requires overseas payment services providers from the US to disclose to customers at the outset all the fees relating to a transaction. It also requires them to give a clear indication of when the money will be received by the beneficiary.

Another aspect gives customers the right to cancel a payment up to 30 minutes before it is made and proposes that, if there is uncertainty around the recipient’s details, their name is used to identify where the money should go rather than the account number.

Although the regulators’ aim of transparency for consumers is supported, some of these obligations could inadvertently create extra costs and stifle innovation.

These concerns were raised by the payments industry, and the US regulator has recently delayed implementation in order to review specific concerns. This shows that they are listening to practitioners, and that’s encouraging for clients as it lessens the chance of any unintended consequences.

Without doubt, some regulation hampers businesses from coming up with new ideas. Half the business leaders surveyed for the WPR marked it as a potential barrier to innovation.

Whether it’s through increased implementation costs or opposing objectives, sometimes regulation can lessen the scope for new thinking. This is particularly relevant in payments because there are variations in the level of regulation faced by different organisations.

But overall, the WPR found quite clearly that regulation, while constraining innovation in some areas, is enabling it in others.

If regulators can provide the flexibility needed for innovation to thrive and businesses can make the most of those opportunities in their payments strategies, then the future is bright.

Much of this information is taken from the World Payments Report 2012, launched last October. It explores the state and evolution of global non-cash payments. To see a copy of the report, produced by Capgemini, The Royal Bank of Scotland (RBS) and Efma, click here. 

For more RBS Insight content, click here

Disclaimer

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc ("RBS") will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter ("OTC") financial instruments you should be aware that OTC derivatives ("OTC Derivatives") can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.