Introduction
The evolution of the business models in the market for payment services constantly reflects a complex balance between regulation and technological progress. The diffusion of the internet and e-commerce, the development of mobile services and the new models of âservice-sharingâ economy entail electronic payment instruments that can be used anywhere, anytime, on the move or remotely, regardless of the location of the payer. The technology also continues to create opportunities for innovative business models, including mobile payments and virtual currency schemes.
In this context, the institutions and regulators are engaged in establishing rules and supervisory measures without hindering market developments; the operation is complex, due to the absence of geographical boundaries of the digital world. On top of this, there is the difficulty of synchronizing actions to technological developments and framing emergent phenomena, such as the virtual currency, with traditional legal and economic categories. One sign of this difficulty is the increased complexity of the institutional framework governing financial services and payment systems with increasing cross-sector and cross-border relations among supervisors. In Europe, discussion as to how to regulate innovative payment services is still underway, or better in intrinsic evolution, and might benefit from (i) the debate on innovation-friendly regulation; (ii) an overview of the recent institutional strategies for the development of innovative payments; (iii) an updated description of the framework, goals and tasks of the various authorities in the field, with the associated synergies and possible overlaps.
The Debate on an Innovation-Friendly Regulatory Environment
The economic debate on regulation, which is a central form of public intervention in the economy, usually considers it as either a driver for or a barrier to innovation. The very concept of regulation varies according to the different historical and geographical context or the prevailing regulatory regimes. A broad definition includes formal tools (such as laws, regulations, directives, circulars, ordinances) and less formal ones such as market self-regulation and best practices (for example industry codes of conduct). The differences mainly reflect the way regulation is replacing other forms of public intervention, notably public enterprise or public-provided utilities.1 Regulation affects incentives to innovate in various ways and interacts with phases of the innovation cycle, from R&D to commercialization.2 The multi-tiered structure of legal sources and the allocation of regulatory powers among different institutions, at the national and/or cross-border level, tend to complicate the analyses.3 The increasing globalization of economic activity and, in some currency areas, the blurring of the boundaries of the nation-state and nation-powers bring out the importance of the organizational perspective on the regulatory domain4 which is a major element in building an innovation-friendly environment.
The financial industry is traditionally heavily regulated, also because its products are often the main or only instruments to finance innovation.5 The impacts of financial rules on innovation have been treated under the more general analysis of the relation between regulation and economic growth and, specifically, in studies on the influence of competition and antitrust laws on capital investment.6 The classical Schumpeterian approach underlines the negative impact of a (strong) competitive environment on the entrepreneurâs willingness and ability to innovate: temporary monopolies, at the national and international level, might be an appropriate incentive to technological innovation.7 By contrast, several empirical studies find a general positive influence of competition on innovation and economic growth.8 Recent researches tend to seek a compromise between the diverging views: these studies recognize the complexities of the links between competition and innovation, focusing on their non-linear relation in a dynamic context and explicitly introducing plausible different influences of competition rules on the firmâs incentive to innovate.
As for the payment infrastructures, the literature is still debating the opportunity to promote competition in clearing and settlement systems for financial transactions for two reasons in particular:
- (i) they incorporate network effects with certain natural monopoly properties, like many utilities;
- (ii) the main public interest in regulating payments sector is a matter of maintaining systemic stability (a question of risk allocation) and consumer protection.However, many of the institutional reforms in payment systems, starting from the 2000 Cruickshank Report in UK and the Single Euro Payments Area (SEPA) project in the Eurosystem, were motivated by the need to increase competition, transparency, good governance, standards and fairness in the supply of payment services and infrastructures in order to promote innovative user-friendly (and rent-free) payments. As payment markets tend to be oligopolistic, regulators may try to open them up to new suppliers (as in the case of the non-banks and non-financial institutions in the EU) and to intervene in fee arrangements for an efficient redistribution of costs and revenues between various stakeholders. The tendency for regulators to place a stronger emphasis on payments efficiency, notably by tasking innovation,9 has involved the government as a direct promoter of innovative payment services (for example by introducing new rules for electronic payments) and financial inclusion as a driver for innovative payment, using innovative payment instruments or low-cost new banking accounts to better integrate unbanked or underbanked people into the financial sector.Together with the institutional reforms, the overall structure of regulatory framework (institutions, powers, standards, supervisory bodies, enforcements), and in particular how the dividing lines between and within regulatory entities are drawn, is influencing the effectiveness and costs of regulation for the economy and/or for sectorial economic agents.10 The financial architecture is usually organized around three factors11: institutions, functions, and objectives. These three factors, not mutually exclusive, are usually combined to increase the resilience of the system. While regulation with an institutional focus addresses financial institutions irrespective of the mix of business undertaken, functional regulation takes the opposite approach. The design of regulatory structures, or the internal structure of a single regulator, is usually driven by the objectives of regulation: the ultimate criterion in devising its optimal structure should be the effectiveness and efficiency of regulation in meeting its basic objectives. The ideaâshared and promoted by the international financial organizationsâis that regulatory agencies are most effective and efficient, but also more transparent and accountable, when they have clearly defined, and precisely delineated, objectives and when their mandate is precise. However, when the objectives of regulation are potentially in conflict (for example promoting competition might be in conflict with incentives to innovative services), one of the issues to consider is which structure is most efficient in resolving conflicts. In a single agency, for example, all conflicts are internalized. One merit of focusing institutional structure upon objectives is that it requires significant conflicts between such different objectives to be resolved at the political level, which does not necessarily correspond to optimal design of the overall financial architecture.
The Institutional Strategies for the Development of the Market for Innovative Payments
Over the past decade the European strategies for innovative payments have developed through a variety of interventions mainly related to three policy goals: promotion of greater competition between operators, integration of national markets into a single European area and enhancement of the security of payment systems and services. By following these three lines of policy we can arrive at a single and coherent overview of the latest regulatory developments in payment innovations.
Innovation and Competition
The first European directive on payment services (Directive CE/2007/64) focused on competition, by introducing a new category of payment service provider, the payment institution. With the hybrid figure of the payment institution, in particular, the aim of the legislator was to provide access to payment services to high-technological sectors enterprises (such as telecommunications); in fact, they were allowed to combine the supply of payment services with their traditional activities, taking advantage of their wide customer base and natural innovativeness. Although many years went by subsequent to the enactment of new rules, the goal was only partially achieved. The Telco world limited its interest in the payment industry, preferring business models that could enhance its specialization without changing the patterns of partnerships with the banking and financial sector and without increasing the compliance costs. The Telco industry showed interest only in services not subjected to regulation, like those regarding the purchase of digital goods and services. In other words, the idea that mobile payment services debited on the phone bill could compete with traditional services offered by banks and card schemes, failed to find successful implementation. This is also why the new directive (PSD2), finally adopted by the European Parliament in October 2015, revised the scope of payment services that can be offered âwithout licenseâ by telecommunications operators, based on a proportionate risk approach and with the aim to stimulate innovation. On one hand the legislator specified the categories of goods and services that can be purchased with phone bills, with explicit inclusion of donations and ticketing; on the other hand, it defined the maximum amount of waived transactions (50 EUR per transaction and 300 EUR monthly) so that operators wishing to handle larger flows must necessarily be licensed as payment institutions (see Box 1.1).
In comparison with the first directive, the PSD2 identifies additional business models in line with the strategyâaffirmed by the EU Commission on several occasionsâto encourage the development of a highly competitive market for e-payments. This strategy builds on the progressive and irreversible shift of trade and administrative relations to the internet (e-commerce, e-government) which, according to the community institutions, must be adequately supported with the development of efficient payment methods, easily accessible to all citizens also for cross-border transactions. In a market dominated by the use of payment cards on the internet, the legislatorâs intervention has developed along two lines: (i) revision of tariff rules and transparency in the world of card-based transactions, with the Interchange Fee Regulation (IFR), and (ii) formal recognition of the services enabling access to accounts, with PSD2. The two legal acts (PSD2 and IFR) build the frame for a safe and efficient use of payment instruments on the internet, f...