Retail Circuits and Instruments: Main Trends

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Retail Circuits and Instruments Main Trends

• Reforming Payment and Security
• Settlement Systems
• World Bank Federal Reserve Board
• Washington, D.C.
• November 4, 2003
• Stuart E. Weiner
• Federal Reserve Bank of Kansas City

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Introduction

• Payments systems worldwide are experiencing
  rapid, unprecedented change
• Key driving forces are evolving end-user needs,
  technological advances, network integration,
  increased cross-border payments
• As retail payments systems develop and evolve,
  how are the needs of end-users best met?

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Terminology

• Retail versus wholesale
• Consumer retail payments
• Merchants
• Billers
• Business, government retail payments

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Key Points

• To be successful, consumer retail payments
  instruments and systems must meet three criteria
• Safety
• Efficiency
• Accessibility
• Consumer/merchant/biller acceptance, in turn,
  will help payments instruments and systems
  achieve necessary critical mass

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Presentation Structure

• Payments mix across countries
• Consumer/merchant/biller needs and preferences
• Critical mass
• Case studies
• Business needs
• Closing remarks

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PaymentsCross-Country Snapshot2001
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Payments Cross-Country Trends1997, 2001
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Payments U.S. ACH Growth from New Sources 2002
2003
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Consumer/Merchant/Biller Needs and Preferences

• Despite strikingly different retail payments
  mixes across countries, all successful
  instruments and systems meet three critical
  criteria safety, efficiency, accessibility
• There will often be tradeoffs among these three
  characteristics
• Distinction between instruments and systems

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Safety

• Retail payments instruments must be perceived by
  consumers, merchants, and billers to be safe and
  reliable
• Payments providers (banks, nonbanks, networks,
  processors) thus have a strong incentive to
  provide this safety
• Providers may not, however, have an equally
  strong incentive to provide this level of safety
  at the macro level
• Systemic and operational risk issues can arise

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Efficiency

• Consumers, merchants, and billers want payments
  methods that are low-cost and convenient
• Providers will consequently have an incentive to
  operate as efficiently as possible
• Economies of scale and network economies (a
  payments mechanism takes on more value to
  existing users as more users elect to
  participate) may lead to consolidation and
  concentration among providers

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Timeline of Regional ATM and Debit Card
Networks1972-2002
 
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Accessibility

• Providers have an incentive to provide broad
  access
• But access need not be universal to be profitable
  for providers
• Two levels of access
• Front-line access by consumers, merchants,
  billers
• Infrastructure access by providers, making the
  first level of access possible

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U.S. Consumer Payments Choices Research Results

• Consumers are more likely to use electronic forms
  of payment
• the younger and more educated they are, and the
  greater income they have
• the more they use new technologies or computers
• Payment choice depends on characteristics of the
  transaction, including transaction value,
  physical characteristics of the point of sale,
  and a bills frequency and value variability

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Critical Mass

• A successful payments instrument must reach a
  critical mass of users
• To reach critical mass, must have consumer,
  merchant, biller acceptance
• Also, providers must ultimately find it
  profitable to participate

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Critical Mass (cont.)

• Reaching critical mass is important for two
  reasons
• Allows merchants, billers, and providers to cover
  fixed costs
• Allows network economies to be realized
  (overcoming the chicken versus egg problem)
• Private versus public provision
• Competitive-network model versus regulated-
  monopoly model

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U.S. Case Studies

• The three criteria (safety, efficiency, and
  accessibility) and critical mass
• Have successfully been met by credit cards, debit
  cards, and ACH
• Have unsuccessfully been met by digital cash
• Have met resistance but are attempting to take
  hold in the P2P and EBPP markets

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Business Payments Needs

• Same three criteria safety, efficiency,
  accessibility
• Two key efficiency considerations
• Internal technology integration (compatibility
  with existing systems, i.e., straight-through
  processing)
• Common standards, interoperability across firms
• Same need for critical mass
• Need to make business case

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U.S. Business Payments Study

• Federal Reserve study undertaken in
• 2001-2002
• Interviewed representatives of roughly fifty
  organizations, including corporate end users,
  technology firms, banks, and private-sector
  providers
• Sought views on longer-term payments system
  developments

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U.S. Business Payments Study (cont.)

• Corporations accounts payable, accounts
  receivable, payments, and reconcilement systems
  continue to be less integrated than necessary for
  seamless handling of invoice and electronic
  payments information.
• The existence of multiple payment-message
  formats, such as the formats for ACH, wire
  transfers, and other electronic payments,
  increases the cost and complexity of payments
  processing.

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Closing Remarks

• Payments instruments and systems are undergoing
  dramatic, even profound, change
• Meeting the needs of end-users will at times be
  challenging, but those end-users will go a long
  way in determining for themselves what will be
  successful and what will not
• Safety, efficiency, accessibility, and critical
  mass will be key elements of success

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References

• BIS, Statistics on Payment and Settlement
  Systems in Selected Countries, 2003
• Bradford-Davies-Weiner, Nonbanks in the Payments
  System, 2003.
• Federal Reserve Board, The Future of Retail
  Electronic Payments Systems, 2002
• Hayashi-Klee, Technology Adoption and Consumer
  Payments, 2003.
• Hayashi-Sullivan-Weiner, A Guide to the ATM and
  Debit Card Industry, 2003.
• Hoenig, Payments and Settlement Systems, BAI
  Money Transfer Conference, 2000.
• Stavins, Effect of Consumer Characteristics on
  the Use of Payments Instruments, 2001.

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Contact Information

• stuart.e.weiner_at_kc.frb.org
• Stuart E. Weiner
• Payments System Research
• Federal Reserve Bank of Kansas City
• 925 Grand Blvd.
• Kansas City, Missouri 64198 USA
• 816.881.2201