Exec Summary

Most jurisdictions share a common interest in pursuing the public policy objectives of safety, efficiency and meeting the needs of users for national payment clearing and settlement systems.

However, the weight each jurisdiction applies to each public policy objective may differ, according to the jurisdiction’s priorities or payment system agenda. In addition, every jurisdiction has its own legacy systems and processes, which may serve to either magnify or blunt the force of drivers of payment system change.

As a result, few jurisdictions have taken the exact same approach in renewing their core payment systems.

As Canada continues to engage in a dialogue to develop the approach to modernize its core payment systems, we set out to better understand the options and approaches taken in other jurisdictions. Our primary objective is to provide stakeholders, who are familiar with payment clearing and settlement processes, with a common understanding of key core payment system design considerations.

To that end, payment systems were analyzed in 27 jurisdictions, where we find the following:

• Most have added (or are in the process of adding) a new real-time retail system.
• All jurisdictions have a batch retail payment system, and most use centralized architecture. Automated clearing house (ACH) systems are the most common. Jurisdictions that maintain a batch retail payment system without centralized architecture have built additional core retail systems to provide for faster processing and enhanced functionality (e.g., real-time retail payment systems or separate systems for bill payments).
• The vast majority of jurisdictions have made major upgrades to their large-value payment systems (LVPS) in the past 10 years, keeping LVPS at the centre of core payment systems. Most LVPS have been redesigned to include liquidity-savings mechanisms (LSM), with technology to facilitate advanced liquidity management and faster retail payment system settlement.

Looking across the different payment system attributes of access, functionality, interoperability, timeliness of payments and risk management, the most prominent trends observed are the following:

1. Access: Jurisdictions are opening up their core payment systems to greater numbers of direct participants. The increasing numbers of direct participants have coincided with jurisdictions upgrading core payment system technology to enable risk-reduction processes and controls.
2. Functionality: Payment operators are leveraging centralized architecture to implement advanced system capabilities to provide monitoring and efficiency-boosting tools (e.g., liquidity management tools) for participants and value-added services for end-users.
3. Interoperability: Payment systems are expanding their degree of interoperability (automation), mostly between core infrastructure and other domestic payment systems and, in some cases, cross-border systems.
4. Timeliness: Most jurisdictions have introduced (or are developing) separate retail payment systems for direct credit transactions that provide funds access in real or near real time.4 Depending on the features of the batch retail system, real-time systems can gain wider usage by being designed to serve either business or consumer payments.
5. Risk management: Most jurisdictions are making payment system changes to reduce credit risk exposures, such as through more frequent retail payment system settlement and expanding LVPS processing capabilities.

The vast majority of jurisdictions have upgraded more than one core payment system. In the jurisdictions that have made technological advancements to more than one core payment system (e.g., a real-time system and batch retail system, or to a retail system and a wholesale system) the result has been highly interoperable, yet distinct, core systems that are complementary in meeting public policy objectives. Here we observe four distinct core payment system configurations emerging:

• Enhanced large-value payment systems (LVPS) that can process large volumes of retail payments. LVPS are operated alongside batch retail systems with centralized architecture (e.g., an ACH). In this configuration, the LVPS provides safety and speed, and the batch system provides enhanced functionality and services for end-users.
• ACH systems supplemented with new real-time (or near real-time) retail payment systems. The ACH provides liquidity cost efficiencies and offers rich services for participants and end-users, but with a delay in the availability of funds for payees. The real-time retail payment system provides end-users with an option for faster funds availability where needed.
• Settlement before exchange (SBE) batch retail systems supplemented by new real-time retail payment systems. The SBE systems use an integrated retail and settlement system process that minimizes credit risk, while offering the potential to also improve batch item timeliness and functionality. The real-time systems provide participants and end-users more timely payment options.
• Decentralized batch retail payment systems supplemented by additional core payment systems with centralized architecture to offer more feature-rich and timely payment options.

Conclusion

In sum, most jurisdictions surveyed have made changes to improve (or are in the process of improving) their core payments systems. As the trends provided above suggest, there are multiple approaches to consider in core payment system modernization.

As each jurisdiction considers their course, they need to determine their specific modernization objectives, based upon how they weigh their public policy objectives, their drivers and needs, and the gaps resulting from their legacy systems.

A solid understanding of the modernization objectives, articulated from a country’s unique set of circumstances can form the foundation for a holistic, multi-system plan to modernize core payment systems.

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Asian payment methods driving global mobile adoption

The increase is driven particularly by major Asian-based payment methods including JCB, UnionPay, and

Mobile Payments Index: a third of global online transactions now mobile

Alipay. JCB recorded the highest share of mobile payments across all the payment methods analyzed, with 54% of payments made on a mobile device, up from 47% last quarter. Alipay increased to 44% (up from 35%), and UnionPay to 31% (from 23%).

In Europe, iDEAL (Netherlands) was steady at 49% of online payments on mobile, Open Invoice (Scandinavia and Germany) reached 47%, Bancontact/Mr Cash (Belgium) was at 39%, and SEPA Direct Debit (Europe-wide) at 22%.

Smartphones now more popular than tablets for online retail purchases…

Shoppers have generally preferred making retail purchases on tablets rather than smartphones. However, the Index shows that for the first time, smartphones have overtaken tablets as the preferred device for making online retail purchases, at 17.5% on smartphone against 16% on tablet, compared to 14% and 17% respectively last quarter. This compares to 29% of digital goods payments on mobile against 7% on tablet, figures that are consistent with last quarter.

..and lead tablets in mobile payment share across the world

Smartphones continue to grow their share of mobile payment volume, increasing 2% from last quarter to 68% on smartphone versus 32% on tablet. This trend of smartphone increasing its share has now been continuing for 10 straight quarters.

On a regional basis, smartphone use far outweighed tablet in Asia, with 29.5% of online payments on a smartphone compared to 4.5% on a tablet. Europe and the US displayed a similar but less pronounced trend, with 23% of online payments on a smartphone and 11% on tablet in Europe, and 23% on a smartphone and 8% on a tablet in the US.

iPad has highest average transaction value

But despite the overwhelming popularity of smartphones over tablets in terms of making a purchase across both regions and verticals, one bright spot for tablets is that in terms of average transaction value (ATV) for device types, for the first time, the iPad led the way, at $107, edging out not just smartphones, but also desktop/laptop, the traditional leader, at $106. This was followed by the Android tablets at $86, iPhone at $83, and Android smartphones at $73.

The UK nudges 50% mobile transactions online

Among individual markets, the UK continues to lead the way in mobile payment adoption, with 49% of online transactions on mobile device (and just over 34% of these on a smartphone). Among other high adoption markets, the Netherlands reached 35% (23% on smartphone), and Sweden 32% (25% on smartphone).

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The research also reveals that mobile first has now become mainstream, while innovative disruptive technologies such as block-chain will potentially become a very attractive alternative to traditional payment methods, transforming payment processing and acting as significant drivers for change this year.

The fourth annual report, ‘The Changing Face of Payments: A Review of Current Payments Infrastructures and Implications for the Future’, predicts that several trends have reached their tipping point. According to 90% of responses, mobile devices will represent a mainstream option for person-to-person or person-to-business payments within the next five years.

What are the key infrastructures you process payments through today?

Digital wallet features continue to be developed, a trend encapsulated by the launch of Apple Pay, which has made such offerings more accessible. The executives surveyed predict the continued influence of such brands, with 39% of responses suggesting that Apple and Google will dominate mobile payments over the next five years.

The study also highlights that cryptocurrency and block-chain technologies are now seen as real drivers for change and are gaining mainstream recognition, particularly in back-office infrastructures.

The emergence of digital-only lenders such as Atom Bank in the UK emphasises the conversion of previously marginal initiatives into the everyday. However, the report has one caveat: that regulation and the use of cryptocurrency markets and Bitcoin will potentially be a major issue for payments regulators and participants in 2015, not least given how fast these new entrants have evolved from emerging technologies to real contenders in the payments industry.

Change leaders in processing infrastructure

For the first time, regulation is not seen as stifling innovation anymore and those surveyed rank the two as equally important in terms of short-term industry development (32% and 33% respectively for banks, and 34% by those from non-banks).

However, innovation is seen as far more important in the long-term, due to competition, market opportunities and an ever-increasing need for more agility for faster time to market solutions (29% of all surveyed consider innovation a priority, compared to 17% for regulation).

Both regulation and innovation are now key considerations for companies striving to optimise customer journeys that are cost efficient, safe, flexible and secure, making them a real investment priority. The importance of innovation is being driven in particular by new entrants to the industry that are major sources of disruption in establishing new ways to pay and to disintermediate or differentiate in a fluid market.

“The payments industry continues to face an unprecedented pace and scale of change, driven by a potent mix of social, technological, political, competitive and regulatory factors,” says Tony Virdi, Vice President of Cognizant’s Banking and Financial Services Practice for the UK and Ireland.

“Innovation is crucial and traditional players need to adapt quickly, with agile and secure technologies to improve their business models and deliver better customer experience. The speed at which these innovative concepts have developed from ‘new kids on the block’ to major agents for change is extraordinary and the key to winning in the ‘Innovation Game’ is to be a part of it. It is essential that financial institutions are able to diagnose, adapt and respond to the changing market with agility in order to respond to ever evolving customer needs – a positive customer experience is key.”

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The Trusted Execution Environment is a secure area of the main processor in a smart phone (or any connected device) which ensures that sensitive data is stored, processed and protected in an isolated, trusted environment.

An introduction to the Trusted Execution Environment for mobile services security

Industry interest in the Trusted Execution Environment is gaining momentum, as it addresses the needs of most applications by offering a higher level of security than a Rich OS, without the constraints associated with the secure element (SE).

The white paper introduces the Trusted Execution Environment and its general security characteristics, before progressing through the key security concerns and perspectives of various actors and markets.

The paper illustrates particular use cases, offering an understanding of how a TEE lays to rest major concerns within those use cases. In particular, the TEE’s role in the following implementation examples is examined: mobile payments, enterprise (bring-your-own-device), content protection and government eID solutions.

“As mobile and consumer markets for connected devices mature and expand, an increasing number of security concerns demand attention,” explains Kevin Gillick, Executive Director of GlobalPlatform.

“Yet while it’s in the interest of all actors in the mobile services value chain to protect applications on many levels, a balance has to be struck to ensure that security doesn’t compromise the end-user experience or the relative ‘openness’ of the device environment which offers commercial opportunities to so many stakeholders. This need to balance security and openness is a key challenge faced by the mobile services industry today.

“The TEE offers a solution which addresses many security concerns without imposing an undue burden on applications,” concludes Gillick. “This white paper will help audiences understand why this is the case and outlines its relevance for many use cases.”

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