Payments: does regulation help or hinder innovation?
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Payments: does regulation help or hinder innovation?

Is regulation bad for payments innovation, draining company resources that could otherwise be used to develop the next big idea? Not necessarily, says Simon Newstead, Managing Director of Market and Business Strategy at RBS. With payments, it can help drive new thinking and improve efficiency – the key is flexibility.

By Simon Newstead,
managing director of market and business strategy

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.

The US

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.

Friend or foe?

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


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