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The regulatory tsunami and six other key findings from IPS 2014

The regulatory tsunami and six other key findings from IPS 2014

Marcel Woutersen

Senior Communications Consultant

22 April 2014

The regulatory tsunami and six other key findings from IPS 2014


This blog post is written by freelance consultant Edith Rigler. She has over 25 years experience in senior positions at global banks. 

In early April, the International Payments Summit was held in London. Boasting to be the longest running conference in payments (22 years!), it brought together more than 140 speakers/panelists, a large number of exhibitors and sponsors and more than 400 participants. The 4-day conference covered a vast range of topics, from payment-specifics to regulation to new technologies and alternative payment methods.

While it is impossible to cover all topics, here are some key findings:

1. Global economic growth is shifting from the West to the East

Several speakers pointed to a marked shift from Western countries to the East, especially China and India. There are three drivers for this shift:

a)     the growth of the middle class in the East which increases demand for products and services;

b)     the increasing urbanization in the East which drives consumption and subsequent trade flows; and

c)     the internationalization of large corporates and the growth of the SME segment.

IMF figures predict that the US, China, Japan, Germany and the UK will be the 5 largest economies in 2020. However, by 2030 the ranking will already have changed to China ranking first, followed by the US, India, Japan and Brazil. In the future, the main world currencies will be thus be the Renminbi, followed by the US Dollar and the Euro.

Much of the developed world, especially Europe, is ageing fast while the emerging world is characterized by a young population. Therefore, there will be an inevitable shift in power away from the developed to the emerging world.

Technology is (nearly) a global playing field as communication technologies are universal. Technology provides global reach; however, it also gives rise to global competition. The obvious questions are therefore how the “old” world should compete with the “new” and what the “old” world could learn from the “new”.

2. Regulation is here to stay and a major concern for banks

Regulatory demands are increasing – in fact, a “regulatory tsunami” can be anticipated. From Basel III to CRDIV, from SEPA to PSDII, from FATCA to Dodd Frank – banks are severely challenged monitoring, analyzing, understanding and implementing all the requirements.

There are three trends in the regulatory area:

a)     The role of the regulator is increasing;

b)     There will be fewer “national” regulatory topics – more regulation will happen at the EU level;

c)     Changes in the supervisory process are noticeable.

In 2014 alone, nine different EU Regulations have already been approved and a further 50 standards will be approved or are currently in consultation. EU regulation accounts for approximately one-third of total global regulation. Nevertheless, regulation impacting payments and settlements represents only 5% of all regulatory requirements.

The impact of the “regulatory tsunami” on banks is quite significant: banks need to staff their compliance areas adequately; they need to improve their internal management of regulatory requirements, and they need to better understand the differences in the transposition of rules in different jurisdictions.

When asked where the saw the greatest risks in the next three years, respondents of the informal IPS poll ranked fraud and information security risk as #1, followed by general legal/regulatory/compliance risk and money laundering.

3. The key challenges in transaction banking continue to be revenue growth and cost savings

In an informal poll held directly at the IPS conference, 33% of participants stated that revenue growth and efforts to replace lost income were the key challenge for transaction banking.

  • To increase payment revenues, participants said banks should focus on offering innovative products and services (34%), followed by extending current products in existing markets (12%) and creating new ones  for new markets (12%).
  • To achieve cost savings, IT platforms should be consolidated (37%) and payment processes should be re-engineered (28%). More than half of the polled participants (52%) said the main effect of regulation was an increase in complexity and cost.

New entrants such as Google or Amazon focusing upon core payments are perceived as the greatest threat to transaction banking today.


4. Single Euro Payments Area (SEPA) – it’s not over yet

The SEPA end-date of 1st February 2014 is now behind us. Some countries are making use of the 6-month transition period until 1 August 2014 during which legacy payment formats can still be accepted by banks; others have already completed their migration and do not need the six-month transition.

However, while many SEPA stakeholders have declared themselves SEPA-ready, they may not be “SEPA-proof” yet. In fact, not all SEPA payments are being processed smoothly. Weaknesses, gaps and errors have emerged and automation has not always been improved to the extent anticipated. Therefore, over the coming months much repair, fixing and fine tuning need to take place,  including harmonization of the national variations in data sets, phasing  out of niche products, adjustment of schemes, and pan-European availability of mandates.Optimization of processes will need to include harmonization of systems and payment engines.

5. International remittance flows continue to increase in volumes, but are subject to pressures

Worldwide remittance flows will reach $700 billion by 2016 while remittance flows to developing countries are expected to reach $540 billion.

Commercial opportunities remain strong but regulatory pressures and lack of support by banks  prevent normal market growth. Worldwide, banks are withdrawing from offering bank accounts to SME money transfer companies. As it is it is impossible to offer money remittance without a bank account, competition is endangered, and prices for payment users have risen.

6. The ‘mobile revolution’ is upon us

Mobile payments will be the most frequently used retail payment method in 2020, followed by cards, according to the informal  IPS poll. Mobile technology is seen as the most important technology driving value in payments. However, the beneficiaries of the “mobile revolution” will be the new service providers,  followed by merchants. Banks are expected to play only a minimal role in the area of mobile banking.

7. Real-time payments have created interest in several markets

Real-time payments were first developed in the UK: in 2008, UK banks faced a regulatory requirement to introduce Sterling real-time payments (“Faster Payments”), as an alternative to the UK´s slow three-day clearing cycle.

Countries that are overhauling and modernizing their payment systems are introducing real-time payments now. Thus on a global basis there are currently approximately 18 real-time payment systems live or in development. However, real-time payments are not without risk, both from a technological and a systemic point of view. Additionally, real-time payments are currently only available for domestic currencies. Therefore, work regarding interoperability of real-time systems between countries would be needed.