APB Conference on Portuguese Payment System

We all know that the banks serve two fundamental purposes:

1ª - Intermediation - The banks' primary responsibility is to manage resources properly, especially customers' deposits, and use them efficiently in the funding of households, companies and institutions, at the service of the economy, growth and the public's wellbeing. The banks channel savings to those with entrepreneurial capacity and a will to invest or spend to improve their quality of life;

2ª -  They provide the public and economic and institutional agents with safe, efficient, reliable payment systems.

The banks are in the news much more when it comes to the first of these missions.

Issues such as the grant (or shortage) of credit to the public and the economy, interest on loans (now very high for new loans, but so low in the past that some say that they "stimulated" borrowing), growth in deposits in times of austerity, the complexity of financial products offered to people and companies, the banks' profits before the crisis and their recent losses and the banks' funding and capital levels are talked about and analysed much more than the changes that have been made in payment systems.

This morning is devoted to payment systems.

They are worth looking at, not only because of their development in recent decades but also because of their prospects, trends and challenges for the future.

In my introduction to the conference, I would like to leave you with just 10 facts.

1. Portugal has one of the most advanced, efficient, functional, secure retail payment systems in Europe and the world. It is a source of pride for Portuguese banks.
2. SIBS is recognised as one of the most innovative, complete effective examples and it has a system in which a series of methods of payments are processed centrally. Multibanco is a very prestigious brand.
3. Portuguese ATMs are among the most effective and versatile and their hardware is highly advanced.
4. Portugal is the only country in which the law does not allow banks to charge their customers for ATM services (the Netherlands is the other EU country that does not charge for ATM withdrawals from another provider, though the law does not forbid it). The costs have to be offset or absorbed in some other way.
5. The profits do not cover the costs of the different payment instruments to the banking system. The degree of coverage is 71.8%, according to the latest Banco de Portugal report on the subject. In other words, the payment systems as a whole have been responsible for losses that exceeded 350 million euros in 2009. At a time when banks' profitability is under serious pressure, (the banks recorded high losses in 2011, 2012 and 2013, and are expected to do so again in 2014), this is a source of added concern.
6. Social costs (i.e. the outlays of all concerned – banks, processers and the central bank – so that the different payment instruments can be used) are lower by unit in Portugal than the European average.
7. Payment systems, just like the banking sector as a whole, are undergoing huge regulatory, technological and behavioural changes. These changes are designed to make the systems more efficient, competitive and secure and to meet users' needs even better.
8. In terms of regulation, there are three important dossiers for payment systems:
   
   -  The SEPA, Single Euro Payment Area, will be coming into force on 01/12/2014.
   -  There is a proposal for the revision of the Payment Systems Directive (PSD ). The first directive defined the legal framework for the creation of a single payment market in Europe.
   
   The Commission published a proposal for revision (PSD2) in July. One of its main aims is to help develop the single electronic payment markets by allowing TPPs (third party providers) access to payment accounts, the so-called PIS (Payment Initiation Services). 
   
   The EBF took a position on this initiative and drew particular attention to the fact that PSD2 needed to be amended to ensure clear allocation of responsibilities and definition of the parties involved, including security requirements, such as adequate consumer protection against the risks of fraud or abusive use of sensitive personal data, such as identity theft, illegal use of credentials or hacking.
   
   This is not the time or place to be raising this issue, but this and other aspects of this Commission initiative need improvement.
   
   -  A Commission proposal on Regulation of Interchange Fees for Card-based Payment was the subject of strong objections from European banks, as expressed by the EBF. There are a number of reasons for contesting a measure that attacks the normal functioning of the market economy, and prices should be set in an agreement between the parties and not administratively.
   
   I would just like to highlight the following points:
• It is not justified from the point of view either of economic rationality or even legal grounds, as there is no evidence that the “limitation” of interchange fees increases the number of transactions.
• It derogates the principle of subsidiarity (which is particularly relevant when 93% of card transactions are national and not European).
• It is inopportune at a time when banking union is fragmented and the peripheral banking systems are marginalised and experiencing especially unfavourable competition in a highly uneven internal market. Implementing this regulation before BU is completed and the European banking market has been levelled out, is highly unfavourable to the Portuguese economy and those of the peripheral countries in general.
• It jeopardises operators' capacity to invest in innovation.
• It will force the banks to pass on the costs to the economy (companies and consumers), which is inevitable, particularly at a time when pressure on banks' return is very high.
• There are no cases that demonstrate that this measure would benefit consumers. On the contrary, experience has shown that they end up being penalised.

Allow me to digress a little.

On the subject of all regulatory initiatives, whatever they may be, it is important to reflect on and assess the impact of the numerous measures currently under way (directives, regulations, decisions, laws, etc), designed to generate short-term benefits but mainly medium- and long-term benefits, such as effects on the economy and banks' capacity to provide funding at reasonable prices. They must be coherent and consistent with the main goals of promoting growth, employment and people's wellbeing and ensuring funding on acceptable terms. For this, we need a stable, strong banking system.

The impacts and costs of all measures should therefore be assessed in advance and be properly calibrated, taking account of their cost-benefit ratio and effects on the economy. Bank loans are their largest component and account for more than 75% of companies' funding in Europe.

As we all know, the banks play an irreplaceable role in financing the economy.

In order to foster growth and economic and social development, there must be a strong, modern, operational, reliable banking system. In short this means:

• well capitalised banks with good levels of solvency and balance sheets that accurately reflect their assets and have adequate returns
• clear business models adjusted to contexts and needs
• a capacity for innovation and cutting-edge technology
• good governance
• an efficient, safe, reliable payment system
• a friendly relationship with customers, via good practices, transparency, a great sense of ethics and high-quality services
• internal and external communication that helps boost trust in banking institutions

As Jacques de Larosière, one of the great figures in European banking, said in a recent address:

“It is evident that, since 2011, the eurozone banks have increased their capital, but they have also considerably reduced their assets to be able to abide by the Basel III capital ratios. The deleveraging did not result only from a fall in demand but also regulatory requirements (…)

“We are living in a paradox. On the one hand, central banks are creating abundant liquidity, but on the other bank loans are being hampered by excessive regulation”.

He said this to highlight that the calibration of measures and calendars and transition periods should allow for the different impacts and implications.

“Too much regulation and too much complexity of this regulation, even though it is individually well intentioned, can lead to unwanted consequences, especially if they do not have a coherent vision. Without this vision, over-regulation can lead, as we see today, to negative pro-cyclical effects on the real economy” (end of quote).

But let's go back to my 10 facts.

9. Where technology is concerned, there have remarkable changes with huge impacts on our area. They include payment methods, services, means and channels.

In particular, following the huge advances already made, the digital revolution also reached banking, where, on a par with the developments and applications that it has produced or adopted, new competition has appeared from new operators (TPPs or attackers) that have been entering the whole payment value chain.

As always, the banks will reap the benefits of the revolution in their processes and adaptation of their products  and also focus on their range of digital services. This will be the best response to competition from new players. It will have the undeniable advantage of the safety to which their past attests and their experience in risk management and especially the trust that they inspire in their users.

10. In the behavioural field, intense work has been done by regulators and lawmakers and by the banks themselves to ensure transparency and ethics in banking (e.g. providing pertinent information on their activity), consumer protection (including work on restrictive and limitative measures, clear, appropriate information on fees and charges for the sake of comparability) and an increase in financial education.

The banks themselves have produced and enforced Codes of Good Practice that help to boost their customers' trust.

During the conference we will try to cover some of the most important aspects of the Portuguese payment system.

I'm going to give the floor to the experts, whom I would like to thank on behalf of the APB and its member banks for agreeing to share their know-how with us.

Fernando Faria de Oliveira,
President of the Portuguese Banking Association (Associação Portuguesa de Bancos)
Lisbon, 4 November 2013