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The dawn of the digital age

The dawn of the digital age

20.04.2016

Addressing students at the Bundesbank's University of Applied Sciences in Hachenburg, Carl-Ludwig Thiele gave his outlook on innovations in the field of payment transactions. Kicking off, he stated that there was a lot of talk about new banking and payment service providers and about innovative payment options other than cash and established cashless means of payment. "The dawn of the digital age appears to truly be upon us in the field of payment transactions," said Mr Thiele, adding that the technologies and methods that would ultimately become accepted remained to be seen.

As revealed by the latest Bundesbank study, the Bundesbank Executive Board member commented that innovative payment methods such as paying by smartphone are still of secondary importance in Germany - but that, despite this, the range of cashless payment methods that are becoming more and more widely accepted at points of sale and being more frequently used by consumers is on the up overall. He highlighted the fact that contactless card payments and mobile payments are especially convenient when paying smaller amounts, meaning that consumers may increasingly reach for their mobile phones instead of cash in future. "In London, 'tap and go' is all but standard practice - not just on the Tube and in buses but also in shops," reported Mr Thiele. He then went on to explain that significantly less cash is used in Sweden and Denmark, too, to the point that Stockholm's street newspaper or a cup of coffee in Copenhagen can be paid for by card or even by smartphone.

Contactless payments on the rise

According to Mr Thiele, there is a clear trend in Germany towards contactless payments based on near field communication technology (NFC for short). Expanding on this, he explained that the NFC chip in cards and mobile phones is able to send a radio signal across a distance of several centimetres to a device such as a retail terminal and transmit the information necessary to make the payment, making it possible to pay smaller amounts of up to €25 without a PIN and subsequently saving a considerable amount of time at the checkout. Banks, savings banks and mobile phone manufacturers have already equipped their cards and phones with NFC technology, he continued, before telling students that acceptance among retailers is also on the rise: "NFC terminals are becoming an increasingly common sight on local public transport, in drugstores, at petrol stations, in supermarkets and in taxis."

Harmonised European standard for instant payments sought

Another big issue addressed by the Bundesbank Executive Board member was real-time settlement in retail payments. He explained that, following the Europe-wide introduction of SEPA, there was to be a harmonised European standard for real-time payments - using so-called instant payment systems, transmitted sums would be available to recipients within a few seconds. "Real-time settlement, which seems so simple and obvious from the consumer's perspective in view of e-mail and WhatsApp, calls for a major coordination effort and significant investment in the retail payment system on the part of the banking industry," said Mr Thiele, who went on to disclose that the banking industry was currently drawing up a set of rules for instant payments based on the SEPA Credit Transfer Rulebook. However, whether the banks would ultimately subscribe to the rules remained to be seen. "The comments that I have heard from the German banking industry so far have been muted," noted Mr Thiele. He added that, while the pressure to offer real-time based solutions was high, it was still unclear as to what solution would be found and the form that this solution would take.   

Fintechs making great strides

Another major challenge for the banking industry, in Mr Thiele's opinion, is the rise of the so-called fintechs, technology companies that are making use of new digital ways to provide financial services. "Customers will no longer need to establish direct contact with a bank or savings bank to initiate payments," he explained, saying that this harboured the risk for credit institutions of contact with customers at large changing fundamentally. At the same time, the number of participants would increase the complexity of payment processes and therefore the risks to security and the protection of personal data. Mr Thiele conceded that the market share held by fintechs is still very small, but that cooperation between fintechs and credit institutions in the future could be one way of overcoming challenges.

Blockchain technology still in its infancy

Another topic covered in Hachenburg was blockchain technology. The Bundesbank Executive Board member explained how the technology works: by incorporating the global computer network, this ledger makes it possible to document any and all transactions in the financial world in near real time and, above all, on a decentralised basis - that is to say, without the need for a centralised unit or institution. According to him, the focus is on developing the blockchain into a basic technology that would be able to facilitate business-to-business transactions. Mr Thiele explained that, while there were pilot projects and ongoing applications, it was too early to assess the extent to which expectations could be met. "In my opinion, blockchain-based solutions are still far from being ready for the mass market." However, he said there was no doubt that innovative payment transaction products were becoming more widespread. With this in mind, he believed that fintechs should look beyond the younger generation, stating that many of them would be surprised to discover how old their customers were on average.

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