area of card payments is giving rise to questions about how big a
role they will play. A recent paper* examines the areas in which
non-banks are expected to grow further, and the differing
approaches in the US and Europe in terms of risk and
Around the globe, non-banks are playing larger roles in the
value chain of payment cards. Roles vary by region and market,
although the need for non-banks to supply some functions has become
universal. There is much debate about this topic: how much of a
role should non-banks play, what risks are associated with non-bank
players, should non-banks be allowed to perform all functions, what
is the risk of non-banks stealing bank customers and how should
non-banks be regulated? These are just a few of the questions that
continue to be discussed.
Retail payment systems are undergoing fundamental changes and
non-banks are an important part of this. However, the approach can
be very different from market to market; for example, the European
Union (EU) and US perspectives on the role of non-banks in the
payment cards system demonstrate both similarities and
Some of the key similarities between these two systems
• expectations that banks that outsource will be responsible for
controlling risk in outsourced activity;
• supervision of processors affiliated with banks; and
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• some reliance on self-regulation.
On the other side, there are regulatory differences between the
• the Federal Reserve does not have a clear legal mandate to
oversee payments systems, unlike European Central
• the supervision of non-bank processors is more uniform within
the US than across the EU member states, but the EU’s Payment
Services Directive (PSD) is bringing harmonisation; and
• in the US there is no equivalent to electronic money
institutions or the ‘payment institutions’ introduced by the PSD
allowing non-banks to provide payment services to end users.
Non-banks have long had a role in core payments processing as
banks and other financial institutions have historically outsourced
such activities as data processing, file transmission and related
tasks. Other activities in which non-banks have been heavily
involved include network services (Visa and MasterCard, most
notably), authorisation services and fraud and risk management
services. All of these are key elements of the payments cards
Additionally, non-banks have been active in the range of
activities that take place before and after the execution of a
given card payment transaction. Examples of such pre-transaction
activities include the development and provision of hardware for
payments (eg, card production and POS devices) and the
establishment of contractual relationships with cardholders and
merchants. Moreover, non-banks have also been important in many
post-transaction services, including statement provision,
reconciliation and retrieval.
Another area in which non-banks have been very active is mobile
(m-) payments, which are available in both the prepaid and
post-paid environment and in Europe have attracted the attention of
the regulators due to the large potential. Currently, post-paid
m-payments are used mainly for payments of very small amounts, to
offset the credit risk for the telecoms companies; however, this
could change in the future, placing them squarely in competition
with payment card issuers. M-payments are relatively small and
usage is low, but growth is expected to be significant in the
In the US almost all card payment activities show a significant
level of non-bank presence, while in Europe this role varies across
markets and activities for the 13 countries surveyed. Four-party
payment cards and open-loop prepaid cards have the highest level of
Non-banks appear more prominent in the US but they have a
noticeable presence in many European countries as well. The role of
non-banks is expected to increase across Europe when the Single
Euro Payments Area and the PSD are implemented.
The table above illustrates the role of non-banks in key
activities of the payment cards value chain. While there are some
differences across countries, the presence of non-banks appears to
be increasing in virtually all markets.
* This article is based on a paper presented at a recent
conference sponsored by the Federal Reserve Bank of Kansas City,
Non-Banks in the Payment System: Innovation, Competition and Risk.
The paper, Non-Banks in the Payments System: European and US
Perspectives, was prepared and presented by members of the European
Central Bank Oversight Division and members of the Federal Reserve
Bank of Kansas City Payments Research Department.