XXIV International banking congress

The payment industry. Modern realities

Lorenza Martínez Trigueros
3-5 June 2015, St. Petersburg, Russian Federation.
 The retail payments landscape
• Cards and electronic fund transfers are the non-cash most widely used retail
payment methods for most jurisdictions; México is no exception.
• These two electronic payment methods have been growing faster than other
less efficient payment methods.
• Technological developments pose a huge opportunity to enhance such trends
and to achieve a better functioning payment ecosystem.
Retail payments index growth
1,600
SPEI < US3,250 (11 mill trans)
1,400 1,360
Card payments (412 mill trans in 2005)

1,200 Cash withdrawals (1,069 mill trans in 2005)

Cheques (563 mill trans in 2005)

1,000
Index (2005 = 100)

800

600

400 333

200 143
60
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Bank of Mexico

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 The retail payments landscape
 In order to be useful as a retail payment method, systems must consider:
• Acceptance
Retail payments present network externalities, thus it is imperative to have many players on
each side of the market.
• Speed
Customers and merchants need to have confirmation of their transactions in near-real time
so that the payments do not hamper economic decisions.
• Security
Issuers must be tranquil that their resources are safe and only authorized transactions will be
debited from their accounts.
Receivers must be certain that they will receive the payments in due time.
• Simplicity
Issuers and receivers must gain from using the system as compared to cash or other
methods.
• Availability
The system must remain available to the users at times when transactions are demanded.
• Price
Economic decisions should not be significantly disturbed by transactional prices.

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 The retail payments landscape
 In the past, only card systems came close to fulfilling some of those basic needs.

 It has taken decades for card payments systems to achieve functional coordination.
Technological development has been an important component to improve and
reduce their costs to consumers.

 In same day electronic transfer systems, technological development has also

allowed it to enter in the retail payments market, providing an alternative payment
service to end users.

 Thus we are experiencing a significant evolution of retail payment systems towards

a potentially more diverse, significantly more efficient, and less costly environment.

 Clearly both cards and electronic transfers can fulfill most of the basic needs for a
retail payment system.

 However coordination required for acceptance requires external variables. Central

Banks may act as a catalyst to get faster coordination and adoption.

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 Bank of Mexico’s role in retail payments

 One of the mandates of Bank of Mexico is to promote the sound development of

payments systems, on that regard it plays different roles:

i. Operates the SPEI (real time gross settlement system), the backbone of the
Mexican payments systems.

ii. Regulates the retail payments systems: Card payments, electronic funds
transfers, direct debits, checks, among others.

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 Electronic Funds Transfers
 Main features required to be widely used
 Real time gross settlement system (RTGS)
× Automated Clearing House (ACH)

ACH / RTGS 3
6
4
Payee’s bank
Payer’s bank
5
Payer 1
instructs his
bank to Debit 7 4
transfer Credit
funds Settlement agent
t
t+1

Payer Payee

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 Bank of Mexico’s role as SPEI operator
SPEUA SPEI SPEI 24/7

2007
2000 Moral suasion to reduce transaction
Banxico began the design of SPEI fees for low value transfers ($6.5K USD)
to a level lower than $1 USD.

1996 2005 2015

Min. transaction: $8K USD SPEUA shuts down Mobile payments 24/7 operation
Min. transaction: removed

1990 2000 2010

1997 2006 2015
Min transaction: $4K USD Fee: $0.04 USD Fee = MC = $0 USD

1995 2004 2010

SPEUA began operations. SPEI began operations Processing timeframes
Min. transaction: $38K USD. Min. transaction: $4K USD. reduction to 30 seconds
Fee: $0.18 USD Fee: $0.08 USD

Min. transaction is the minimum amount per transfer on SPEUA/SPEI.

Fee is the amount that Banxico charges to commercial banks per transaction on SPEUA/SPEI.
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 Bank of Mexico’s role as SPEI operator

Third-party1/ monthly payments settled in SPEI by size

Total value of payments Number of payments
Billions of USD2/ Millions2/
180 18 Average annual
Average growth rate
160 annual 16 Processing timeframes
growth rate 22 20%
140 14 reduction to 30 seconds
120 12
Fee reduction 27 %
100 10
14% to less than 21
80 8 $1 USD
115%
60 6
13
40 4
42 %
20 2
43% 331 %
0 0

Dec-06

Dec-07

Dec-09

Dec-13
Dec-05

Dec-06

Dec-07

Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11

Dec-12
Jun-13
Dec-13
Jun-14
Dec-14

Dec-05

Jun-08
Dec-08

Dec-10
Jun-11
Dec-11

Dec-12

Jun-14
Dec-14
Jun-06

Jun-07

Jun-08

Jun-12

Jun-06

Jun-07

Jun-09

Jun-10

Jun-12

Jun-13
Payments <= 8,200 USD Payments > 8,200 USD* Payments <= 8,200 USD Payments > 8,200 USD*
Number of participant banks offering internet banking services

Source: Bank of Mexico.

1/ Third-party payments: those which are both sent and received by SPEI participants as a service request of end users.
2/ One-year moving average.
*Payments are censored at $6.1M USD because larger payments exhibit very high volatility. However, the latter represent only 0.13 % of the total
number of transactions.

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 Bank of Mexico’s role as SPEI operator
 In 2014, more than 48 % of the payments were below $325 USD.

Distribution of third-party1/ payments settled in SPEI

20%

16%

12%
Percentage

8%
2006
2014
4%

0%
U SD SD SD SD SD SD US
D
US
D
US
D
US
D
US
D
US
D
US
D
US
D
US
D
$0 3U 5U 30
U
26
U
50
U
K 5K
$3 $6 $1 $3 $6 .3K .2
5K .5 2.5
K
$6 25
K
50
K
.95
M
.88
M
$1 $3 $6 $3 $3 $6 $1 $4

Source: Bank of Mexico.

1/ Third-party payments: those which are both sent and received by SPEI participants as a service request of end users.
2/ One-year moving average.
*Payments are censored at $6.1M USD because larger payments exhibit very high volatility. However, the latter represent only 0.13 % of the total
number of transactions.

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 Bank of Mexico’s role as SPEI operator

Issuing bank Bank of Mexico Receiving bank

Phase 1 – Initiating. Phase 2 – Settlement. Phase 3 – Posting.

Maximum time for initiating Time determined by Bank of Maximum time for funds
payment: 30 sec. (after Mexico, according to the triggers posting: 30 sec. (after receiving
acceptance by issuing bank). to initiate a settlement cycle. settlement notice by SPEI).

• Average: 6.59 sec. • Average: 2.02 sec. • Average: 5.06 sec.

• 96% of payments are initiated • 97% of payments are settled • 97% of payments are posted
within 30 sec. within 5 sec. within 30 sec.

Average end to end time: 13.67 seconds

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 Bank of Mexico’s role in mobile payments
and low value transfers
 Bank of Mexico issued regulations to promote and facilitate electronic transfers
initiated with a mobile device.

• Rules for the clearing houses authorization and operation (Dec 2013)

• Association of mobile phone numbers to bank accounts rules. (Nov 2014)

• Extended hours of operation (24/7) and reducing processing times (up to 15

seconds) of mobile payments through SPEI.

 To enhance final users’ immediacy experience of person-to-person payments, Bank of

Mexico’s regulation will require participants to process in 24/7 and reduced
processing times, payments up to $520 USD.

• SPEI will be available for end users 24/7:

• Banks will have to process the origination and posting of those payments within 5
seconds.

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 Card payments at the point of sale (POS)

Authorization process Authorization process

Clearing and settlement

Payments
platform

Issuer Acquirer
Debits Credits

Payment Money and godos flow

Goods or services
Cardholder Merchant Information flow

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 Bank of Mexico’s role in card payments
 Card payments market was concentrated-  Regulation eliminates entry barriers- Participation
6 banks represent more than 90% of the market. rules and modifications must be authorized by Bank of
Mexico.
 Vertical integration- 6 banks own the two
incumbent clearing houses.  Improves competition- Two new clearing houses are in
the process of authorization
 Entry barriers- Mayor banks and clearing houses
used to set the participation rules and discriminating
 Discriminating fees have been prohibited- Clearing
fees by means of private contracts houses cannot set tired fees to acquirers or issuers nor can
charge any fee to other clearing houses for payments
interchange.
Before After
Incumbent Incumbent Incumbent Incumbent

Issuer Acquirer
Issuer Clearing house Clearing house Acquirer Clearing house Clearing house

New New New New

Acquirer Issuer Acquirer

Issuer Clearing house Clearing house Clearing house Clearing house
No fees Fees
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 Final remarks
 Bank of Mexico has followed two strategies to enhance the availability, reliability
and convenience of electronic payments:

• Exploit economies of scale and scope of SPEI.

• Improve the regulation for privately-run payment services and providers.

 Coordination with the industry is necessary to ensure that society enjoys the
benefits from more efficient payment alternatives.

 In its different roles (regulator, operator and catalyst), Bank of Mexico has been
improving SPEI to provide a robust payments infrastructure and level the playing
field to participants in order to increase competition in the provision of more
efficient payment services, specially to those persons excluded from formal
financial services.

 Find the proper balance on setting incentives on innovation and regulation.

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