Tuesday, July 05, 2011

Latest oversight framework of the ECB: the institutional drift continues and the blind spot for outside-payments increases

Today, the ECB published updated standards for oversight of payment and settlement systems. And once more I found it quite interesting to observe this big institution increase its span of control and policy-reach in a process which is called institutional drift. Which is a scientific term for: just grab something that is within reach of what you're doing and see if anyone can stop you. If not, you just expanded succesfully your territory. Which is the fuel and drive for any organisation or institution of course.

The distinctive example of institutional drift, worthy of further scientific exploration (if ever a political scientist would wish to do so), regards the vague term: 'oversight' on payment systems. And in this blog I am giving some clues as to a possible lines of reasoning and research.

1. In general it is of course a good thing that central banks, in their role as an important local government institution keep an eye on the developments in the payments and securities sector in their country. Some central banks at some point in time called this: 'oversight'.

2. And should anyone wonder if this is the same as supervision: it is not. Supervision is formally described and delegated in general laws and supervision law. Oversight on the other hand is a self-invented word of central banks. Yet there are always some generic words in the central bank law that vaguely refer to the job of central banks to promote smooth payment systems.

3. This promotion of smooth payment is of course relevant given the role of a central bank as the settlement bank for active banks in its country. But in time, central banks have started using the terminology and words in bank law to increase their action radius. So they started becoming involved with national retail payments, not being a real supervisor, but sort of acting as such and using complicated terminology as oversight to disguise (in some countries) the lack of a strong legal basis. So we have a mixed bag of central banks in the EU, all claiming to also do oversight, with some of them having a real legal basis, and others not having it really.

4. Enter the European central bank, more than ten years ago. In a quest for a bigger role in the universe, they found the oversight function to be of relevance and started drawing in this territory. Which brought them in conflict with some local central banks that said: 'Hey, ECB, hands off our local retail payment systems and oversight, that is a local matter, not a European matter'. But then again, over time such a stance can't be uphold, due to the centralizing powers of any power centre. So the ECB's role in retail payments oversight got bigger and bigger.

5. So over time we could witness the Dutch local central bank publish and use 'oversight'-standards. The ECB got involved in cards-standards. Which was a strange move, upon which the Dutch Bankers Association also commented:
1 The Articles 105(2) of the Treaty and Articles 3 and 22 of the Statute of the European System of Central Banks and of the European Central Bank (ECB) at best provide a legal basis to publish or enact regulations with respect to gross-settlement systems that are directly relevant for the functioning of the money market. We note that the scope of the proposed oversight framework for CPS extends beyond this domain. While we recognize that analytically the proposed framework (or any other payments oversight regulation and measures of the ESCB) may perhaps be considered ‘in line’ with the statutory tasks of the ESCB, we are of the opinion that such an extension lacks the required legal basis. Additionally we note that it is only remotely related to the primary tasks of maintaining price stability.

6. Still, this verbal slap on the hand by the NVB made no impression whatsoever, and so we can witness the European central bank pursuing the quest for retail payment oversight. There is a catch however. The ECB conforms to the definition of payment instruments in the Payment Systems Directive and thus leaves a whole range of thirdparty instruments as OV-chipcards or e-money on mobile phones out of their scope. So here is an interesting blind spot.

7. If we take the spirit of the ECB document as a guidance, aren't mobile phone money and pre-paid cards (and possibly all other new kinds of payment mechanisms) effectively the instruments that most require some form of oversight? And aren't those the systems (rather than the ones of banks) that have the best record in making the money of consumers effectively disappear? Contactless card may be more prone top operational errors (the Dutch system is) and money on mobile phone is notoriously gone due to unrequested reverse billing via sms and what have you.

8. So what I find intriguing is the mixed message the ECB is thus sending. On the one hand they wish to increase their hand/policy area to fit all the world of payments into their remit. So with an not-legally based word as oversight they conquer the retail payments world. Yet, they carefully seek to steer clear from instruments that may be too complicated or are too tough to handle.

9. Which leads me to my final questions. Who asked for this? Who is paying this? And is anyone in Europe holding the ECB responsible for what they are doing in the area of retail payment oversight? Are they being evaluated by some other organisation than just themselves? And is this what the European citizens or European Parliament wish the ECB to do (rather than leave this to local central banks)?

Saturday, July 02, 2011

Fed issues rules to debit card interchange...

After a lot of thinking, the FED issued its rules for debit card interchange. Essentially they've outlined the borders beteen which the outcome in the market is acceptable. And it's a smart solution for a tricky debate, because at some point it looked as if the FED didn't really knew what they were up to.

An interesting element is that 3 party networks are excluded from the regulation (which is legally inevitable). And that a sort of competition appears to be forced upon the issuer. In any case, the markets reaction in terms of increasing share price was quite clear. Although it might also have been the short-squeeze in US treasuries that did the trick.

Friday, July 01, 2011

Dutch Ov-Chipcard gets instructions from parliament

This week was the last week of this seasons parliament sessions in the Netherlands. And our parliament has a tendency, of late, to increasingly focus on details and incidents, rather than strategy and policy. Thus, responding to consumer dissatisfaction, the Dutch MPs approved a decree in which TransLinkSystem, the builder of the public transport chipcard, is ordered to simplify the check-in, check-out system.

Upon check-in the system deducts a big amount (sort of bail) from the pre-paid purse and only if check-out functions properly, the system returns the money (and deducts the fare price). This doesn't work properly so if somehow the machines don't work properly you quickly run out of cash and are forced into the hassle of phoning/contacting customer service to get your money back. There is even a separate fund that Translink owns, in which money resides which should have been claimed back due to these operaitonal errors. It's the money of customers who are unaware of the errors (they may have enabled the autoload function that fills up the purse from their bank account and they may not really check their accounts that well).

Additionally, there's going to be a change in governance for the ov-chipkaart. MPs decided to install a governing board that is responsible for design and customer features, reducing Translink to the mere processor of the scheme.

Well, as with most of MP initiated ideas, we'll have to see if this will fly (and how.....).