A New Era in Fintech Payment Innovations? A Perspective from the Institutions and Regulation of Payment Systems

Abstract

The growth of financial technology is a marked trend as Price Waterhouse Coopers observes fintech as ‘a dynamic segment at the intersection of the financial services and technology sectors where technology-focused start-ups and new market entrants innovate the products and services currently provided by the traditional financial services industry’. Fintech reaches into many areas of financial services, from products to services and markets, and many aspects could be poised to be ‘disruptive innovations’, which, in Bower and Christensen’s framework, refer to the creation of new markets and value networks that eventually disrupt existing markets and value networks, displacing established market leaders and alliances. Fintech in payment innovations seems promising in revolutionising the way we pay and how money is transferred.

The advancement of technological possibilities alone is usually not a sufficient predictor of their disruptive potential. This paper places payment innovations within a payment system. The payment system comprises of initiation of payment, transfer as well as clearing and settlement. We argue that existing payment systems are defined by certain institutional tenets that serve commercial objectives but more importantly, deliver public goods and public interest objectives for users and policy-makers. This perspective sets the context for discussing the prospects of competition, and shows that the disruptive potential of modern competitors in payment services should not be overstated. Competition in payment services may address certain aspects for improvement but its salience may be more nuanced than hyped. In other words, pro-competition in regulatory policy should not be regarded as an unequivocal good.

Three types of payment innovations have been hailed to have disruptive potential in recent developments. First, innovations in retail payment interfaces or options at point of sale, such as mobile or app payments, that may displace the use of cash and cards. Second, virtual currencies such as Bitcoin may come to be accepted as legitimate forms of payment by merchants and businesses. Third, new ledger technologies such as the distributed ledger or autonomous organisation technologies may replace existing infrastructure in payment clearing and settlement systems.

Section A discusses the institutionalisation of certain tenets in existing payment systems. We discuss large value transfer systems and retail payment systems separately as these have evolved in different ways. It may be questioned if new technology has the potential to break down these established ‘categories’ of payment development, but we show that the separate developments are also in large part due to public policy objectives. We establish the key institutional tenets of payment systems in both large value and retail payment architecture and show that they have evolved to secure for users efficiency in the discharge of payments, but also public policy objectives in safety, confidence and consumer protection in the commercial conduct of payment. This discussion is based chiefly on developments in the UK, EU and US where institutional maturity has been achieved. Arguably the same commercial objectives and public policy needs subsist more widely, and large value transfer systems are very similar worldwide. Even in retail payment systems where certain institutional tenets are not highly developed in some jurisdictions, our discussion relates to issues of common interest.

Section B then discusses each of the three types of payment innovation identified in this article. We raise key examples observed across a number of different parts of the world, and discuss their compatibility or ‘substitutive potential’ with the institutions of payment systems discussed earlier. This Section critically discusses if each type of payment innovation has the potential to bring about institutional change. Section C concludes.