Card Payments and Internet Banking Thijs Kettenis

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• Card Payments and Internet Banking
  Thijs Kettenis
• 2nd Conference of the Macedonian
  Financial Sector on Payments and
  Securities Settlement Systems Ohrid
  29 June 2009

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Contents

• Retail payments and central banks?
• Cards
• Innovations
• Mobile payments
• Internet banking
• Efficiency

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Retail versus wholesale payments

• Low value ? Large value
• High volume ? Low volume
• Consumers and ? Financial institutions
• businesses
• Time less important ? Time critical
• Low systemic risk ? High systemic risk

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Task of DNB

• By law (Bankwet 1998)
• fostering the well-functioning of payment
  systems
• In practice safeguarding and promoting
• safety, stability, continuity, trust
• efficiency
• availability and accessibility

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Payments different roles of DNB

• Operator
• - Cash
• - Large value payment system TARGET2
• - Services to securities settlement systems
• Overseer
• - Payment systems
• - Payment products
• Catalyst

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Catalyst

• Consultation with market parties, government
  agencies and international forums
• monitoring developments
• intervene when deemed necessary

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Innovations in retail payments

• 1. What is happening?
• 2. When mass adoption of these new applications?
• Contactless payments at the point-of-sale (POS)
• Mobile phone
• Internet

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Overview of innovative developments
Verified by Visa / MasterCard Securecode
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Contactless Payments
US case MasterCard Visa American
Express Cards 2005 5 mln 2006 30
mln Terminals 2005 20.000 2006 200.000
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Mobile Payments

• Near field communication (NFC)
• Contactless chip in mobile phone
• Wave Pay vs Chip Pin
• NFC can be used for all kinds of applications
• contactless payment at POS
• Also P2P payments possible

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Mobile payments

• Screen
• ? information on products, balance
• Keyboard
• ? enter information
• ? communicate
• Authorize large payments by PIN
• Top up from online bank account

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Characteristics of Mobile Payments

• Simple (user friendly)
• Secure (fraud free)
• Inter-operable (mobile)

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Different systems of Mobile Payments

• Bank-account-based / wallet system
• Telco-billing-based
• Credit-card-based

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Proximity / NFC

• Expected number of NFC mobiles
• 2010 300 million
• 2013 600 million

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Biometrics Security
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Consumer online banking penetration per country
Source Eurostat
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Advantages and risks of internet banking

• Advantage
• Efficiency
• Risks
• Unwanted access to bank accounts
• ? Reputation risk
• Operational risk
• ? Reputation risk, liquidity risk, credit risk,
  strategic risk, legal risk

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Regulation of internet banking in the Netherlands

• Principle-based (? rule-based)
• Approach
• Compliance to law and rules
• ? Law controlled operations
• ? Two-factor authentication
• Best practices
• ? BIS Risk Management Principles for
  Electronic Banking
• Self-regulation of banking sector
• ? code of conduct

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Two-factor authentication

• Something you know (password)
• Something you have (token, TAN)
• ? Safer than one-factor
• ? Common in European Union
• ? Factors in use
• ? Account number, username, password
• ? TAN (paper, SMS), token
• ? Future hardware token combined with EMV

authentication
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iDEAL Dutch standard for online banking based
electronic payments

• Launched in October 2005
• Three major banks in the Netherlands(market
  share gt 90)
• Existing internet banking interfaces used for
  authentication and authorization
• Additional banks

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User experience the webshop
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User experience choice of payment method
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User experience choice of issuing bank
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User experience payment authorisation
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User experience back to the webshop
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iDEAL advantages

• Customer
• Easy to use (pre-filled transaction form
  familiarity with electronic banking and security)
• Safe and trusted payments
• Merchant
• Guaranteed payment (no charge-backs)
• Low cost
• Large potential customer base
• Bank
• Further usage of electronic banking systems
• Further reduction of paper based payments

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iDEAL transactions
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Payment Systems Policy

• Various payment devices available
• Cash, debit card, e-purse, credit card, cheques
  
• Instruments are different costs, convenience,
  safety
• Question How could we pay efficiently?

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Efficiency No Free Lunch

• Main results
• Social costs POS payments 0.65 gdp
• per POS transaction 0.35
• per sales 2.4
• per household per annum 400

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Variable costs of cash, debit card, e-purse
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EFFICIENCY McKinsey Report
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EFFICIENCY McKinsey Report
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Efficiency Merchants report
Average costs per transaction
Retail business
Cash 0.18
Debitcard (PIN) 0.20
e-Money (Chipknip) 0.14
Creditcard 2.70
Retail 2001 Cash 0.17 Debitcard 0.27
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CASH-LESS SOCIETY?

• Condition debit card should be cheaper for any
  transaction size
• User convenience and safety
• Anonymity

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CASHLESS SOCIETY?

• LESS-CASH
• rather than
• CASH-LESS