Innovation in Retail Payments and Its Impact on a Country's - PowerPoint PPT Presentation

Seppo Honkapohja Bank of Finland Innovation in Retail Payments and Its Impact on a Country's Economic Growth and Financial Stability Presentation in Bank Indonesia Seminar and Workshop 13 November 2017 13.11.2017 Unrestricted 1

Agenda 1. Effects of innovation at the level of whole economy  The big picture: Digitalisation, technological change, productivity, and well-being in the long run  Optimists and pessimists: how will digitalisation impact the economy and society as a whole  Widening use of digital technology and new opportunities 2. Effects of innovation in financial markets  The financial system and economic performance  Payment systems and economic well-being  Innovations in financial services and financial stability 3. Evolution of payment systems  Main drivers and trends: consumer expectations, fragmentation of the markets, real-time payments, “embedded payments”  Assessing the change: European situation (PSD2, PAD) 4. Conclusions and policy considerations  Key areas and challenges for policy makers 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 2

1. Effects of innovation at the level of whole economy 1.1 Long-term trends 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 3

Why has our standard of living improved so much over last 150 year? 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 4

13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 5

The rise in the standard of living 1860−2010 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 6

Labour productivity growth and improvement of living standard in Finland in 1860−2015 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 7

Technological development evident as waves of productivity growth 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 8

1.2 Debate about digitalization 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 9

What is digitalization? ”Suomen Pankki”  Digitization: = 01010011 01110101 01101111 To convert, store, transfer, and 01101101 01100101 01101110 process information in a 00100000 01010000 01100001 format understood by computers 01101110 01101011 01101011 01101001 – Binary data – Digital information can be music, movies, documents, maps, observational data etc.  Digitalization: Widespread economic and social transformation made possible by the development of information and communication technology – A change that is visible in all sectors of the economy – Automation, robotization, digital platforms, artificial intelligence, industrial internet, internet of things, digital government etc. 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 10

Will digitalization cause a new wave of productivity growth which matches the previous technological revolutions? Pessimists Optimists   Computers are seen everywhere We ain’t seen nothin’ yet (Joel Mokyr) except productivity statistics  The second machine age (Robert Solow) (Erik Brynjolfsson & Andrew McAfee)  Development has been limited to  We tend to overestimate the effect of a entertainment and communication technology in the short run and (Robert Gordon) underestimate the effect in the long run  The low-hanging fruits have already (Ray Amara) been picked (Tyler Cowen)  The same pessimist arguments were  We’ve been waiting for accelerated made before the previous technological growth for a long time now revolutions   Economic headwinds will dampen The statistics do not tell all growth despite technological  The rate of new innovations has not progress (Robert Gordon) slowed down 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 11

Prices of ICT equipment and services have fallen exponentially 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 12

Prevalence of ICT equipment and connections in households 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 13

Mobile data transfer volume in Finland, 2007−2016 Currently almost 10 times more data is transferred in one day than in year 2007 as a whole 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 14

Technological development, economic growth and the road ahead 1. Productivity growth derived from technological development is the main driver of improving living standards in the long run. 2. The future impact of digitalization on economic growth is uncertain, but signs of its potential are already clearly visible. 3. Digitalisation is bound to transform industries based information processing and communication − such as finance and payments. 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 15

2. Effects of innovation in financial markets 2.1 Financial systems and economic performance 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 16

Financial systems and economic performance Source: Hartmann et al. (2007) “The role of financial markets and innovation in productivity and growth in Europe“ 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted

Impact of finance on economic growth (1) Question: Can there be too much finance? Source: Cournède, B. and O. Denk (2015), “Finance and economic growth in OECD and G20 countries”, OECD Economics Department Working Papers , No. 1223, OECD Publishing, Paris. 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 18

Impact of finance on economic growth (2) Other views also exist:  For example, Durusu-Ciftci, Ispir & Yetkiner (2017) find that by fostering the development of a country’s financial sector, economic growth will be accelerated. Journal of Policy Modelling, Vol. 39, Issue 2. (http://www.sciencedirect.com/science/article/pii/S0161893816300631) For financial innovation both “bright and dark sides” exist:  For a recent review on innovation-growth view and innovation-fragility view, see e.g. Beck, Chen, Lin & Song (2016) “ The bright and the dark sides ” Journal of Banking and Finance, Volume 72, November 2016 ( http://www.sciencedirect.com/science/article/pii/S0378426616301133) 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 19

2.2 Payment systems and economic well-being 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 20

On the relationship between retail payments development and economic performance Source: “Efficient retail payments: An untapped source for reviving growth in Europe?”, Iftekhar Hasan & Tuomas Takalo, VoxEU, 24 January 2014 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 21

Some studies on p ayment systems and economic growth  DeRenzis et al (2012 & 2013): – Electronic payment instruments have overall a positive impact on economic development  Tee and Ong (2016): – The impact of adopting cashless payment on economic growth can only be significantly observed in the long run  Zandi et al. (2017): – Increasing use of electronic payments boosts consumption and GDP, and the impact increases as penetration rises. Effect on the global level is 0,1% of GDP.  Ilyes & Varga (2016): – Utilise a DSGE model to study impacts on the performance of the Hungarian economy if retail cash payments were substituted with card payments. Results show both positive indirect and direct effects. 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 22

2.3 Innovations in financial services and financial stability 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 23

Financial services and Fintech  Use of advanced technologies by financial services firms is not a new phenomenon: – Internal technological solutions to service provision and to compliance with regulatory obligations. – Also outsourcing with external service providers has existed for long time.  But the rise of FinTech is a recent phenomenon.  It has led to – Increased technological, especially IT, investments – Appearance of a whole array of different firms:  Incumbents  specialized start-ups and  global telecom/technology companies (“GAFAA”: Google, Apple, Facebook, Amazon and Alibaba”) . 13.11.2017 Seppo Honkapohja Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted 24