Nonbanks and Risk in Retail Payments

This paper documents the importance of nonbanks in retail payments in the United States and in 15 European countries and analyses the implications of the importance and multiple roles played by nonbanks on retail payment risks. It shows that nonbanks play multiple roles along the whole payment processing chain of five main payment instruments (card payments, electronic cheques, credit transfers, direct debits and e-money and other pre-funded/stored value instruments). The importance of nonbanks is assessed as prominent in the United States across all the considered payment instruments, and high and growing in Europe where however differences among the various countries and payments classes persist. In Europe the importance of nonbanks is expected to grow in the future, driven by industry and regulatory developments. The paper argues that nonbanks’ presence has shifted the locus of risks in retail payments toward a higher relevance of operational risk in its various forms (malfunctioning, data security, and data protection), as well as higher relevance of fraud risk and system-wide impact of disruptions at key providers concentrating processing for important payment market segments. Banks have become increasingly dependent on nonbank service providers, and the adoption of new technologies in payments processing, particularly as regards communication networks, while on the one hand supporting mitigation of credit and liquidity risks connected to payments authorisation, increases the number of possible points along the processing chain that may be vulnerable to fraud and illicit use. The paper reviews the main regulatory safeguards in place, and concludes that there may be a need to reconsider some of them in view of the growing role of nonbanks and of the global reach of risks in the electronic era. * Terri Bradford, Fumiko Hayashi, Christian Hung, Richard J. Sullivan, Zhu Wang, and Stuart E. Weiner are members of the Payments System Research function of the Federal Reserve Bank of Kansas City. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. † Simonetta Rosati is with the European Central Bank Oversight Division. The views expressed in this paper are those of the author and do not necessarily reflect the views of the ECB or the Eurosystem.