Published Date: 11 January 2005

Keynote Address by Mr John Palmer, Deputy Managing Director (Prudential Supervision), Monetary Authority of Singapore, at NETS 20th Anniversary Dinner, 11 January 2005

"Fostering innovation and promoting consumer interests in retail payment systems"


1   Good evening ladies and gentlemen.

2   To begin, I would like to thank NETS for inviting me to speak at its 20th Anniversary Dinner.  In the past two decades, NETS has grown from strength to strength.  NETS is now an established brand name in Singapore.  I have been told that Singaporeans commonly use the word 'NETS' as a verb to describe making electronic payments.  Indeed, NETS has achieved much in providing consumers a variety of value-added and innovative payment products. 

3   Tonight, NETS not only celebrates its past accomplishments. It also looks forward to future challenges and achievements.  One of these will be the linkage between NETS and China UnionPay (CUP). This will be significant in many ways, and I wish both parties success in this venture.

Trends and challenges in the retail payments industry

4   The NETS-CUP linkage is but one example of how the retail payment industry is constantly changing and reinventing itself in order to remain responsive and relevant to consumers.  In today's retail payment market, consumer choice is the name of the game.  Innovative retail payment systems and products are increasingly catering to a variety of user preferences, spending patterns and consumer needs.  At the same time, there are also indications of convergence in technologies and platforms for greater economies of scale.  While it is difficult to predict the future evolution of the retail payment industry, there are a few trends that could potentially shape the industry's future direction.  I will touch on three of these.

5   First, in line with the global trend of increasing cross-border financial activities, cross-border retail payments are becoming more important to certain consumer segments and payment systems.  Retail payment systems have historically had a strong domestic focus.  Anecdotal evidence suggests that cross-border payments still amount to only about 1-2% of total retail payments. But this proportion is expected to grow quickly.  The growing demand in some specific low-value cross-border payments has triggered payment system providers, clearing houses, and even central banks to look for new solutions and value propositions to offer to consumers. 

6   The NETS-CUP link is a good case in point. Driven by the rapidly growing wave of Chinese outbound tourism, the NETS-CUP collaboration is a timely effort that provides greater consumer choice and convenience for a specific market segment.  We can see similar developments in other parts of the world.  For instance, the Automated Clearing House (or ACH) linkage between the US and Canada is largely a demand-driven initiative.  The Federal Reserve has also announced the possibility of future linkages to Mexico and Europe.  The growing demand to make cheap, efficient, and convenient cross-border payments could fundamentally reshape the business models of retail payment systems in the medium term.

7   The second trend is the parallel growth of niche retail payment systems, fuelled by consumer demand.  It used to be that 'niche' meant small-scale outfits, startups, and dotcoms. Now, some of these systems have grown to become established, even global, payment systems in their own right.  While many of the niche players of the dotcom era have come and gone, small retail payment systems continue to emerge and find new niche markets.  These range from micropayment providers and stored value gift cards, to various mobile and Internet payment systems.  So whether you fancy paying 99 cents online to download an mp3, or using your mobile phone to make payments at vending machines, someone out there would likely be able to provide you with an innovative solution.

8   A third trend is materialising on the supply-side. Some recent developments seem to point towards a convergence rather than a divergence of technologies.  This may seem somewhat contradictory in the light of the proliferation of cross-border, niche, or customized payment platforms, but it could in fact be complementary to that proliferation and could even drive consumer demand.  We are already seeing such trends in card-based payment systems, where providers have spent time and resources setting industry standards and technical specifications.  While there are various issues and difficulties associated with such integration and convergence, there is undoubtedly an economic benefit from establishing shared infrastructure, common standards and technical specifications, while providing distinct functionalities that serve different groups of consumers. 

9   These three trends that I have touched on point towards a common theme - that retail payment systems have to innovate in order to remain relevant, maintain cost-competitiveness, and add value for consumers.  This is likely to lead to more divergence and competition in the front-end of retail payment systems, such that consumers benefit from a myriad of delivery channels, payment methods, and niche services.  At the same time, there is potential for greater convergence and collaboration in terms of standards, procedures and infrastructure, such that retail payment systems benefit from greater efficiencies at the back-end of their operations. 

What are the risks involved in retail payment systems?

10   From the regulator's perspective, I should take this opportunity to touch on some of the risks involved in retail payment systems, particularly in view of the new trends and developments that I have described.  The same payment system risks that affect the MAS Electronic Payment System (or MEPS), the ACH, and other higher-value payment systems affect retail payment systems as well, albeit to a lesser extent.  Being retail payment systems, the value of transactions are lower and risks tend to be more contained, in comparison to higher-value payment systems.  But for both large-value payment systems such as MEPS, and for retail payment systems, operational risk is a primary concern.

11   I will not be discussing the types of operational risk in detail, but suffice it to say that operational risk for retail payment systems covers a broad range of risks, from technology or security risks, to fraud and reputation risk.  Instead, I would like to discuss those risks from a consumer's perspective.

12   The story of the elderly lady who was conned to give her ATM card to a stranger pretending to offer help is becoming a modern urban myth.  There are also those among us who continue to write our ATM PIN or Internet banking passwords down, rather than memorizing them.  It does get a bit difficult these days with the number of PINs, access codes, and passwords that we have to commit to memory, but I hope none in the audience, other than I, are guilty of this. 

13   We may be able to attribute some of these risks at the consumer level to the digital divide, but this is not a reason to be complacent about them. Recently, the scams have become much more elaborate and sophisticated.  Not only have ATMs been rigged with hidden cameras and card-skimming devices, entire fake ATMs have appeared out of thin air in some countries!  Fortunately, this has not happened in Singapore, yet.  I gather it is quite difficult to smuggle an ATM around Singapore without somebody notifying MAS.  We have, however, been hit with many phishing websites, which are basically the online equivalent of fake ATMs.  These phony bank websites immaculately duplicate the real ones, with the objective of phishing for personal and card information from unsuspecting users.

14   I mentioned that the risks for retail payment systems remain relatively low, in terms of systemic impact to the economy or the financial sector.  But while such risks may be low for the financial system, they can be significant for an individual.  And recurring losses to customers can translate into losses to the systems in the long run, due to an erosion of consumer confidence in the products offered by the systems.  From that perspective, risks inherent in retail payment systems should not be regarded as insignificant.

Innovation vs. consumer interests

15   Let me summarize some of the issues I have covered to this point.  The development of the retail payment industry is very much driven by consumer demand.  In order to address the wide range of consumer needs and wants, as well as to exploit new technology, there is a need for innovation, dynamism, and competition in the retail payment systems' market place.  At the same time, the pace of evolution in the industry and the variety of payment options available to consumers could create risks of which consumers may be unaware or not fully aware.

16   Some might like to see a high degree of regulation of retail payment systems to ensure that the interests of consumers are always protected.  But regulation can create costs to the retail payment industry, and ultimately, to consumers. Premature or unnecessary regulation can impede innovation, and since the benefits of innovative new products accrue directly to consumers, over-regulation can inadvertently have an adverse impact on consumers.

17   Because both the benefits and risks of innovation accrue directly to the users, I would argue that consumers are in the best position to assess their own risk tolerance as well as the risks that they undertake when they use certain payment systems. A key precondition to this is information and understanding: as long as consumers are sufficiently well informed about the choices they make and understand the risks of the systems they use, their private risk assessment is likely to be superior to any public policy measure.

MAS' view - a pragmatic approach to oversight

18   These principles of fostering innovation and promoting consumer interests guide MAS' approach to payment system oversight.  For retail payment systems, we are keenly aware of the need for public policy to foster innovation and dynamism in the market.  This is why, in the upcoming Payment Systems (Oversight) Act, we have opted for a relatively light-touch regulatory regime.  The new Act will provide a clear and consistent framework for MAS to adopt a pragmatic and risk-based approach towards payment system oversight, focusing mainly on systemic and system-wide risks, and regulating where such risks are clear and present.

19   A risk-based approach does not mean that there is would be no oversight for payment systems with lower risks. MAS will continue to monitor the development of retail payment systems, especially in the area of emerging risks.  Where there are signs of significant problems or market failures, we will consider whether putting in place additional regulatory or supervisory measures is likely to lead to a better outcome for the market.  In most cases, MAS is likely to choose to empower and educate consumers, so that they are better able to make their own decisions and assess their own risks.  Through financial education and market discipline, coupled with sound payment system oversight policies, we hope that the market will grow and mature in tandem with the rapidly developing industry.

20   To give a concrete example, under the new Payment Systems (Oversight) Act, we propose to liberalise the Multi-Purpose Stored Value Facilities (or MPSVF) market.  The draft legislation is currently out for public consultation. Once public comments have been factored into the legislation, MAS intends to launch a consumer education programme on the implications of the new liberalised rules.  While consumers can be assured that a bank will continue to be fully liable for the stored value that they place in their NETS Cashcard and the EZ-Link card, they need to be aware that we are proposing to allow non-banks to provide similar, small-scale MPSVF.  Consumers can look forward to more innovative and creative schemes that may better serve their specific needs and wants, but must also be aware of the credit risks that they will take on when they purchase such stored value facilities.

Consumer Education - Cooperation between public and private sectors

21   To empower consumers to make more informed choices in their financial decisions, the MoneySENSE national financial education programme was launched in October 2003.  It brings together public and private sector initiatives in financial education for a long-term, sustainable programme to enhance the basic financial literacy of consumers.

22   Since its launch, MoneySENSE has published a series of consumer guides, organized talks and seminars at grassroots venues and developed programmes in the mass media. We will be leveraging on the MoneySENSE effort to educate the public about retail payment systems.  To start off, we are planning to launch two programmes to educate consumers on the use of GIRO transactions and stored value facilities.  More of such programs on retail payment systems will be developed and implemented going forward.

23   Financial education is a shared responsibility of the public sector, the private sector and consumers.  Because of their direct interface with consumers, retail payment systems must play a role in educating their customers on specific risks and other considerations that should be taken into account in using their systems and products.  They are also in the best position to advise their customers on new technologies and emerging risks.

24   Only through close co-operation between the public and private sectors will we be able to ensure that consumers in Singapore are equipped with knowledge to make sense of the different payment systems and instruments, and to use them wisely.


25   In conclusion, we should recognize that MAS, the industry, and the consumers all have a part to play in the development and smooth functioning of the retail payment landscape in Singapore.  MAS will oversee the industry in a pragmatic and risk-focused way, monitoring the overall payment system landscape, but focussing primarily on systemic or system-wide risks.  The relationship between the industry and consumers will also have to be built on market discipline, given the constantly evolving needs and wants of consumers, and the changing technologies and methods that the industry will have at its disposal. 

26   MAS will continue to act as a facilitator for the retail payment industry, fostering innovation, healthy competition, and cooperation among industry participants.  As we begin to move towards greater consumer empowerment, MAS will also act as a catalyst for the industry by encouraging more financial education efforts for consumers.

27   Let me end with a heartfelt birthday wish.  I hope the next 20 years will be good ones for NETS and for Singapore's payment system landscape as a whole.  I wish NETS, and its infrastructure partners like CUP, more successes to come in all their endeavors.