XXIV International banking congress The payment industry. Modern realities Lorenza Martínez Trigueros 3-5 June 2015, St. Petersburg, Russian Federation.

The retail payments landscape Cards and electronic fund transfers are the non-cash most widely used retail payment methods for most jurisdictions; México is no exception. These two electronic payment methods have been growing faster than other less efficient payment methods. Technological developments pose a huge opportunity to enhance such trends and to achieve a better functioning payment ecosystem. Retail payments index growth Source: Bank of Mexico

The retail payments landscape In order to be useful as a retail payment method, systems must consider: Acceptance Retail payments present network externalities, thus it is imperative to have many players on each side of the market. Speed Customers and merchants need to have confirmation of their transactions in near-real time so that the payments do not hamper economic decisions. Security Issuers must be tranquil that their resources are safe and only authorized transactions will be debited from their accounts. Receivers must be certain that they will receive the payments in due time. Simplicity Issuers and receivers must gain from using the system as compared to cash or other methods. Availability The system must remain available to the users at times when transactions are demanded. Price Economic decisions should not be significantly disturbed by transactional prices.

The retail payments landscape In the past, only card systems came close to fulfilling some of those basic needs. It has taken decades for card payments systems to achieve functional coordination. Technological development has been an important component to improve and reduce their costs to consumers. In same day electronic transfer systems, technological development has also allowed it to enter in the retail payments market, providing an alternative payment service to end users. Thus we are experiencing a significant evolution of retail payment systems towards a potentially more diverse, significantly more efficient, and less costly environment. Clearly both cards and electronic transfers can fulfill most of the basic needs for a retail payment system. However coordination required for acceptance requires external variables. Central Banks may act as a catalyst to get faster coordination and adoption.

Bank of Mexico’s role in retail payments One of the mandates of Bank of Mexico is to promote the sound development of payments systems, on that regard it plays different roles: Operates the SPEI (real time gross settlement system), the backbone of the Mexican payments systems. Regulates the retail payments systems: Card payments, electronic funds transfers, direct debits, checks, among others.

Electronic Funds Transfers Main features required to be widely used Real time gross settlement system (RTGS) Automated Clearing House (ACH) 2 ACH / RTGS 3 6 4 Payee’s bank Payer’s bank 5 1 Payer instructs his bank to transfer funds 7 4 Debit Credit Settlement agent t t+1 Payer Payee

Bank of Mexico’s role as SPEI operator SPEUA SPEI SPEI 24/7 1995 SPEUA began operations. Min. transaction: $38K USD. Fee: $0.18 USD 1996 Min. transaction: $8K USD 1997 Min transaction: $4K USD 2004 SPEI began operations Min. transaction: $4K USD. Fee: $0.08 USD 2005 SPEUA shuts down Min. transaction: removed 2006 Fee: $0.04 USD 2000 Banxico began the design of SPEI 1990 2010 2015 Mobile payments 24/7 operation Fee = MC = $0 USD 2007 Moral suasion to reduce transaction fees for low value transfers ($6.5K USD) to a level lower than $1 USD. Processing timeframes reduction to 30 seconds Min. transaction is the minimum amount per transfer on SPEUA/SPEI. Fee is the amount that Banxico charges to commercial banks per transaction on SPEUA/SPEI.

Bank of Mexico’s role as SPEI operator Third-party1/ monthly payments settled in SPEI by size Total value of payments Billions of USD2/ Number of payments Millions2/ Processing timeframes reduction to 30 seconds 22 Fee reduction to less than $1 USD 27 % 21 13 42 % 331 % Number of participant banks offering internet banking services Source: Bank of Mexico. 1/ Third-party payments: those which are both sent and received by SPEI participants as a service request of end users. 2/ One-year moving average. *Payments are censored at $6.1M USD because larger payments exhibit very high volatility. However, the latter represent only 0.13 % of the total number of transactions.

Bank of Mexico’s role as SPEI operator In 2014, more than 48 % of the payments were below $325 USD. Distribution of third-party1/ payments settled in SPEI Source: Bank of Mexico. 1/ Third-party payments: those which are both sent and received by SPEI participants as a service request of end users. 2/ One-year moving average. *Payments are censored at $6.1M USD because larger payments exhibit very high volatility. However, the latter represent only 0.13 % of the total number of transactions.

Bank of Mexico’s role as SPEI operator Issuing bank Bank of Mexico Receiving bank Phase 1 – Initiating. Maximum time for initiating payment: 30 sec. (after acceptance by issuing bank). Average: 6.59 sec. 96% of payments are initiated within 30 sec. Phase 2 – Settlement. Time determined by Bank of Mexico, according to the triggers to initiate a settlement cycle. Average: 2.02 sec. 97% of payments are settled within 5 sec. Phase 3 – Posting. Maximum time for funds posting: 30 sec. (after receiving settlement notice by SPEI). Average: 5.06 sec. 97% of payments are posted within 30 sec. Average end to end time: 13.67 seconds

Bank of Mexico’s role in mobile payments and low value transfers Bank of Mexico issued regulations to promote and facilitate electronic transfers initiated with a mobile device. Rules for the clearing houses authorization and operation (Dec 2013) Association of mobile phone numbers to bank accounts rules. (Nov 2014) Extended hours of operation (24/7) and reducing processing times (up to 15 seconds) of mobile payments through SPEI. To enhance final users’ immediacy experience of person-to-person payments, Bank of Mexico’s regulation will require participants to process in 24/7 and reduced processing times, payments up to $520 USD. SPEI will be available for end users 24/7: Banks will have to process the origination and posting of those payments within 5 seconds.

Card payments at the point of sale (POS) Authorization process Authorization process Clearing and settlement Payments platform Issuer Acquirer Debits Credits Payment Money and godos flow Goods or services Cardholder Merchant Information flow

Bank of Mexico’s role in card payments Card payments market was concentrated- 6 banks represent more than 90% of the market. Vertical integration- 6 banks own the two incumbent clearing houses. Entry barriers- Mayor banks and clearing houses used to set the participation rules and discriminating fees by means of private contracts Regulation eliminates entry barriers- Participation rules and modifications must be authorized by Bank of Mexico. Improves competition- Two new clearing houses are in the process of authorization Discriminating fees have been prohibited- Clearing houses cannot set tired fees to acquirers or issuers nor can charge any fee to other clearing houses for payments interchange. Before After Incumbent Incumbent Incumbent Incumbent Issuer Acquirer Issuer Clearing house Clearing house Acquirer Clearing house Clearing house New New New New Issuer Acquirer Issuer Clearing house Clearing house Acquirer Clearing house Clearing house No fees Fees

Final remarks Bank of Mexico has followed two strategies to enhance the availability, reliability and convenience of electronic payments: Exploit economies of scale and scope of SPEI. Improve the regulation for privately-run payment services and providers. Coordination with the industry is necessary to ensure that society enjoys the benefits from more efficient payment alternatives. In its different roles (regulator, operator and catalyst), Bank of Mexico has been improving SPEI to provide a robust payments infrastructure and level the playing field to participants in order to increase competition in the provision of more efficient payment services, specially to those persons excluded from formal financial services. Find the proper balance on setting incentives on innovation and regulation.