Innovation and competition in payments: Evolving policy challenges

Abstract

Technology-led innovation in payments has been a constant over history. Nevertheless, the ongoing process of digital transformation is proving to be radically different from the previous waves, as it is leading to a more profound reconfiguration of the financial industry. By facilitating the entrance of new players, particularly FinTech and big tech companies, technological innovation in payments has increased competition, further inducing innovation and efficiency gains. Despite having obvious benefits, payment system innovations and the associated changes in competition dynamics have implications for consumer protection, financial stability and market integrity that require an adequate response from supervisors and policymakers. This paper explores how the digital transformation of financial services has led to the opening up of the payments market to new providers, initially specialised FinTech companies and increasingly large technology conglomerates. The paper also discusses how regulators and policymakers have already responded to the evolving nature of the payment ecosystem, and key issues that policymakers should take into consideration to define a forward-looking approach. Finally, it calls for a balanced regulatory intervention that promotes electronic payments adoption and responds to the challenges posed by this unprecedented transformation trend in payments.