Non-cash payment: Inevitable trend and impacts on deposit insurance

10:03-21/06/2018

Non-cash paymentis supposed to bring benefits to individuals, businesses, the banking system as well as the country as a whole. The development of this means of payment has become an inevitable trend to promote a sustainable economic development, create financial transparency helping streamline the flow of money in a clearer and smoother manner.

Vietnam will reduce proportion of cash payment

At the end of 2016, the scheme on development of non-cash payment in Vietnam for the period of2016to2020was approved by the Prime Minister. The objective of the scheme is to reduce the ratio of cash to M2 to less than 10% by the end of 2020; 100% of supermarkets, shopping malls and distribution centers have card accepting devices and allow buyers to use non-cash payment facilities; 70% of electricity, water, telecommunications and media service providers accept non-cash payment from users; 50% of individuals and households in big cities use non-cash payment facilities in regular shopping.

On September 25, 2017, the State Bank of Vietnam (SBV) issued a plan on the development of card payment through card accepting devices for the period 2017-2020, which sets out specific measures to accelerate the development of card payment through card accepting devices. Overall measures include continuing to develop and complete card acceptance facilities at point-of-sale terminals; applying new and modern card payment technologies with fast, simple and convenient payment methods, including payment using chip card technology (contact and non-contact), payment by mobile devices using NFC technology, payment via QR Code ...; streamlining, improving the quality and efficiency of POS network; developing shared POS network, mPOS, other card accepting devices; enhancing the security, safety and confidentiality in card payment activities, payment via card-accepting facilities at  point-of-sale terminals; applying new and advanced security measures such as chip cards, 3D Secure, biometric authentication, QR Code, Tokenization, etc., which are in line with the paymenttrend in the world  and ensure security, safety in payment ...

The process of promoting non-cash payment has been creating a change in the public's payment habits. According to a consumer survey conducted by Visa in October 2016, 70% of survey respondents said that electronic payment was prefered to the traditional payment method. Out of the 500 respondents with income of at least 5 million dongs per month, 29% chose to carry cash less than they had done 5 years earlier, 59% cited the reason of using cards more and 56% worried about safety when carrying cash. According to this survey, the level of electronic payment preference in Vietnam in 2016 increased by 24% compared to 2015. In order to meet the needs of customers as well as development requirements, most banks have improved their infrastructure and core banking system, developed and integrated payment systems.

According to the statistics of Vietcombank, the total number of transactions of electronic payment via mobile banking, Internet banking and SMS banking has been continuously growing in recent years, up from 34 million transactions in 2015 to more than 60 million in 2016 (176% growth equivalently). In the first half of 2017 alone, this figure reached over 36 million transactions, equal to 60% of the 2016’s total number. Along with that, the trading value also increased from nearly 270 trillion dongs in 2015 to nearly 490 trillion dongs in 2016 and nearly 300 trillion dongs in the first half of 2017. The average growth rate of trading value in 3 recent consecutive years was 150% per year. According to the SBV, as of August 2017, the proportion of cash to the M2 was only 11.45%, decreasing from 14.02% in 2010. This number will be higherwhen mobile payment with many uitilities appear and are forecastedto quickly become a trend in Vietnam.

Vietnam is considered to have many ideal conditions to promote mobile payment. Vietnam has numourous advantages with 140 mobile subscribers per 100 people, nearly 60 million 3G and 4G subscribers and 99% of districts covered by 4G. The number of mobile broadband smartphone subscribers is expected to continue to increase to 80 million by 2020. The Payment Department of SBV said that over 41 commercial banks have been providing payment services via mobile phone with the fast-growing number and value of transactions. In the first 9 months of 2017, the number of mobile phone transactions reached over 90 million with transaction value of over 423 trillion dongs (equal to 93% and 139% respectively compared to 2016).

How can non-cash payment change deposit insurance?

Promoting non-cash payment will not only alter the spending habits of the Vietnamese but also change the banking system. Payment via credit card, bank transfer, check or other forms of electronic payment will increase the number and total value of checking accounts at credit institutions. Individual checking accounts at insured institutions are, in essence, considered as demand deposit accounts and covered by deposit insurance.

Besides making payments directly from individual checking accounts at banks, consumers may also use e-payment accounts at payment service providers. The providers themselves, in order to meet the needs of the customers, have their accounts at banks.Given the increasinguse of e-accounts for non-cash payment, the deposit insurer and banking supervisors need to pay more attention to the risk of misuse of deposits, because in the event of a bank failure, payment disruptions occur not only with customers who have accounts at the bank, but also with payment service providers hosting the customers' e-payment accounts. Deposits at banks are covered by deposit insurance as regulated by law, but the deposits in the customers’ payment accounts at payment service providers are usually not insured by deposit insurance.

In the United States, the Federal Deposit Insurance Corporation (FDIC) indirectly insuresprepaid accounts including prepaid cards, and funds deposited in e-accounts issued within the United States territory. These accounts must meet the following specific criteria: they must be open loop payment service; the funds must be secured by a deposit at insured institutions; The owner of the e-payment account must be the principal owner of the funds which are not established by the payment service providers on behalf of the customer; updated records of the account holder's identity and deposit balance must be fully stored. Notably, the Federal Government payments, such as tax refunds and social security payments can only be sent directly to prepaid accounts which meet the FDIC requirements.

In Colombia, according to the Comprehensive Financial Inclusion Law (Law 1734), a new form of financial intermediation was established in 2014: specialized electronic deposit and payment institutions. These organizations, referred to as Sociedades Especializadas en Depositos y Pagos Electronicos-SEDPE, are considered as depository institutions and are placed under the supervision of the Financial Supervisory Authority, and insured by the deposit insurer like commercial banks. On the other hand, SEDPEs provide limited deposit and transaction services, are not allowed to provide credit services, and therefore have to follow a regulatory framework with requirements less stringent than for banks.

In India, the Law on Amending the 2007 Payment and Payment System Law effective in June 2015 stipulates that customers' funds are protected if the issuer of prepaid payment instruments is insolvent. To protect the customers using payment services, the Reserve Bank of India has stipulated that unpaid funds must be kept in a designated account (trust account) at a commercial bank. This amount is exempted from the rights of the liquidator in order to protect the clientsin case where the payment service provider or the bank goes bankrupt.

In Turkey, the Payment Systems Act requires funds deposited by customers at electronic payment service providers to be deposited in specific trust accounts at a licensed bank. If an electronic payment service provider is insolvent, the law stipulates that the deposits in the trust accounts must be used to indemnify the customers against any damages incurred and to pay debts, regardless of priorities given by other laws.

Thus, some countries have regulations to protect customers using electronic payment services through deposit insurance or through other mechanisms. This is also an issue that authorities need to consider to ensure the rights and interests of users of these services, thereby promoting non-cash payment.

On the other hand, once people have formed new and more convinient payment habits, the process of payment and changes in account balance will occur very quickly and continuously. This can cause certain difficulties for tracking, storing data on deposits of insured depositors. Deposit insurers in some countries such as the United States and South Korea have set requirements on keeping and reporting statistics of deposit data according tostrict and clear standards so that when a credit institution goes bankrupt,the depositors may soon be reimbursed.

Finally, in terms of payment, in order to meet the demand for electronic payment, deposit insurers also need to consider whether to make insurance pay-outbyaccount transfer or authorize a bank to make insurance pay-out. The scheme on development of non-cash payments in Vietnam for the period2016 – 2020also clearly stresses on accelerating electronic payments in the public sector, public administrative services, increasing the rate of payment of social allowances, pensions, and other incomesvia account transfer. Insurance pay-out should also follow this trend. As a result, payment time can be shortened.Amounts paidwould be clearly controlled, errors would be avoided.Both depositors and deposit insurerscan minimize the risk of mispayment,at the same time, the insurance payments, after being paid, can continue to stay in the banking system.

Research and International Cooperation Department