Payment Institutions – Potential Implications of the New Category of Payment Service Providers for the Austrian Financial Market

Unlike in other areas of the financial market, progress toward the integration of payments markets has not yet been satisfactory. While the introduction of the euro was an important step in this direction, a single European payment area for cashless payments still does not exist. Current initiatives thus aim to lay the groundwork for integrated cross-border payment transactions, in particular by harmonizing the applicable legal framework. The European Commission’s New Legal Framework for Payments in the Internal Market initiative is of special importance here. It proposes, inter alia, the introduction of a new category of payment service providers (payment institutions) in addition to credit and e-money institutions that would perform payment services under comparatively less stringent licensing and supervision regulations. Against this background, the Oesterreichische Nationalbank conducted an empirical survey among Austrian market participants (banks and nonbanks) in the summer of 2005 to assess possible competition and risk-related implications of the introduction of payment institutions on the Austrian financial market. The survey showed that most of the Austrian market participants questioned were critical of the current draft Directive and that respondents shared the European Commission’s primary expectations - for example, that it will create a level playing field - only partly or not at all. On the contrary, they fear distortions of competition, increased risks and, over the long term, a loss of confidence in the stability of the payments market among end users. There is unanimous agreement among respondents that both payment and credit institutions should be subject to the same capital and supervision requirements in order to head off these risks. Furthermore, the survey shows that none of the Austrian market participants questioned is currently considering transformation into a payment institution.