ESBG keeps a close eye on prudential treatment of crypto assets

On 30 September 2022, ESBG responded to the second public consultation of the Basel Committee on Banking Supervision (BCBS) on the prudential treatment of banks' crypto asset exposures, which is built on the proposals in the first consultation issued in June 2021.

The basic structure of the proposal in the first consultation is maintained, with crypto assets divided into two broad groups: Group 1 includes those that are eligible for treatment under the existing Basel Framework with some modifications. Group 2, on the other hand, includes unbacked crypto asset and stable coins with ineffective stabilisation mechanisms, which are subject to a new conservative prudential treatment.

In the response to the second consultation in 2022, we advocated for the removal of the technological risk add-on from the proposed prudential framework.

The first reason for this would be the principle of technological neutrality. The regulation should focus on regulating the services but not the applicable technology in order not to prevent the adoption of a specific technology and to neither prefer nor prejudice a specific business model or service provider. Secondly, technological risk already exists in all asset classes. If persistent technological risks are detected, the supervisor could require actions for their mitigation or apply a Pillar 2 Requirement (P2R) surcharge. Finally, a common surcharge of capital would reduce institutions’ incentives to mitigate inherent risk.

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OCTOBER 2022 | TOPICS: Prudential, Supervision and Resolution | Public Consultation | Crypto Assests | Basel Framework | Technology Neutrality

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Digital euro: ESBG’s response to the European Commission targeted consultation

ESBG stated the need to further assess exactly what gaps in the payments system could be filled by the introduction of a digital euro, and to analyse how the existing solutions could be adjusted to enhance their value to the customer. This in its response to the European Commission targeted consultation on June 15. We highlighted the financial education challenges ahead, which will be key to address in order to continue building the customers’ confidence in the financial sector.

The response also stated that ESBG and its members are in favour of limits to individual holdings of digital euro – ideally in the form of €1,500 cap. It elaborated that a higher limit might cause a deposit outflow that would not be manageable for most banking business models in the EU and would likely force banks to de-leverage massively. The negative impact of this on balance sheet would be particularly severe for savings and retail banks that currently have little to no access to market funding. The deposit outflow would not only impact liquidity, but also the volume of credit provision of deposit-intense banks, which in the past kept the lending stable even in crisis times.

For a digital euro to be successful, it must provide a user-friendly onboarding process and it should be secure, easy to access and use, and adapted to the public. It would also require the acceptance of both the consumers and merchants. Finally, However, any measure aimed at introducing mandatory acceptance – and any eventual exemption – should be carefully assessed and designed at EU level to avoid affecting the level playing field between different means of payment and crowd-out the existing solutions.

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ESBG welcomes horizontal cybersecurity requirements for digital products

The European Commission launched a public consultation in March to gather views from a wide range of stakeholders to help shaping the Cyber Resilience Act, a regulation on horizontal cybersecurity requirements for digital products and ancillary services. As a response to this public consultation on the Cyber Resilience Act, ESBG submitted its position to the European Commission on 18 May. The ESBG position focuses on the following aspects: I) Cybersecurity of digital products and the users of digital products; II) Improving the cybersecurity of digital products; and III) Stakeholder impact of potential regulatory measures.

Digital products and ancillary services create opportunities for EU economies and societies but they also lead to new challenges because when everything is connected a cybersecurity incident can affect an entire system, and thus disrupt economic and social activities. The initiative for a Cyber Resilience Act aims to address market needs and protect consumers from insecure products by introducing common cybersecurity rules for manufacturers and vendors of tangible and intangible digital products and ancillary services.

On the whole, ESBG welcomes the European Commission’s Cyber Resilience Act as the level of risk of cybersecurity incidents affecting digital products has increased during the last five years. The overall level of cybersecurity of digital products marketed in the European Union could be improved. Subjecting certain products marketed in the Union to cybersecurity requirements would be effective (e.g. hardware or software products subject to higher cybersecurity risks).

Moreover, ESBG members believe that leaving it to hardware manufacturers and software developers to demonstrate compliance with security requirements is insufficient. It would be more valuable to have the opinion of a third party based on a control framework.

All feedback received will be taken into account as the Commission further develops and fine-tunes this initiative, that is tentatively scheduled for the third quarter of 2022. Input will help the Commission analyse cybersecurity-related problems associated with the digital products markets, explore possible ways forward and assess the impact of different types of interventions.

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An open data economy should be multilateral and cross-sectoral

ESBG submitted its position to the European Commission on the proposed Data Act on 12 May. ESBG welcomed the Commission’s data strategy and its commitment to create a single market for data that will constitute a potential source of growth and innovation.

We believe that a European approach to data is essential to ensure competitiveness, avoid fragmentation of national regulations, and benefit from a scale effect. Moreover, ESBG members stressed that the horizontal regulatory approach is crucial to establish the key rules and principles for all sectors as, in our view, an open data economy should be multilateral and cross-sectoral.

The European Commission published its proposal for the Data Act in February and opened this call for feedback in March. The proposal clarifies who can use, access, and share data generated in the EU across all economic sectors, and on what terms. The Data Act aims to provide a harmonised framework for data sharing, conditions for access by public bodies, international data transfers, cloud switching, and interoperability.

The Data Act is based on the results of an open public consultation that the European Commission carried out in 2021, to which ESBG responded in September. It is the second main legislative initiative directly related to data, following the recent adoption of the Data Governance Act, which aimed to increase trust and facilitate data sharing across the EU and between sectors.

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Digital platforms serving the agricultural sector

Scale2Save Campaign

Micro savings, maximum impact.

BRUSSELS, 18 November 2021 - The World Savings and Retail Banking Institute (WSBI) programme for financial inclusion, Scale2Save, launched today ‘A case study on digital platforms serving the agricultural sector’, the fifth of its State of the Savings and Retail Banking Sector in Africa research series.

This new publication, co-authored with FinMark Trust, an independent non-profit trust for making financial markets work for the poor, explores the topic from the point of view of Financial Service Providers (FSPs). It aims to answer two key questions FSPs must consider when weighing whether to launch an online platform for farmers: Why should I participate – and if I do, what must I keep in mind? This case study looks at a variety of African agricultural platform providers and more closely at three platform models: bank-led (First City Monument Bank in Nigeria), fintech-led (DigiFarm in Kenya) and telco-led (EcoFarmer in Zimbabwe).

The emergence of digital platforms serving farmers in Africa is of enormous importance as the agricultural sector employs more than half of the continent’s labour force, and accounts for almost 20% of the continent’s gross domestic product.

Platform models are still very new in the agricultural arena. However, the use of platform services to support smallholder farmers has blossomed. During the pandemic they proved a valuable lifeline, enabling farmers to stay in touch with their value chain partners, from financial service providers to farm input suppliers and off-takers.

Looking forward, agricultural digital platforms clearly have the potential to play a powerful role as a catalyst for financial inclusion and to transform the food sector into a more inclusive one that offers viable opportunities for smallholder farmers.

This case study is guided by the overarching objective of the WSBI research series, which is to inform FSPs about developments in the finance industry that affect services to low-income customers.

WSBI’s Scale2Save programme is a six-year partnership with the Mastercard Foundation.

The publication is available for download free of charge here.

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Case study cover

The publication is available for download here.

FULL CASE STUDY - ENFULL CASE STUDY - FRALL CASE STUDIES

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Digitalisation of financial service providers to serve low-income customers

Scale2Save Campaign

Micro savings, maximum impact.

New Scale2Save case study: BRUSSELS, 30 September 2021 - The World Savings and Retail Banking Institute (WSBI)’s programme for financial inclusion, Scale2Save, launched today ‘A case study on connecting with low-income customers through digitalisation’, part of its State of the Savings and Retail Banking Sector in Africa research series.

Digitalisation is revolutionising the way financial service providers conduct their business. In Africa, the spread of mobile phones over the past two decades allowed the development of new forms of mobile transactions. Now digitalisation of African financial service providers is entering a new phase, as the widening use of mobile phones to access the Internet enables the roll-out of profitable digital services for low-income customers.

This new publication, co-authored with FinMark Trust, explores the answers to a question that many executives are asking: How best to digitalise a financial institution? The case study draws upon management consulting literature to assess digitalisation strategies in a pragmatic way. It also assesses three leading African financial organisations against this framework: Al Barid Bank, Morocco; Equity Bank, Kenya; and Consolidated Bank, Ghana.

The aim of this publication, as of the Scale2Save programme, is to identify the elements for financial service providers to serve low-income people and therefore boost financial inclusion. By opening the doors of remote access to formal savings and payments to people long excluded from them, these new customers get opportunities to improve their economic situation. They are enabled to smooth consumption, build assets, prepare against risks and improve their ability to cope and recover from shocks. In the context of Covid and its consequences, this case study highlights the importance of speeding up digitalisation by financial services providers not only in their service offer but also as dynamic organisations and as part of a digital financial ecosystem. It also underscores customer centred initiatives as a key to success.

WSBI’s Scale2Save is a six-year partnership with the Mastercard Foundation.

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The publication is available for download here.

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ECB announces members of Digital Euro Market Advisory Group

ECB appoints 30 senior business professionals with proven experience. Members to advise Eurosystem on design and distribution of potential digital euro. Meetings of group to be held at least quarterly, starting in November 2021.

25 October 2021 – The European Central Bank (ECB) has today announced the members of the Market Advisory Group for the digital euro project.

The Eurosystem’s High-Level Task Force on Central Bank Digital Currency called for expressions of interest on 14 July, following the Governing Council’s approval of the digital euro project investigation phase. After assessing applications, the selection committee appointed 30 senior business professionals with proven experience and a broad understanding of the euro area retail payments market.

“I am pleased that many high-quality experts from the private sector are willing to contribute to the digital euro project”, says ECB Board Member Fabio Panetta, Chair of the High-Level Task Force.

“Their expertise will facilitate the integration of prospective users’ and distributors’ views on a digital euro during the investigation phase.”

Members of the Market Advisory Group will act in a personal capacity, advising the Eurosystem on the design and distribution of a potential digital euro from an industry perspective, and on how a digital euro could add value for all players in the euro area’s diverse payments ecosystem. A representative from the European Commission and representatives from Eurosystem national central banks will also participate in the group.

Meetings are to be held at least quarterly, starting in November 2021, and written consultations will be organised between meetings. The issues identified will also be considered in the Eurosystem’s established forum for institutional dialogue on retail payments, the Euro Retail Payments Board (ERPB). The ERPB consists of high-level representatives of industry associations and represents a wide range of stakeholders. In addition, the Eurosystem will engage with the public and merchants through dedicated surveys (e.g. of focus groups) and will continue to hold technical workshops with the industry.

Members of the Digital Euro Market Advisory Group:

Aleksander Kurtevski, Managing Director, Bankart
Alessandro De Cristofaro, Director Digital Innovation Strategy, CRIF
Antonio Macías Vecino, Head of Payments Discipline, BBVA
Axel Schaefer, Payment Regulation and Innovation Specialist, Ingka Group (IKEA)
Cristian Cengher, Product Owner Cross Border Payments, Erste Group Bank AG
Cyril Vignet, Project Manager Innovation, Banque Populaire Caisse d’Epargne
Diederik Bruggink, Head of Payments and Innovation, European Savings and Retail Banking Group
Etienne Goosse, Director General, European Payments Council
Fanny Solano, Director Digital and Retail Regulation, Transparency and Implementation, CaixaBank
Fernando Rodríguez Ferrer, Head of Business Development, Bizum
Gerard Hartsink, Chairman, ICC DSI Industry Advisory Board
Inga Mullins, CEO, Fluency
Jens Holeczek, Head of Digital Payment Unit, National Association of German Cooperative Banks
Jochen Siegert, Managing Director, Global Head of Asset Platforms, Deutsche Bank AG
Nicolas Kozakiewicz, Chief Innovation Officer, Worldline
Nilixa Devlukia, CEO, Payments Solved
Nils Beier, Managing Director, Accenture Strategy & Consulting
Paul Le Manh, Advisor to CEO, EPI Interim Company
Piet Mallekoote, Former CEO, Dutch Payments Association
Régis Folbaum, Head of Payments, La Banque Postale
Roberto Catanzaro, Chief Strategy and Transformation Officer, Nexi Group
Ruth McCarthy, Managing Director, FEXCO Corporate Payments
Sean Mullaney, Head of Payment Engineering, EMEA Payments, Stripe
Silvia Attanasio, Head of Innovation, Associazione Bancaria Italiana
Sofia Lindh Possne, Senior Advisor, Group Regulatory Affairs, Swedbank
Stefano Favale, Head of Global Transaction Banking, Intesa Sanpaolo
Teresa Mesquita, Chief Marketing and Product Officer, SIBS Forward Payment Solutions
Valdis Bergs, Chairman of the Board, Mobilly sia
Ville Sointu, Head of Emerging Technologies, Nordea
Yves Blavet, Open Banking Director, Société Générale

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On the European Commission's Artificial Intelligence Act

The Commission aims to turn Europe into the global hub for trustworthy Artificial Intelligence. If we share this idea on the principle, it should be recognised that this is a risky bet.

The European Commission published a proposal for an Artificial Intelligence (AI) Act at the end of April. In parallel, it has set up a public consultation for stakeholders to provide feedback on the draft text, which ended on 6 August.

AI technology has only slowly began arriving on the market and as applications become more sophisticated, they will likely often become very unpredictable in their development. To ensure legal certainty, a level playing field and no obstacles to innovation, a clear definition of artificial intelligence is needed. This would cover the Commission work, as well as national data protection authorities, the Council of Europe initiative, and the OECD framework on classifying AI systems. ESBG members very much welcome the proposed technology-neutral and future-proof definition of AI, and the Commission’s risk-based approach to enable a proportionate regulation.

The Commission aims to turn Europe into the global hub for trustworthy Artificial Intelligence. If we of course share this idea on the principle, it should be recognised that this is a risky bet. Indeed, if European values are not ultimately adopted on an international scale, non-European solutions are potentially more efficient because they have been developed in less restrictive regulatory environments and could compete with European solutions.

With regards to the acceptance of data usage, members would like to use real datasets instead of the Commission proposed ‘synthetic’ datasets. These would mimic real life situations and allow AI training in a realistic setting, without the risk of second order bias (e.g., ethnicity indication based on living area or income).

We also believe that there should be a provision in the draft text to protect European AI developers and users at international level. AI does not discriminate against physical locations, and many different countries across the world have different interpretations of copyright and liability when it comes to AI applications.

Finally, we call for clarity on the scope of the text when it comes to biometric identification of natural persons. It is not yet clear if financial services firms and their providers, who rely on biometric identification to onboard customers remotely (and comply with KYC – know your customer requirements) will be included in the scope of the full set of requirements in the AI regulation.

We support the Commission in its efforts to create a clear legal framework for artificial intelligence which does not inhibit innovation and at the same time provides security for all market participants. We are particularly pleased with the Commission’s philosophical approach to promoting “digitalisation with a human face”. We believe that trustworthy AI in cooperation with human expertise will be of great value to European society. We particularly emphasise the interaction between man and machine. We firmly believe that both humans and machines are irreplaceable. However, we must ensure that new regulation does not inadvertently cripple our markets, dampen innovation and opportunities.

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Instant payments

ESBG supports efforts to increase uptake of instant payments

BRUSSELS, 6 July 2021 – ESBG submitted its response to the European Commission’s (EC) public consultation on Instant Payments on 23 June. The association representing over 800 savings and retail banks fully supports efforts to increase the uptake of instant payments and shares the view that SCT Inst scheme could facilitate stronger and more integrated homegrown pan-EU payment solutions.

ESBG invited the EC to foster an environment that enables the uptake of instant payments, inter alia by favouring market-led developments and limiting any eventual action to the building blocks needed for widespread adoption of SCT Inst and the resolution of any hindering factors.

ESBG and its members are of the view that SCT Inst should be considered the basis of new pan-European payment solutions and further offers. Especially in the corporate segment, instant payments have huge potential in terms of new business models that could attract new clients. In particular, there is growing interest for the combination of SCT Inst with other payment schemes (e.g., Request To Pay), which can result in innovative use cases for instant payments. Any further action taken by the Commission should duly consider the differences that exist between retail and corporate segments and the potential unintended consequences of any new intervention.

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ESBG responds to ECB public consultation on digital euro

BRUSSELS, 13 January 2021 – ESBG submitted its response to the European Central Bank (ECB) public consultation on a digital euro.

The association representing some 900 savings and retail banks welcomed the opportunity to provide its views on the possible future issuance of a digital euro but at the same time highlighted the need for further information on key aspects of the project, such as the main purpose of a digital euro, its technical implementation and functionalities, the role for savings and retail banks and other Payment Service Providers, who would perform compliance checks, as well as the interplay with SCT Inst, just to name a few. The current ‘one-size-fits-all’ approach cannot be successful in the long run. In this respect, in its response, ESBG invited the ECB to publish a second report that could provide more concrete information on how a digital euro would work, and to run a second public consultation before deciding to proceed with an implementing phase.

The ESBG response to the consultation addresses the following key themes:

Impact on financial stability

Any new form of currency brings about fundamental challenges and the introduction of a digital euro could have severe impact on the entire functioning of the EU economy. Going forward, decisions need to be taken carefully and with a clear view on the main objectives. A digital euro could jeopardize financial and prudential balances of banks, by weighing on their solvency and profitability, and by increasing their risks and fostering more severe bank runs. In times of financial distress, the demand for a digital euro could increase dramatically, since it would constitute a risk-free asset. This could spur the crisis and even incentivise central bank runs. All these elements may threaten financial stability, to the detriment of customers and citizens. It follows that a digital euro must be designed as a means of payment only, thus avoiding its use as an investment tool. To do so, ESBG and its members recommend the use of limits to holding and a no remuneration policy.

Customer and data protection

A digital euro should not only be easy to use, but also easy to understand. Proper safeguards should be in place to ensure all players are protected. For instance, if offline transactions are implemented, there is the risk of loss of only locally stored digital euro in case the device used for storage is lost or damaged. Most importantly, ESBG stressed that under no circumstances a digital euro should undermine the trust in existing means of payments. Privacy should be safeguarded in any case, and some restrictions or enhanced consent requirements may be necessary to protect consumers from certain business models that may use data on transactions to target ads or offers.

Building on the existing payments infrastructures

Europe is at the forefront of innovation for retail payments, and especially banks and payments institutions, together with the Eurosystem and National Central Banks (NCBs), provide European citizens with the most efficient payments systems available, including via digital means. ESBG believes that allowing banks to maintain their role of intermediaries and distributors of money to the public – as this is currently the case with cash – by building on existing infrastructure will ensure a high level of consumer protection, user experience and trust, as well as financial stability. At the same time, this will ensure the efficiency of the retail payment system and transformation mechanism are preserved. Instead of building a brand-new payment system, the association recommends a digital euro be integrated in the current payment system. Finally, to ensure a level playing field, it is crucial to ensure the principle “same functionalities, same liabilities, same rules”.

ESBG and its member banks stand ready to further engage with the ECB on these strategic issues in the weeks and months to come.

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