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European Central Bank set to keep rates on hold – Industry roundup: 26 October

ECB focuses on shrinking its PEPP €1.7 trillion bond pile

The European Central Bank is “particularly attentive” to the impact of the current conflict in the Middle East and is carefully monitoring developments, says its president Christine Lagarde.

“It is a region of the world where there is a lot of traffic of oil tankers, where there are oil producing countries as well and where there could be an impact either directly or indirectly or through the confidence channel, which also matters,”  she added.

The ECB’s Governing Council is midway through a two-day meeting at the Bank of Greece in Athens, for the first time since 2008. In a television interview yesterday, Lagarde said that the battle to rein back consumer-price increases is not over, but she has confidence that inflation can be returned to the ECB’s target rate of 2%.

“We are not done yet,” she told Greece’s Antenna TV. “And we need to really bring inflation back to 2% in the medium term because that’s our target and that’s the price-stability mission that we have.”

The ECB is expected to announce later today that it will keep interest rates on hold for now after a series of rapid and sharp hikes - most recently a 0.25% increase last month that took the deposit rate to 4%. However, while inflation pressures are easing and the economic outlook is worsening for the euro area — the 20 nations that share the euro — the ECB will insist on keeping rates high for a prolonged period of time. Economists suggest that the next move will be a rate cut but that it is unlikely to be delivered earlier than Q3 2024.

Also on the agenda at the Athens meeting is the growing need for the ECB to rethink how soon it starts shrinking the €1.7 trillion ($1.8 trillion) stash of bonds it bought during the pandemic, or risk disorienting markets down the line.

The Governing Council is believed to have begun discussions on ending reinvestments under the pandemic emergency purchase programme (PEPP) programme before the current end-2024 cutoff. That would fully align quantitative-tightening efforts with interest-rate policy, which has delivered an unprecedented 10 straight hikes to tame resurgent inflation.

Some officials see PEPP purchases, which can currently act as a first defence should the bond yields of euro-zone governments jump unreasonably, as a key instrument amid budgetary jitters in countries like Italy.

But there are compelling grounds to halt reinvestments more quickly: Doing so too far into next year, or to match the existing deadline, risks the move happening alongside rate cuts to buoy Europe’s struggling economy, sending mixed signals to investors.

Bonds from a larger portfolio — amassed from 2015 during fears of deflation — are already being allowed to roll off. But with the key policy rate at 4% to try to constrain economic activity and tame prices, PEPP reinvestments have become an outlier.

There is a “strong argument in favour of stopping PEPP reinvestments sooner than the end of next year” because that would be “consistent with our interest-rate policy,” Governing Council member Madis Muller said last month.

The ECB last updated the programme’s guidelines in December 2021 — well before rate hikes started. Back then, it promised future roll-offs “will be managed to avoid interference with the appropriate monetary stance.” Barclays economists reckon an average of about €18 billion a month comes due under PEPP, though there are no official disclosures.


Federal Reserve proposes reducing banks’ debit card transaction fees

The US Federal Reserve is proposing a reduction of nearly a third in the amount of so-called "swipe fees" banks can charge merchants for processing debit-card transactions, setting up a pitched battle between the two industries over potentially billions of dollars in revenue.

Citing data that showed the costs of processing such transactions had fallen by roughly half in recent years, the Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction.

The proposal, now open to public feedback, marks the first time the Fed has adjusted the fee cap after it was set in 2011. US banks charge retailers when processing debit-card transactions, and the Fed was ordered to limit those costs to a "reasonable and proportional" level as part of the 2010 Dodd-Frank financial reform law.

The fees generated US$31.59 billion for lenders in 2021, according to Fed data.

Retailers and banks have long sparred over the fees, with merchants complaining they are excessively high and pad bank profits, while financial firms argue retailers have failed to pass savings on to consumers via lower prices on products.

Retailers, which have pressed the Fed for a lower cap for years, praised the proposal, while vowing to try and push the limit even lower.

"Today’s proposed rulemaking signals an end to these outrageous markups," said Austen Jensen, executive vice president of the US Retail Industry Leaders Association (RILA), which represents large retailers.

The proposal would also trim an added fee that banks can charge from 0.05% of the cost of the transaction to 0.04%. However, the Fed proposed expanding a supplemental fee banks can charge to cover fraud-prevention services from 1 cent per transaction to 1.3 cents per transaction, citing a slight uptick in those costs.

In practice, the proposed changes would result in, on average, a 17.7 cent fee on a US$50 transaction, down from a 24.5 cent fee currently, according to Fed officials.

The Fed also proposed automatically adjusting the cap every two years in response to fresh data.


Turkey’s central bank expected to raise interest rate to 35%

Turkey is likely to raise interest rates for a fifth straight time today as pressure builds to rein back inflation that is seen as nearing 70% by the end of the year as the Israel-Hamas war worsens the outlook.

The central bank’s Monetary Policy Committee will increase the benchmark rate by 500 basis points (bps) — the same as at its last meeting in September — to 35%, according to most analysts surveyed by Bloomberg, including those from Goldman Sachs Group Inc. and Morgan Stanley.

After a freeze of more than two years, the Central Bank of the Republic of Turkey almost doubled the benchmark rate in June from 8.5% to 15% amid concerns that the move was insufficient to combat rising inflation and a continuing economic crisis.

Since June, the central bank has turned its focus from economic growth to disinflation and lifted its policy rate by 2,150 basis points while other macroprudential measures such as credit tightening to cut domestic demand were also put in place.

In August the bank delivered a sharper than anticipated hike from 17.5% to 25% and last month followed up with a further increase to 30%. The strategy marks a partial shift from the unorthodox economic policy of Turkey’s president, Recep Tayyip Erdoğan, which left interest rates unchanged despite a sharp devaluation in the Turkish lira.

The median forecast in a Reuters poll for the year-end policy rate was 35%. The central bank is expected to hike rates further to 40% in the first half of next year, the poll also showed.

Further depreciation in the Turkish lira and increases in taxes and fees have fanned inflation, eating into Turks' savings despite tighter monetary policy.

Despite expected interest rate hikes, inflation was seen remaining elevated through the rest of this year, ending 2023 at 69.3%, the median of the poll of 10 institutions showed. Estimates in the Reuters poll ranged between 64.6% and 73.0%.

Inflation is forecast to stand at 43.4% at end-2024 and 25.3% at end-2025 according to the poll.


Standard Chartered, Deutsche Bank execute stablecoin payments via UDPN blockchain

Standard Chartered’s innovation arm SC Ventures and Deutsche Bank said they completed the first proof of concept (PoC) for the Universal Digital Payments Network (UDPN), which  aims to connect payments across various central bank digital currencies (CBDCs) and blockchain networks using messages (similar to Swift).

Unlike Swift, institutions exchange messages via a permissioned blockchain. Banks are willing to participate because the network only supports regulated tokens and enforces compliance using decentralized identities.

The UDPN was founded by Red Date Technology, the co-founder of the Chinese Blockchain-Based Service Network (BSN). It has been developing UDPN in conjunction with consultancy GFT, and DLA Piper’s digital asset initiative TOKO is also involved. Several additional organisations will participate in network governance through the UDPN Alliance.

A release added that UDPN aims to address the adoption barriers faced by current digital currency offerings. As the number of CBDCs, stablecoins and deposit tokens proliferate, they illustrate a lack of interoperability. 

Current interoperability between stablecoins is mainly enabled through centralised crypto exchanges, which due to the lack of exchange oversight and regulation is  not a viable solution for the interoperability of CBDC and deposit tokens. Additionally, mainstream adoption of digital currency requires enforcement of know your customer (KYC) and anti- money laundering (AML).

UDPN aims to provide a decentralised identity infrastructure to enable compliance and cross chain interoperability by exchanging messages rather than currencies. The currency transactions happen on their native blockchains or infrastructures. That means, via UDPN users can swap a USDC stablecoin on one network for a Euro stablecoin on another or a bank deposit token.

Separately, Deutsche Bank announced that it has hired Credit Suisse’s chief technology and operations officer in the latest senior hire from the Swiss bank by the German lender.

Joanne Hannaford, who was leading a major transformation project at Credit Suisse to simplify and modernise its technology systems, has joined Deutsche Bank as chief information officer for its corporate bank.

She will join in early 2024 and succeeds Rafael Otero, according to Bernd Leukert, Deutsche Bank’s chief technology, data and innovation officer.


Itaú Unibanco and Inswitch launch ‘Pix no mundo’ cross-border payments

Itaú Unibanco the largest bank in Latin America and embedded finance technology specialist Inswitch are launching “Pix no mundo” (Pix around the world), a solution that allows Brazilians abroad to use the Pix payment system for purchases and transactions across Latin America as if they were in Brazil.

Pix, launched by Brazil’s central bank three years ago, is the most widely used payment system in the country, offering instant money transfers in Brazilian reais 24 hours a day. In August 2023 alone, 3.8 billion transactions were conducted through this system.

Pix no mundo is described as “incredibly user-friendly”. By scanning the QR code at the physical point of sale (PoS), money is directly deducted from the customer’s account from any Brazilian bank linked to the Pix system. Behind the scenes, Itaú and Inswitch handle the entire process of currency conversion and international remittance, eliminating the need for users or merchants to worry about sending documents or registering, as is common in traditional currency exchange operations.

“This partnership between Banco Itaú and Inswitch is driving the expansion of Pix throughout Latin America, enabling more individuals and businesses to conduct online financial transactions quickly, securely, and efficiently,” stated a release.

“Additionally, Pix no Mundo addresses the key challenges in cross-border payments:

  • Instant and efficient currency conversion
  • Transaction security and traceability
  • A consumer convenient payment option
  • Faster reception of funds by merchants, who will have their payment confirmation on line and the money received in just three business days, in contrast to the extended timelines associated with other payment methods.”

Report promotes value of Variable Recurring Payments

As open banking gains traction, merchants, banks and payment providers are convinced that Variable Recurring Payments (VRPs) will unlock widespread benefits, provided the industry works together to create the market conditions that are needed for success, according to a new survey report.

The Future of Dynamic and Variable Recurring Payment is a joint publication by account-to-account (A2A) payment infrastructure provider,, and the global community forum Open Banking Expo.

A release added that the results “point to an industry that is now fully cognisant of the benefits of commercial VRPs (often called non-sweeping or premium APIs). Indeed, when asked to compare the benefits and disadvantages of commercial VRPs against other payment types, respondents said commercial VRPs come out on top in virtually every category.

“Frictionless user experience is believed to be a key driver of consumer adoption. The element of control is another important factor, with respondents saying the ability for users to set a maximum individual payment amount is the most useful parameter.

For merchants, appetite and enthusiasm are picking up as 60% said they will actively seek to convert card payments to VRPs, with faster settlement of funds and greater reliability seen as key benefits. Merchants also noted the potential for lower cost of processing than cards. 33% of merchants said they want to convert Direct Debits to VRP, although a common concern was that costs could be higher, given the relatively low cost of Direct Debit.

The report does, however, highlight a potential stumbling block to adoption. While virtually all banks surveyed believe they are likely to benefit commercially by offering VRPs, in reality there is still very limited bank coverage (with the exception of NatWest, which announced a VRP partnership with last October). The belief in VRP’s potential must, therefore, be translated into reality through accelerated bank commitment to test and then scale VRP. While a comprehensive multilateral framework or agreement may be developed in future, it is crucial that commercial VRPs be first tested and proven across all of the UK’s large retail banks through pilot exercises.

Bank of China Hong Kong explores smart contracts for CBDC payments

The Bank of China Hong Kong (BOCHK) has announced the start of a pilot project to explore the use of smart contracts in the proposed Hong Kong central bank digital currency (CBDC).

The bank will examine smart contract usage in prepaid service contracts through its mobile application, BOC Pay. Initial participants for the study will be selected bank employees and ten merchants drawn from the medical, beauty, education, and fitness sectors, according to its official disclosure.

Per the statement, customers’ prepaid funds will be automatically converted to e-HKD in their accounts designed to be run by smart contracts. The smart contract executes after meeting certain predetermined conditions, allowing participants to pay for goods and services with select merchants.

“This hypothetical e-HKD pilot is being conducted through BOCHK’s existing BoC Pay and BoC Bill Merchant App, effectively reducing the technical barriers and additional resources required for merchants to participate in this pilot of prepaid consumption,” said Chen Guang, deputy general manager of the Digital Currency Task Force at BOCHK.

In addition to integrating smart contracts with the e-HKD, the pilot links point-of-sale functionality in the offering. Through the integration, merchants are not required to install additional software, which analysts say could improve the adoption levels of the CBDC.

BOCHK has been experimenting with prepaid functionalities since May, when the Hong Kong Monetary Authority (HKMA) officially unveiled the start of CBDC pilots. Sixteen banks were onboarded to explore the use cases of full-fledged payments, offline payments, tokenised deposits, and programmable payments with retail applications.

“We aim to capitalise on HKMA’s e-HKD Pilot Programme to create a new business model for retail SMEs and build a healthy ecosystem for prepaid consumption,” said Guang.

The HKMA recently launched an expert group of academics for CBDC research.


Mastercard in Web3 collaborations with self-custody wallet firms

Payments giant Mastercard is exploring how best to collaborate with self-custody wallet firms such as MetaMask and Ledger, according to a Web3 strategy workshop report seen and reported by CoinDesk.

Mastercard pointed out in a presentation deck that having a payments card helps wallet providers increase the number of active users and build loyalty and other revenue streams while giving cardholders the opportunity to spend their crypto balance in a frictionless way.

But wallet firms face significant demands on resources when introducing a card in a new region, which is where Mastercard and its issuance partners come in. The payments technology firm also said it is evaluating “new models for global issuance using stablecoin on chain settlement” and “inexpensive fast chains,” according to the deck.

“Mastercard is bringing its trusted and transparent approach to the digital assets space through a range of innovative products and solutions – including the Mastercard Multi-Token Network, Crypto Credential, CBDC Partner Program, and new card programs that connect Web2 and Web3,” a Mastercard spokesperson said via email.

Major credit card networks are moving ahead with crypto despite tough market conditions and regulatory uncertainty in the US and elsewhere. Earlier this year, Mastercard made clear its Engage programme will focus on bringing new crypto card programs to market. Visa, meanwhile, has been working with stablecoin USDC and the Solana blockchain for cross-border payments and exploring ways to address issues such as paying Ethereum gas fees.

Mastercard will release a set of franchise standards, or rules for partner firms, to ensure consumer protection, price competition and transaction monitoring requirements, according to the deck. The company’s acquisition of CipherTrace in 2021 means the blockchain analytics specialist is on hand to provide monitoring services.

Once the proposed standards are validated, the next step would be to issue a card targeting the European Union (EU) or UK as a first market, Mastercard said in its presentation deck. “Users want a simple solution – seamless transactions without pre-funding, without spending crypto and without having to deal with taxes,” it said.


Banco de España demonstrates support for the digital euro

Banco de España has joined other European banking institutions in preparing their customers for the potential benefits of a digital euro. Spain’s central bank recently published a short text explaining the nature and uses of the European Union’s potential central bank digital currency (CBDC).

The bank claims that the physical cash format “does not allow to exploit all the advantages offered by the growing digitalisation of the economy and society.” However, the digital euro will make electronic payments a vital piece of the financial system.

The authors highlight the possibility of offline payments with the digital euro, stressing its level of privacy, equivalent to cash. They also make reservations that in the online form, users’ data would still be visible only to their financial institutions and not to the CBDC infrastructure provider, Eurosystem.

According to the project calendar published in the text, the current “preparation phase,” launched a week ago, will finish by 2025. However, a final decision on issuing a pan-EU CBDC is yet to be made.

The Bank of Finland recently expressed the same positivity toward the digital euro. A board member, Tuomas Välimäki, called it “project “in the European payment sector.

The European Central Bank (ECB) has now shared a link to the landing page dedicated to basic information about the digital euro. It promises to deliver an “easier life” and a “stronger Europe.”

Last week the Governing Council of the ECB announced the beginning of the ”preparation phase” for the digital euro project, which will last two years and focus on finalising rules for the digital currency and selecting possible issuers.


Thought Machine and Form3 team on real-time payments in US and Europe

Cloud banking tech specialist Thought Machine has enlisted cloud-native account-to-account platform Form3 to add FedNow, The Clearing House’s Real Time Payments (TCH RTP) and Sepa Instant Credit Transfer connectivity to its payment platform.

Thought Machine’s Vault Payments is a cloud-native and API-enabled platform designed to simplify payment processing for banks.

Through the integration of Vault Payments with Form3's account-to-account platform, clients can harness the configuration capabilities of Thought Machine in conjunction with Form3's direct connections to various payment schemes.

Both platforms are cloud-native and both natively support ISO 20022 messaging standards.

Paul Taylor, CEO of London-based Thought Machine, says: “We are delighted to partner with Form3, marking a significant step towards realising our vision of a truly Universal Payment Engine.”

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