Ways to Pay - An Interview with Nilixa Devlukia

The following article is an adapted transcript based on the audio recording of Episode 6 of the Mr. Open Banking podcast. The audio version is available here.

At Mr. Open Banking, we often emphasize that what makes open banking so different and so important is that it has to do with our money.

Opening up access to financial data, while certainly crucial, is only one part of the open banking equation. Open banking starts to really get interesting once you add the power to move money. 

Payments - the ability to move money from A to B - is the other big part of open banking. Initiatives around the world are taking a close look at how we move money - to those we buy from and to each other - both locally and globally. Often, these initiatives are closely tied to broader open banking efforts. In fact, most open banking standards include a payments API.

In this article, we aim to explain payments: a rather arcane and often misunderstood arena. It’s a story that involves not just open banking, but cryptocurrency, central banks, and even Facebook.  

In order to better understand payments, we were joined by Nilixa Devlukia. Nilixa is the CEO of Payments Solved, a regulatory consultancy that focuses on payments, digital banking, and fintech. A lawyer by background, Nilixa has made some major strides in driving changes across the banking and payments ecosystem to help make it more secure, transparent, and inclusive. Nilixa has even worked with the European Commission, the European Central Bank, the World Bank, the EU, and several other regulators across the globe to evolve the payments landscape. 

Although payments isn’t exactly a subject that people talk about at parties, Nilixa confesses she’s guilty of doing just that. For her, explaining electronic payments effectively requires taking a few steps back. Since the beginning, we have always needed a way to pay a wage or barter. From shells and coins to paper currency and cheques, humans have consistently found ways to give value and receive value. 

“In today’s society, often the easiest way of giving and receiving value is to make an electronic payment from my bank account to your bank account. That doesn't mean that real, physical money flows from me to you. But it means that I have given value and you have received value.” 

Although this concept has been around for many years through credit and debit cards, today’s electronic payments are moving faster. In most jurisdictions, you can send money and receive it instantaneously, available to spend or store away. This evolution of faster payments has created a shift away from cash and cheques. Especially during COVID-19, electronic payments have become increasingly important around the world as a contactless option. 

But how is that different from how customers use a Visa or MasterCard today? Nilixa explains: 

“Visa and Mastercard are the schemes and the rails in which merchants participate in order to be able to accept debit and credit card payments.”

When Nilixa says rail, she is referring to the infrastructure that supports the messaging that flows between the scheme members. It’s like the plumbing that connects all four parties. 

If the rail is the physical connection, the scheme is the set of rules that everybody must play by. Each market has its own payment schemes that - if you send or receive money within that market - you must adhere to. These schemes also support all participants in case something goes wrong. 

We asked Nilixa to describe the card scheme - the one we’re exposed to every day via Visa and MasterCard. She explained that these cards we know and love exist within what is called a four-party card scheme. The four parties involved in this relationship are the consumer, the merchant, the issuer, and the acquirer. 

The bank issues a credit card to the consumer. The consumer wants to purchase something from the merchant. And in order to take their money, the merchant has a relationship with the acquirer. Nilixa continues: 

“The international card schemes sit above all that, providing the infrastructure, the scheme rules, and the dispute resolution mechanisms.”

An important thing to note here is that there is a cost to running payment rails, payment infrastructure, and payment schemes. How that should be managed and apportioned, Nilixa says, is a topic for much debate globally. 

Simply put, the card companies are making their money via interchange fees, which are essentially charges levied for participating in the scheme on the rail. 

Visa and MasterCard today control the vast majority of electronic payments, effectively giving them a monopoly on these interchange fees since, ultimately, they own the network. As the owners, they get to decide on the size of the moat.

As Nilixa explained, there is indeed a cost to run the rails, but thanks to technology, that cost continues to be driven down, reducing the justification for erecting moats around those rails.

This is where open banking comes in. It introduces a new player onto the payment field: the Payment Initiation Service Provider (or PISP). These PISP payments are actually already here thanks to some of the more mature open banking environments. 

PISPs sit between the customer and their bank account and primarily have a relationship with the merchant. They are designed as interbank payments - as in, directly from bank-to-bank - and were first introduced into the EU legislation as a means of bringing innovation and competition to the market. 

One potential benefit of accepting PISP payments for a merchant is lower interchange fees, since they are interbank payments and not card payments. Nevertheless, merchants today are mostly still accepting card payments. 

Nilixa believes this is due to consumer adoption. People tend to pay with what they know until the new format becomes ubiquitous, as was seen with contactless - or tap - card payments. 

Additionally, the open banking ecosystem is not yet fully formed and does not support PISP payments in the way it could, Nilixa says. For example, if a customer wants to receive a refund on something they paid for with PISP, that functionality does not yet exist and it will be difficult for them to get their money back. 

However, even if all those functional gaps were worked out on the open banking side, Nilixa argues there still wouldn’t be a threat to the existing card schemes and card issuers. Card schemes themselves are evolving around the world, as Visa and MasterCard are getting involved in their own open banking initiatives. Basically, if the open banking ecosystem evolves, so will the card schemes. 

Does this mean that there is a world where the card schemes and rails can coexist with open banking equivalently? Nilixa says absolutely. 

“I think that's necessary because, at the end of the day, this isn't about the winners and losers in the card schemes or the interbank schemes. It's about consumer choice. And for me as a consumer, the different payment mechanisms and methods that I have at my disposal give me several choices.” 

At some point, those choices may even become invisible. A consumer may not exercise their autonomy to say “I want to pay by PISP” or “I want to pay by card”. Nilixa believes this is because consumers don’t always understand the differences between card schemes and open banking schemes. This may cause challenges for consumers, businesses, and regulators moving forward. 

The challenges don't end there. After explaining the tried-and-true card schemes and the open banking schemes, Nilixa moved on to the exotic new third option for sending electronic payments, a method that really does completely reimagine the very idea of money: cryptocurrency.

Cryptocurrency has taken the world by storm over the past decade. And just like with payments, cryptocurrency is a way of exchanging value between parties. 

The challenge with cryptocurrency is that it does not have a stable value like traditional currencies do. Because of this, we have seen the evolution of mechanisms that provide stability to the value of the currency, also known as stablecoins. Stablecoins support the value of the currency through stable assets like gold, oil, and even national currencies, in an effort to keep the convenience of crypto for payments, but lose the volatility. 

The most famous of all stablecoins is Facebook’s Libra: an attempt to create, in effect, a global currency. As a concept, it has driven the conversation around how payments can be better, with a more consumer-centric approach. But when the first Libra whitepaper was published, the reaction from central banks caused a fallout. Nilixa explains: 

“I recollect meetings with Libra at which 26 central banks were present. Except for conferences and central bank meetings, I'm not sure that I've ever heard of a situation where 26 central banks want to talk to an organization.” 

On top of that, central banks and regulators had to consider the global aspect of Libra and how it could possibly be funded. Sending money from one country to another is often very expensive; meanwhile, Libra was proposing a near-zero cost along a set of payment rails that would span the globe. 

But is it possible that Facebook was right? Central banks are ultimately organized around states, whereas cryptocurrency is global - it’s not bound to any one region. Likewise, payments aspire to function globally and allow you to move money between any bank, no matter where you are.

For Nilixa, this does not necessarily mean that banks are outdated. Central banks are looking closely at what they need to do to move forward in the space. For example, the Bank of International Settlements has innovation hubs in different sectors across the globe. 

Additionally, most central banks in places like Sweden, Singapore, Canada, China and the UK are considering the concept of a Central Bank Digital Currency, or CBCD. This idea is essentially central bank-backed money, just like the money you carry in your wallet. Cryptocurrency - even through stablecoins - doesn’t have that guarantee.

Mark Carney, former governor of the Bank of England, recently wrote the foreword to a report from the Bank of England about CBCDs. The report stated that their reasoning for issuing this technology would be financial stability, monetary policy, and competitive innovation. Carney outlined the different ways of issuing the currency, from account-based, which would look a lot like your bank account today, to token-based, which would be more like cash. The report included a number of other important questions posed to the industry, from deciding which entity should control the client relationship to which payment rails should be used. 

If these questions were answered effectively and the governments of the world moved towards CBDCs (or electronic money), it’s possible that the cost of running a payment rail would decrease to almost zero. In that case, there could be no more room for current card rails and schemes to exist. 

As far as Nilixa is concerned, at the end of the day there are always going to be different ways of making payments and exchanging value. Moving forward, central banks will most likely focus on the cost and value of cross-border payments.

Libra is not the only way Facebook is trying to enter the payments game. They recently introduced WhatsApp payments in Brazil. Shortly thereafter, the Brazilian government suspended their license for review. The open banking regulations that Brazil announced very recently were part of the reason for this.

However, it’s not that the Brazilian government wants to stop WhatsApp from enabling person-to-person payments. It’s that if WhatsApp is going to play in Brazil, they have to follow the same rules as everybody else.

Nilixa believes if any big tech firms want to be in the financial services space, then they should “step up and be regulated” as if they were a financial services provider. She explains: 

“There are current loopholes and gaps in various regimes that say you can do payments, but you don't have to be regulated or authorized or supervised because you've managed to secure your business in a way that slightly puts you outside of that regulatory regime.”

Nilixa believes there needs to be a mindset shift. If you come into financial services, remember that you are dealing with people’s money and livelihood. There is a responsibility that comes with that. 

Her company, Payments Solved, has a similar mindset. As a regulatory consultancy, Payments Solved is looking to drive change and to create a payments ecosystem that works well for everybody and is more fair and inclusive. 

“The future payments environment for me would be one where my bank didn't give me pages and pages of terms and conditions. Instead, they just said, ‘Nilixa, we're here for you. If it goes wrong, we'll sort it out.’” 

Although a little dry, make no mistake: payments is one of the most critical pieces of a complete open banking ecosystem. After all, if you can’t move money around, then how do you enable trade?

The good news is, we’re really good at moving money around, even electronically. Thanks to credit cards, we’ve been enjoying electronic payments for decades, albeit for a fee.

Open banking is trying to change the game. By creating an open standard around payments, open banking aims to make the movement of money seamless, effortless and as low-cost as possible. Instead of depending on proprietary networks, it leverages the ubiquitous internet. Instead of passing payments through a private scheme and rail, it passes them bank to bank, removing the middlemen and their requisite fees.

At the same time, entirely new ways to pay are emerging. Cryptocurrency and stablecoins have ignited a battle between banks, social networks and global governments - a battle for the future of money, as they debate the rules of who is allowed to move money and who is not.

Our guest Nilixa is happy to welcome all players. As long as they follow the golden rule: same activity, same regulation. 

This means that whether you are a central bank, a massive tech giant, or a two-man payments startup in a garage, you all play by the same rules. May the best way to pay win.

To learn more about Nilixa and Payments Solved, find her on LinkedIn or contact her at nilixa@thepayregexpert.com.

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