Source: National Bank of Ukraine
Digital payments have changed our economy, our lifestyles and our way of doing business.
As the global markets have felt the bite from the Coronavirus pandemic, banks have moved online, levels of online transactions increased, and the e-commerce market has reached fever pitch.
It is said that with every challenge comes and opportunity. When it comes to the financial services sector, every opportunity also comes with a challenge as to how best to regulate marketplaces in order to ensure a vibrant business climate and adequate consumer protections. As the Governor of the Ukrainian National Bank, this is my key challenge.
The Ukrainian financial sector is weathering the global pandemic and quarantine restrictions rather well - largely as a result of our domestic FS industry already being technologically advanced. In spring, during the worst days of lockdown, our banks were able to quickly adapt and provide their services remotely.
Unsurprisingly, the pandemic has hastened the decline of cash transactions as businesses and consumer harness the benefits digital payments bring from a convenience and health perspective. In contrast, in 2016 only a third of the total amount of card transactions were cashless; in September of this year, it was 56% - and rising. Contactless transactions in the retail industry increased from 30% to 42% compared to the beginning of the year, NFC payments from 15% to 19%.
Ongoing expansion of the payment infrastructure plays the major role in this process. The number of POS terminals in Ukraine increased by 8% in 2020, over 85% of terminals are contactless. The number of businesses accepting cards for settlements have rose by a third during 2020.
Innovations and digital solutions have a strategic priority of the Ukrainian National Bank for many years. Along with strengthening Ukraine’s payment infrastructure, our role as a regulator is to put in place the right policy framework that ensures development of digital projects. There are a number of ways we are approaching this challenge.
Firstly, we have started a review and update of the legal framework underpinning payments policy in the country. Key changes will include bringing the EU's revised Payment Services Directive (PSD2) provisions into Ukrainian law - including a major push towards Open Banking, which will provide consumers with increased flexibility, more transparency and quality customer service from their banks. As it is common in the EU countries, new players such as PISP (Payment Initiation Service Providers) and AISP (Account Information Service Provider) will enter our financialmarket, ensuring a more competitive market with the higher quality of financial services.
Secondly, we are upgrading Ukraine’s system of electronic payments. Last year, the banking system converted to International Bank Account Number (IBAN). Since August of this year, the system of electronic payments processes payments 23/7. Our next steps will be transition to 24/7 and implementation of ISO20022 standards. Implementing the standard in Ukraine will help the country better integrate into international payment frameworks. In other words, we are creating a “highway” for payments in line with international standards with uniform “road signs” for the entire global community.
Thirdly, we have introduced various methods of remote customer identification. With immediate effect, our banks can open accounts and provide financial services remotely. To do this, we studied the experience of Germany, Switzerland, the Scandinavian countries, and, of course, we took into account the practices of those international banking groups that are present in Ukraine. These instruments include data transfers through the NBU’s BankID System (which comprises 22 identifying banks that jointly account for 87% of the payment cards market), qualified electronic signatures, collection of data from credit bureaus (which possess information about 70% of bank customers), video verification, transfers of digital copies of biometric documents through the mobile application Diia (Action). Technology is at the heart of everything we do.
Fourthly, we also have enabled financial market participants to sign initial documents by writing on the screens of their mobile devices - tablets or smartphones - using styluses or even fingers. This is how we simplify processes and reduce red tape.
Fifth, when developing digital financial services, we have paid special attention to the consumer protection- which are often SMEs. To ensure the highest possible standard, we have defined clear information security and cybersecurity requirements for the market in order to mitigate the risk of cyberattacks.
Sixth, we are working to create a full-fledged Sandbox at the NBU for in-depth interaction with FinTech, as is the case in the world’s leading central banks. In the meantime, a special advisory body was set up at the NBU in 2019 for these purposes. We already have FinTech companies and startups coming to us to share their ideas and perspectives.
As Governor of the NBU, I am acutely aware of the need to listen to the views of the private sector. As such, we are working closely with business to analyse their policy ideas and welcome their expertise and advice on how to introduce new and innovative products and services to the market. In 2020, the NBU received 13 of these applications. Last year, we reviewed eight applications, five of which were concerned with PayTech projects and three with Regtech projects.
Last but not least, we have been working to create the concept of the e-Hryvnia, Ukraine’s central bank digital currency (CBDC). We have been looking into this idea since 2016. In 2018, we launched a pilot project on e-Hryvnia issuance - CBDC for retail payments, based on blockchain platform. We have published the results of this pilot project and held an international conference on CBDC in Kyiv. Today, this Ukrainian project is known internationally.
Our plans remain unchanged, and we continue to explore the possibility of e-hryvnia issuance . We are focused on researching possible use cases for the e-Hryvnia.
In our research, we rely on the needs and input from financial market participants, consumer needs, and global best practices.
Why have I, as Governor, placed such a focus on the digital transformation of the Ukrainian financial services sector?
To succeed in its role as a regulator, it is crucial that the NBU provides Ukrainians with handy and robust cutting-edge solutions, as well as a gold standard regulatory environment that is competitive globally. Only by enabling as many financial market players as possible to strengthen their digital operations and streamline their services will Ukraine be competitive globally.
Technology is at the heart of everything we do. The tech innovation I am spearheading not only benefits the financial service sector - but offers new and exciting opportunities for the country’s whole economy.
Kyrylo Shevchenko is the Governor of the National Bank of Ukraine