Voice of the Industry

Alias use in the Dutch payment system not the way forward

Friday 29 May 2020 08:50 CET | Editor: Mirela Ciobanu | Voice of the industry

Carin van der Cruijsen from DNB explains how the social costs of unique aliases for payments account numbers outweigh the benefits of such a measure, highlighting its advantages and disadvantages

Introducing unique aliases for all payment account numbers in the Netherlands is not the way forward. While it would make switching to a different bank easier, the social costs outweigh the benefits of such a measure and there are additional disadvantages. This emerges from a DNB study commissioned by the Dutch Minister of Finance (Bijlsma et al. 2020).

Obstacles for consumers and businesses to switch bank account increase switching costs in terms of time and administrative hassle for switchers and reduce competition by lowering the threat of switching. This may result in higher fees, less innovation, and less optimal service. Reducing obstacles to switching is therefore a valid policy goal. A possible way of making switching banks easier is number portability. Number portability means that customers can take their payment account number (IBAN) to another bank. However, lowering switching barriers through introduction of number portability would only be feasible at EU level, because the IBAN system would have to be changed.

An alias is a possible alternative to number portability. We define an alias as a unique identifier that is linked to an IBAN. This way, a payment instruction (credit transfer or direct debit) is linked to an alias rather than an IBAN. When a consumer or business switches banks, their alias remains unchanged, while the underlying bank account number changes. This would reduce the hassle involved in a switch. As this can only be achieved if everyone uses aliases instead of IBANs, it must be enforced by law. The creation of an alias system for IBANs may be technically less complex than number portability.

First, we assessed the suitability of seven existing aliases on the basis of various criteria. The main criteria are that the alias must be self-validating and stable. The use of self-validating numbers ensures that a typing error does not result in an incorrect payment and that consumers and companies can verify whether aliases are valid. Stability means that the alias of the person, business or institution does not change. We find that existing aliases are unsuitable for large-scale use in the payments system. For example, email addresses and telephone numbers are not self-validating and stable enough.

A newly designed alias that does meet these criteria (we refer to such an alias as ‘robust’) would therefore have to be used for large-scale alias use in electronic payments. DNB requested the research agency SEO Amsterdam Economics to conduct a key figure cost-benefit analysis of the introduction of a newly developed alias (Hers et al. 2020). The analysis shows that the social costs of introducing a new robust alias only in the Netherlands considerably outweigh the benefits. The overall net present value calculated over 10 years is EUR -580 million (see Figure 1). The cost-benefit balance is the difference between the expected benefit of EUR 487 million and the expected cost of EUR 1,066 million.

Figure 1. Costs of alias use exceed benefits

The benefits are relatively low because the number of switchers – although roughly doubled due to the mandatory use of aliases – remains limited, and the efficiency gains are low, whereas the one-off investment costs are relatively high. Importantly, 90% of the benefits for switchers comprise time savings expressed in monetary terms. There is relatively little efficiency gain, because the payment system in the Netherlands is already fairly efficient and the competition has already increased, for example due to PSD2. The main cost components are the one-off costs that have to be incurred, particularly for the system modifications necessary for alias migration for banks, direct debit issuers and organisations with a large number of outgoing payments (in batches). The one-off costs are relatively high because all operators in the payment chain have to incorporate the alias in all their accounting records and systems.

Introducing aliases only in the Netherlands would also meet with other objections. National laws would need to be amended, foreign market entrants would incur additional costs for operating in the Dutch market for payment accounts, and a two-tier system would need to be created in order to distinguish between domestic and foreign credit transfers and direct debit transfers. This would not align with the objective of creating a true Single European Payments Area. It would also complicate non-cash payments and could cause confusion among payment account holders.

On this basis, we conclude that introducing legally enforced alias use exclusively in the Netherlands is not a suitable method for removing obstacles to switching banks. It would, however, be a good idea to assess the costs and benefits of alias introduction at a European level. Dual systems would not be necessary and cost savings could be achieved. It would also prevent barriers to entry for foreign operators. Also, extending its scope beyond payments could drive up the benefits.

In addition, the Switching Service for payment accounts (the so called ‘Overstapservice’, which automatically redirects payment made to the ‘old’ payments account to the ‘new’ payment account during a period of 13 months) currently offered in the Netherlands could be used more often, particularly by consumers, and further improved. For example, by giving switchers a real-time view of the organisations and direct debit issuers that have already been informed about the switch, and by extending the period in which the Switching Service operates. This will already further reduce the hassle involved in a switch.

References

About Carin van der Cruijsen

Carin van der Cruijsen is a senior researcher and policy advisor at DNB. Her main area of expertise is financial consumer behaviour. Currently her work focuses on topics such as trust in financial institutions and consumer payment behaviour. Curious to see her publications? Have a look at her website.

 

 

About De Nederlandsche Bank (DNB)

DNB is the Dutch central bank, financial sector supervisor and resolution authority. DNB is committed to a stable financial system: stable prices, solid financial institutions, and properly functioning payment transfers. In the fulfilment of all its tasks, DNB puts into practice its mission: working on trust.

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Keywords: Carin van der Cruijsen, DNB, payments account, unique aliases, banking, fintech, payments, Netherlands, bank account, data, portability, De Nederlandsche Bank
Categories: Banking & Fintech | Payments General
Countries: Netherlands
This article is part of category

Banking & Fintech