Speech by Jean-Claude Trichet, President of the ECB at the Jackson Hole Economic Symposium Panel: Setting priorities for long-term growth
The title of our panel today is Setting Priorities for Long-Term Growth. Given all of our recent struggles to regain our reference growth paths, it may strike some as something of a luxury to think about the long run; central bankers and policy makers have had to devote unprecedented attention to higher-frequency economic developments. Many new lessons have been learned; many policy and institutional innovations have been introduced.
The recent financial crisis has produced a large and persistent downturn in our economies; a downturn, moreover, that threatens our long-run growth potential. It is therefore entirely natural that policy makers do not lose sight of the prerequisites for stable sustainable growth.
This is especially so for most of the advanced economies, including the euro area, characterized (as it has been in recent decades) by declining potential growth rates. In the face of any economic predicament, one should ask oneself two questions – what got us here, and what can get us out? In the wider case of sustainable growth for the euro area, what matters is a commitment to structural reforms and sound macroeconomic policies. In the case of the financial matters, a robust macro prudential and supervisory framework is key. I will address both these issues in my coming remarks.
Likewise, some may consider it unusual to solicit views on matters of long-run growth from the President of a central bank. After all, pick up just about any growth-theory textbook and you’ll find few references to inflation and fewer still to monetary policy. Monetary policy is fundamentally viewed as neutral over the long run.
And indeed, inflation is ultimately a monetary phenomenon. Growth, in turn, is ultimately a real one reflecting, in particular, technology, education and training, capital accumulation, institutional quality.
Nonetheless, monetary-policy institutions can play and have played a fundamental role in supporting long-run, sustainable growth. In many ways, I see a parallel between the theory and practise of monetary-policy making and the shaping of modern growth analysis which emphasises the role of sound/proper institutions.
That achieving high and sustainable growth matters, however, is easy to motivate. On the subject of growth differences across countries, Lucas (1988) memorably wrote: The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
I. WHAT DRIVES GROWTH IN THE LONG RUN?
So let’s start to think: what does drive growth in the long run? In fact, growth theory – much like central banking – has come a long way. As everyone knows, Solow’s work in the late ’50s produced two startling insights.  First, that smooth factor substitutability could rid us of the Harrod-Domar boom-bust cycle. This, in fact, paved the way for a proper analysis of sustainable growth.  His second insight was that growth was driven not only by factor accumulation but also by technological progress.
Fundamentally, technological progress and innovation are, over the long run, the prime drivers of economic growth and also important reasons for differences in international economic performance, even though demographic differences are also very relevant. Higher growth rates of technical innovation raise output and can lower the non-inflationary rate of unemployment.
But what is technical change? Cracking open the Solovian black box of technical progress has taken us from theories of learning-by-doing, to the impact of R&D on product variety and quality. The latter theories being underpinned by Paul Romer’s reflection on the fact that ideas are fundamentally non rival.  This concept, by the way, was not really new. The famous letter of Thomas Jefferson to Isaac McPherson expressed it very clearly in 1813.  The bottom line in all of this is that knowledge spillover between open, dynamic economies could benefit everyone. Not surprisingly, these new developments in growth theory came replete with policy prescriptions.
A more recent but allied literature suggested the following: how close an economy is to the technological frontier and whether its institutions facilitate convergence to that frontier are vital considerations.  In effect, a laggard country gains by implementing (or jumping to) frontier technologies.  But an economy near the frontier – or with an appetite to define that frontier – should increasingly favour innovation over imitation.
Like many close to European policy , I find this an attractive framework. Indeed, following World War II, the European economies were remarkably catching up in productivity and technological terms and today are leaders in many fields, in particular as concerns the embedding of technological innovation in manufacturing processes.  Yet, there is still an enormous potential to tap, to reform our economies and boost their growth potential and job creation. 
II. GROWTH PATTERNS IN THE EURO AREA AND US
Debates about the US versus the euro area have become common place in recent years. To my mind, though, such debates often fall short of a careful, nuanced analysis required. Some international comparisons are indeed informative and yield important insights. Others – given lack of harmonized data, data concept or data unit – are more suspect. The crisis, though, has taught us that growth is only meaningful if it is sustainable and balanced. Growth that is not sustainable but follows boom-bust cycles, carries enormous costs in terms of economic well-being. These costs go far beyond pure GDP numbers; the deepest of these costs is that they, in some cases, put a strain on the fabric of our societies. For that reason alone, sustainability is a key qualification to associate to growth. The second key term is the balance of growth, both in domestic and external terms. Domestically balanced growth implies a broadly acceptable distribution of economic well-being within societies in terms of income and wealth as well as the avoidance of misalignments especially of asset prices; and externally balanced implies the need to avoid excessive international disequilibria.
Since the introduction of the single currency in 1999, the euro area has experienced a per-capita growth rate that, at around 1% a year, is comparable to that in the United States (1.1%). This is the first fact that is often overlooked in international comparisons. In such comparisons, we often look at headline growth numbers; yet, demographics are very different. Adjusted for population growth, there has been virtually no difference between US and euro area growth over the first decade since the introduction of the single currency. The euro area, though, has created more jobs: 14 million compared with 8 million in the US. Further, over recent decades differences in country and state dispersion rates of growth and inflation in the euro area and US are remarkably similar. On employment, moreover, it will be interesting to compare our different evolutions in the coming years. What we all want to avoid is excessively volatile employment where human capital is all too easily lost and inequality deepens.
Table 1 shows a detailed comparison of the euro area with the US over recent decades. This makes the standard growth accounting of contributions into employment and labour productivity. Labour productivity itself can be further decomposed into changes in labour composition, Information and Communication technologies (ICT) and non-ICT usage per hour and (residual) TFP growth. The interest in the distinction between ICT and non-ICT reflects recent evidence that the ICT sector has been strongest where most growth has emerged across the world economy.
Looking over the contributions, we note a significant difference in labour productivity (1.7 for EU13 vs. 2.9 for US). The main drivers in this comparison of labour productivity are ICT capital services per hour (0.4 vs. 1.0) and, perhaps more significantly from our standpoint, economy-wide TFP (0.5 vs. 1.1). Although having said that, there turns out to be quite some heterogeneity among countries,
Moreover, see Table 2 analysing the sectoral decomposition of TFP growth. TFP in the production of goods is slightly larger in the euro area than in the US. Rather, the higher overall TFP growth in the US is driven by stronger TFP growth in services, in particular in distributive trade (0.2 vs 0.5).  Although, in passing, we should remember that productivity and technical improvements in Services are plagued by measurement difficulties.
But of course TFP numbers always represent a rough metric.  The TFP residual will be contaminated by measurement errors, erroneous assumptions about market structure, or the nature and existence of the aggregative production function. The residual will also be a catch-all of neglected factor utilization, factor quality improvements over time, statistical complications associated in calculating factor rewards (appropriate tax and depreciation allowance for capital income etc).
But the wider perspective is: (1) the services and distributive sector is now a dominant and growing part of the euro area economy’s output (around 60%) and employment share; (2) the Service sector typically more regulated and thus less flexible to changes and open to innovation  although certainly recently there has been progress in the deregulation of network industries and progress through the new Services directive; (3) evidence is mixed but the Service sector in general is often thought to have inherently lower productivity and employment generation mechanisms relative to the more open manufacturing sector.
III. Diversity within the United States and the euro area
Allow me, next, to take a closer look at the developments both across US states and euro area Member States.
For the euro area it is very common to look at the level of its constituent countries and focus on the diversity among individual states, because a number of economic policy choices that affect productivity are national.
For the US, this exercise is rarely done. It is often conjectured that relevant policies are federal, and therefore by definition uniform at the level of the federation; and that, as a consequence, differences at the state level play much less a role. In essence, it is therefore often assumed that the US economy would be significantly more homogeneous than the economy of the euro area.
Looking more closely at the regional dispersion across US regions and euro area economies does not confirm this. In fact, the dispersion of many of the key indicators is surprisingly similar.
Let me share with you some findings from our analysis that we started some months ago and begin with inflation.  Before the crisis, the dispersion of HICP inflation in euro area countries had remained broadly stable since the late 1990s, at a level similar to the 14 US Metropolitan Statistical Areas.  During the crisis we saw a temporary increase in inflation dispersion in the euro area but this has been reversed over the past 12 months. (Chart 1.)
The picture is similar for the dispersion of GDP growth. Before the crisis the dispersion of growth rates was around 2%, in both the euro area and the United States. Dispersion rose somewhat during the crisis in both currency areas but remained broadly in line with pre-crisis patterns overall.  (Chart 2.)
Going one step further, investigation of the sources of this growth dispersion in the US and euro area economies reveals parallels even in the root causes of dispersion in economic performance and productivity. On the one hand, both currency areas comprise regions that experienced a significant boom and bust cycle over the past decade. On the other hand, both also contain regions that are facing significant structural challenges of a more long-term nature.
In the United States, for example, Nevada, Arizona, Florida and California experienced increases in house prices that outpaced the national average by a wide margin. The steep house price increases accompanied above average growth in these states. This could probably be explained, at least in part, by the impulse that these states received from the housing-related sectors such as construction, which saw its share in terms of value added increase at the national level during the years of the housing boom. In the crisis, the sharp fall in house prices in Florida and the south-western US states turned boom into bust. These states experienced the harshest recession among the US states. 
Similarly, in the euro area some countries experienced asymmetric boom-and-bust cycles. Several euro area countries had higher than average growth in the pre-crisis years. In Ireland and Spain particularly, strong growth was accompanied by strong increases in housing prices.
At the same time, other US states, particularly the former manufacturing powerhouses in the “Great Lakes” region, have seen a long episode of below average growth. Below average performance of the region – and particularly weaker growth rates in the states of Michigan and Ohio – are related to strong reliance on manufacturing. Structural shifts in the US economy towards services have gradually reduced the value added of manufacturing relative to GDP, with implications for areas with a high concentration of companies in manufacturing industries other than information and communications technology. During the crisis, GDP growth in the ”Great Lakes” region, which was below average before the crisis, remained below average.
Similarly, other countries in Europe – Portugal, for example – have experienced growth persistently below the euro area average for the past decade due to structural rigidities that are now being addressed.
Just a few years ago, the low-growth group of countries included Germany – labelled the “sick man of Europe” at that time. Yet Germany is now an example of how big the dividends of reform can be if structural adjustment is made a strategic priority and implemented with sufficient patience.
The effect of the crisis on the different euro area economies follows a similar pattern to those of comparable US states. The countries in the euro area that have been hit hardest are those in which either large asset-bubble driven imbalances unwound or structural problems were left unaddressed before the crisis. Those countries that have yet to implement more far reaching structural reforms also have relatively low growth prospects after the crisis. These relatively low growth rates are linked to a deterioration of competitiveness, driven, for example, by persistent above average unit labour costs.
Precisely as regards the evolution of unit labour costs, that are so important for growth, dispersion both ahead of the crisis and during the crisis was quite similar in the euro area and the United States. (Chart 3.)
At the same time, it is worth noting that both currency areas include regions with persistently above or below average unit labour cost growth. Again leaving aside the countries to join the euro area most recently, here, Greece, Portugal and Ireland, in particular, had progressively lost competitiveness vis-à-vis their main trading partners in the euro area. They are now engaging in catching-up, adjustment strategies. Germany, which had lost competitiveness in the reunification process, by contrast, has been able to restore this competitiveness over the same period of time. (Chart 4.)
Similar persistent losses and gains in unit labour costs are also observed in the United States. Taking a look at the upper and lower bound of the spectrum of US states over the same period as the euro area reveals that some states have experienced large or persistent increases in unit labour costs, currently exceeding the national average by as much as 20%. Other states have been improving their labour cost competitiveness vis-à-vis the national average over the past decade. (Charts 5,6 and 7.) In summary, there are strong indications that economic diversity in the euro area and the United States has not been significantly very different over the past 12 years.
The observation that very large, continental economies of the size of the US or of Europe are probably necessarily diverse should not be reason for complacency. The fact that advanced economies of the size of more than 300 million people have a tendency to be significantly diverse calls for a solid economic governance framework and explains why the ECB Governing Council has been so vocal in this ground since the inception of the euro area.
And this inherent diversity of advanced economies of large size is an additional reason to resolutely engage in the structural reforms that would permit to accelerate the completion of the European single market in all sectors, and to enhance the growth potential of each individual European economy and of the euro area as a whole.
IV. Setting Priorities for Long-Run Growth
Let us get back to our central theme – Setting Priorities for Long-Run Growth. Let me make some suggestions – three to be precise. A first, and overwhelming, priority – notably for the euro area – is the vigorous implementation of structural reforms . A second, but by no means unrelated priority, is the continued attention to external and internal imbalances . A final priority is greater flexibility on the part of policy institutions. Let’s take them one by one, with a particular emphasis on the euro area.
First, structural reforms. We earlier noted the primacy of institutions in modern growth theory. Sound institutions are essential to encourage a flexible, cutting-edge, knowledge-based economy. There is substantial evidence from industry-level studies on regulation as well from firm-level studies on the dynamics of firm performance that confirm the need for such a conducive environment to generate productivity growth. 
Douglas North defined institutions as … the rules of the game in a society … the humanly devised constraints that shape human interaction.  And being “humanly devised constraints” (rather than exogenous geographical or climactic constraints), their major impact was through the setting of incentives. 
And one can see the remaining challenges for many advanced economies as follows:
• Employment regulation needs to help more proactively outsiders, low-skilled, young and older workers.
• In Europe, the single market needs to be advanced especially in the area of services. 
• Tax, benefit and pensions systems should not discourage labour participation and create weak incentives for investment and innovation.
• The distribution of wealth and general economic well-being needs to ensure some acceptable social balance.
Several remedial policy proposals have been suggested and implemented in the recent past. The most well known is the European Council’s Lisbon Strategy for Growth and Jobs, followed by the Europe 2020 Strategy.  The latter is the Agenda that the European Union and its Member States have decided to help Europe recover from the crisis and come out stronger, both internally and at the international level.  The Agenda sets targets for the European Union in 2020 in terms of employment, research and development, energy and education.
The Agenda puts particular emphasis on structural reforms in the labour and services markets. These two markets are still over-regulated and not directly subject, given their largely non-tradable dimension, to the competitive forces originating from within and outside the single markets.  At the EU-level, the necessity and shape of structural reforms is acknowledged, but the gap between awareness and implementation is far from closed.
That said, we would do well to understand why political systems abide distortionary, inefficient structures and resist more efficient alternatives. Do structural reforms imply a J-curve of long-run gain but short run pain that sits ill with the decision making process in our democracies? Do vested interests strategically and systematically block change?
A second priority is vigilance against imbalances. I spoke at the last Jackson Hole symposium of the risks of chronic global imbalances and costs involved in unravelling the excessive private leverage, unsustainable fiscal and trade positions. Establishing more reasonable borrowing, restructuring and strengthening the balance sheets of firms, households and governments in an orderly manner remain key to smooth and continuous global growth. In all this, central banks are not immune. Tensions in financial markets and severe global imbalances deepen uncertainty and, therefore, profoundly challenge monetary-policy setting.
Precisely these dangers underpin the Mutual Assessment Process of the G20 framework. The indicative indicators – agreed in February this year – identify imbalances in public, private and external positions as the key culprits preventing balanced global growth, and a key input in shaping corrective policies. Seen in that light, a country’s economic success should be judged also on these indicators and not only on its last few years’ growth figures.
However, another imbalance – which has gained currency following the financial turbulence – is income imbalances. Naturally, extremes of income inequality and restricted opportunity challenge our values and strain the fabric of our societies.
In short, growth skewed towards the few (or absent for a large minority) risks social tensions, undermines institutions and encourages policy failures of one kind or another. Structural reforms, particularly in the form of re-training, improving job matching, providing flexibility and incentive for job creation and innovation remain the best policy options for encouraging well-balanced growth, and an environment of low and credible inflation the best environment to encourage matters from a central-banking perspective.
Finally, a priority for medium and long-run growth is that our policy institutions remain attuned to an ever-changing landscape. We have seen in recent years the near-Knightian uncertainty policy makers endured and how boldly they responded. The ECB was among the first central banks to react to the outbreak of the financial turmoil in August 2007 in providing liquidity to distressed institutions. Another example of flexibility by ourselves and in the wider central banking community is in the swap agreements with other central banks as an example of internationally co-ordinated means of swiftly responding to the crisis.
Since then, we acted with what I have previously (here in Jackson Hole) called ‘credible alertness’.  This includes implementing both non-standard monetary policies and our interest rate policy. Interest rate policy depends on the outlook for price stability. The use of non-standard measures depends on the functioning of the monetary policy transmission and must be commensurate with the level of malfunctioning or disruption of money and financial markets and segments of markets. Our non-standard measures do not in any way impinge upon our capacity to design our monetary policy stance to deliver price stability in the medium term.
Despite all the ups and down of recent years, our key challenge remains as it has always been: to create strong, sustainable, balanced, non-inflationary growth. Credibility and the medium-term orientation in monetary policy allows, where needed, scope and flexibility to address various types of severe shocks. Over the long-term a commitment to price stability anchors expectations, improves the workings of the price mechanism, reduces transaction costs, protects savers and reduces uncertainty. This is what I meant at the outset when I said that the theory and practice of monetary policy making paralleled developments in growth theory – namely, both are now seen to hinge on institutional quality.
Let me conclude. Ultimately growth is driven by technical progress. This is especially important where there are limiting demographic factors. In the euro area, there is ample of scope to realize efficiency gains from existing and prospective technological changes given structural reforms and more vigilant implementation of the existing policy agenda. The remarkable resilience of the German labour market in the last few years , where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms.
Although there have been improvements in the euro area in recent years, there is still evidence of regulatory and market-based barriers to entry in selected professions which have to be actively corrected.
Structural reforms – re-training, improving job matching, providing flexibility and incentives for job creation and innovation – remain the best policy options for encouraging well-balanced growth, and an environment of low and credible inflation the best environment to encourage matters from a central-banking perspective.
Likewise, alertness against savings and trade imbalances across the global economy is a fundamental concern. Such imbalances – if unchecked or conveniently rationalized away – make our entire, inter-connected economies more fragile and more risk prone. We have seen how rapidly negative financial impulses can transmit through the global economy and pull down economic activity. Alertness means alertness. I have learned whilst discussing global imbalances and financial transmission channels – much of it done here at Jackson Hole – that appropriate improvements in regulation and multilateral surveillance frameworks can yield large gains. We should work hard to maintain momentum.
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Ebbinghaus, B. and W. Eichhorst (2006) Employment Regulation and Labor Market Policy in Germany, 1991-2005. IZA Discussion Paper 2505, December.
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European Commission (2002) Better Functioning Labor and Product Markets. In European Economy 6/2000, Chapter 3, Brussels: European Commission.
European Commission (2005a) Working for Growth and Jobs: Next Steps in Implementing the Revised Lisbon Strategy. Commission Staff Working Paper 622/2.
European Commission (2005b) Working together for Growth and Jobs. A new start for the Lisbon Strategy. Communication to the Spring European Council.
European Commission (2010) Europe 2020: A European Strategy for Smart, Sustainable and Inclusive Growth. Communication from the Commission to the European Council, arch.
European Council (2010) European Council 17 June 2010 Conclusions, June.
Gerschenkron, A. (1962) Economic backwardness in historical perspective, Belknap Press of Harvard University Press.
Gomes, S., P. Jacquinot, M. Mohr and M. Pisani (2011) Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment, Working Paper 1323 (Frankfurt: European Central Bank)
Gómez-Salvador, R., A. Musso, M. Stocker and J. Turunen (2006) Labour productivity developments in the euro area, Occasional Paper No. 53, European Central Bank.
International Monetary Fund (2004) World Economic Outlook: Advancing Structural Reforms. Washington, April.
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La Grandville, O. de. (2009) Economic Growth: A Unified Approach. Cambridge University Press.
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Sondermann, D. (2011) Productivity in the Euro Area: Any Evidence of Convergence?, European Central Bank, mimeo.
Solow (1956, 1957).
For contemporary discussions see La Grandville (2009), Klump et al. (2007 a, b).
“… He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature …”, Letter of Thomas Jefferson to Isaac McPherson, 13th August 1813.
Acemoglu, Aghion and Zilibotti (2006).
This is the so-called advantage of backwardness, Gerschenkron (1962).
Sapir et al. (2003), Kok (2004).
Gomez-Salvador et al. (2006).
See for example, the discussion in Sondermann (2011).
Note, the share of respective sector grouping’s value-added in total value-added across both countries are quite similar: Goods Production (0.44 for the euro area; 0.36 for the US), Market Services (0.35 for the euro area; 0.42 for the US), and Distributive Trades (0.21 for the euro area; 0.22 for the US).
See for example the discussion in Crafts (2008).
See European Central Bank (2006)
Keynote address by Jean-Claude Trichet, President of the ECB at the “ECB and its Watchers XIII” conference, Frankfurt am Main, 10 June 2011
The use of all US states in the computation of GDP dispersion, in contrast to only 14 US Metropolitan Statistical Areas (MSAs) in the computation of inflation dispersion, is to be explained by data availability. The most recent entries to the euro area have been excluded to avoid breaks in the time series.
The 2010 data for US regions are estimates published by the Bureau of Economic Analysis on 7 June 2011.
 The “Industry specialization index” – a measure of the degree to which states are more or less specialized in an industry relative to the nation average – reveals that California, Florida, Arizona and Nevada all witnessed the share of their respective construction sectors increase relative to the national average between 2001 and 2006, followed by the opposite development after 2006.
Nicoletti and Scarpetta (2003), Bartelsman et al. (2005).
For instance, the Service sector accounts for over 70% of GDP but only 20% of intra-EU trade. Some home bias in the provision of Services is inevitable, but such a gap suggests that there are considerable local rents being extracted at consumers’ expense.
For example: European Commission (2002, 2005a, 2005b, 2010), International Monetary Fund (2004), Organization for Economic Co-operation and Development (1997, 2003, 2006).
European Council (2010).
Macroeconomic assessments of the gains that might be realized in the euro area from greater competition and other structural reforms can be found in, for example, Bayoumi et al. (2004), Ebbinghaus and Eichhorst (2006), Jacobi and Kluve (2006), Gomes et al. (2011).
“Monetary Policy and Credible Alertness”, J. C. Trichet, Jackson Hole Symposium, August 2005.
For example, Arpaia, A. and G. Mourre (2011), Boysen-Hogrefe and Groll (2011), Burda and Hunt (2011).
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FSS and India Post Payments Bank AePS Partnership Advances Financial Inclusion in India
New Delhi, January 12th,2020: FSS (Financial Software and Systems), a leading global payment processor and provider of integrated payment products, today announced partnering with India Post Payments Bank (IPPB) to promote financial inclusion among underserved and unbanked segments. As part of the collaboration, IPPB will use FSS’ Aadhaar Enabled Payment System (AePS) to deliver interoperable and affordable doorstep banking services to customers across India.
FSS’ AePS solution combines the low-cost structure of a branchless business model, digital distribution, and micro-targeting that lowers acquisition costs and improves reach. This strategic partnership offers significant opportunities to bring millions of unbanked customers into the financial mainstream. Currently, there are nearly 410 million Jan Dhan accounts in India. A primary reason for low usage of banking and payment services is the challenge of accessibility in rural areas and the cost of maintaining active accounts — including transaction and transport— outweigh the benefits. In rural and peri-urban areas, the average time to reach a banking access point potentially ranges between 1.5 and 5 hours, compared with the average of 30 minutes in urban areas.
Leveraging its vast network of over 136,000 post offices, and 300,000 postal workers, IPPB has been setup with the vision to build the most accessible, affordable, and trusted bank for the common man in India to deliver banking at the customer’s doorstep. With the launch of AePS services, IPPB now has the ability to serve all customer segments, including nearly 410 million Jan Dhan account holders, giving a fresh impetus to the inclusion of customers facing accessibility challenges in the traditional banking ecosystem.
Speaking on the tie-up, Mr.Krishnan Srinivasan, Global Chief Revenue Officer, FSS said, “We are proud to be IPPB’s technology partner in this monumental nation-building exercise. The collaboration is evidence of FSS’ deep payments technology expertise and commitment to bringing viable, market-leading innovations that promote financial deepening. FSS’ AePS solution combined with IPPB’s expansive last mile distribution reach empowers citizens of the country with a range of digital payment products and advance India’s vision towards less-cash economy.”
“Through the vast reach of Department of Posts network along with the advent of the interoperable payment systems to drive adoption, IPPB is uniquely positioned to offer a range of products and services to fulfil the financial needs of the unbanked and the underbanked at the last mile. Having launched AePS services, the Bank has become the single largest platform in the country for providing interoperable banking services to customers of any bank. The strategic partnership with FSS provides us with an opportunity to expand the portfolio of financial services and improve customer experience whilst maintaining operational efficiency, thus building a digitally inclusive society,” said Mr. J. Venkatramu, MD & CEO, India Post Payments Bank.
The infrastructure created by IPPB addresses the accessibility challenges faced by customers in the traditional banking ecosystem. It fulfils the Government’s objective of having an interoperable banking access point within 5 KM of any household and creating alternate accessibility for customers of any bank.
The operation of FSS’ AePS solution is based on agents performing transactions on behalf of customers using a tablet, micro-ATM or a POS device. The system is device agnostic and can accept transactions originating from any terminal. Customers of any bank can access their Aadhaar-linked bank account by simply using their fingerprint for cash withdrawal, balance enquiry and transfer of funds into an operating IPPB account, right at their doorstep. FSS’ AePS exposes APIs to third parties to develop an expansive services ecosystem and extend a broad suite of financial products and tools including micro-insurance, micro-savings, micro-finance, mutual fund investments, enabling the bank to further services adoption among low and moderate-income consumers.
FSS (Financial Software and Systems) is a leader in payments technology and transaction processing. FSS offers an integrated portfolio of software products, hosted payment services and software solutions built over 29+ years of experience. FSS, end-to-end payments products suite, powers retail delivery channels including ATM, POS, Internet and Mobile as well as critical back-end functions including cards management, reconciliation, settlement, merchant management and device monitoring. Headquartered in India, FSS services leading global banks, financial institutions, processors, central regulators and governments across North America, UK/Europe, Middle East, Africa and APAC. For more information visit www.fsstech.com.
About India Post Payments Bank
India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. IPPB was launched by the Hon’ble Prime Minister Shri Narendra Modi on September 1, 2018. The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India. The fundamental mandate of IPPB is to remove barriers for the unbanked & underbanked and reach the last mile leveraging a network comprising 155,000 post offices (135,000 in rural areas) and 300,000 postal employees.
IPPB’s reach and its operating model is built on the key pillars of India Stack – enabling Paperless, Cashless and Presence-less banking in a simple and secure manner at the customers’ doorstep, through a CBS-integrated smartphone and biometric device. Leveraging frugal innovation and with a high focus on ease of banking for the masses, IPPB delivers simple and affordable banking solutions through intuitive interfaces available in 13 languages.
IPPB is committed to provide a fillip to a less cash economy and contribute to the vision of Digital India. India will prosper when every citizen will have equal opportunity to become financially secure and empowered. Our motto stands true – Every customer is important; every transaction is significant and every deposit is valuable.
Be Future-Ready: The Case for Payments as a Service (Paas)
By Barry Tarrant, Director, Product Solutions, Fiserv
Over the years, financial institutions have faced a myriad of changes in regulations, technology and customer expectations. Banks are now having to deal with the competing demands of maintenance and compliance on the one hand, and the need to innovate and deliver value-added services on the other. The balance of effort is increasingly consumed by the former with the share of investment in innovation and value generation being squeezed.
COVID-19 has changed customer behaviour, which will accelerate the need for more digital innovation, adding further to the demand on technology resources that are already stretched to the limit. While future investment plans may remain uncertain, banks need to consider several factors for their technology strategy, such as efficiency, where to invest and how to reduce capital expenditure.
It is apparent that the traditional approach to implementing and updating technology is no longer sustainable in the long-term.
The true cost of outdated technology
Maintaining technology has always been a challenge. What makes it more important now than ever is that innovation expectations have become far greater and exist on multiple simultaneous fronts. Today, there is more demand for product innovation, alongside the need to deliver consistently across multiple channels. On top of this, banks are facing structural changes, such as the convergence of payments.
Faced with this combination of imperatives, many banks are finding that continuing to maintain their payments technology in-house is no longer the most viable option.
Banks that persist with existing in-house infrastructures are in many cases spending large sums just to keep up, with little left for innovation. This can put them at a distinct disadvantage in today’s digital environment, where challenger banks and fintechs are fully embracing tools like the cloud to optimise operations while delivering truly transformational customer experiences.
Maintaining technology can be quite costly, and leveraging shared payment innovation can result in notable cost savings. Additionally, there are savings to be had in the areas of capital costs, opportunity costs, regulatory or payment scheme compliance costs, and the inevitable one-off costs from technology or infrastructure upgrades.
And as the options available for customers to initiate payments across card and non-card payment rails increase, this will drive a convergence of the technology that supports the processing of those payments, further increasing the demand for change.
In this environment, migrating to an alternative technology strategy, such as PaaS, can be a strategic and cost-effective decision.
One solution to mitigate the risks and costs associated with maintaining technology is to outsource payments activity to a PaaS provider. The most obvious advantage here is cost reduction. However, there are many other positive and significant financial benefits that can be realised in terms of reduced capital expenses and the associated effects on balance sheet and free cash flow. This is particularly important in the current environment as capital investment comes under even more scrutiny.
Running a robust platform is a PaaS provider’s primary business, whereas for a bank it is just one of the many areas in which it has to invest. A PaaS provider is compelled to continually reinvest to ensure their technology never stands still long enough to become outdated, while also recruiting high-calibre personnel to support and advance it.
Geographical scale can also add value and increase opportunities for innovation. A PaaS provider with clients around the world sees and delivers innovation globally, which can be redeployed elsewhere rapidly and at a lower cost than custom development. Also, a global processing network can serve as a worldwide payments intelligence network, detecting trends, such as new payment types, consumer payment behaviour and cyberthreats.
One further consideration is how payments have become increasingly commoditised in recent years. As traditional revenue streams from payments have declined, it makes even less financial sense to retain payment processing in-house. By adopting PaaS and benefiting from the associated cost savings, retained payment margins can be maximised, simultaneously freeing up resources that can be diverted to innovation and value-added activities, such as enhancing customer experience and building the franchise.
Debunking the myths
Despite the compelling business case for banks to adopt PaaS, some remain reluctant to do so because of various myths. One example is the belief that outsourcing data is inherently risky. The reality is, in fact, the opposite. PaaS providers have the scale, resources and procedures to address and invest in key priorities – for example, cybersecurity. Keeping things in-house can actually create greater data security risk if resource constraints are an issue.
Budgetary considerations aside, experience and specialist tools are also major points of difference here. A typical bank IT manager might experience two or three major transition projects in their entire career. In contrast, teams at a PaaS provider collectively will have experience successfully delivering many major transformation projects, and will have also developed a whole range of specialised implementation adapters and toolkits that are continually enhanced and expanded.
Be more agile and tactical
When technology becomes outdated it can easily go from an asset to a liability. While COVID-19 has emphasised this reality for some, truly appreciating it requires a comprehensive assessment of existing technology and its long-term impact on business. Outsourcing through PaaS has a wealth of benefits that can radically transform this situation. Financial institutions can become more agile and tactical so they can continue to innovate and provide services that customers demand while differentiating themselves from the competition.
Teaching Your Kids to Build Good Credit: The One Tool You Never Knew You Needed
Teaching your kids about money can be tricky. You want them to understand the value of a dollar without putting undue pressure or stress on them too early on. It’s essential to have productive conversations with your children around money so they can have the knowledge to guarantee their own financial well being when they become adults. One of the most important conversations to have with your kids is on the importance of building good credit, the steps they can take to do so, as well as techniques for avoiding the risks of poor credit. While you may have already thought to educate them on credit cards and loans, there is one tool you may have never considered that can help you underline this lesson. Read on to find out more.
Tradelines – What Are They?
A tradeline is defined as a record of activity for any type of credit that has been extended from a lender to a borrower and is also reported to a credit reporting agency. In short, a tradeline is a record-keeping mechanism that tracks all of the activity associated with that borrower’s account. For each credit account you have, you will have a tradeline. Generally, tradelines are one of the most widely used tools credit agencies use to calculate an individual’s credit score.
Tradelines typically include the following information:
- The name and address of the lender
- The type of account
- Partial view of the account number
- Current status of the account
- The date the account was opened
- The date the account was closed (if it has been closed)
- The date of last activity
- The current account balance
- The original loan amount or credit limit
- The monthly payment amount
- The recent balance (only applicable for credit cards)
- The payment history
The Type of Tradeline You Never Knew You Needed
When it comes to educating your child on the logistics of building good credit, there is a specific type of tradeline that can help achieve this goal: AU tradelines. In this case, AU stands for authorized user. In this type of tradeline arrangement, a parent can add their children to their tradelines as a means of aiding in building their credit. In other words, AU tradelines are the perfect tool to get your kid’s finances started on the right foot as they enter adulthood. By providing your child with this assistance early on, you will not only boost their credit, but you will teach them a valuable lesson on how to “futureproof” their credit management and use such tools to their benefit.
Ultimately, holding constructive conversations with your kids around responsible financial practices is an essential step in guaranteeing their future prosperity. Not only will you enhance your children’s understanding of valuable financial tools, but you will set them on the path to financial security and freedom. The more freedom and stability they have, the sooner they will be able to achieve their financial goals of buying a car, a home, or paying for their education. At the end of the day, you cannot put a price on that kind of peace of mind.
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