CBC Governor Herodotou reveals breakthrough in digital finance

The Central Bank of Cyprus has completed the tender for a new digital platform for customer compliance, said CBC Governor Constantinos Herodotou, speaking at an event organized by the Association of Cyprus Electronic Money and Payment Institutions, on Thursday afternoon.

“In an effort to promote the digitalization of the financial sector to create an efficient financial ecosystem and to support the economy, the Central Bank of Cyprus issued a tender for implementation of a remote digital platform”, the Governor said. The tender has been completed and CBC will announce the results in the next few days.

According to the Governor, the digital platform will progressively bring benefits to individuals and corporates, such as reducing the time for compliance and bank transactions and upgrading the quality of services. The implementation will take place in three phases. Phase one is the implementation of the technology for the sector to remotely onboard customers and remotely update existing customer records.

Digitalization will provide an optimized user-friendly interface without any need for physical presence, which will be customizable by each participating financial institution in accordance to their needs. Phase two will implement connectivity and interoperability with utilities as well as governmental services to obtain accurate customer data for verification processes, thus speeding up the KYC (Know Your Customer) process and ensuring the integrity of data entries.

The third phase will be information sharing between participating institutions when there is an update on customer data or AML purposes, which may reduce the need for further engaging the customer in the process, he said.

Regarding new financial technology companies (FinTech), Herodotou said that the coexistence of traditional banks and innovative fintech companies is transforming the financial sector landscape. “There are significant advantages in combining the network and regulatory expertise of traditional banks, with the agile and innovative operating models of Fintech”, he noted, adding, however, that innovation comes with challenges and risks.

“The Central Bank of Cyprus encourages innovation and the opportunities that are created by digitalization. In parallel, it is its duty to maintain a watchful eye” in order to ensure that no undesired risks are being produced, he noted.

“We are witnessing transformative challenges due to digitalization and innovation”, Herodotou noted, adding that in order to address these, the Eurosystem is taking a multidimensional approach, promoting instant payments as the new norm and investigating the possible introduction of the digital euro.

Instant payments allow the release of funds that are blocked in the financial system. At the same time, instant payment solutions should comply with customer and data protection, anti-money laundering and Sanctuary stations, said the Governor, noting that from November 2017 to the second quarter of 2023, instant payments reached about 15% of total volume of credit transfers in EU.

Although Cyprus banks do not yet offer instant payments, certain Electronic Money Institutions (EMIs) and Payment Institutions (PIs) that are regulated by the CBC are eligible to offer this service to their clients, he said.

Regarding the digital euro, Herodotou said that it has the possibility to complement the physical euro. It's worth noting that in addition to banks, other end-service providers plan to also have a role in the distribution of the digital euro to their customers.

In terms of the domestic market developments, Herodotou said that the number of Payment Institutions and Electronic Money Institutions operating in Cyprus has exhibited significant growth in the last few years. Currently, in Cyprus there are 11 licensed PIs and 20 licensed EMIs. Furthermore, a number of institutions from other member states of the EU, offer these services in Cyprus.

Despite a large number of already licensed institutions, given the size of Cyprus, there is continued interest for new licenses. At present, 33 applications for new licenses are being assessed by the Central Bank of Cyprus.

Patrick Papsdorf, Head of Section of Payments Oversight at the European Central Bank presented the data regarding digital payments in EU. He said that non-cash payments in euro area increased both in volume and in value in recent years, to 114.2 billion transactions and to €197 trillion.

He noted that in 2022 cash payments dropped to 59% of all transactions, from 79% in 2019, cards are at 34%, compared to 25% in 2019 and mobile apps are at 3%. The majority (62%) of card payments at POS are contactless. The number of contactless transactions in Cyprus is even higher, at 84%, he said.

Regarding person-to-person transactions, Papsdorf noted that cash is dominant with 73% of transactions’ volume and 59% of value, although cashless payments are increasing, with mobile apps at 10% of transactions volume and 11% of value and credit transfers at 12%.

Papsdorf underlined the importance of regulation and oversight regarding financial services in light of technology, noting the need for safety and efficiency of the payment system as a whole. He referred to PISA, a eurosystem framework for payment instruments, schemes and arrangements.

The Chairman of Association of Cyprus Electronic Money and Payment Institutions (ACEMPI), Ioannis Georgoulas said that digital payments have the potential to revolutionize the foundation of the economic system, providing a gateway to a more inclusive, efficient and sustainable future.

“Digital payments are not just a technological innovation. They are a gateway to a more inclusive, efficient and sustainable world. They empower individuals, drive economic growth, offer convenience, financial inclusion and environmental sustainability”, he said.