Payments are not just being disrupted, but utterly transformed by new technology.
The way we pay for goods and services has evolved constantly over the past 50 years. We swapped cash for cards. Service providers such as Visa and Mastercard became a feature of daily life. We shopped on the internet and paid for items electronically. We discovered PayPal, Apple Pay and Alipay, and then found that our mobile phones were all we needed to shop. As the means of payment changed, whole infrastructures adapted and developed around them.
The pace of change in payments today is unprecedented. A confluence of factors is driving the transformation. This OMFIF report examines how the future of payments will look, and surveys central banks’ and regulators’ opinions as to the challenges and opportunities they face.
Mobile ownership and telecommunications technology are driving the digital economy forward. Demand for real-time clearing and settlement of high-volume, low-value payments between retail businesses and individuals is accelerating. Consumers value the ability to conduct instantaneous fund transfers around the clock. This desire for speed, convenience, ubiquity, safety and affordability in conducting digital transactions has been turbo-charged by the need to preserve public health and reduce dependence on physical cash during the pandemic.
The relentless and irreversible shift from the age-old reliance on physical cash poses problems but also brings benefits in the developing world. Innovation in payments must consider accessibility, affordability and inclusion for those on the periphery of the financial and payments infrastructure.
Although many of the payments innovations and business models linked to mobile and e-money originated in developing countries, these now have palpable effects in advanced economies as well, disrupting the traditional activities of banks and other payment providers. Smaller fintechs and large techfins are injecting greater innovation, collaboration and competition into the payments arena and broader financial services.
The advent of cryptocurrencies and distributed ledger technologies has spurred a wave of research from governments and central banks. Apart from the roll-out of fast retail payment systems that offer near-instantaneous domestic clearing and settlement, there is broader potential for profound changes in how central banks can promote better speed, security and access to payments. Consideration of CBDC implementation and the notion of digital sovereign fiat that can be transferred quickly and cheaply is sparking further changes that could transform the execution of monetary transactions.
Regulators need to keep pace with these innovations. New, non-traditional payment entities will emerge as systemically important components of the financial system. Proactive central banks and regulators, keen to harness the benefits of payments innovation without undue policy risks, engage more with industry.
As many central bank respondents to OMFIF’s survey indicated, their governance and involvement in hybrid systems for payments and money will encompass not only a role as issuers of sovereign digital fiat, but also as standard-setters to protect consumer needs and innovation enablers for greater payments competition.
Bhavin Patel is Senior Economist and Head of Fintech Research and Brandon Chye is Economist at OMFIF.