There has rarely been such a dynamic and innovative time for the payments industry. The advent of novel technologies has galvanised efforts to improve the speed and security of payments, as well as to bring down costs and broaden access to financial services.
Progress in domestic payments has been rapid, with cheap and quick digital payments solutions already widely available, including in emerging markets where mobile payments solutions have gained impressive traction. Progress in cross-border payments has been less impressive, however, and persistent problems weigh heavier for those in emerging markets, with higher costs disproportionately falling on those least able to bear them.
The problems of connecting different domestic payments environments, many of which have widely varying architecture, are incredibly complex and there is a variety of solutions being explored. The Committee on Payments and Market Infrastructures has done an excellent job in defining the problems and laying out responses.
Traditional players are making important improvements to their services, improving speed and security with new frameworks, but there are still major obstacles that are yet to be surmounted including data localisation.
Outside of the traditional payments space, the DMI’s ‘Future of payments 2022’ report examines the efforts of innovators to develop a new payments infrastructure that can sidestep some of the challenges facing the established cross-border payments industry. This is unlikely to be a ‘winner-takes-all’ kind of fight. The variety of payments systems will grow, creating competition and diversity in the marketplace.
As part of the ‘Future of payments 2022’ report, we introduce our first survey on central bank attitudes and intentions regarding central bank digital currency. Our survey shows that improving cross-border payments is not the primary goal central banks are pursuing with their development of CBDCs. Nevertheless, many survey respondents said that they saw promise in the interlinking of domestic CBDCs as a means of improving cross-border payments.
We examine what promise CBDCs hold for emerging markets, where development is taking place most rapidly, as well as looking at the value cryptocurrencies and stablecoins offer to jurisdictions with unstable and unreliable currencies. While they offer valuable havens from inflation and, in some cases, cheap remittance channels, the absence of robust know-your-customer procedures and tools to prevent financial crime could limit their potential.
As these systems become more important, the technological expertise central banks require is growing. Our survey shows that cybersecurity is the top concern for central banks examining the possibility of issuing digital currency. We explore the threats they face and the policies they can employ, particularly in emerging markets, to mitigate them.
Finally, we examine the development of the metaverse and discuss what payments solutions might be needed to serve the emerging use cases that a new digital environment will necessitate.
It is possible that by developing the infrastructure to support payments in globally accessible digital environments, we might end up with a solution that can help solve some of the problems in cross-border payments.
The payments industry is undergoing seismic changes. Both the established players and new entrants have work to do before they are able to address the challenges of cross-border payments, but the systems we use to send value to counterparties in other countries will change substantially over the next few years.
Katie-Ann Wilson is Managing Director of the Digital Monetary Institute.