Many central banks want to introduce central bank digital currencies to shake up the payments industry, disrupting the established order and allowing new entrants to compete for payments business. Some in the banking community will lobby against CBDCs in an effort to protect their interests, but policy-makers would do well to press on.
Of course, central banks appreciate the importance of the banking sector to the economy and do not intend to entirely undermine its business model. They are prepared to take a collegiate approach. In OMFIF’s 2023 Future of payments survey, 82% of respondents said they intend to work with commercial banks and payment service providers on digital currencies.
But central banks seem increasingly of the opinion that disruption and competition in payments would be a healthy development. Introducing a platform for new players to participate should improve competition, driving innovation and providing consumers with more choices at lower prices. That’s worth doing, even if banks complain.
Lessons from Kenya’s m-pesa
The Central Bank of Kenya’s m-pesa stands out as a success story in mobile payments. It is an SMS-based mobile money service that enables users to deposit, withdraw and send money. Since its launch in 2007, financial inclusion in Kenya increased to 84% in 2021 from only 26% in 2006 comprising 25m mobile money users. No user is more than 3km from an m-pesa money agent, making it very accessible.
Its success can partly be attributed to the collaboration between service providers and the central bank throughout the process, determining usage charges at the start, then continuing to iterate with new legislation designed to mitigate risks without harming functionality. This adaptability has allowed the m-pesa to keep up with the needs of consumers over its 17-year lifespan.
Competition has been an integral part of the m-pesa’s history. Giving telecommunications providers the opportunity to compete with commercial banks in offering similar products ensured rapid development. Integration with the telecoms custom of trading pre-paid mobile phone airtime was part of the proposition right from the start. The m-pesa’s functionality has gradually expanded to include traditional banking services, such as providing payments and invoicing services for business, offering microcredit and expanding into remittance services.
The telecoms company’s involvement has meant healthy competition – as the m-pesa grew, more commercial banks negotiated with Safaricom to link their services to the CBDC by offering savings accounts with attractive interest rates on deposits. In turn, other telecoms companies began setting up their own versions of the m-pesa.
Competition is key to success
Brazil’s PIX is another example of a new payments system where competition was key to its success. By connecting nearly 800 banks and financial service providers, PIX helped to level the playing field, boosting the customer base of local banks. This led to stronger competition in the payments sector, and helped to create a system that has exceeded usage expectations and increased financial inclusion in the country.
In India, the Unified Payments Interface is a real-time payment system and interbank electronic fund transfer system regulated by the Reserve Bank of India. Like PIX, the UPI created a level playing field, expanding the universe of companies offering payments and financial services. This has reshaped the payments landscape in India, with at least 300m active monthly users, spurring on financial inclusion thanks to its accessibility, interoperability and security.
The banking sectors in all these countries have not just survived this additional competition but thrived on it. The innovation that resulted from this competition has grown the banking sectors’ customer base in a way that would otherwise have taken much longer to achieve. The competition among telecoms companies and commercial banks in Kenya led to a 71% increase in bank deposit accounts from 2015 to 2019, leading to better financial performances for commercial banks. There were improvements to financial inclusion in Brazil, too, where access to a formal financial account rose to 84% in 2021 from 70% in 2017.
The success of the m-pesa, PIX and UPI underscore the case against commercial banks’ reluctance to new payments systems: collaborating with the ecosystem, innovating and adapting to the implementation of the new payment system is not something to shy away from.
As Sheila M’Mbijjewe, former deputy governor at the Central Bank of Kenya, stated at an OMFIF roundtable: ‘Being scared of having your business model interrupted is not the way to go, we have to keep developing. If we had kept everything within the existing banking structure, banks might have hesitated to innovate, and might have kept prices high. You’ll have to be ready for change, and you cannot remain stuck.’
Katerina Liu is Research Analyst, Digital Monetary Institute, OMFIF.
