Technology is transforming payments. Digital innovation is disrupting the instruments (eg cash) and institutions (eg banks) that have historically dominated payments. New players are developing innovative payment solutions that compete with traditional means of payment provided by banks. Incumbents are also redesigning payment systems to make them faster, cheaper and easier to use. And consumers have come to expect continuous improvements in the convenience and safety of payment services. This special issue of the BIS Quarterly Review examines the fast-changing world of payments. The five articles explain the strengths and shortcomings of existing payment systems, describe how these systems are changing and assess emerging solutions.
Payment systems are vital to the functioning of the economy. A payment system is a set of instruments, procedures and rules for the transfer of funds between participants. Safe and efficient transfers underpin the purchase and sale of goods, services and financial instruments. Indeed, a pre-condition for engaging in transactions is trust that payments will be executed. Established payment systems have evolved to become safer, faster and cheaper. As Bech and Hancock (2020, in this issue) explain, wholesale payment systems – for large-value transfers, mainly between banks – have experienced successive waves of innovation over the past few decades. Retail payment systems – for low-value but high-volume transfers between consumers and businesses – initially lagged behind but are now changing rapidly. Changes to payment systems require coordination among many participants. Wholesale systems typically have a small number of participants and include the central bank in a leading role, which helps to align incentives to change. As a result, innovations are simpler to develop and implement in wholesale systems. Retail payment systems are becoming increasingly convenient, instantaneous and available 24/7. Nevertheless, payment systems still suffer from shortcomings in two areas: access and cross-border payments. Large numbers of people have limited or no access to a bank or other type of account for making payments, especially in emerging market and developing economies. Obstacles to opening a payment account include high costs and a lack of documentation or trust. Furthermore, crossborder payments remain slow, expensive and cumbersome. As Bech, Faruqui and Shirakami (2020, in this issue) explain, the coordination problem among participants is especially acute for cross-border payments because changes involve multiple systems, currencies, and legal and regulatory regimes. Furthermore, risks associated with money laundering and terrorist financing can be more difficult to manage across borders. A high share of cross-border payments flows through correspondent banks. Correspondent banking is an arrangement whereby one bank holds deposits owned by other banks and provides those banks with payment and other services. The number of correspondent banks fell by about 20% between 2011 and 2018. Rice, von Peter and Boar (2020, in this issue) find that all regions experienced a decline, not only those jurisdictions with a blemished record for corruption or inadequate crossborder information-sharing. The retreat of correspondent banks is a potential concern because it might result in higher costs for cross-border payments, less diversity in available products or services, or even a loss of access to the global banking system, all of which in turn could lead to greater use of informal, unregulated payment networks. Technology is expanding the options for cross-border payments. Fintech and big tech companies are increasingly offering cross-border payment services. Other initiatives aim to improve the infrastructure that links payment service providers in different countries. Bech, Faruqui and Shirakami (2020, in this issue) review initiatives to build payment systems designed to operate across borders, link domestic payment systems or establish procedures for payment service providers to access systems remotely. While there are currently a small number of functioning examples, including in Mexico, South Africa and Switzerland, more such initiatives are being implemented or planned. If successful, these initiatives could help bank-based payment systems remain competitive with alternative arrangements. The most transformative option for improving payments is a peer-to-peer arrangement that links payers and payees directly and minimises the number of intermediaries. Many peer-to-peer arrangements use distributed ledger technology (DLT). Whereas account-based systems record transactions in a central ledger, DLT systems record transactions in multiple places at the same time, resulting in a decentralised, synchronised ledger. Examples that have garnered attention in recent years include Bitcoin and so-called “stablecoin” initiatives like Libra.
Central banks are increasingly exploring the desirability and feasibility of establishing their own peer-to-peer systems through digital currencies. Auer and Böhme (2020, in this issue) identify features that a central bank digital currency (CBDC) needs to become a trusted and widely usable medium for retail payments. These include scalability, accessibility, convenience, resilience and privacy. Various technical designs differ in how well they support these features; the challenge is to design a CBDC that combines the virtues of a direct claim on the central bank with the convenience offered by intermediaries. Auer, Cornelli and Frost (2020, in this issue) find that the results of past CBDC pilot projects are mixed, with some projects determining that the costs exceed the benefits but others advancing towards implementation. Central banks in emerging market economies in particular are moving from conceptual research to practical development (Boar, Holden and Wadsworth (2020)). Peer-to-peer arrangements also have the potential to transform wholesale payments. Bech, Hancock, Rice and Wadsworth (2020, in this issue) analyse how tokenisation – or the digital rendition of assets – could improve the clearing and settlement of securities. They conclude that tokenisation might reduce costs and complexity but does not eliminate the risks associated with one party failing to settle transactions. The success of token-based settlement systems could depend on how well they interact with traditional account-based systems.
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