Tag: Bank of International Settlements

Was 2019 the year central bankers got interested in retail payments?

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Through 2019 the spectre of Facebook’s stablecoin initiative, Libra, has stalked the world’s central bankers. With a potential reach in the billions and the fact that it would bypass existing national currencies, the proposal put the frighteners on England’s old lady and central bankers around the world. But perhaps there is unity in fear, and during 2019 we have seen cooperation between central banks. The central bankers have been clear on Libra: “there is an open mind, but not an open door.” In addition, they have been thinking carefully about the reasons Libra attracted such positive coverage. 

The Bank of England’s future of finance review concluded that despite the ongoing revolution in online commerce, payments are often more expensive than they need be and take too long to clear. This is amplified for cross-border payments which can cost up to 10 times their domestic equivalent. Central bankers in the UK, Eurozone and US are all taking action to address this. The US Federal Reserve has proposed building a real-time payment system, FedNow; and, the ECB has thrown its support into an initiative to enable SEPA Instant payments at point of sale, PEPSI (Pan-European Payment System Initiative). In the UK, the Bank of England has pioneered efforts to enable non-Bank PSPs to access central bank money, and will consult further in 2020. 

Historically central banks don’t tend to worry about the low-value payments made by the person in the street. They care about the high-value wholesale payments. This has changed in 2019, and I do not expect a reversal. As the central banks central banker, the Bank of International Settlements (BIS), concluded recently the development of cryptocurrency, the entry of big tech firms into financial services and the Libra proposal has “propelled money and the payment system to the top of the policy agenda.” And BIS has asserted the central role of central banks in payment systems. To paraphrase Agustin Carstens, BIS’ General Manager, it doesn’t matter how a payment system is organised central banks must provide the foundations of that system. These foundations include the unit of account, settlement finality, liquidity provision and regulatory oversight. 

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Learning from India’s payment revolution

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The search engine Google, in its recent submission to the Federal Reserve’s consultation on the proposal to create a real-time payment system, FedNow, urged the US central bank to learn from India’s payment system. In India, the National Payments Corporation of India, a non-profit partnership between the central bank and commercial lenders, has built the Unified Payments Interface (UPI).

The UPI launched in 2016 and is a real-time interbank payment system that also harnesses the philosophy of open banking. Technology companies can build applications that can transfer funds in and out of payment accounts held at banks. The rate for growth in the use of the UPI has been dramatic. The monthly volume of UPI digital retail transactions has risen seven-fold since the beginning of 2018. In November 2019, there were more than a billion transactions, totalling around $27 billion in value. The UPI has facilitated the large-scale adoption of digital retail payments in India, increasing from 65% in 2013/14 to 95% in 2018/19. 

India has shown that open payments infrastructure can address policy problems like financial inclusion. For instance, India has gone from only 27% of adults holding a Bank account in 2008 to 80% in 2017. It also can enable significant innovation and competition. However, payments infrastructure alone will not solve all these problems. It must go hand-in-hand with trusted digital identity services, appropriate data protection arrangements and robust fraud protections. This together with wider Government initiatives like demonetisation appear to have moved the needle on financial inclusion.

But, before we get too carried away on the growth trajectory of payments in India it is worth bearing in mind that India is starting from a low base. Despite the staggering growth in the use of cashless payments, the average Indian made under 20 cashless payments during 2018.

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