Tread Carefully in the Payments War Zone
Libra is Facebook’s attempt to make payments “as simple as sending a message”, as it said at the launch back in June 2019.
But in an equally pithy critique, Jamie Dimon commented that it was “a neat idea that’ll never happen”. The world of currencies and payments is going through radical change at the moment; it’s really worth looking at why it was a neat idea and why it will probably never happen. The answer lies with the regulators, but not as you may expect.
The big thing with money is that it needs to be trusted. Intrinsically, money does not have value, but the trust and the usefulness of that trust in enabling people to exchange things of value gives money value. Libra’s neat idea is to make this digital currency out of a basket of real currencies. They want people to consider the currency as exchangeable for other trusted assets in the same way as the old gold standard was used 100 years ago to back the dollar or the pound. Link this to a centrally managed block chain with only authorized parties allowed to add transactions to the chain, and you have the convenience of a digital purse but the stability of a real currency. Neat.
The regulators are very concerned though. In September, France and Germany announced they would block Libra. They said, “no private entity can claim monetary power, which is inherent to the sovereignty of nations”. This is slightly ironic but suggests that the lessons of the Euro have been learned. The words were chosen carefully, but blocking is not enough. What other regulators are doing is going beyond this to make their payments systems as simple and convenient to ordinary individuals as any alternative, to then retain their control over the monetary system. Some are even seeking ways to make their currency crypto. Here are three steps they are taking.
- Adoption of Real-Time Payments
- 24/7 Payments Infrastructure
- Unification of Open Banking APIs
The UK was one of the first adopters of what was called 'Fast Payments'. Although there was a means for high value payments to be cleared in the same day with CHAPS, the inherent clearing design was an automation of the three-day process from the days when banks exchanged paper. In 2008, this was changed so that participating banks could make payments by a message and open up the convenience of payment transfers on the same day from electronic and mobile banking systems. It has been on a slow burn around the world. Singapore adopted the practice in 2014. The Clearing House between the US banks introduced it in 2017. Hong Kong in 2018. Payments are now messages sent rather than files transferred.
Following this, countries are radically rethinking their payments and currency infrastructure to a digital world. In the UK, the various payment companies have been brought together to form Pay.UK. Pay.UK has proposed a new payments architecture to advance into continuous settlement and offer greater security, such as confirmation of payee, and richer functionality, such as request to pay. In the USA, the Fed has announced ‘FedNow’ targeting 2023/24 for release, with similar goals to Pay.UK. In China, the battleground has already been seized by the tech giants with WeChat and AliPay, moving the country almost to a cashless society. The regulator would be concerned to lose the control of the currency in these circumstances. So, the People’s Bank of China has declared the intention to create a domestic cryptocurrency. Perhaps in connection to that, China has passed a cryptography law coming into effect on 1st January 2020. Some of the regulators are fighting back and creating the backbone digital 24*7 infrastructures for each of their countries to try to make tech firms less threatening in their currency space.
Against the payments’ infrastructure, there are APIs established that allow payments to be initiated by an application rather than going to a bank. Last year, I wrote about how the Monetary Authority of Singapore was fulfilling the great innovation role of a regulator. It was through their Banking API initiative. Now Singapore, China and the UK are leading the effort to unify relevant Banking APIs under ISO 20022. If that succeeds, then an application that initiates payment in pound sterling can do so in Singapore dollar or Chinese renminbi.
Where is all this heading? Consider buying a newspaper (a quaint old-fashioned artifact that printed news before the Internet). In the day, the purchase was real-time using cash. At least it was between the newsagent and the customer. The newspaper distributor was paid later, as was the newspaper publisher, out of the combined customer sales by the many different newsagents. This created the need for credit arrangements and payment systems for the banks. In the new digital world, both the customer’s purse and the newsagent’s till will be applications. Buying a newspaper is then a payment from one application (the digital purse) to the other (the digital till) through the unified API architecture into the always-on payments infrastructure, but it has the power to be extended that the purchase can immediately also settle the figures owed the distributor and the publisher. It could even mean the return to a wage packet paid into an individual’s purse. This could mean free flowing payments, potentially outside the banks, with a different credit profile. That would require the banks to rethink their role. There may be more than a twinge of hope that this is all a neat idea that’ll never happen. It hasn’t happened yet, but things are changing fast and consequences are hard to predict.
In rediscovering their role as innovators, some of the regulators are trying to outflank initiatives like Libra. But the picture is complex because not all regulators are being as proactive. At times it feels like a Mexican stand-off between the regulators, the banks and the tech giants! The only firm prediction in a war zone is that there will be casualties. Those who invest time understanding the reshaping of currencies, payments and credit in a digital world are the ones best protected.