Digital Payments
Summary of a Special Report by The Economist
The 2023 May 20 edition of The Economist has a very interesting Special Report on Digital Payments, including discussions on India’s #UPI, #CBDCs, #Crypto, and alternatives to the #USD.
This article is a TL;DR generated by ChatGPT.
Digital Payment System
As payments systems go digital, they are changing global finance (economist.com)
💡 Payment systems are undergoing massive change due to digitization, reducing friction in the movement of money and facilitating trade from a distance.
💡 Emerging economies are seeing the biggest drops in cash-based transactions, with digitization being a big part of this shift away from cash.
💡 State-led systems and incumbent banks are adopting new technology, with new state-sponsored payment platforms becoming the dominant forms of non-cash payment in India and Brazil.
💡 China’s closed fintech apps and new settlement system may reduce the region’s dependence on the dollar.
💡 Digital finance has had its share of hype, but modern digital-payment platforms are clearly challenging the old order.
💡 The debate in richer countries over whether crypto or fintech firms will end the reign of banks and card networks has been all but settled.
💡 Emerging markets have developed open payments systems that provide an alternative to both the bank/card model in the rich world and the closed fintech giants of China.
💡 Many governments are taking steps to reduce their dependence on Western payment networks and on the dollar.
💡 Control over payments systems confers massive political power, and many governments are cracking down on crypto, which promised permissionless access to payments.
💡 This report will describe the differing payment models, contrasting the bank/card networks in the rich world with the fast payments systems in emerging markets and the closed fintech ones in China.
The Old Bank Card-Model
The old bank/card model is still entrenched in the rich world (economist.com)
💡 Italy’s prime minister has targeted card fees, calling them a “hidden tax” on small businesses.
💡 Banks and card networks have proved resilient in the face of digital competition, with crypto firms and fintechs accounting for around 9% of the global market capitalisation of large listed and private payment firms in 2019, rising to almost 15% by Q3 2021.
💡 The economics of credit cards help explain the strength of the bank/card model, with retailers passing on some of their card fees to consumers in higher prices.
💡 Differential pricing, regulation, and competition from new networks are three broad ideas for improving the current model.
💡 American regulators want more competition, with some hoping the Federal Reserve’s FedNow will be a game-changer.
💡 A third strategy is to build an alternative payment method for existing repeat customers, rather like the RedCard of Target, a big retailer.
💡 Big tech is getting in on the act, with Apple and Meta potentially turning into global payments giants.
💡 Payment processing has attracted the likes of Checkout.com, Adyen, and Stripe.
💡 The biggest opportunities may be in Asia, where buy-now-pay-later has done better than in the West.
Central-Bank Digital Currencies (CBDCs)
Central-bank digital currencies are talked about more than coming to fruition (economist.com)
💡 The roll-out of central-bank digital currencies (CBDCs) is slower than expected, with some politicians and central bankers questioning their purpose.
💡 CBDCs could make payment systems more competitive, upgrade cross-border payments, and influence standards governing the design of new currencies.
💡 The impact of CBDCs will depend on their design, with most launched CBDCs intermediated by commercial banks and working with private wallet-providers.
💡 The sand dollar, e-CNY, and e-naira have seen little uptake despite high-profile launches, with some Chinese users preferring Alipay and WeChat Pay.
💡 Some governments are encouraging CBDCs through incentives, such as Nigeria offering 5% discounts to those who use the e-naira to pay for rickshaws.
💡 CBDCs could offer programmable money and fine-grained control over the economy, but these are still experimental.
Risks vs. Benefits
There are risks but also big potential benefits from digital payments (economist.com)
💡 Digital finance has great potential but also introduces novel risks.
💡 Payment systems come with trade-offs, with costs that can amount to over 2% of global GDP.
💡 Different payment models exist, with card networks dominating in the rich world, low-fee bank account-to-account transfers in India and Brazil, and a closed duopoly of Alipay and WeChat Pay in China.
💡 No payments system is perfect, and each could learn from others.
💡 Going cashless comes with risks, including financial instability and the risk of bank runs.
💡 Regulation and giving more firms access to riskless central-bank reserves for facilitating payments could reduce risks.
💡 Digital finance has the potential to reduce friction for payments, bring millions into the formal financial system, and add value to many economies.
India’s Unified Payments Interface (UPI)
A digital payments revolution in India (economist.com)
💡 The Unified Payments Interface (UPI) in India is a fast-growing payments network that allows free and fast account-to-account transfers using fintech apps such as PhonePe or Google Pay. It processed over $1tn in transactions in 2022, equivalent to a third of India’s GDP.
💡 Brazil’s Pix, which facilitates bank-to-bank payments with a small fee, was launched in November 2020 and now accounts for some 30% of Brazil’s electronic payments.
💡 Digital payments generate real-time data on sellers’ businesses and buyers’ purchasing habits, allowing lenders or insurers to reach customers who may have neither the financial history nor enough assets to participate in traditional finance.
💡 M-PESA, a mobile-money service launched in Kenya in 2007, is now used by over 90% of Kenyan households and has reduced extreme poverty in Kenya by at least 2%.
💡 Alipay and WeChat Pay dominate China, giving them huge market power.
💡 Open payments systems may not produce another giant with the clout of Ant in China.
💡 State support has been critical to the success of open platforms.
💡 Boosters of India’s system like noting that UPI promotes competition among fintechs and banks.
💡 Customer protection has suffered with UPI, with 18% of users having some grievance with the system, such as fraud or a mistaken payment.
💡 UPI is a clear improvement on cash, but even those who champion it see a need for multiple payment options.
Crypto
The promise of crypto has not lived up to its initial excitement (economist.com)
💡 Crypto has gone through a spectacular decline, with public trust hitting rock bottom after a string of high-profile swindles and crashes.
💡 Attitudes to crypto have polarised, with some believing its promise of revolutionising finance has been shattered.
💡 The strongest arguments for using crypto have always been where the alternatives are worse, such as in countries with high inflation or currency depreciation.
💡 Crypto transactions promised more efficiency and the avoidance of irksome control by governments, but neither benefit has really come about.
💡 Crypto advocates now claim to want regulation to reduce uncertainty and regain consumer trust, but regulators often go further than expected.
💡 There are places where crypto may still be useful, such as in cross-border payments and as a hedge in countries with currency depreciation or severe inflation.
💡 Ripple’s network allows cryptocurrencies to intermediate trades between traditional currencies, reducing costs.
💡 Crypto will not remake the global financial system because it has proved neither efficient nor immune to regulation.
💡 A stronger candidate for digital change may be central banks.
💡 The question remains whether crypto offers anything uniquely valuable if it faces the same regulation as fintech firms.
An Alternative to the Dollar
Could digital-payments systems help unseat the dollar? (economist.com)
💡 Russia built a central-bank owned card network called Mir to reduce dependence on Western card networks and the SWIFT messaging system for international payments.
💡 China’s cross-border interbank payment system (CIPS) offers an alternative to the Western system in the event of sanctions and has expanded to 1,430 participants by early this year.
💡 The yuan’s share of trade finance has more than doubled from 2% to 4.5% since February 2022.
💡 Central-bank digital currencies could pose a bigger threat by creating a common standard for cross-border payments.
💡 New cross-border payment systems will surely cut the cost of trading outside the dollar and SWIFT.
💡 The yuan cannot grow further unless China opens up its capital account.
💡 Instant-settlement technology can make mistakes in transfers more likely.
💡 A currency’s dominance historically begins with trade invoicing.
💡 Neither the yuan nor any other currency is anywhere near being a serious challenger to the dollar.
💡 If digital finance makes it less costly to avoid the greenback, that could cause some concern in America.
