Digital banking
currency. All told, over 80 central banks are investigating CBDCs, from mammoths like the US to minnows like the Marshall Islands.
This eagerness is easy to understand. Encouraging
faster, cheaper transactions, CBDCs could yet transform global banking for the better. But amid these upheavals, one group has less cause for joy. Long enjoying a dominant spot in the financial ecosystem, commercial banks risk being usurped by upstart nationalised rivals. In a world where businesses or individuals can get loans directly from their central bank – funded and underwritten by the state – old-school commercial banks risk being battered by the coming revolution.
All the same, there is also evidence that thoughtful commercial institutions are trying to crest the coming wave. Partnering with national banks, organisations from JP Morgan to Credit Suisse are busy experimenting with new services. And even if they aren’t, the arrival of CBDCs could still push commercial banks forward, the new-found competition encouraging them to improve functionality. Not, of course, that people should ignore plain old pounds and pennies. As the global financial system develops over the next decade, traditional forms of currency shouldn’t be forgotten – if only for the dependability they offer regular people.
Digital spheres It’s impossible to underestimate the importance of digital money. In the UK, to take one example, roughly 97% of the cash circulating in the economy is now digital. Unlike coins or notes, that means it can’t be held or counted, or stuffed in wallets. But from debit transactions to mortgage repayments, its influence is colossal. At the same time, the power of digital money is set to increase further. According to a recent study by Access to Cash Review, only 30% of transactions in the UK now use paper notes and coins, a figure that’s expected to drop to just 10% by 2035. That’s of a piece with other European countries. In Sweden, for instance, the whole economy is expected to go cashless over the next couple of years.
Despite their crucial role in fuelling the global economy – not least across borders, already a $37.15tn business – digital banking has long suffered problems. “I’m always concerned when I hear the narrative being put forward by certain industry organisations that digital payments are somehow more efficient, or have benefits for the economy,” says Simon Youel, head of policy and advocacy at Positive Money, a pressure group. “At present, the evidence seems quite clear that, actually, current digital payment systems are much more expensive than cash to operate.” It’s a point echoed by Dr Rashad Cassim, a deputy governor at the South African Reserve Bank (SARB), the country’s take on
Future Banking /
www.nsbanking.com
a central bank. As Cassim notes, digital transaction costs in South Africa can be expensive, especially for merchants who sometimes end up paying 5% of the total transaction in fees.
Up to a point, this is hard to refute. They may grease financial markets, but people have long grumbled about the costs of digital payments. As Cassim implies, credit card payments are one area of frustration. Digital transfers are another. In the US, for example, banks typically charge the sender anything from $25 to $40, while recipients often get hit with costs too. Cross-border payments, with their army of middlemen, can be even more pricey. Of course, all these problems beg an obvious question: who’s to blame? Youel, for his part, targets credit card companies. As the only organisations able to conduct certain payments, he suggests they essentially charge “new forms of economic rent” on hapless consumers. Commercial banks probably deserve criticism here too. Unique in its ability to create digital money – for instance each time a loan is signed – the industry’s stranglehold means customers have traditionally had to lump it or leave it.
“I’m always concerned when I hear the narrative being put forward by certain industry organisations that digital payments are somehow more efficient, or have benefits for the economy. At present, the evidence seems quite clear that, actually, current digital payment systems are much more expensive than cash to operate.”
Simon Youel
It makes sense, in other words, that governments have begun challenging commercial banking’s monopoly – for the sake of their own power if not the public at large. That’s especially true given multinationals have started muscling in on the market too, Facebook is just one of companies trying to develop its own currency. The speed of change, at any rate, is dizzying. As so often these days, China is leading the pack, researching the potential of a digital yuan as long ago as 2014. Seven years later, the so-called e-CNY is slowly taking shape, having been trialled in Shanghai, Chengdu and Beijing. Other CBDCs are even more advanced. In the Caribbean, the Bahaman Sand Dollar is one of the first digital currencies to hold identical status as its physical doppelganger. As the programme’s website explains, it hopes to sharpen ‘the efficiency of the Bahamian payments systems’ – and ‘achieve greater financial inclusion’ across the country’s 700 islands. With aims like that, it’s perhaps unsurprising that Youel argues CBDCs represent “a huge transformation in the financial system”.
90%
Global GDP of 81 countries that are now exploring CBDC.
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