Payments Are a Big Business

If payments were a country, its GDP would rank 9^th, just behind Italy and ahead of Brazil and Canada. According to McKinsey, global payments revenue reached $2 trillion in 2019. It is more than twice the size of the airline industry. And represents roughly 2.2% of global GDP. It is quite interesting that McKinsey talks about paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More revenue. Most central banks look into the social costs of payments and focus on how to reduce them.

McKinsey reminds us that what are costs for some is revenue for others. Malte Krüger and Franz Seitz undertook a critical review of costs of payments studies in 2014 and found that cost estimates ranged from 0.34% of GDP to 3% (see Table 1 below). McKinsey is in the upper tier of that bracket. Krüger and Seitz also warn against the temptation of performing international comparisons as studies differ significantly in terms of scope and methodology.

Table 1. Developed Economies: Costs of Payment Instruments (as a percentage of GDP), 2000-2011

Source: Krüger, Malte, and Frantz Seitz. “Costs and Benefits of CashMoney in physical form such as banknotes and coins. More and Cashless Payment Instruments in Germany. Module 1, Overview and Initial Estimates, Expertise for the Deutsche Bundesbank.” January 2014.

Clearly, payments are not synonymous with moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More, but arguably they are a core function of money and are the function that receives the most attention.

An increasing number of stakeholders are vying to capture a share of this huge market.

Banks’ Payments Revenue Is Under Pressure

Historically banks have been the main providers of a range of payment services, from cash to credit transfers. However, traditional revenue sources, including interest margins on current accounts, revolving credit lines, interchange fees, and cross-border fees, are under pressure in the current environment. Interest rates are at historically low levels globally. In addition, interchange and cross-border payments are under pressure due to regulation and competition. Consequently, new entrants to the banking market — including challenger banks, non-bank payments institutions, and BigTechs — are challenging the competitiveness of traditional banks.

Fintechs Are Unbundling Payment Portfolios

Fintech has profoundly altered the payments industry. Current players include startups as well as established firms like Paypal, MPesa, and Square. Typically, Fintechs offer unbundled solutions for specialized payment market segments such as online payments, person-to-person, or foreign exchangeThe Eurosystem comprises the European Central Bank and the national central banks of those countries that have adopted the euro. More transactions. Some of the key solutions developed by Fintechs include Mobile Wallets, P2P Mobile Payments, Foreign Exchange and RemittancesMoney sent home from emigrants working abroad. More, Real-Time Payments, Digital CurrencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More Solutions…

Interestingly a small but growing group of Fintechs have also started to look at how they can leverage software and modern communications technology to improve cash services: access to cash, acceptance of cash, and the efficiency of the cash cycle for all stakeholders. This is what we have dubbed CashTech.

Platforms Are Betting on New Revenue Streams

Digital platforms from Alibaba to Uber have started looking into the global payments market for some time. Google launched its digital wallet as early as 2011; Google Pay followed in 2017. Apple Pay has been available for consumers since 2016.

Two key motivations behind BigTech’s expansion into payments consist of further capturing transaction data and locking users into their ecosystem. BigTech companies already exploit troves of data on what consumers like or dislike, where they shop, where they go, etc.… Payments data helps build a yet more accurate user profile than any social media account.

In June 2019, Facebook announced its plan to launch Libra, a virtual currency built on a tailored version of blockchain technology designed to let people shop and make low-fee money transfers globally. The game-changing initiative was not only focused on creating a new payment system: it was about creating a new currency. Facebook was not competing with banks or Fintechs. Instead, it was competing with the Federal Reserve and other central banks. Libra was due to be launched in 2020. Since been renamed Diem, the project has been considerably watered down and lost many of its founding stakeholders but is still not live in June 2021.

Mobile payment giants Alipay and WeChatPay dominate Chinese non-bank mobile payments, a market that generates twice the transaction value as bank cards. In 2020, regulators halted the $37 billion initial public offerings (IPO) of Ant Group, the parent company of Alipay, which would have been the world’s largest-ever IPO.

Cryptos Are Too Big to Ignore

The sheer value of crypto-currencies – Bitcoin’s market cap exceeded the $1 trillion mark in the first quarter of 2020– make them too big to ignore. Central banks and regulators regularly disqualify crypto-currencies as a form of money. Several limitations impede their use in day-to-day transactions: limited adoption, regulatory hurdles, price volatility, energy consumption, privacy concerns… However, BitcoinBitcoin is commonly said to be a cryptocurrency, a digital means of exchange developed by a set of anonymous authors under the pseudonym of Satoshi Nakamoto, which began operating in 2009 as a community project (Wikipedia type), without the relationship or dependency of any government, state, company or body, and whose value (formed by a complicated system of mathematical algorithms and cryptography) is not supported by any central bank or authority. Bitcoins are essentially accounting entries i... More and, to a lesser extent, other crypto-currencies are attracting an increasing number of organisations seeking to benefit from – or fearing to miss out on – the spectacular increase in its value. In October 2020, PayPal added the capability to pay in Bitcoin to its wallets. In February 2021, Tesla announced it had invested $1.5 billion in Bitcoin. In May, the value of Bitcoin tumbled after Tesla CEO Elon Musk revealed he would no longer accept bitcoin for car purchases due to concerns with the use of fossil fuels for bitcoin mining.

Central Banks

Traditionally, central banks are at the core of the monetary system as they are issuers of money and have oversight responsibility for the financial system. However, the advent of giant digital platforms and decentralized virtual currencies has challenged what was considered a monopolistic situation.

In response, central banks around the globe have been warming up to Central Bank Digital Currencies (CBDC). According to the BIS, 86% of the world’s central banks are exploring CBDC. Motivations vary significantly, such as those who worry and prepare for a less-cash future (Sweden) to those who hope to stimulate a less cash-heavy economy (Eastern Caribbean). Nevertheless, what unites them is: firstly, the commitment to provide digital central bank money that emulates but not eliminates the physical central bank money, cash. And secondly, they aim to safeguard individual consumer privacy and protection and efficiency and resilience of national retail payments networks.

And the Winner Is…

 Who will be the new race winners for money, and is cash prepared and equipped to join the race?

It is too early to say as the race has barely started. But we should consider a few lessons from the past.

1. Covid-19 has marked a notable return of more diverse futures thinking. It has highlighted the need to retain agency via identifying multiple plausible futures, recognizing different pathways, and, importantly, imagining desirable societal futures, even amongst acute crises. Let’s not stick to a single narrative.
2. There is no single nature of money. Money has always been diversified in its form: gold and silverWhite, shiny, and soft metal used to mint coins or medals. More; banknotes and coins; central bank and private money…. In the future, we will continue to require a diversified, not singular, monetary system.
3. The discussion should not be limited to technology (its form) but rather to money’s social and economic role (its function). The future monetary landscape needs to reconcile the traditional functions of money with a positive social and environmental impact: inclusion, resilience, and sustainability. Today, only cash ticks these boxes.

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