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Innovations in retail payments:past, present and future…Luiz Awazu Pereira da Silva (*) with Takeshi Shirakami (**)Keynote speech at Joint ECB-NBB conference: Crossing the chasm to the retail payments of tomorrow, Tuesday 26 and Wednesday 27 November 2019, Brussels

(*) Deputy General Manager, Bank for International Settlements (BIS). (**) Deputy Head of the Secretariat of the Committee on Payments and Market Infrastructures (CPMI), BIS. We thank Morten Bech for his comments. The views expressed here are our own and not necessarily those of the BIS or the CPMI.

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Outline and main messages… Retail payment systems are subject to constant technological evolution at

the levels of instruments and infrastructure.

Stablecoins (eg Libra) are a wake-up call about two well-known shortcomings of the current payment system: access and financial inclusion and cross-border payments.

Payment systems are networks with externalities and increasing returns to scale, whose benefits are to be shared among a widest possible range of stakeholders; payment ecosystem should remain contestable and open, encourage new entrants and innovations, preventing monopoly rents.

Competition between forms of global stablecoins reveals different ambitions / strategies to resolve these challenges; can cooperation between the private and public sectors find solutions?

The BIS will be an active participant in these efforts via our research, the new Innovation Hub and BIS committees such as the CPMI.

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Digital money

Electronic money

Coins and notes

Primitive money

3

Retail payments: history of technological innovation of instruments transacted

Digital money

2.0?

10,000 BC Time Line…… 2,000

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Retail payments: also a history of constant technological innovation of infrastructure

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Innovations in retail payments: past

5

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Travelling back to medieval Antwerp

Antwerp in 16th century − “the centre of the entire international economy”, Fernand Braudel

Its success was supported by finance: a highly efficient system for exchanging and clearing promissory

notes a legal technique of transferring debt obligations efficiently and

safely a dense network of merchants, making cross-border payments

quite regularly

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Benefiting from information technology

New financial techniques and payment methods in medieval Europe benefited from an information technology innovation

It helped to diffuse: Mathematics for calculating interest rates and exchange rates Double-entry bookkeeping

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A few observations from the history

Innovations have surged constantly to facilitate payments for both instruments and infrastructure

Innovation often takes time to flourish

Institutional arrangements ensure trust and social acceptance

Pre-modern systems settled payments in commercial bank money, not central bank money; and were subject to instability

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Innovations in retail payments: present“3Ps”

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New payment behaviours or preference of consumers1

TotalLarge denomination2

1 2012–18 changes. The start/end of an arrow represents 2012/2018. Data for Argentina and China are not comparable with those for other jurisdictions and are thus not shown. Data are not available for Hong Kong SAR. 2 Banknotes no longer issued are not included in the calculations. For India, 2012–16 change due to demonetisation process. “Cash used for store of value” = the two largest-denomination notes for each jurisdiction. “Cash used for payments” = the rest of the notes and coins in circulation.

Source: CPMI Red Book. Bech, M and C Boar (2019): “Analysis of the 2018 Red Book Statistics”, November.

USGB

CH

SE

JP

EA

CA

AUTR

ZA

SG

SA

RU

MX KRID

IN

BR0

2

4

6

8

10 20 30 40 50

Value of card payments

Cash

use

d fo

r pay

men

ts

US

GB

CH

SE

JP

EA CA

AU

TRZASGSA

RU

MXKR

ID

IN

BR

0

4

8

12

16

10 20 30 40 50

Value of card payments

Cash

use

d fo

r sto

re o

f val

ue

US

GB

CH

SE

JP

EA

CA

AUTR

ZA

SGSA

RU

MX KRID

IN

BR

0

5

10

15

20

10 20 30 40 50

Value of card payments

Cash

in c

ircul

atio

n

Small denomination2

As a percentage of GDP

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New payment behaviours or preference of consumers1

Contactless card payments

1 Data not available for all CPMI countries. 2 The start/end of an arrow represents 2012/2018. The start date is 2013 for ID and 2014 for DE, ES, IT and NL.

Source: CPMI Red Book. Bech, M and C Boar (2019).

Number per inhabitant per year

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New platforms in retail payments

Diffusion of fast payments 1 Use of fast payments

1 The dashed part of the lines corresponds to projected implementation.Sources: Bech, Shimizu and Wong (2017): “The quest for speed in payment”, BIS Quarterly Review, March, pp 57-68; FIS (2018): Flavors of Fast report 2018, September; Bech, M and C Boar (2019); Instapay; national data.

0

35

70

105

140

80 85 90 95 00 05 10 15 20

RTGS systems Fast payment systems

Number of transactions per capita per yearNumber of systems

0

10

20

30

40

0 1 2 3 4 5 6 7 8 9 10 11

ChileDenmarkIndia

NigeriaMalaysiaMexico

SingaporeSwedenUnited Kingdom

Years after implementation

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New players in retail payments

Direct participation in RTGS 1 E-money issuers

1 “Banks” includes central banks. “Non-banks” includes government, postal institutions, payment systems, central counterparties, securities settlement systems and other.

Source: CPMI Red Book. Bech, M and C Boar (2019).

Institutions offering payment services/instruments

0

25

50

75

100

12 13 14 15 16 17 18Banks Non-banks

0

25

50

75

100

12 13 14 15 16 17 180

25

50

75

100

12 13 14 15 16 17 18

% of total institutions % of total number of e-money issuers % of total direct participants

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Techs are increasingly moving into mobile payments

1 Venmo is a mobile payments app owned by PayPal that integrates social media features. It is popular among college students in the US. 2 Calibra is the mobile wallet that will run on top of the Libra network. 3 M-Pesa (M for mobile, pesa is Swahili for money) is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007.

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Big techs in payments could achieve global adoption…

1The numbers do not include Instagram or WhatsApp users unless they would otherwise qualify as such users. 2 2017 data. 3 2016 data. 4

Estimate based on the public data for Mercado Libre. 5 Only mobile payments for consumption data (ie excluding mobile payments for money transfer, credit card payments and mobile finance).

Sources: J Frost, L Gambacorta, Y Huang, H S Shin and P Zbinden, “BigTech and the changing structure of financial intermediation”, BIS Working Papers, no 779, April 2019; World Bank; Forrester Research; GlobalData; iResearch; Mercado Libre; Nikkei; Worldpay; S&P Capital IQ; companies’ reports and announcements; national data; BIS calculations.

…due to big techs’ capacity for data analytics and large network of users

0.0

0.5

1.0

1.5

2.0

12 13 14 15 16 17 18

Bn

Facebook1

WhatsAppMessengerInstagram

Monthly active users

0

15

30

45

60

10 12 14 16 18

USD bn

Advertising Payments

Big tech mobile payment services2

Facebook’s revenue

0

4

8

12

16

0.00

0.15

0.30

0.45

0.60

US3 IN BR4 ID UK CN5

Lhs Rhs% of GDP % of GDP

Yearly volume

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Market capitalisation of major financial groups and big tech firms1

In billions of US dollarsTechnology companies

Financial groups

0

200

400

600

800

1,000

JPM

ICBC

BofA

CCB

WFC

HSB

C

Ant2

0

200

400

600

800

1,000

Mic

roso

ft

Amaz

on

Appl

e

Goog

le

Face

book

Alib

aba

Tenc

ent

Baid

u

eBay

Advanced economiesEmerging market and developing economies

Ant = Ant Financial; BofA = Bank of America; CCB = China Construction Bank; ICBC = Industrial and Commercial Bank of China; JPM = JPMorgan Chase; WF = Wells Fargo.1 Stock market capitalisation. 2 The estimated value of Ant Financial was derived from the amount raised in the company’s recent funding rounds times the stakes sold.Sources: J Frost, L Gambacorta, Y Huang, H S Shin and P Zbinden, “BigTech and the changing structure of financial intermediation”, BIS Working Papers, no 779, April 2019.

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Into the future: Challenges ahead

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Stablecoins – bringing crypto-assets closer to money

Crypto-assets emerged recently but have volatile prices

Stablecoins use a stability mechanism to promote trust in the coin, for example, by anchoring the coin to: fiat currency a reputable institution other safe and liquid assets

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“Stable” coins?

0.0

0.5

1.0

1.5

2.0

Tether DAI Bitcoin1 Ether1

min-max rangemedian75th-25th percentile

Volatility 1

0.90

0.95

1.00

1.05

1.10

Q1 18 Q3 18 Q1 19 Q3 19

USD

TetherUSD CoinTrueUSD

PaxosDAIGemini

Price

1 Data are standardised 7-day rolling averages of historical volatility. Neither Bitcoin nor Ether are ‘stablecoins’; they are included for reference.Sources: coinmarketcap.com; Bullman, D et al, “In search for stability in crypto-assets: are stablecoins the solution?”, Occasional Paper Series No 230, August 2019.

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The Bank of Amsterdam (1609-1819) – an early stablecoin?

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The Bank of Amsterdam balance sheet over time

Assets Liabilities

Frost, J (BIS), H S Shin (BIS) and P Wierts (DNB): “The Bank of Amsterdam and the long-term sustainability of privately issued money“, forthcoming.

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G7 Working Group on Stablecoins: Investigating the impact of global stablecoins, October 2019

Stablecoins introduce a host of potential challenges and risks from a public policy, oversight and regulatory perspective.

+ Challenges if globalTransmission of monetary policyFinancial stability risksFair competition International monetary systemCurrency substitution

Risks regardless of sizeAML/CFT complianceSafety of payments systemCyber securityData privacy/protectionConsumer/investor protection

Market integrityTax compliance

“Absolute prerequisite”Legal certaintySound governance

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A wake up call for innovation in cross-border payments

…at still high average costs1Decline in correspondent banking

75

80

85

90

95

100

12 13 14 15 16 17 18

%

Active corridorsActive correspondents

2

4

6

8

10

11 12 13 14 15 16 17 18

%

BanksTraditional money transfer firmsFinancial technology firms

Remittances volumes are rising

1 Average total cost for sending $200; figure adapted from The Economist (2019).Sources: National Bank of Belgium; SWIFT BI Watch; The Economist (2019); World Bank, Remittance Prices Worldwide;World Bank; BIS calculations.

0

150

300

450

600

91 94 97 00 03 06 09 12 15 18

USD bn

World inflows

“There is a broad perception and anecdotal evidence that, compared with domestic payments, cross-border retail payments remain slow, costly and opaque, with heightened risks to manage.” CPMI, Cross-border retail payments, February 2018

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BIS Innovation Hub

BIS created the BIS Innovation Hub, which will foster innovation and greater collaboration amongst the central banking community globally

An increasing number of central banks are improving their RTGS systems and actively looking into potentials of central bank digital currencies

With the BIS Innovation Hub, the BIS, together with its partners, is taking a leading role in driving central banks’ efforts

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BIS Innovation Hub: Hub Centres

Three Hub Centres established so far: Hong Kong, Singapore and Switzerland

For example, Singapore Hub Centre will look into foundational public digital infrastructures – the “global stack”, which will: bring together people’s accounts in different financial

institutions onto a single platform make financial services more accessible to all enable faster and cheaper payments

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Payment systems as networks (infrastructure + instrument)

Payment systems are networks, and networks exhibit externalitiesand increasing returns to scale

Such network benefits should be shared among a widest possible range of stakeholders

Our payment ecosystem should remain contestable and open, encourage new entrants and innovations, preventing monopoly rents

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To conclude… History of payments… back to the future?

Technological innovation always facilitated payments… from Middle-Age, metal coins, couriers, etc until modern systems with commercial banks handling private accounts, fiat money, RTGS, fast payment

Trust was addressed by institutional arrangements: legal monopoly over issuance of sovereign money, central banks to address the financial instability associated with decentralised private payment arrangements, (relative) secure private/public infrastructures for transactions, physical then virtual…

More technological innovation response to challenges of financial inclusion and cross-border payments: private crypto assets and big tech stablecoins; would they now dominate payments?

Improvements in virtual payments and infrastructure does not necessarily mean that private stablecoins will substitute sovereign fiat money…

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Need for coordination and role of the public sector

Coordination is needed to overcome inertia with sub-optimal incumbent arrangements. But this is not easy especially in a cross-border context with a range of stakeholders

A potential role of the public sector and an effective symbiosis of central bank payment systems and private sector systems The public sector would provide an underlying infrastructure as a

public good; and the private sector would compete and innovate for the benefit of customers

Innovation can also take the form of different types of sovereign fiat money; lots of discussions regarding CBDC

Innovation could help to keep a diversity of choices in payments and also foster greener payment instruments

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Thank you

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Annex

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Security of payments

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Security of payments in the past…

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Evolution of security of payments: the authenticity of what?

Oral instructionsFace to face trust

Written instructionsSignatures

FaxSignatures

Telexbilateral

key exchanges

InternetCrypto-graphy

Metal coins

• Validate the authenticity of coins (metal quality and quantity)

account based

• Validate the identity of account holders

Digital tokens

• Validate the authenticity of tokens