Just 15 years ago, we were embroiled in a heated discussion on the dangers of chip and pin, yet stand in the queue of your local supermarket today and you will see people paying using their phones or watches. the acceleration of technology in the financial sector has been extraordinary.
The covid-19 era has shone a light on the adaptability of payments and how people use them. as people were forced to remain at home, many turned to tech to manage their lives. in the first month after the coronavirus outbreak, there were 6m downloads of financial services apps in the uk alone. it began a trend of consumers being pushed out of their comfort zones to embracing new ways of managing their finances.
An ey study in july found 54 per cent of people used a new form of payment during lockdown and 21 per cent of people tried online shopping for the first time. as users become more comfortable with these payment methods, adoption will only grow. as many as 50 per cent surveyed expected to use contactless and smart payment apps as their payment of choice.
So, what is the use case that will drive the future of payments?
In recent years, we have seen consumers increase demand for more user-centric payments where speed and ease of use are paramount. this has triggered an interest in cryptoassets. some suggest this as the next big move in payments. i am hesitant to jump to such a conclusion.
Bitcoin was initially seen as a challenger to the status quo. yet it has never been able to stake a claim to day-to-day transactions because it has lacked one of the fundamental components of money a store of value because its fluctuations made it far too unstable. in a bid to overcome this flaw, stablecoins emerged the most prominent being facebooks digital currency libra. while libra addressed the volatility problem, it rang alarm bells because a private actor was leading the charge against inefficiencies in cross-border payments.
Technological advances and user demand are the catalysts for progress, but adoption hinges on trust both in the provider and in the underlying mechanism. our current payments network is built on trust. but this trust already risks being eroded as too many intermediaries take their cut and money transfers are often too slow.
Libra responds to both technological advancement and user demand with the creation of a global payments network that can deliver on the promise of the internet of money. while some believe it might have cracked trust in the underlying mechanism, has it secured trust in the provider? libra changes the role of government and shifts functions previously provided by the state into corporate hands. in this scenario, governments can no longer provide protection to citizens.
The question is, does consumers desire for a more user-centric payments network override the need for government involvement? i would argue the answer is no. in the uk at least, it is the governments role to protect the interests of its people. therefore, it is unlikely that government will allow itself to be removed from the equation completely even if there were demand for this.
Some argue the regulator should take a light touch approach, giving business license to develop the payments network. i disagree with this approach. we saw where light touch regulation got us with wirecard. in this case, there were a number of subsidiaries across jurisdictions and companies linked into the business. this made the business structure complicated to follow.
The question to answer is, did the supervisors understand what they were looking at? we should learn from this and we cannot afford to have this happen again. we need a more hands-on approach that sees regulators work with private companies in realising the opportunities afforded by technology, while ensuring citizens are protected.
So, what is the one good use case that will transform payments? while it is hard to say at this stage, i think the bank of englands exploration of a central bank digital currency has the right ingredients. the introduction of an electronic currency as a complement to physical bank notes would match technological advances and user demand but would do so as a trusted provider using technology that can be relied upon.
There are still many things to work through such as the mechanics to create standardisation, so this can be adopted on a global scale.
A central bank digital currency offers an opportunity to work with private players to modernise the payments network, embrace innovation and serve the needs of a flourishing digital economy, as well as ensuring citizens never need to worry about the security and reliability of how they pay.
Ron kalifa, previously vice-chairman of worldpay, is a member of the court of the bank of england and is leading the uk governments review of the fintech sector