Covid-19 has highlighted payments systems problems – BIS report

The Covid-19 pandemic has highlighted shortcomings in payments systems, and may have strengthened the case for central bank digital currency (CBDC), says a report from the Bank for International Settlements.

The pandemic has “amplified calls” for greater access to digital payments by vulnerable groups, the BIS says in the report, published on June 24. It has also highlighted the need for more “inclusive, lower-cost payment services”.

One possible solution could be central bank digital currencies. The BIS said a CBDC could offer consumers a “safe, trusted and widely accessible” digital means of payment.

“A CBDC could become a complementary means of payment that addresses both specific use cases and market failures as well as a catalyst for continued innovation in payments, finance and commerce at large,” the BIS says.

According to the BIS, a large proportion of consumers still rely on cash when making day-to-day purchases. During the pandemic, however, a large swathe of merchants have refused to accept cash, using the argument that banknotes have increased the spread the virus.

The BIS noted some central banks warned this practice could “place an undue burden” on consumers with limited access to other forms of payment.

“The ability to use contactless payments in physical stores and for online purchases has supported economic activity. Yet digital payments are still not sufficiently convenient or accessible to all,” the report says. “Due to unequal access, low-income and vulnerable groups face difficulties in paying or receiving funds.”

Falling short of expectations

The current payment infrastructure and the quality of payment services “still [fall] short of evolving customer expectations”, it adds.

For those who are unbanked, some government-to-person payments have had to rely on cheques. These “take longer to process and may pose higher risks of fraud than bank transfers”, the BIS says.

Technological innovation has increased access to electronic payment services, but has not made it universal, the report says.

“Lacking a transaction account, 1.7 billion adults globally, and hundreds of millions of firms, are tied to cash as their only means of payment,” the BIS says.

During the pandemic, a large swathe of merchants have refused to accept cash, using the argument that banknotes have increased the spread the virus

Both the retail and wholesale payment sectors remain costly for users, the BIS says. For debit and credit card users, the majority of the cost is absorbed by the merchant. But there are also interchange fees, which are born by the consumer.

Wholesale payments, especially those across borders, are also “slow and opaque”, the report says. Many cross-border payments, especially remittances, are costly and can incur a fee of up to 10% of the value of the transaction.

To combat this, many central banks are in the process of building new retail instant payment systems, but many of these efforts are “not universally available”, the report says.

An opportunity for CBDCs

The BIS believes that CBDCs, if “properly designed”, have the potential to provide consumers with a new payment option. They would “[be] interoperable by default, [foster] competition among private sector intermediaries, and [set] high standards for safety and risk management”.

Central banks could issue two types of CBDC: wholesale or retail.

“A wholesale CBDC can enhance safety and speed and potentially simplify the post-trade clearing and settlement cycle,” the BIS report says, and could also reduce the risk of fraud and cyber attacks.

But the report notes that “research on CBDCs is still in its early stages, and development efforts will take some time”. Central banks must exchange information on CBDCs, it argues, in order to benefit from peer learning and develop common approaches.

But the report says the impact of a retail CBDC could be “more far-reaching”. A retail CBDC could provide users with “direct access to central bank money, and potentially offer a safe, reliable and universally accessible settlement instrument”.

The BIS says the benefits of offering a retail CBDC would need to be weighed against risks. These include bank disintermediation, amplifying bank runs, and making central banks have a “larger footprint” in the financial system.

“If the CBDC design succeeds in taking these various considerations into account, central banks could harness technological progress in the field of digital currencies and offer a stable and trusted digital unit of account, with guaranteed finality of payments,” the BIS says.

“CBDC issuance is not so much a reaction to cryptocurrencies and private-sector ‘stablecoin’ proposals, but rather a focused technological effort by central banks to pursue several public policy objectives at once.”

Nonetheless, private-sector attempts to develop electronic currencies “have propelled payment issues to the top of the policy agenda”, the report says.

“Some of these [attempts] have failed to gain much traction; others are perceived as a threat to jurisdictions’ monetary sovereignty; while many have yet to address a host of regulatory and competition issues.”