Payment system innovations are being driven by the growing need for alternative money-management methods, including digital currencies and blockchain, which allow for instantaneous settlement, greater automation, and transparency.
Blockchain can also reduce transaction costs thanks to its programmability and rich data exhaust, which may prove especially appealing for global companies seeking solutions that facilitate cross-currency workflows.
Crypto and Digital Currencies
Cryptocurrencies have gained significant attention among investors worldwide. Their technologies allow money flows to be programmed using smart contracts, payments to be processed among machines automatically without human intervention and cross-border multi-currency payments to become simpler than ever before.
Even with their immense popularity, digital currencies often lack any practical use as payment mechanisms. Their prices fluctuate wildly and have long been associated with speculation; additionally they incur substantial overhead costs from mining new coins.
As the world transitions towards a cashless economy, instant payment methods that work across channels will become more complex and require innovations to increase efficiency, increase security and mitigate risks. Central banks are becoming more interested in CBDCs which serve as advanced representations of central bank money for the digital economy (Graph III 1, left-hand panel). The SBA supports CBDC development that ensures financial stability while encouraging innovation while respecting consumer protection and data governance requirements.
An innovative banking model that decentralizes financial services and empowers consumers is quickly gaining momentum throughout Europe and beyond. This method gives regulated third-party apps direct access to banking data via APIs; providing them a level playing field with mandated data formats and communication protocols (APIs).
Allowing an online budget app access to your account balances and spending patterns allows them to suggest ways to save money or suggest applying for a new credit card. Furthermore, giving these apps access gives gig workers and side hustlers an accurate representation of their income that can help them qualify for loans that would have otherwise been unavailable to them.
Open banking provides nonfinancial businesses with powerful data monetization opportunities and seamless payment integration into customer journeys for e-commerce, marketplaces, and platforms. It simplifies payments and account management while offering more consistent service delivery that drives consumer engagement and retention. However, open banking does carry added risks; PSPs should prepare themselves to manage a potentially higher volume of transactions and implement stringent risk-mitigation standards before undertaking this type of model.
Wholesale Cross-Border Payments
Wholesale cross-border payments facilitate B2B transactions and increase accounts payable efficiency. They use one platform for domestic and international money transfers, eliminating double entry and multiple interfaces while supporting an array of payment methods.
However, their fundamental shortcomings such as batch processing and limited data processing capacity cause settlement delays and trapped liquidity. Furthermore, their requirement to interface with legacy infrastructure creates barriers to automation that prevent new technologies from entering the market.
As globalisation progresses and companies expand beyond national borders, payments must also reach suppliers quickly. Companies increasingly turn to back-end networks that facilitate interoperability between various local payment systems – banks, neobanks, MTOs, wallets and fintech platforms all connect directly to these alternative networks for faster transaction processing times – but even these systems can become vulnerable to the DNA loop that fosters greater access and efficiency while at the same time entrench power through data concentration and market control.
Stablecoins aim to bring traditional money’s credibility and stability into crypto, promising they are backed by fiat currencies or precious metals. Unfortunately, they also present new risks if they fail to deliver as promised or come under regulatory scrutiny.
Stablecoins employ a mix of fiat assets (like bank deposits and US Treasury bills ) and algorithms to regulate supply. These arrangements may have serious ramifications for customers, merchants and the payment system depending on their scale and nature.
Tether and USD Coin have faced liquidity issues as investors attempt to redeem their coins quickly, creating price fluctuations and potentially destabilising the system (Caramichael and Liao 2022). On the other hand, algorithmic stablecoins that control supply through smart contracts may present less systemic risk and are subject to lower capital charges under proposed capital frameworks.