Will Covid-19 accelerate the arrival of digital currencies?

The Covid-19 pandemic took the world by surprise with an unprecedented political and economic shock. As a result, we’ve updated our outlook on digital currency attitudes and trajectories

CBDC – as we knew it

Two months ago, the factors that drove research and development into central bank digital currencies (CBDC) included:

  • Technology considerations: the possibilities unlocked by today’s tech to create e.g. programmable money and decentralised, even offline exchange infrastructures;
  • Efficiency and financial inclusion: the desire to develop payment systems and use them as a development tool for the rest of the economy (less of a driver in developed economies);
  • Geostrategic considerations: the dominance of the dollar in finance and trade, the emergence of China on the world stage and the role of US and Chinese big tech firms;
  • Monetary autonomy: the dystopian idea of a private sector global currency operator sharply reducing national central banks’ monetary degrees of freedom and efficacy;
  • The declining use of physical cash and the urge to develop public sector alternatives to private digital infrastructures;
  • The realisation that any CBDC is potentially highly disruptive and therefore has financial stability implications that need to be managed carefully.

Covid-19 will accelerate, not slow, CBDC developments

We don’t think that Covid-19 alone will be a good enough reason for central banks to suddenly adopt digital currencies. However, the pandemic is likely to accelerate the process.

Here are a few reasons:

  • The declining use of physical cash is likely to accelerate, as contactless payments are encouraged to reduce contagion risk. While this may not win over the staunchest physical cash fans, the forced introduction to contactless payments may convince a silent majority;
  • The role of government is likely to increase, as we discuss here. This may make it easier for central banks to obtain the necessary political mandate to introduce a digital currency;

The pandemic may clear the political way towards introduction of CBDC

  • The financial system will come under increased pressure from Covid-19. The financial stability concerns related to CBDC (mainly substitution from bank deposits into CBDC) will therefore be even more pressing. At the same time, so will be calls to insulate payment systems from pressures in the lending parts of the financial system;
  • The pandemic will reshuffle the cards on the geopolitical stage. Some countries may emerge with less economic damage, giving them a clear opportunity to flex their muscles;
  • This and de-globalisation may intensify attempts to establish “national champions” in digital payments, either private or public.

So what are central banks up to? Will Libra 2.0 host any CBDC?

The global Financial Stability Board launched a consultation on global stablecoins (such as Libra), however, that was already planned. The Dutch central bank stated this week it’s ready to test CBDC in the Netherlands, once CBDC is properly debated at the Eurozone level. Yet this statement too, like other communications about intensifying research and pilots starting, was already in the pipeline before Covid-19. In other words, it’s too soon to see a corona effect.

De-globalisation may intensify attempts to establish “national champions” in digital payments

Last week the Libra association updated their white paper and introduced “single-currency stablecoins” alongside the original multi-currency Libra coin. In this new version, they argue that if central banks were to create a digital dollar, euro or British Pound, the Libra association could host these on the Libra infrastructure.

This offer has put the ball firmly back in the central bankers’ court. It may sound like an offer central banks can’t refuse, but we doubt whether they will take it up. In principle, a central bank may like the idea of having its CBDC hosted on multiple private platforms, in addition to its own public infrastructure. Availability on widely used platforms is in fact necessary for broad CBDC acceptance. So from that perspective, hosting CBDC on the Libra platform may be fine. There are a few problems though.

The dreaded multi-currency original Libra is not off the table yet. Authorities will continue to regard this global stablecoin with suspicion

The biggest one is that, even though Libra added single-currency Libra’s and potentially CBDC to the mix, the dreaded multi-currency original is not off the table yet. Authorities will continue to look at this global stablecoin with suspicion, and will probably demand guarantees in some form that it does not threaten monetary autonomy. We doubt whether Libra is able and willing to give such guarantees. The best one, from the authorities’ perspective, is to have no multi-currency Libra at all. But even in this long-awaited version 2.0, Libra refused to bite that bullet.

Moreover, Libra 2.0, which still has the potential to quickly become a dominant payment platform, will not make the previously mentioned questions on financial stability any easier. The Libra association may feel it has addressed all authorities’ objections to its v1.0 proposal, yet it may face more stiff conversations with central bankers.

A new dynamic?

In the end, whether CBDC arrives or not, was never, and never will be, a purely technological question. It was and will primarily be about political acceptance and alignment with other political strategic goals, both domestic and international.

De-globalisation, bigger role of governments and close cooperation with the financial sector will guide CBDC discussions

In that respect, our initial assessment is that CBDC will be a more likely option post-Covid-19. The bigger role of governments and the close cooperation between them and the financial sector in combating the economic fallout will guide discussions about CBDC in the context of the role the financial sector has in serving society.

That said, CBDC will not be introduced overnight. Right now, authorities and the rest of society are in crisis-fighting mode. However, previous crisis episodes have shown us that the foundations for the post-crisis institutional framework are laid in crisis times. We expect the debate to start soon.

This article first appeared on ING THINK

Facebook’s Libra updates its plans, now back in business?

It’s been a few months since we heard from Libra. As it turns out, the consortium has been working hard on version 2.0 of its white paper. This time, its proposed digital currency has a serious chance of being acceptable to authorities

It turns out that Libra had a lot of homework to do. When the initial white paper was published in June, a storm of criticism followed. Authorities all over the world were afraid a global stablecoin with the userbase of Facebook would create a de facto global private central bank, reducing the monetary autonomy of existing central banks. Concerns were also raised about Libra’s governance and its compliance framework. It quickly became clear that Libra would not fly in its initially proposed form, simply because many authorities would outlaw it.

But the Libra Association paid attention, and their 2.0 plan contains a number of fundamental changes that should to a very large extent address the fundamental concerns raised. To name the most important ones:

  • Libra has introduced “single-currency stablecoins” alongside the “global stablecoin”. In other words: the original Libra will get company from EUR-Libra, USD-Libra etc. These local currency versions blend in much easier in domestic monetary, financial and regulatory framework, and do not pose direct threats to monetary autonomy. That said, a successful Libra network could still influence financial stability. While an important concern, this should not be a complete showstopper. We do see potential issues around the fact that the “global” stablecoin, the original Libra, continues to exist. Authorities will continue to regard this global stablecoin with suspicion, and demand guarantees in some form that it does not threaten monetary autonomy. In what was probably a well-timed coincidence, the Financial Stability Board issued a consultation about global stablecoins earlier this week..
  • Libra is attempting to bring its business participants clearly within existing regulatory parameters. For example, exchanges and wallet providers are to register as Virtual Asset Service Providers (VASPs), meaning they have to comply with global standards to counter money laundering and terrorist financing. This too is important, as it will provide regulators with the tools needed to monitor and enforce compliance.
  • The third important change is that Libra is giving up on a fully decentralised future. Doubts about the feasibility arose immediately on publication of the initial white paper. There was great uncertainty about how a decentralised Libra network would look, and how authorities and supervisors would interact with it. Libra has apparently not been able to provide authorities with a satisfactory sketch of a decentralised network that nonetheless can be supervised and controlled effectively, and has instead opted to let go of the decentralised idea altogether. This is a very important signal with wider implications. Various crypto-projects are still working on fully decentralised approaches. But they now have a hard question to ask: will a decentralised setup ever be acceptable to authorities, or will it cause the coin/asset to languish on the fringes of the financial system forever?

Libra has shown that those who gave up on the project, did so too quickly. Libra 2.0 is very different from the initial version and now has a serious chance of being acceptable to authorities, and actually come into existence. The biggest issue in our view remains that the global currency basket-version of Libra is not off the table enitrely. Moreover, even in its watered down local-currency form, Libra, in combination with Facebook’s vast userbase, would remain a strong disruptive power to existing payment systems and the financial system at large. Let’s see how Libra’s proposals are received this time round.

This article first appeared on ING THINK

The new decade: the way we pay

The way we manage our daily money is changing rapidly, both visibly and behind the scenes. Effects will go beyond the disappearance of plastic cards

Payments: striving for integration, achieving more fragmentation?

Payments are seen as the plumbing of the economy. If that seems dull, rest assured, it isn’t anymore. It combines cutting edge tech developments, geopolitical arm-wrestling, stiff competition and central bank strategic manoeuvring.

Take Facebook’s Libra, a new cryptocurrency which threatens to disrupt the global financial system. After a strong backlash from global politicians and central bankers, it is unclear whether Libra will launch as planned in 2020. But with tech giants pushing deeper into finance, and bigtech already taking over payments in China, the industry looks set to be transformed in ways that have yet to be fully recognised.

The geopolitical importance of payment infrastructure is clear. The central role of the dollar in international finance means the US can wield power over foreign financials – power the US has been increasingly willing to use. It prompted, for example, the European Commission and European Central Bank to advocate more strongly for the development of a European retail payment infrastructure (as opposed to the current system reliant on the US firms Visa, Mastercard and Paypal, with expanding US and Chinese bigtech payment front-ends), and to develop plans to promote the international role of the euro.

Given their potentially far-reaching consequences, digital currencies are rapidly turning into Boardroom material as well.

Libra, and the strategic importance of money and payments, has prompted some major central banks to perform a U-turn on central bank digital currencies (CBDC). Before 2019, CBDC was mostly a debate for monetary seminars, now, it’s a topic of key strategic relevance for central bankers. As the Bank for International Settlements puts it, 20% of the world’s population may be using retail CBDC in the next three years. Both private and central bank digital currencies could have disruptive implications for banks. Bank disintermediation changes the channels of monetary transmission and raises fundamental questions about the operational framework of monetary policy. Mitigation of consequences for the availability of bank lending might involve central banks extending funding to banks, or taking on a greater role in credit provision themselves. Neither of these options look very attractive from a central bank perspective. At an even more fundamental level, the emergence of new digital currencies may fuel the debate about bank money creation, involving a total rethink of the financial plumbing of our economies. Given these potentially far-reaching consequences, digital currencies are rapidly turning into Boardroom material as well.

Last year, an EU directive known as PSD2 entered into force. In the UK, this is known as “Open Banking”. The “APIfication” of payments opens up the system to all kinds of new non-bank players. Paradoxically, individual service providers aim to provide a seamless, integrated service to their clients. The ideal often mentioned is an all-inclusive “super app”, like WeChat or TaoBao, which caters for all the clients’ needs, and makes any other app superfluous. At the same time, research into new currencies, both private and public, and the suspicion about the role of global players could actually result in a more fragmented back-end.

What to expect in the years ahead?

For crypto-assets, the future is with those initiatives that embrace and work with regulation

We remain of the opinion that a niche role is the best that ‘legacy’ crypto-assets can hope for as long as they continue to try and work around regulation. The future is with initiatives that embrace and work with regulation. Moreover, the debate is moving towards digital assets, with the industry making further progress on asset custody solutions, and regulators playing catch-up quickly this year, especially (perhaps surprisingly) in Europe. France strengthened its regulatory framework by issuing the Pacte Act last year. This new legislation brings more clarity on primary digital assets issuance, and allows Digital Asset Service Providers (DASPs) to operate in secondary markets. It also imposes some prudential and anti-money laundering measures. Germany created a new licensing regime for digital asset custody. Europe is now one of the most active regions in developing asset tokens and their legal framework, with Switzerland, Germany and France leading the way. However, to avoid fragmentation across jurisdictions, coordination and standardisation are needed. This would also bolster cross-border activity, which in turn would strengthen Europe’s credentials as a digital market.

2020: digital asset regulation in full swing

ING research
ING Research

Meanwhile, the CBDC debate and research are accelerating. We expect more progress on the wholesale front first, with a key focus on improving efficiency, speed and costs while reducing counterparty risks. At the same time, central banks have stepped up their research on retail CBDC, but given the potentially more disruptive nature, they are likely to be careful and take it slow. In the developed world, the RiksBank is definitely the most “progressive” central bank on CBDC research with its e-krona project, in the face of steeply declining cash use. Before issuing e-krona, however, the central bank needs to make sure that it has a clear mandate from the Swedish parliament, and so far, nothing has been decided. The People’s Bank of China is also doing some serious work, having filed over 80 patents, and we should be ready for some potentially ground-breaking announcements in 2020. The PBoC is looking to preserve and build on the well-developed domestic digital payments infrastructure, while issuing and controlling CBDC centrally.

Wholesale central bank currency may soon hit the wholesale market

2020: the digital currency race gets global

ING research
ING Research

As for Libra, Facebook has suggested it could drop its currency basket approach and instead build separate €-libra, $-libra currency tokens. While many of Libra’s corporate backers have walked away from the project following objections from regulators and central bankers, we still expect them to return with Libra 2.0. If Libra (or another bigtech, for that matter) is able to establish a globe-spanning payments infrastructure, coupled with a unified digital ID scheme, it would be a major threat for banks and existing payment infrastructures in general.

A globe-spanning payments infrastructure with a unified digital ID scheme would be a major threat to existing infrastructures

Could this mark the end of good old notes and coins? Lower acceptance of cash transactions might further marginalise the unbanked and may not be socially desirable. In the United States, for example, the city council of New York joined San Francisco and Philadelphia in forcing retail stores to continue to accept physical cash. Within Europe, usage of and attitudes towards the continued availability of physical cash vary markedly between countries.

Physical cash still dominant?

There were 90 billion non-cash payments in 2018 in the eurozone, or on average 2,854 every second. The latest eurozone survey on cash usage showed that in 2016, there were an estimated 129 billion cash transactions. Since 2016, non-cash payments increased by a cumulative 16%. It seems safe to assume that the number of cash transactions declined over that period, but that cash is still the dominant means of payment in the eurozone. We are probably not far off the turning point, though.

Euro area non cash payment services

ECB, ING Research
ECB, ING Research

The impact goes beyond the disappearance of plastic from your wallet

Policymakers have their work cut out for them in the years ahead: adjust customer due diligence and competition, privacy and digital ID frameworks, managing (geo)politics, and not least minimising the monetary and financial consequences. Central banks understandably want to take the time to think through all these aspects of digital currencies. The question is whether private sector initiatives allow them the time to do so.

This article first appeared on ING THINK

Where a retail digital currency could thrive

Where might a retail-digital currency thrive? We ask as Facebook’s Libra was a wake-up call for central banks and global policymakers, and there’ll be at least one or two contemplating launching such a currency of their own. We’ve examined global indicators to discover what might be coming next, and where.

The concept of retail digital currencies is now being taken far more seriously, not least by us, for numerous reasons. They include financial inclusion and arguments about the public nature of money to efficiency and costs. And in this article we take a global perspective and ask ourselves where in the world could be most receptive to a digital currency infrastructure. We’re only providing broad-brush, tentative answers using the World Bank’s Global Financial Development Database. Crucially, a global perspective based on a limited set of composite indicators merely identifies countries where demand for more, better and cheaper financial services might be highest. That is not sufficient to establish a business case for launching a digital currency.

Financial inclusion 1: broaden access to digital money

Introducing a digital currency, not reliant on existing systems but built as a standalone infrastructure which preferably extends across borders, makes the most sense in countries where access to, and usage of, existing digital means of payment is limited. The world map below shows access to digital money, measured as use of bank accounts, cards, electronic and mobile payments. Access is relatively broad in most developed economies, look at China (thanks to Alipay and WeChat Pay), Kenya (thanks to the mobile payment system M-Pesa) and most of South America. Africa and southern Asia stand out as areas where access to digital money could be broadened.

Chart 1: Access to digital money

Dark green: relatively highest access. Dark red: relatively poorest access. Grouping of countries based on deviation from global mean. Source indicators are access to bank accounts, pervasion of credit and debit cards, adoption of electronic payments, and usage of mobile phones to pay. Source: ING calculations based on World Bank Global Development Database. 

Financial inclusion 2: broaden access to credit

For businesses developing digital currencies, it may be attractive to offer (micro)credit as well. Platform companies have non-financial data on their consumers and suppliers, which they may use to assess creditworthiness fast and accurately. For less developed countries, improving access to credit may accelerate economic development. Most credit opportunities concentrate again on the African continent. In contrast, it is noteworthy that some countries in South-East Asia which score low on access to digital money, do offer relatively broad access to credit.

Chart 2: Access to credit

Credit to private sector as % of GDP. Dark green: relatively highest ratio. Dark red: relatively lowest ratio. Grouping of countries based on deviation from global mean. Source: ING calculations based on World Bank Global Development Database. 

Efficiency and cost reduction

Scope for efficiency gains and business opportunities are bigger when the incumbent banking system is less efficient. The map below – though based on a small set of indicators whose significance should not be overestimated – shows that in most developed economies, the banking sector is relatively efficient. The Middle East and North Africa region also scores well, and thus lends itself less well to digital currency disruption from this perspective. Sub-Saharan Africa and Latin America show the weakest results.

Chart 3: Banking sector efficiency

Dark green: relatively highest efficiency. Dark red: relatively lowest efficiency. Grouping of countries based on deviation from global mean. Source indicators are banking sector cost-to-income ratio, net interest margin, overhead-to-total-asset ratios and the Boone indicator, a measure of competition. Source: ING calculations based on World Bank Global Development Database. 

Facilitating remittances

Sending money home across borders can be an expensive business, and an integrated infrastructure next to the current correspondent banking system could offer a new, cheaper and faster channel. The remittance market is growing at an astonishing rate: if we exclude China, remittances now outpace foreign direct investment (FDI) flows. Moreover, the global average cost of sending payments currently stands around 6.84% of the sum sent. To assess the importance of this to a domestic economy, we look at the inflow of remittances over GDP. The map below highlights in green the countries for which remittances are a relatively important source of income.

Chart 4: Importance of remittance inflows

Dark green: relatively high remittance inflow to GDP ratio. Dark red: relatively low ratio. Grouping of countries based on deviation from global mean. Source: ING calculations based on World Bank Global Development Database. 

So, what next, and where?

What can we conclude from our highly abstract analysis? The general picture that emerges is that there is most scope for improvement across Latin America, sub-Saharan Africa and parts of southern Asia, although for different reasons. In Africa, access to credit is most limited. In South America, efficiency and cost of finance offer opportunities. In southern Asia and Central America, a cross-border digital currency infrastructure might primarily be in demand to facilitate cheaper remittances.

Yet whether the introduction of a digital currency would be a successful or even sensible next step in the countries concerned, cannot be determined just by comparing a few global indicators. Relevant domestic circumstances are, for example, poverty levels, trust in and acceptance of intangible payment instruments among both merchants and the public, the presence and reliability of power and communications networks, and the applicable regulatory framework, to name just a few.

The introduction of a digital currency really requires a country-by-country approach

From a technical perspective, a digital currency infrastructure can only thrive if it is connected to and integrated into domestic and international systems, against manageable operating costs. This requires cross-border coordination and harmonisation by regulators, for instance, to agree on a digital identification method. Technical standardisation is also needed to avoid creating a new infrastructure which may develop into another difficult-to-maintain legacy a few decades down the road.

To conclude, while global analysis yields insights in the possible use cases for digital currencies across regions, the introduction of a digital currency really requires a country-by-country approach, taking into consideration local needs, circumstances and policies. Nonetheless, we note that demand for digital currency is more likely to rise in those places where the financial system is less developed and more fragmented.

This article first appeared on ING THINK

Wat kan de facebookmunt Libra nog redden?

Mark Zuckerberg, de baas van Facebook, moet morgen voor het Amerikaanse congres verschijnen. Daar moet hij zijn digitale munt, de Libra, verdedigen. Sinds de lancering van de munt in juni is er veel kritiek op de plannen van Facebook. Gaat het Zuckerberg lukken om het congres te overtuigen dat de munt kan werken? En ligt er een rol voor Nederland weggelegd in dit verhaal? Wouter van Noort, tech-journalist van NRC en Teunis Brosens, econoom van digitale zaken bij ING, vertellen het in De Nieuws BV.

Kijk (jawel) naar de radio-uitzending:

Of alleen audio:

Game over for Libra? The G7 report lays down the rules

Today’s G7 Report on ‘global stablecoins’ confirms authorities’ concerns with Facebook’s proposed digital currency Libra. We still see a way forward for Libra, but is Facebook willing to take that route?

Libra represents a breakthrough in digital currency thinking

Facebook may have underestimated the pushback it received on Libra, but the proposal has at least one major achievement: it has greatly accelerated the debate on digital currencies and has jolted authorities in thinking about the implications of global currencies for monetary policy and financial stability. This morning, the G7 published a report on ‘global stablecoins’, and while the report covers more than just Libra, it is clear that the workstream would not have existed, had Facebook not launched its proposals earlier this year.

The problems authorities see with global stablecoins are basically twofold: practical, and fundamental

The problems global authorities see with global stablecoins are basically twofold. Firstly, there are practical demands in the area of fighting money laundering, fraud, terrorism finance, but also, for example, with security, data protection and privacy. Any institution dealing with money should comply with such demands. Authorities have made clear that Libra has not yet fully provided satisfactory answers in these areas. But that may change in the future. The fact that a number of experienced payment processors have left the Association is not helping Libra here and could mean a further delay in its timetable. But Facebook has the financial power to buy external expertise where needed and should be able to address practical matters should it wish.

Fundamental issues pose a more existential threat to global stablecoins

Secondly, there are more fundamental issues to address. A stablecoin launched on a global scale, and denominated not in domestic currency but (as in the case of Libra) based on a basket of existing currencies, has profound implications for financial stability and monetary policy. When economies abandon their domestic currencies and move to global stablecoins, the ability of domestic central banks to set monetary policy is greatly reduced.

As we show elsewhere, countries are already faced with an “impossible trinity”, meaning they cannot achieve free cross-border capital mobility, monetary policy autonomy and exchange rate management at the same time; countries have to choose two out of these three. Wide domestic adoption of a global stablecoin reduces this policy menu still further.

With a global stablecoin, there is no-one to call to discuss monetary policy consequences

Capital mobility is enforced by the stablecoin, while monetary autonomy is restrained by the limited use of domestic currency by residents. A country then may be left with the option of trying to manage its exchange rate vis-à-vis the stablecoin, to retain some influence on competitiveness. That is not an attractive prospect for central banks. Even for those countries which are highly dependent on the dollar for trade and external financing, at least with the dollar they can phone the Fed and discuss implications of Fed policy for their economies. With a basket-based stablecoin, there is no-one to call.

Moreover, a global stablecoin held by many agents (say a modest share of Facebook’s 2.4bn users), quickly becomes a systemic institution itself. Even if it does not set monetary policy itself, by its sheer size its buy and sell actions will have profound implications on financial markets. A “bank run” on such a stablecoin could have wide repercussions and might necessitate a bailout should confidence in the payments infrastructure deteriorate. Finally, global stablecoins will bolster the platforms they are traded on, adding to bigtech competition worries.

The problems stablecoins pose, depend on their use case

So it is with good reason that authorities want to think through all the implications of a stablecoin, such as Libra, which has the potential to grow big very fast. G7 Working Group chairman Benoît Coeuré emphasised authorities do not want to ban stablecoins before it’s clear how they would actually operate in reality. But at the same time, such coins should not jeopardise public policy goals, including monetary policy and financial stability.

The G7 poses high demands, but does leave some room for global stablecoins

The G7 report does provide an opening for Libra. It notes that the impact of a stablecoin is bigger when it is used as a store of value. The Libra association has emphasised that Libra is primarily intended for use in remittances, and to provide the unbanked with a digital means of exchange, and that it assumes people will move in and out of Libra quickly. If indeed Libra can credibly guarantee authorities that the coin will only be used as a means of exchange, that might provide a window to move discussions forward. The problem here is, is the Libra association able and willing to provide such guarantees? How will it force people to exchange their Libras for fiat currency? What if the Libra association decides that in a few years’ time, it is useful as a store of value after all?

There might be an easy way out, but Libra appears unwilling to take it, for now

An obvious solution that would take away a lot of objections is to abandon the idea of a global stablecoin, and to instead issue €-Libra, $-Libra, etc. In this way, the locally denominated Libras would easily fit existing e-money regulations, and central banks would retain their current control on local currency. Abandoning the global denomination would also, in our view, not reduce the gains to be reaped from operating a single digital global infrastructure.

Blockchains such as Ethereum show that it is very easy to operate tokens representing different assets and currencies on a single ledger. So far, however, Libra appears unwilling to let go of the idea of a single currency. So long as Libra clings to that idea, we think it will face strong opposition from central banks. We look forward to seeing what Facebook’s CEO. Mark Zuckerberg has to say on this at his Congressional hearing next week.

This article first appeared on ING THINK

OMFIF Podcast: Libra and its potential role in the global monetary system, Part I

Facebook’s plans for a global cryptocurrency have caused a stir among regulators and finance ministries. The company sought to announce Libra before launching it to gather feedback from regulators and central banks on the proposed economic design and regulatory frameworks. However, it has exacerbated speculation on its impact and purpose. Christian Catalini, co-creator of Libra and head economist at Calibra, and Teunis Brosens, lead economist for digital finance and regulation at ING, join OMFIF’s Bhavin Patel to explore Libra’s position in the global monetary system. They discuss how it differs from other currencies and payment systems, how the reserve works, its impact on emerging markets and the risks to monetary sovereignty.

 

Banking disrupted by FinTech and BigTech

Today banks are facing competition from non-bank firms whose core strategy is based on technological innovation – Big Tech and Fin Tech. What is in store for the future of banking?

Watch Nicolas Véron’s introduction of a Geneva Report on the topic, followed by panel discussion featuring Kabbage’s Sam Taussig and myself:

Introducing the 22nd edition of the Geneva Reports on the World Economy, co-author and Bruegel scholar Nicolas Véron lays out the challenges that traditional banks are facing given modern technology. Discussions began with an overview of traditional banks, defined by their government charter. While engaging in many activities, in essence, a bank’s business is to take deposits and make loans. These roles are being challenged and the definition becomes an increasingly blurry line with the emergence of FinTech and Big Tech. The Geneva report therefore explores the question: Does technology challenge big banks?

FinTech companies excel in speed, customisation, and are digitally adept. Bigtech companies including Facebook, Apple, Google, and Amazon in the United States, along with Baidu, Alibaba and Tencent in China, boast an enormous scale of reach, and have both public trust and data. Banks remain the upper hand in customer experience, and their policy base gives them the ability to lobby. Véron encourages everyone interested to read the report in order to better understand the dynamics posed between these groups. He then recognises how early we are in the stage of competition, and that many questions are yet to be answered: How will banks evolve? How will banks embrace FinTech? How will policy respond?

The Geneva report outlines previous banking evolutions and identifies underlying themes. What is new with this challenge is how big Big Tech truly is. Libra gave a wake-up call to policy makers that FinTech will continue to grow, and policy needs to be implemented. Véron again encourages all to read the report to further understand the challenges and implications of banking competition.

Opening up the panel to a discussion, Teunis Brosens, lead economist for digital finance and regulation at ING, remains confident that banks will not go away. He poses the question whether Big Tech firms are willing to become banks or not. Emphasising the regulatory role of traditional banks, Brosens sees the next steps to moving forward as a levelling of the playing field both in local and global spheres specifically in terms of data sharing.

Sam Taussig, head of global policy at Kabbage, an Atlanta based small business credit platform, expands on his view of the future of banking, agreeing that traditional banks are not obsolete. From his perspective, customers will use FinTech’s user friendly interface, who will be backed by the regulatory base of a bank. The main concerns here are of anti-trust and data ownership.

Rebecca Christie, a Bruegel scholar, posed questions of redlining and regulation. She questions how intra-bank competition will affect this evolution, and whether fees will remain a setback for banks. After a discussion led by Christie, the floor was opened up to Q&A where the panel shared their thoughts on shadow banks, the need for specialised licenses, and the role of central banks in creating cryptocurrencies.

Notes by Larissa Nowjack

Meeting notes first appeared on Bruegel