There are risks but also big potential benefits from digital payments
All payment systems come with trade-offs. In a sense, all that is needed is a spreadsheet recording how much of a given currency any would-be payer has. But to prevent fraud, manage disputes, ensure privacy and offer credit, the costs can add up. One estimate suggests they can amount to over 2% of global GDP. This special report has laid out three broad payment models. In the rich world card networks on top of bank accounts have retained their dominance. Yet even here there are different approaches. Americas uncapped credit-card fees make the system regressive if also more credit-friendly. European regulation of fees and willingness to give fintechs access to payment systems has instead meant more competition and greater consumer choice. In India and Brazil zero or low-fee bank account-to-account transfers have digitised payments systems. This approach could be ideal for low-value payments in poor countries. In time the data they produce could usefully boost credit provision at an early stage of development. Yet as with any state-led system, there is a risk of mismanagement, exemplified by Indias insistence on keeping fees for its UPI payment system at zero. In China the closed duopoly of Alipay and WeChat Pay has persisted despite a state crackdown. Its role in credit provision has lessened as China shores up its banks. But the worst of the crackdown is over. In time Chinas e-CNY may grow into a huge payments system, but only if the government pushes it. Either way, the government has access to data on every digital payment, having forced Ant Group and Tencent to co-operate. That will reinforce its control. No payments system is perfect, and each could learn from others. America should consider the European model of capping credit-card fees or letting debit cards compete on an even footing. Either would make the system more inclusive. India ought to be ready to introduce small fees for digital payments, as Brazil has done. That would improve customer protection and help the system grow. Neither cryptocurrencies nor central-bank digital currencies will revolutionise payments systems. Going cashless also comes with risks. During the pandemic, despite a surge in digital payments, the amount of physical cash in circulation rose, by about 10% in Britain. Part of the reason was a flight to safety. What if banks or critical infrastructure were to go down? Many countries, from Argentina to Belarus to China, range from overbearing to incompetent. In these, it is good that citizens can save and transact beyond the states eye. A more novel risk from digital finance may be financial instability. A recent paper by Luigi Zingales of the University of Chicago and co-authors finds that deposit outflows from digital banks were greater than those from traditional banks in the second quarter of 2022. The number of brokerage accounts, which give consumers another place to park assets, also correlates with greater outflows. As the authors conclude: Regulation that takes as given deposit stickiness may be obsolete. The Silicon Valley Bank collapse is instructive in this regard. It had digitally savvy depositors, comfortable with banking apps. As Jane Fraser, boss of Citigroup, a bank, has said, social media and mobile banking could yet be a game-changer for bank runs. SVB was closed for the weekend of March 11th-12th, giving the authorities time to work out what to do. But a real-time payments system, like UPI, Pix, or Americas FedNow, would make this a lot harder. The risk of deposit flight from banks is one reason why CBDCs have caps on how much a user can hold. Ultimately the new world of digital finance should unleash great potentialThere are answers to such possible threats from digital finance. One is more regulation. Force banks to hold less risky assets and the likelihood of a bank run falls. Another is for regulators to give more firms, including fintechs, access to riskless central-bank reserves for facilitating payments. That could reduce the pressure governments face to backstop banks because customers would have other options for accessing liquidity. Britain already has a version of this, since non-bank payment-service providers can apply to use the Bank of Englands real-time payments system. As with many technologies, digital finance may empower oppressive states and bring stability risks of its own, stressing the need for better governance. But ultimately the new world of digital payments should unleash great potential. It will reduce friction for domestic and cross-border payments. It has brought millions into the formal financial system, giving them access to credit and other financial services. Given the centrality of payments to economic activity, it promises to add value to many economies.