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Payments after the COVID crisis emerging issues and
challenges
Speech given by
Christina Segal-Knowles
Executive Director
Financial Market Infrastructure Directorate
Webinar: London School of Economics and Centre for Economic Policy Research
11 June 2020
I would like to thank Natalia Dobrovolschi, Rachel James, Cordelia Kafetz, Hardeep Rai, Josh Sadler,
Jonathan Wakefield, and Ellen Caswell for their assistance with preparing this speech and
Laura Wallis and Stephanie Haffner for their comments and input.
Thanks Erik and thanks very much for inviting me to this webinar.
I'll talk through very briefly how payments were changing well before and the impact we've seen
COVID-19
during the global health crisis. And then I'll begin to cover what central banks can and are doing in
response.
Even before the current crisis, people were changing the way they pay.
the fact that the way we pay has been changing significantly won't be a surprise.
For many if not all of you-
You've experienced this. In London, where I live and work, contactless payments have become ubiquitous -
from small coffee shops, to farmer's
markets, to stalls at sporting and music events, the need to rush to the
you can tap your card, phone or watch. We've become accustomed to online baskets
cash machine is gone -
and clicks; to summoning and paying for services on our phone.
People's behaviour
has changed. About a year and a half ago I stopped carrying a wallet with room for
cash- all I needed on a daily basis was a debit card and my phone. I am not alone. And is this shift is not
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exclusive to London from 2017 to 2019 the number of people using cash just once a month or less in the
UK more than doubled to 7.4 million.1 The result has been a marked increase in digital payments, particularly
card payments, and a steady decline in the use of cash for retail transactions. In mid-2016 cards overtook
payment in the UK. And the trend hasn't looked back.
cash for the first time as the most frequently-used
This doesn't mean that cash is not still important for some. There are important inclusion implications that I
won't do justice to here but -
that deserve a mention while UK Finance estimates that 98 percent of people in
the UK had a debit card in 2019, there are still groups that continue to rely on cash, with this reliance relating
1
See UK Finance Press Release: Cards used for half of payments for first time last year.
https://www.ukfinance.org.uk/press/pressreleases/cards-used-half-payments-first-time-last-year
to factors spanning age, income, disability and geography. The UK government has said that the UK is
committed to ensuring that those who rely on cash will continue to be able to access it, and the Bank of
England supports this important agenda. While this story I'm telling about the move to digital payments has
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been UK-focused the trend is global. Many emerging market and developing countries have also seen a
sharp rise in digital and in particular mobile payments.
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Some types of international payments importantly including remittances remain expensive and
cumbersome.
As domestic payments are evolving, the importance of international payments is rising. Cross-border
e-commerce has risen. And remittances inflows have increased by 64% in the last decade to overtake
foreign direct investment as the largest source of external financing for low and middle income countries.2
But cross-border payments are often more expensive, slower, less transparent and harder to access than
domestic ones. The average cost of remittances, for example, stood at around 7% in 2019, well above the
UN sustainable development goal of 3% by 2030.3 And the same frictions exist in other types of wholesale
and retail cross-border payments.
Work is underway at the international level to tackle these frictions. Enhancing cross-border payments is a
G20 priority for 2020. The international Committee on Payments and Market Infrastructure has a task force
looking at possible solutions. But there is no magic bullet. This will require international coordination on
several fronts: with solution elements ranging from harmonised processes (AML checks), agreed targets,
improvements to existing infrastructures (aligning opening hours) and even new infrastructures (for example
to interlink domestic systems).
2
World Bank Press Release: Predicts Sharpest Decline of Remittances in Recent History
https://www.worldbank.org/en/news/pressrelease/2020/04/22/world-bank-predicts-sharpest-decline-of-remittances-in-recent-history
3
FSB Report on Enhancing Cross-border Payments: https://www.fsb.org/wp-content/uploads/P090420-2.pdf
The COVID-19 crisis has accentuated these trends and brought new challenges.
The COVID-19 crisis has accelerated these trends. Temporary closure of shops and restaurants, or the
desire to socially isolate led people to increasingly turn to online shopping. And many shops are encouraging
forms of payment over the use of cash. In the UK, data from LINK, the UK's largest cash
contactless
machine network, suggests that cash transactions have plummeted. Since the UK lockdown began (24th of
March), ATM cash withdrawals in the UK have dropped by around 60%.4 A recent LINK survey found that
75% of survey respondents are using less cash than before the crisis.5 And online sales have taken off,
jumping to 30% of total retail transactions in the UK in April 2020 from just over 18% a year earlier.6
To make these stats more real, my parents have for the first time in their lives begun shopping for groceries
online. Now, I don't know whether my dad's extreme grumpiness about having someone else pick his
produce means he'll return to shopping it's
in-person once safe for him to do so or whether the convenience
of having someone arrive at his door with his groceries will win him over. In time, we'll see how enduring the
broader shifts are. Indeed, in that same LINK survey, 76% of respondents said that the Coronavirus crisis will
affect their future cash use. Internationally, COVID-19 has also exacerbated challenges in sending
remittances.7 And many countries, advanced and developing, has necessitated sharp increases in
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government to person payments raising new challenges.8
4
LINK: Coronavirus Crisis means cash use down but UK still withdrawing £1billion from ATMs each week:
https://www.link.co.uk/about/news/coronavirus-cash-usage-data/
5
See LINK article above.
6
ONS: Internet Sales as a percentage of total retail sales:
https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j4mc/drsi
7
BBC News: Coronavirus: Migrants struggle to send money home: https://www.bbc.co.uk/news/business-52506797
8
World Bank blogs: Responding to crisis with digital payments for social protection: Short-term measures with long-term benefits:
https://blogs.worldbank.org/voices/responding-crisis-digital-payments-social-protection-short-term-measures-long-term-benefits
The private sector is responding. Central banks and other regulators will need to respond too.
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All this combined with regulatory changes9 has led to an explosion of innovation in payments. Given these
challenges, safe forms of payments innovation are welcome. They could meet unfulfilled customer needs,
widen access to financial services, lower costs, and facilitate better payments integration. Innovation could
also support financial stability by increasing diversity in payment methods. And innovation could potentially
address the longstanding challenges in international payments by making them less costly and cumbersome.
But even though some new technology seems cutting edge, recent innovation has largely been focused on
the 'front' or
consumer-facing end, sitting on top of existing card or bank-to-bank payment systems.
Since the invention of the credit card in the 1950s, almost all payments by households and businesses in
advanced economies have been made through one of four routes: cash, cheque, card or bank-to-bank.
Most new innovation to date hasn't changed that. Even when we tap our phone or watch on an ipad to pay -
we're still generally paying by either card or
bank-to-bank transfer. But fintechs, and in some cases big
firms, are now proposing to change this by using cryptoassets known as 'stablecoins' for
technology
transactions currently processed by retail or wholesale payments systems.
The basic idea of a stablecoin is not dissimilar from a pegged currency. Early forms of cryptoassets such as
Bitcoin have so far proved too volatile for widespread use in payments. 'Stablecoins' aim to address this by
pegging themselves to a fiat currency or basket of fiat currencies. Most propose to maintain reserves or
backing assets to defend this peg. While some stablecoins proposals are designed as investment products,
most seek stability in pursuit of becoming a new way to pay for goods and services or make peer-to-peer
transactions. Many propose to integrate into popular social media or online technology platforms. With this
backdrop and an estimated 3 billion social media users worldwide, it's not hard to imagine that some of these
proposals could quickly reach significant scale.
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including open banking reforms in the EU and the introduction of a payments competition regulator in the UK.
But of course innovation won't be sustained if it's unsafe or detrimental for financial stability. Clear,
transparent regulatory expectations are critical to ensure that uncertain rules of the game don't hold
- I'm going to focus on the
innovation back. This poses several challenges for regulators two that are most
important for financial stability.
We need payments to be secure and reliable.
Problem 1 for central banks is that robust and reliable ways to pay are essential to financial stability.
Well-functioning and resilient payment chains allow payments to be made on time, with confidence, even in
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periods of economic uncertainty. Think receipt of your salary, benefits and pensions, direct debit bill
payments ability to tap and ride the tube home or leave the restaurant after a meal. The reliability and
resilience of payments is so important to our economy that the UK Financial Policy Committee, tasked with
identifying, monitoring and reducing systemic risks, lists avoiding serious interruptions in the provision of
payment and settlement services as one of the very purposes of preserving financial stability.
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If a stablecoin were to significantly replace current systemic payments chains as a way to pay logic follows
that they would pose the same risks to the economy as current payments chains and should be regulated to
the same standards. This is relatively straightforward: regulation should be technology neutral: based on
the activity conducted and the risks posed, not the technology used or the entity's legal form. In other words,
same risks same regulation. In the UK, recognising the importance of payments for financial stability, the
Bank of England supervises systemic payments systems such as Bacs, the Faster Payments Service,
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CHAPS, and Visa. And internationally, there are principles the Principles for Financial Market Infrastructure
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which Benoit helped to create when he was at the helm of the Committee for Payments and Market
Infrastructure - that govern how payments systems should be regulated and the standards they should meet.
These standards form the basis of the BoE's regulation.
While same risk, same regulation may seem obvious, in many countries it will require changes to the
regulatory framework.
Where stablecoins are used in place of money, they need to offer the same protections as money.
Problem 2 is how do you ensure the stability of the "thing" being transferred in the payments chain. Existing
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systemic payment arrangements transfer money that is stable and reliable in bad times and in good. This
generally takes two forms: public central bank money - either reserves held at the central bank or cash; or
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private commercial bank money bank deposits. Prudential regulation, access to central bank liquidity, and
deposit insurance give holders confidence that underpins their willingness to receive commercial bank
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money as payment. This gives payment recipients shops and businesses - confidence that when someone
taps their card or phone to pay, the amount promised will arrive in their account. International standards
explicitly call on payment systems to settle in central bank money when possible and where that's not
possible, to settle in commercial bank money and to strictly limit any credit and liquidity risk of the instrument
being transferred and settled.
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However stablecoin arrangements propose to transfer new instruments that they will create themselves
and to settle most of their transactions across their own books. With the right regulation, stablecoins may be
safe for use in systemic payments chains. But the protections these stablecoins would offer are currently big
question marks. Some major stablecoin proposals offer no legal claim for holders. None. This is significantly
different from how we currently pay: When my parents pay for their groceries using their debit card, the shop
ultimately receives an electronic deposit in the shop's bank from the shop's bank to
account - a promise
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redeem the amount deposited in local currency on demand. When pre-COVID my parents paid in cash,
with a central bank promise to "pay the bearer." Were they to pay in the future with
the shop got banknotes
some proposed stablecoins, the shop would just get a bunch of stablecoins. If the shop can't sell the
stablecoin to get local currency or other goods in an amount equivalent to the price of the grocery order,
tough luck.
Additionally many stablecoins propose backing in instruments that may have market and liquidity risk. While
these risks might be acceptable for speculative investment purposes, payments are different. This is why the
UK Financial Policy Committee has said that where stablecoins are used in systemic payment chains as
money-like instruments, they must meet standards equivalent to commercial bank money in terms of stability
of value, robustness of legal claim and the ability to redeem at par in fiat.
Stablecoins' borderless nature of course also means that international regulators' coordination is necessary
and work is indeed underway. A Financial Stability Board consultation is ongoing with supervisory
recommendations for global stablecoins, aligned with the Bank's view on same risk -
same regulation.
Is there a role for central banks (public money strikes back)?
The changes in how we pay I described at the beginning of this presentation have not just involved a switch
from physical cash to electronic payment. It has also necessarily involved a switch from public, central-bank-
issued money to private money. This is because central bank money is currently only available in physical
banknotes or in reserves, which certain regulated financial institutions hold in accounts at the central bank.
For the public and most businesses, the only current option to hold money backed by the central bank is in
the form of physical banknotes.
I've assumed in the story so far that the cash decline and the rise of online continues the march towards the
dominance of private money in our transactions. But is this right? An alternative would be for central banks
to issue a new electronic form of central bank money that can be used by households and businesses for
payments, also known as a central bank digital currency or CBDC. CBDC presents a number of potential
opportunities. It could help respond to some of the changes and challenges I described in the beginning of
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this presentation including helping to meet the future payments needs of the digital economy, addressing
the consequences of a decline in access to cash, and providing a building block for better cross-border
payments. It also may be a safer alternative to new proposed forms of private electronic money like
stablecoins.
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But a CBDC may also have significant implications for how our financial system works in particular if
households and businesses were to move their deposit balances from commercial banks to CBDC. This
could in turn affect how we implement monetary policy and support financial stability. The Bank has launched
a dialogue on the appropriate design of CBDC and an evaluation of whether the benefits of CBDC outweigh
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the risks. Our deadline for comments is tomorrow so if you would like to contribute it is not too late.
- changes in the way we pay and the challenges we've seen over the
To conclude past several months pose
two important and interrelated questions for central banks and regulators. First, how do we ensure that we
have legislative and supervisory frameworks in place to support development of safe private sector
innovation that could respond to these challenges? Here, it is clear that we need to ensure that new ways to
pay and new forms of electronic money are offer equivalent protections to existing ones. And second, what
I'm looking forward to the
is the right role for central banks in provision of the money we use to transact?
discussion.