Joachim Nagel: The shape of money - yesterday, today and tomorrow
Opening speech by Dr Joachim Nagel, President of the Deutsche Bundesbank, at
the Payments Symposium, Frankfurt am Main, 26 September 2022.
* * *
1 Introductory remarks
Ladies and gentlemen,
Welcome to this year's Bundesbank Payments Symposium. There are few other
opportunities to exchange thoughts with payment experts like yourselves in such an
intimate setting.
Especially in a market that is as fast-moving as payments, central banks stand to
benefit enormously from what you have to say. After all, you're the ones that customers
come to first to with their wishes.
Regrettably, I am unable to be with you today in person due to other commitments. But
my Executive Board colleague Burkhard Balz and a number of our experts are in
attendance to discuss the latest developments in payments with you - to forge new
contacts and nurture existing networks.
2 Change of shape
Networks are also the topic of my speech today. This may come as a surprise to some
of you here at this event, but I'd like to start by talking about the construction of the rail
network in Germany; and then I'll bring in the development of a digital network,
specifically the internet. In their own way, these two technical revolutions changed the
demands placed on money.
The dawn of the railway age in Germany was in the mid-19th century, some time after
its European neighbours. The first tracks had been laid in Britain in the 1820s, while
Germany's first long-distance line - connecting Leipzig and Dresden - went into
operation in 1839. A little earlier, in 1835, the locomotive "Adler" was already serving
the six-kilometre line between Nuremberg and Fürth. Germany was a patchwork of
many small states back then, but that didn't stop the rail network from quickly growing
to a remarkable size. By the end of the First World War, it spanned around 45,000 km
in length.
Railway construction was pivotal for spreading the Industrial Revolution. Having a
welldeveloped rail network was indispensable for transporting iron and coal quickly and at
low cost. Industrialisation sent goods production and trade soaring to previously
unimaginable levels. That drove up demand for money as well. The monetary system at
that time, though, was still based on coins made of precious metals. The need for cash
rose so sharply, in fact, that the mints in the small states were no longer able to keep
up. There simply wasn't enough gold and silver available.
That is why the small states gradually started issuing paper money. But they weren't the
only ones - over time, banks and even railway companies, including the
LeipzigDresden Railway Company, were also granted the right to issue paper money. Unlike
coins, which had their own intrinsic value because of the precious metals used to mint
them, paper money could be produced in any quantity without any major difficulties or
costs.
Interestingly, paper money was not regarded as cash to begin with. State-issued notes
merely bore a statement that they were accepted at government cash offices in the
same way as cash. The paper money issued by banks - "banknotes", as they were
known - carried an outright "promise to pay on demand". This promise was there to
encourage the general public to have as much confidence in the paper money as they
had in the intrinsically valuable coins.
From then on, it was possible to pay with both metal coins and money made of paper.
Money, then, changed its shape as a result of a technological revolution so as to keep
pace with the needs of the economy and of consumers. Private enterprises were
involved in this process from day one.
3 The market for online payments
Digitalisation and the internet are another technological revolution. The introduction of a
digital network has brought a lot of changes to our day-to-day lives.
Just as the railways transported people beyond the borders of the small states in no
time and enabled them to go about their business in the next-largest city,
people nowadays can do their shopping from the comfort of their own armchair with just
a few clicks on a smartphone. In the vast majority of cases, people pay for their online
transactions digitally as well. Measured in terms of transaction numbers, customers use
[1]
e-payment methods in nearly every second purchase. That's a figure that makes one
thing very clear: people evidently also want to complete their online purchase
immediately and conveniently by paying for it online. And they do so by choosing the
easiest and quickest way to pay.
It would take longer for people to wait until they have received an invoice and then pay
by credit transfer. That is still how just over one in four transactions are settled, but the
[2] [3]
trend is declining sharply. In 2020, that figure stood at 37%.
So here again, a technological revolution has triggered a change in the needs of the
economy and of consumers when it comes to making payments. In a nutshell,
payments in the digital world need digital means of payment. Private enterprises were
quick to spot this pivot in requirements and developed well-functioning payment
solutions. Once again, the market economy has demonstrated how swiftly it can adapt
to new needs and cater for gaps in the market.
However, some developments here are problematic, three of them particularly, in my
view:
first, the lock-in effect;
second, data protection;
third, strategic dependencies.
Bigtech firms recognised the value of data in general and of payment data in particular
early on. Almost all the major providers of technology platforms are based outside
Europe. They are constantly adding new services to their digital ecosystems, which
then make it attractive to use other services within those ecosystems as well.
These include almost seamlessly integrated payment options which make life very easy
for customers. I imagine most of us are happy to complete a purchase along with the
related payment within a matter of seconds.
Things get problematic when users become dependent on one particular provider
because of the services offered within its digital ecosystem. This is a phenomenon
known as the lock-in effect, where the platform and the digital ecosystem become a
gilded cage. There are all kinds of reasons why this dependency can come about, but it
often relates to the costs or other barriers that prevent customers from leaving.
Providers try to make it as unattractive as possible for users to switch to other
platforms. They can minimise the incentives to switch providers if:
they offer a particularly user-friendly service;
they have acclimatised users to a digital environment and these users don't want
the hassle of learning something new;
there are some services they offer exclusively on their platform; or
switching platforms comes at a cost that users aren't willing to bear. That cost
doesn't necessarily need to be a financial one. Just think about how much time
and effort it takes to train an algorithm to learn your taste in music.
This lock-in effect can prove inefficient from an economic perspective if, for instance,
customers pass up on a better offer because switching seems like too much effort. The
upshot is weaker competition.
That is why we, as a central bank, are committed to promoting such concepts as open
standards and harmonised interfaces in the world of payments. This increases
competition, and counteracts lock-in effects.
The second problem has to do with payment data. In digital ecosystems, it's difficult for
users to fathom exactly how their sensitive payment data are processed. Moreover,
there aren't many convenient options for consumers to pay online without disclosing
some of their data at the same time.
And, lastly, there is the issue of strategic dependencies in payments. A single,
crossborder payment solution to facilitate e-commerce or card payments in the euro area that
is based on European infrastructure does not yet exist. And one-sided dependency
always harbours risks, too. This is why the Eurosystem champions the idea of
European solutions for the payments space - both private sector and government
initiatives.
4 A state-issued complement to the existing landscape
A system based on European infrastructure could help Europe to shake off such
dependence. And that's the very reason why I'm an advocate of the Eurosystem taking
a proactive approach in addressing the changing shape of money and pushing forward
with its investigations into central bank digital currency. The introduction of a new form
of government money for the digital world, namely central bank digital currency, would
represent a further step in the development of state-issued money - following in the
path of coins and banknotes. Central bank digital currency and the associated
infrastructure would be an important complement to the existing set of ways to pay.
Yet digital money in itself is nothing new. Digital commercial bank money has been
used to make payments for many years now. It's just that most people don't realise that
they are often utilising private sector money to pay for things as they go about their
daily lives. It is hassle-free to use and they trust in its stability.
This confidence in its stability is partly rooted in the fact that it can be exchanged on a
one-to-one basis for cash. Cash is a form of central bank money and acts as an anchor
securing trust in commercial bank money.
Central bank digital currency could offer a new combination of attributes, and this would
be where its own specific advantage would lie. First, it is central bank money. Central
bank money is default-free, meaning trust in it is especially high. It is controlled by the
central bank and payments are settled using the Eurosystem's infrastructure.
Second, central bank digital currency would be accessible to all sections of the
population, could be used for digital payments and could potentially open the doors to
entirely new forms of use. With this in mind, the Eurosystem is currently looking into the
introduction of central bank digital currency, as part of its digital euro project.
Besides the other benefits offered by digital payments at the point of sale or when
shopping online, customers can rest safe in the knowledge that their data is protected
when paying with the digital euro. This is because the Eurosystem has no commercial
interest in the use of transaction data. The digital euro could be an option for digital
person-to-person payments, too.
In addition, the development of a new infrastructure opens up further opportunities.
Over the past few years, we have seen mounting demand for stablecoins and other
crypto-assets. One reason for this could be that decentralised financial systems offer
additional functions compared with normal bank accounts. Smart contracts are one
such example. These allow payments to be executed automatically as soon as
predefined conditions are met.
When it comes to developing a new payment infrastructure, thought and planning
should go into such opportunities from the outset. We anticipate that any potential new
platform that is developed will serve as a springboard for innovation.
Interoperability for cross-border payments between currency areas should also be a
goal from the very start. In particular, the fact that many central banks around the world
are currently considering the introduction of central bank digital currency opens up the
prospect of tangible progress in this area.
As you can see, the Eurosystem has embarked on quite the undertaking with its digital
euro project and we're investing a huge amount of time and energy into it. At the same
time, however, central banks depend on cooperation with you - the payments experts.
After all, central banks are not the kind of banks that provide accounts for everyone.
According to the current legislation, the Bundesbank wouldn't even be permitted to do
so.
And that is why the Eurosystem is reliant on the tried-and-tested cooperation within the
two-tier banking system. In this system, central banks, commercial banks and payment
service providers each bring their own respective strengths to the table, to the benefit of
all the parties involved. The central bank's role lies purely in providing an efficient,
stable and secure payment infrastructure. Commercial banks and payment service
providers have direct contact with customers - they are the user interface.
I know some voices have expressed fears that the central bank's footprint in the
payments space could grow too large. But these are not fears which I share. And I
would even go so far as to say that, with the proportion of cash transactions declining,
you can - if anything - view it as a step towards maintaining the size of that footprint as
it stands today.
5 Centralised or decentralised settlement?
The introduction of central bank digital currency poses a major challenge from a
technical and economic perspective. The system needs to be capable of processing an
extremely high number of payments per day in a secure and swift manner.
And this is precisely where centralised settlement infrastructures could have an
advantage over decentralised settlement. The scalability trilemma is a term used in
specialist circles to refer to the idea that only two out of three attributes - scalability,
decentralisation and security - can be ensured to a satisfactory degree at the same
time.
Well, nobody has any interest in a system which is insecure. So, if the scalability
trilemma holds true, a decentralised settlement system would leave only the option of
the combination with security. But this would then be at the expense of scalability. [4] If
a payment system is unable to process enough transactions, it could lead to
fragmentation in the payments market.
The dawn of the railway age in Germany also saw a similar problem. Each small state
had issued its own money, meaning many different currencies existed alongside one
another in Germany. While the newly constructed railways allowed people to travel
quickly to a neighbouring small state, if they wanted to buy anything, they had to
change their money every time they crossed the border. Added to this, there were so
many different exchange rates that it was a real hassle to keep track of them all.
And this was how things stayed until currency was centralised. In 1871, a decision of
the German parliament introduced the Mark as the common currency throughout the
entire territory of the Kaiserreich, rendering the need to change money at borders within
Germany obsolete. A milestone in the history of money in Germany.
1. Deutsche Bundesbank (2022). Payment behaviour in Germany in 2021.
2. Deutsche Bundesbank (2022). Payment behaviour in Germany in 2021.
3.
3. Deutsche Bundesbank (2021). Payment behaviour in Germany in 2020 - making
payments in the year of the coronavirus pandemic.
4. Auer, R., C. Monnet und H. S. Shin (2021), Distributed Ledgers and the
Governance of Money. CESifo Working Paper Nr. 9441.