Pacing Payments

This article in Modern Consensus indicates that Fed Chairman Powell dislikes the idea of a central bank digital currency (CBDC) and thinks very highly of our hodgepodge U.S. payments market.

When Powell answered a question about the benefits and drawbacks of a CBDC, he spent four paragraphs listing serious problems, and one sentence about potential benefits. That amounted to conceding that a CBDC might lead to “safer, less expensive, faster, or otherwise more efficient payments.”

However, the reasons to create a CBDC largely apply to poorer, developing countries, he said. They included a slow and unreliable payments infrastructure and a large unbanked population, as well as consumers rapidly abandoning physical cash.

Those aren’t problems in the United States, Powell wrote.

I’ve just returned to the UK after a week in New York where I was able to test the latest thinking and progress on intraday liquidity in the US and Canada.

Here I provide six reflections on how firms are addressing the intraday challenge - keep reading to the end as reflection six explains how the Federal Reserve is increasing the intraday pressure.

1) Intraday liquidity is now too narrow a definition

I talk about intraday liquidity all the time. In fact, I’ve even been accused of proselytising, which I am quite proud of, but I’ve started to realise that the phrase ‘intraday liquidity’ is too narrow in summarising the problems and opportunities in this space. Some people (those I’ve not yet managed to convert) might see ‘intraday’ as something only for risk management to look at ‘after the fact’ ie break down yesterday’s liquidity activity into minute by minute periods, so that peaks and troughs can be identified and reported on. But this is only the first step in the process as it doesn’t put you in control of events as they happen.  

The payments industry is a dynamic and fast-moving environment. While that’s a good thing, it also means there’s a disconnect between the pace at which we develop new technologies and how well we can manage and reconcile them with industry policies and practices.

For institutional forces, keeping a competitive edge in the space demands a broad reach to effectively manage payments in a global marketplace. This is compounded by the pressure created by competition from fintech upstarts that have more latitude to move fast in an increasingly digital environment. This begs the question: How can more established players keep pace?

Under these circumstances, it seems that the card schemes, as well as major banks and other international brands, see acquisition as a reasonable way to grow and reach new consumers.

The expansion of traditionally consumer-focused FinTechs widening their solution scope to include B2B payments tools exemplifies just how massive the opportunity is for service providers to tackle friction.

Around the world, B2B transfers are expected to reach a $218 trillion valuation in the next three years alone. And with the ability for even the smallest of businesses to step into an international market, and to both source and procure from business partners around the world, the expansion of cross-border B2B transaction volume is only slated to accelerate.

The magnitude of the market is attractive even to B2C FinTechs, though the industry has quickly understood that B2B problems cannot be addressed with tools and technologies designed for consumer. And indeed, some businesses in need of cross-border payment solutions have been forced to revert to those B2C solutions, with lackluster results.

SatoshiPay, a FinTech based in London and Berlin, launched in 2014 with the intention of solving micro consumer payments friction. But with recent investment by Blue Star Capital, the company is expanding into the B2B realm to address cross-border corporate payments hurdles.