Are we on the verge of a payments revolution?

17 October 2016

Innovations in payments seemingly know no bounds. Instead of having to remember passwords, you can now take a selfie or use a fingerprint to prove your identification with Mastercard. You can use your smartphone to pay for a coffee, or better still, use the cuff of your Lyle & Scott payment jacket. Peer-to-peer payments offered by non-banking companies like Venmo, Facebook and Snapchat mean you and your friends can exchange small amounts quickly and easily from your phones. In future, even your car could be a method of payment – Visa is experimenting with an in-car app which allows you to buy petrol, food and drinks without leaving your vehicle.

Exciting as this is for users, the real value for banks is in back end infrastructure innovation. Payments make up a critical part of a bank’s revenue stream: Global annual revenues from payments are estimated to be $480 billion, and in 2015 in the UK alone the daily average value of payments settled by CHAPS, Bacs, FPS and Visa Europe was £295 billion. With numbers of this scale, any innovation in this area could have a huge impact.

Bring on blockchain

The innovation banks are waiting for could be distributed ledger technology (DLT), also known as blockchain. Blockchain is attractive to banks because it cuts out the need for a third-party intermediary, significantly reducing the amount of time and cost required to process payments. Santander’s Innoventures have predicted that DLT ‘could reduce banks’ infrastructure costs […] by between $15-20 billion per annum by 2022.’

The Bank of England has stressed that it isn’t the digital currencies that are important, but what their underlying infrastructure could allow us to do. In partnership with PwC, the BoE recently created its first distributed ledger proof of concept, in order to investigate the capabilities offered by this exciting technology. Is this all hype or are we at the beginning of a revolution in payments?

DLT takes over the world

While the BoE stopped short of proposing to build its real-time gross settlement (RTGS) on blockchain technology in its recent consultation paper, it did say that the new RTGS must be capable of interfacing with new technologies such as DLT. This won’t only improve payments infrastructure, but also increase its reach.

This debate is just beginning. In a speech earlier this year Ben Broadbent, Deputy Governor for Monetary Policy at the BoE, explored the possibility of using distributed ledgers to allow central banks and governments to expand access to a CBDC and balances held at the central bank to all individuals, potentially opening up new services and products to people who currently don’t have access to them. Central banks in China and Australia are also considering the idea of a digital central bank currency (CBDC) operating on a distributed ledger.

And that’s not all. The Council for Science and Technology recently suggested that ‘distributed ledger might eventually be used for a wide variety of government services’, from the collection of taxes to the delivery of benefits. The government is the biggest single user of payment systems in the UK, so we’ll wait with interest to hear more about these ideas.

What next?

With so much to play for, now is the time for the payments industry to take action. As an industry we’re not short of innovative ideas; the real challenge is whether we can collaborate successfully to make those ideas a collective reality.

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