Perspective on future of digital payments

Monday January 25, 2021
1:10 PM UTC

Session Leads: Paul Makin (@PaulMakin), Sam Kummary (@elnyry-sam-k)

Session Description: A brief perspective on future of digital payments

Session Slides

Session Recording

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Current offerings great simple slide


AuthN and AuthZ are a liability problem that create big interoperability problems.

The bar is set by whoever takes on the risk and so invariably it is high the UX is terrible.

Interoperability is HARD if there is not a standard for how authentication is done. Why trust a tx initiated and authenticated by someone else if you are liable for the loss?

This is what the card networks have got right and managed to do it while only adding a few percent in fees to cover this “insurance”. Are free txs really possible?

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As the resident free payments zealot, I’ll say YES! Interac in Canada is a working example. It costs a financial institution $0.00125 flat fee to clear a payment, regardless of the face amount. That is so close to zero that you can safely round down.

By contrast, the card networks charge for Insurance, they charge for Credit, and they charge for Payments. But their charge for payments is on the order of $0.25 / tx! Credit is charged to the consumer, and Insurance is charged to the Merchant, who inevitably passes this on to customers either directly or by hiding it as increased retail prices.

So how does Interac do this? By being efficient and through mandating participation as part of the payment license.

In a commercial environment, we can get to the same outcome through technical and business efficiency. A “not-for-loss” utility model that recovers the costs to operate the switch need not have ad valorem fees (that is, fees that depend on the principle value). This is possible if the switch does not take any financial risk. And by offsetting the risks to the financial service providers using technology (Interledger Protocol) it becomes possible to pay a fixed cost to join and participate in the scheme, rather than a per-transaction fee. The cost per transaction to participate then drops as transaction volume rises.


I wonder why we assume that there’s no cost to users in the increased regulation which is a necessary component of all of the stuff we’re talking about? The fact that bureaucratic compliance is something we’ve got used to in the middle-class world doesn’t mean that the rest of the world isn’t very clear about what it’s going to cost them…

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Well said. And we do consider that. For example, ISO 20022 compliance is a hidden cost that is “eaten” by the developed world banks but will be a barrier to entry in LMICs, especially for non-bank FIs. And compliance to FATF and other international regulations, not controllable by the sovereign government, will clearly matter as cross-border moves towards “cost recovery” and away from ad valorem for-profit. As David says, common currency unions is a regulatory response to apply economies of scale to reduce the costs of payment within a region. But the costs to establish these unions is immense, though will not likely be charged to end users directly.

Can you think of other compliance cost examples that Mojaloop might help with?

There’s also a cost to individuals. I was thinking of the points that Paul made about the cost of cash. The cost of non-cash might be: I have to pay (all) my taxes. Which, depending on the jurisdiction, might be a significant disincentive for individuals. It may be convenient for governments to get the payment systems to do the heavy lifting to raise compliance levels, but that doesn’t mean that it will switch people away from cash…

Current estimates of the cost of cash to a country’s economy, as a percentage of GDP:

Efficient eg Scandinavian .25%
Medium eg Benelux 0.5%
Uk France 0.75%
Russia 1%

And up from there

great presentation!!

an advantage of crypto currencies is that they are not tied to FIAT currencies. so isn’t this negated when governments are doing their own digital currencies.

But these (apart, possibly, from Russia) are highly digitised economies in which the bureaucracy of regulation is already institutionalised. The cost to an individual or a business of becoming financially visible is therefore factored in - it’s already happened (unless you’re rich, of course…). But there are many other jurisdictions where that is less true, and where the marginal cost of becoming financially visible may be considerable. That’s a cost of non-cash, in my view

The danger of not being tied to a fiat currency is that it stops being a currency, and becomes a speculative asset. See: Bitcoin. Or dies. See: Digicash.

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or becomes an alternate currency not linked to fiat currencies and their weaknesses. i.e. no controls on printing of currency. loss of value etc.

Slides now available. See original post.

Sometimes the stars align - an article from yesterday: Existing digital currencies unlikely to last says BofE governor Bailey

Makes me feel I’m just following corporate thinking. In fact I simply happen to agree this time!