Member of the Board Tuomas Välimäki
Economics of Payments X Conference 20-22 October 2021
Online, 22 October 2021
Closing remarks at the Economics of Payments X Conference
Now, it’s time for me to close the tenth Economics of Payments conference.
We’ve experienced three intensive afternoons, mornings or evenings depending on your location, with 23 papers or keynotes. We had 183 registered participants to the conference coming from 35 different countries from all continents – this is indeed a global conference on themes that are relevant to everyone, no matter whether you are from: the financial sector or authorities, a merchant or a consumer that needs to choose the most suitable payment method for your needs.
We started the conference with the opening speech by Governor Rehn. He discussed the vision of developing electronic payments from the central bank’s perspective.
Namely, he highlighted four cornerstones:
- First, the infrastructure for payments must be open and cost efficient in order to make the payments market contestable.
- Second, payment services must be developed considering the needs of all user groups. With the diminishing role of cash, we need to be sure that everyone stays on board with the developments.
- Third, in digital world increasing attention to safety, reliability and the prevention of misuse must be one of our basic principles.
- And fourth, transparency and usability of the information related to payments are important aspects to which we need to pay enough attention.
Subsequently, some common themes arose in many of the papers presented:
Cash is not disappearing, but its use as a payment method is diminishing as a trend, which has accelerated further with the pandemic. Only two outliers were shown to deviate from the common pattern. Namely, in Sweden not only the transactional use of cash is diminishing but also the volume of cash in circulation has reduced over time. On the contrary, the market share of cash as a payment instrument has still been growing in Turkey.
We learned that especially in times of severe crises, and irrespective of their origin, an additional stimulus to cash arises. The motives behind this are likely shifting from transactions towards hoarding. This is something we also need to think when designing the central bank digital currencies.
It is intuitive that the use of cash as the medium of exchange fades when the world becomes more and more digital. Yet, the authorities probably need to pay attention to ensure that the variety in payments options stays wide enough. We heard how significant amounts of consumer surplus may be lost, and supply could become more limited if the payment methods are limited like the empirics from Uber rides in Mexico illustrate.
Yet, one should pay attention to potential adverse distributional impact different payment methods may have if their costs are not covered directly but are mostly reflected in the prices of goods and services. These transfers may relate to non-banked population, as well as to the consumer and merchant acceptance of different payment methods. Regulating the interchange fees the card schemes are allowed to charge could be a way to increase the share of electronic payments. The EU regulation on interchange fees has been shown to significantly contribute to the adoption of electronic payments in EU countries.
Sometimes you don’t need regulatory interventions or waiting for long term trends to materialize to experience rapid changes in the payment landscape. COVID-19 has been a shock that has altered the scene very quickly. For example, onboarding of new users for electronic payments increased significantly in India as a reaction to the Pandemic. Similarly, European consumer preference at the Point of Sale were shown to have changed considerably during the pandemic. Going cashless is accelerating, and it seems that the phenomenon is likely to prevail once we are out of the health crisis.
The possibility of making contactless payments was shown to have accelerated the shift towards using debit cards on small payments. It is likely that the pandemic has increased the preferences for contactless payments both by contactless cards as well as with mobile devices.
We also saw an interesting illustration based on granular data on the creation of payment networks. Increasing usage brings out more complex patterns from which we may learn on the adoption of the systems.
On the second day, the emphasis was more on liquidity needs and Fintechs.
We were presented a pioneering study with a broad cross border comparison and analysis of the determinants and drivers of the liquidity usage in large value payment systems. The analysis is indeed something for us, the central bankers, to go through thoroughly and to digest when we are contemplating the design of our RTGS systems.
On the liquidity needs for transition to Instant payments, we learned that more liquidity is needed. However, the increase is eventually likely to be modest, and given the excess liquidity currently prevailing in the systems, this may be an opportune moment to revamp the retail systems.
We tend to say that payment system is a critical requirement for a modern economy. Yesterday we were provided with a theoretic setup and empirical data from the Russian crisis in 2004 to understand the real economy impact of a payment system panic.
We were also presented with a proposal for a framework to assess Central counterparties resiliency based on public disclosure data.
Machine learning and AI are entering also to the payment systems. We saw an intraday liquidity management game setup with a machine learning twist. In a strategic game setup, reinforcement learning was successfully used for the bank’s decision on the amount of liquidity posted.
As another topical issue, crypto currencies, entered the Economics of Payments conference. We learned about the analyses on the crypto investors, their motives and their interaction with mainstream finance. It seems that crypto's are not seen as an alternative to fiat currencies but instead they are a niche digital speculative object. Conclusions suggest how cryptos should be regulated. We were also presented with a framework that can facilitate evaluating what kinds of regulations might be needed with stable coins.
Today, we finally turned to the central bank digital currencies. The keynote presentation explained us how retail CBDCs may come with wide-ranging consequences. The shifts in the balance sheet positions of Central Banks on one hand and the banking sector and real economy on the other hand may result in politization of central banking. This is something which needs to be taken into account, and can be addressed while designing the new form of central bank money.
In the more technical sessions, we first were introduced to a demand side study on the declining use of cash, with a comparison to the developments of the competitors for a potential retail CBDC.
Then, based on a structural model of demand for payment instruments together with survey-based estimates for the consumer preferences, we were shown how the introduction of a retail CBDC could improve consumer welfare, and that for crowding out the old methods, the CBDC would need to be significantly better than the old means. Achieving the merchant acceptance is certainly crucial for the entry of a new method into the network business.
We were also shown how one could add safety to a CBDC if an expiry date was introduced to an off-line version of it.
Finally, the last paper studied the competition between banks (lenders) and nonbanks in a situation where the latter issue digital currencies.
It’s excellent that the CBDCs have been given a prominent role in conferences like this. We need a lot of new analysis before we dare to introduce a new type of a central bank money. Simply, we, the central banks, cannot operate like start-ups and innovate with the legal tender. When we are about to introduce a new format for money, we need to be certain that it is safe to use, it fulfils its objectives and does not come with significant adverse effects.
Furthermore, we probably need to start exercising expectation management and to de-mystify the whole concept. CBDC will not and cannot be a panacea to everything. Currently, there are plenty of different aspects people want to have from it, and some of them are obviously contradictory – like creation of an anonymous payment method by which we should simultaneously prevent money laundering.
If and when CBDC comes, it will bring about an easily accessible, credit risk free payment method that offers high level of privacy. We can and will design it so that it will not harm monetary policy transmission nor will it materially reduce financial stability – otherwise we would not introduce one.
Finally, let me conclude. The studies presented in this conference can provide valuable insight for development of payment systems and for the future policy work.
And the work needs to continue. Even if we are exhausted after three days of intense presentations, it is good to be reminded that the next Economics of Payments conference is already approaching. We’ll be returning to the original rhythm of having conferences on even years. So, the Eleventh Economics of Payments conference will be organized in 2022, and it will be hosted by the Bank of Canada. I want to extend my gratitude to them for contributing remarkably already in the agenda of this conference.
So, on my behalf, thank you all for your participation.