There is justifiable excitement surrounding digital payments, given the potential of the technology to support a wide range of financial services for businesses and consumers alike. But the rise of powerful new platforms and means of exchange raises public policy concerns that cannot be ignored.
Digital payments are attracting growing interest, and eye-popping
numbers abound, as demonstrated by the US payment processor Stripe’s
recent $95 billion valuation. Why all the excitement, and why now?
At one level, the reason is straightforward:
digital payments allow buyers to pay sellers without physical currency
changing hands. Though the technology has been around for a long time,
it is finally becoming much easier to use for small-value retail
payments. Moreover, the pandemic has accelerated the switch to digital
payments, as people have shifted to e-commerce and taken steps to avoid
handling currency in ordinary purchases.Digital payments also generate
real-time data on sellers’ businesses, the timing of cash flows, and
buyers’ purchasing habits, allowing payment providers to offer credit,
savings, wealth management, collections, insurance, and other financial
services. Where credit was once the way to draw in customers and offer a
panoply of financial services, payments may be a safer channel for such
upselling.But a provider who handles only a fraction of a customer’s
payments has only a partial picture of that customer. Payment providers
therefore are eager to control all means of payment: bank accounts,
e-wallets, credit cards, cryptocurrencies, and so on. And e-commerce and
social-media platforms want to go a step further by combining their
powerful data-collection engines with payments.With near-total knowledge
of users’ behavior, a provider can both address customers’ every need
(directly or through partners) and lock them in for the long term,
because the costs of seeking similar services elsewhere will be too
high. This tie-in need not be entirely exploitative: a merchant who uses
a provider for a wide suite of services can be offered more credit,
because she will be less likely to risk losing those services by
defaulting.There is also much excitement about cryptocurrencies, which
are just one form of digital payment, typically requiring an initial
exchange of a fiat currency like the US dollar into a given unit. A
cryptocurrency like Bitcoin offers ostensible benefits as a means of
payment because, unlike fiat currencies, it cannot be inflated away
(because its supply is fixed), and it allows for decentralized payment
verification, eliminating the need for any party to trust the others
involved, let alone trusting government or regulators.
But there are
impediments to Bitcoin’s use. Its value is not managed by a central
bank, so it can fluctuate wildly. Firms, barring those led by true
believers, do not want to keep a currency whose value can fluctuate by
10% every day. And Bitcoin transactions are expensive and inefficient,
owing to the costly decentralized verification process. By some
estimates, the annual electricity use needed to verify Bitcoin
transactions exceeds that of a medium-size country. It is hard to imagine that such an environmentally destructive process will be tolerated indefinitely.
Other
cryptocurrencies have a fixed value, because they are pegged to a
currency like the dollar and fully backed with cash reserves. These
“stablecoins” are easier to use in payments; but like other traditional
means of exchange, they are dependent on (those pesky) regulators. While
some stablecoins have tried different methods of payment verification
than Bitcoin’s, none has emerged as the next “killer app.”Cryptocurrencies
are thus a work in progress. By design, Bitcoin addresses the lack of
trust in fiat currencies, central banks, and governments. But, beyond
the paranoiac, criminal, and terrorist communities, such concerns are
not widely shared. That could change if more people start believing that
central banks are out to debase fiat currencies, or if the world breaks
up into US- and Chinese-led blocs that don’t trust each other’s
currency or settlement systems. Of more immediate use would be a
cryptocurrency that focuses on reducing transaction costs in difficult
payment situations such as small-value or cross-border exchanges. For
example, a voracious but eclectic reader could make micropayments for
every article she reads online without taking on a bunch of costly
subscriptions.
Equally promising are proposals for smart contracts that
would deliver a payment automatically once some verifiable condition has
been met (eliminating the need to trust humans).In any case, the
emergence of a dominant digital-payment provider, cryptocurrency or
otherwise, would raise important public policy concerns, such as whether
it could be trusted to collect and handle customer data responsibly.
Owing to its mixed track record on data and privacy issues, Facebook’s
proposed stablecoin (Libra, which has since been rebranded as Diem) met
with skepticism from financial regulators. For its part, Europe has made
an initial attempt at regulating data use under its General Data
Protection Regulation. But the law will need to be fine-tuned in light
of developments in the digital-payments sphere.A related issue concerns
antitrust. Does a single payment provider that handles all business
services – including e-commerce and logistics – have an excessive amount
of market power? The recent tensions between Chinese regulators and Ant
Group owe something to the fear that e-commerce platforms like Alibaba
(Ant’s parent company) are using their market power – enhanced through
payments – to restrict competition. One remedy here would be to create
public payment bridges, such as India’s Unified Payments Interface,
where the key payment services are open to all comers and not controlled
by any one private entity.
But perhaps the
greatest regulatory concern is systemic risk. When one or two providers
dominate an entire country’s digital retail payments, commerce could be
devastated if anything goes wrong. Advances in cryptography (through
quantum computing) may make it easy to subvert existing schemes of
digital verification. And public bridges, while increasing competition,
may concentrate risk. The only way around this is to have multiple
providers, multiple bridges, and multiple technologies in the payment
arena.
Central banks are now contemplating getting into the
digital-payments game themselves. They fear losing control over payments
as physical cash becomes redundant, that the private sector will get it
wrong, or that other central banks will steal a march on them. Central
bank digital currencies would ensure a public presence in payments; but,
again, this option would concentrate data and risk, while also raising
questions about the viability of private digital payments. But that’s a
subject for another (my next) commentary.
Raghuram G. Rajan, former governor of the Reserve Bank of India, is
Professor of Finance at the University of Chicago Booth School of
Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind.
© Project Syndicate
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