The Future of Payments:  From Bartering to Cryptocurrencies and Instant Payments

By Juan Rio Salvador

We have changed our shopping and work habits during the Covid-19 pandemic.  In most countries people have been working virtually with limited contact with brick-and-mortar businesses. The remote/hybrid model pushed us to buy more online and increased the use of non-cash payments.

I believe that we are gradually moving towards a cashless society. It is good to have money of any kind but it is also important to increase payments efficiency to save us time. As Jim Rohn said, “Time is more valuable than money. You can get more money, but you cannot get more time.”

As consumers and business owners we are now looking for 24/7 availability of money transfers to support our changing needs and improve business cash-flow management. Instant payments and blockchain based crypto currency payments are part of the innovative and agile businesses strategies of the new virtual world. They could also reduce the time consuming and costly need for financing.

One thing is clear, governments and regulators are prioritising money oversight and anti-money laundering with new regulation such as the Sixth Anti-Money Laundering Directive (6AMLD). They are increasing transparency, digitalising requirements on Customer Due Diligence (CDD) measures and adding new guidance on Ultimate Beneficial Owners (UBO). The 6AMLD will be applicable to cryptocurrency exchanges, custodians and obliged entities such as lawyers, accountants, real estate agents, crypto digital wallets/virtual asset service providers, high value art traders, etc.

The Evolution of Money and Payments

Leading economists Paul Krugman and Robin Wells, defined money as “any asset that can easily be used to purchase goods and services”. We can track payments back to around 3,000 B.C. Previously there was a barter system with people exchanging goods. Then, barley, salt, feathers, shells and other commodities were used as token money instead of simple barter.

Approx. 700 B.C. coins were minted and used as payment. In the 7th century or so China started issuing bank notes/IOU certificates on paper. In the 17th century, we had banknotes and coins similarly to the cash model we still have. By the 19th century, banking became a pretty respectable business making a profit by basic money lending. During the past few years, digital and crypto payments led by Bitcoin, have evolved with an exponential increase during Covid-19.

The European Central Bank  statistics show a decline of cash and an increase of non-cash payment methods; card payments now account for nearly 50% of the total.

Are Instant Payments,  Cryptocurrency and Blockchain Slowly Killing Cash?

Consumers are more tech savvy and demand better payment options. Companies are looking to increase their cash-flow by offering new ways to pay bills and buy goods/services. So, fintechs are now innovating to leverage smartphone penetration towards electronic payments. However, there is still a number of population segments and countries dependent on cash transactions. In some cases, this is due to lack of trust towards technology and/or the banks.

We all agree that there is a need to keep cash accessible and accepted as a means of payment for the unbanked and non-technological savvy consumer. But, the search for efficiency and the adoption of mobile phones is driving digital payments, and reducing traditional cash infrastructure like bank branches, ATMs, etc. The shift in buying behaviour and the decline in cash use was also reflected on the Mckinsey 2020 global payments report.

That said, major changes to the infrastructure of traditional payments require wide collaborations and are slow and difficult to scale. When I was working in the U.S. I visited the Federal Reserve Bank of Philadelphia; I was surprised by the number of cheques they were processing for clearing as paper or electronic cheque images. If cheques are still in use, I imagine it will be more difficult to move to a cashless society.

Central Banks and Governments Are Promoting Innovation on Digital Payments

There are ongoing initiatives on the future issuance of digital central bank currencies (digital cash) such as the USD, Euro, Yuan, Pound, etc. along with the focus on real time payments, regulation, data protection and open banking. Central banks are embracing blockchain innovation so instead of printing money, they could issue electronic cash/coins backed by the government.

The Digital Yuan is now receiving widespread interest as China proposes global rules for central bank digital currencies. China has completed real-world trials of their digital currency and it is already the global leader in mobile wallet consumption.

EU-driven regulations aim to create one single, integrated and standardised payments infrastructure using the Single Euro Payments Area (SEPA) to make cashless euro payments in a fast, safe and efficient way. SEPA Instant Credit Transfer (SCT Inst) is a scheme to allow euro transactions to be processed in seconds at any time (24/7/365). It is based on ISO 20022 XML messages. These “real-time” transfers settled immediately upon confirmation. However, other transactions such as mobile and online payments require further harmonisation.

The EU set up rules and the infrastructures for payment service providers – PSPs instant payments, but managing instant payments is complex, the clearing and settlement of the SCT Inst transactions is outside SEPA. Clearing and settlement mechanisms – CSMs are the processes underlying all payment transactions. The main ones are; the European Central Bank’s TARGET Instant Payment Settlement – TIPS (They also have the electronic payment instruments – PISA to oversight digital payment tokens, including stable-coins). Then, there is the Euro Banking Association’s (EBA’s) real-time payment processing facility via RT1.

So, TIPS and RT1, kind of compete for members direct and indirect participation. TIPS, has fewer barriers to entry for smaller banks and fintechs, which can partner with a sponsor bank to gain access to TIPS. This is thanks to the EU’s P2DS / Open Banking regulation to open up banking ecosystems to pass information to third parties to create new products, innovation and competition ensuring financial data is safe.

Payment APIs (Application Programming Interfaces) are software interfaces designed for managing payments. Banking open APIs offer collaboration including client information, payment processing, loyalty programs, etc. Apple Pay, PayPal, Stripe, Ripple, Flywire, etc. are widely used digital payments solutions with APIs to access the functionality of payments to keep track of customers, search payments, create recurring charges,… As well as this, NFC and QR codes will see an uptake as a safe and fast payment solution. These are convenient to both merchants and consumers.

Another interesting development is SWIFT GPI (Global Payments Innovation), a new initiative from SWIFT that combines the traditional SWIFT messaging and banking system with a new set of rules. It gives full transparency over where a payment is at any given moment for end-to-end tracking. SWIFT allows now blockchain companies to connect into its GPI platform.

Fintech and Decentralised Finance Are Impacting the Payments Landscape

Fintechs using blockchain/distributed ledger technology (DLT) are transforming financial services with faster and more convenient payments. I have covered in previous Irish Tech articles how blockchain technology is disrupting many industries including finance with cryptocurrencies and how Bitcoin, Ethereum, Cardano, etc. becoming mainstream.

Cardano is working with several African governments to enable citizens to use its blockchain. Developing countries will contribute substantially to crypto development by looking for real-time and cross-border payments globally.

The US banking regulator, the Office of the Comptroller of the Currency, approved the use of stable coins for the settlement of financial transactions by banks. The banks can use public blockchain chains as infrastructure similar to SWIFT, ACH, and Fedwire. This will potentially transform banking and the global economy.

Why are governments pushing for digital money and digital currencies?

National central banks and governments are getting excited about digital money and digital currencies. They see central bank’s digital currencies as a way to improve the efficiency and safety of payments, but mainly to gain back control. The move of payments from traditional centralised systems to decentralised technologies, such as distributed ledgers/blockchain, is beyond the control of traditional regulation.

The use of payment-dedicated blockchains with electronic identity could support digital central bank currency like the USD or Euro. These could reduce costs and help intermediaries to compete with global technology giants (Facebook, Amazon, Apple, Microsoft and Google). On the other side, government-issued digital currencies could create lack of privacy and more surveillance.

Risk Management, Fraud and Anti Money Laundering

Regulators are considering how supervision will need to adapt to continuous change in digital and cryptocurrency payments. They need to assess the functionalities of systems that enable transactions and guarantee privacy. For example, data breaches increases are a challenge for the protection of consumers’ financial data.

The implementation of instant payments impacts the efforts for anti-money laundering (AML), fraud detection and Ultimate Beneficial Owners (UBO). This creates opportunities for fintechs as third-party providers in this space. Digital transformation will be required to ensure timely and effective checks and screening processes along with customer due diligence.

Author bio LinkedIn| Twitter |Rioxa Consulting

Juan Rio Salvador is a global business transformation leader and risk management expert. He has over twenty years of real-world management experience in financial services and innovation in Europe and the USA.

Juan founded Rioxa Consulting to empower people to thrive in life and in business by inspiring them. Juan is passionate about leadership & business strategy, transformational coaching, blockchain & cryptocurrency adoption, robotic process automation (RPA) and artificial intelligence (A.I.).

Juan is an energetic international speaker invited at forums and conferences in Frankfurt, Budapest, London, Madrid, Barcelona, etc. He recently published “How to Build a Thriving Business, The Proven Formula for Growing Your Business Post Covid-19”.

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