The payments innovation illusion: why so few are getting so rich by changing so little

The curious thing about innovation in payments is that the only market participants to be damaged by it are the banks, and even they are still very much in business. All that appears to have happened is that the card networks and a select group of rapidly scaling FinTechs and their investors have become enormously wealthy by cherry-picking low cost, high margin payments business from the banks. Is payments innovation not actually the transformative phenomenon we are always being told it is?

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SUMMARY


Innovation in payments is largely an illusion. Uncompetitive banks created an opportunity for payments FinTechs to cream off a large share of the profitable payments business of the banks.


Genuine innovation in payments must occur at the network level. Even new networks such as the social media platforms in China and Mpesa in Africa have not eliminated the need for banks.


In developed markets, the existing payments networks remain intact and, for all the excitement they have generate, crypto-currencies have so far had no meaningful impact on payments.


Though some FinTechs have eaten bank margin in cross-border payments, international payments are still utterly dominated by slow, expensive and opaque correspondent banking relationships.


The vast sums tied up in the cash and securities liquidity banks are forced to maintain as liquidity buffers represent a massive efficiency opportunity no FinTech has yet managed to exploit.


Current methods of making payments are costing the world economy $1.2-2 trillion a year. Infrastructures accessible by banks only, plus self-contradictory regulatory efforts to make payments both cheap and safe, are to blame.


A number of tested technologies, such as data standards and APIs, can improve efficiency, but only Blockchain promises un-intermediated transfers of value on the network, and it is far from being a fully functional alternative to the status quo.


Network reform is obstructed by national laws, regulations and payments cultures, and local interpretations of international Know Your Client (KYC), Anti Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening checks.


Although digital identities (digital IDs) could cut compliance costs, concerns about personal data security, privacy and confidentiality need to be allayed.


Merchants which sell goods and services directly to consumers are confused by the range of choices superficial innovation has created, and resentful of the costs and risks they create.


Hopes of genuinely radical change in payment now rest on the worldwide infrastructural shift from batch processing of payments to real-time settlement, regulation to counter national obstacles to cross-border efficiency, open access to central bank real-time gross settlement systems (RTGSs) and central bank digital currencies (CBDCs).


Innovation in payments is disappointing because it is trapped by a combination of superficial change and 20th century paradigms.
A truly revolutionary possibility is the replacement of deposit-taking, credit-manufacturing banks by decentralised finance (DeFI) style services dependent on smart contracts.



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