The Rise Of Digital Payments And What It Means For Central Banks

Livemint     31st March 2021     Save    

Context: Rise of digital payments and its implications on Central Banks.

Reasons for growing interest in digital payments

  • Ease of exchange: Thus, buyers prefer it, especially for small-value retail payments.
  • Impacts of the COVID-19 pandemic: It accelerated the switch to digital payments as people have shifted to e-commerce.

Positive aspects of digital payments

  • Ease of access to financial services: Digital payments generate real-time data on sellers’ businesses and buyers’ purchasing habits, allowing payment providers to offer credit, savings, wealth management, collections, insurance and other financial services.
  • Rise of crypto-currencies (a form of digital payment)
    • It cannot be inflated away: as its supply is fixed.
    • Trustworthy: It is a decentralized payment verification system, eliminating the need for any party to trust the others involved.
    • Reduce transaction costs: in small-value or cross-border exchanges

Problems associated with digital payments

  • Antitrust Issues: whether the payment provider could be trusted to collect and handle customer data responsibly. E.g. Facebook’s Libra failed to generate the required trust.
  • Exploitative nature: 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.
    • E.g. e-commerce platforms like Alibaba are using their market power—enhanced through payments—to restrict competition.
  • Regulatory concern of systemic risk: Advances in cryptography (through quantum computing) may make it easy to subvert existing digital verification schemes like payment bridges such as India’s Unified Payments Interface.
  • Impediments of using crypto-currencies:
    • Fluctuating value: As a central bank does not manage its value.
    • Transactions are expensive and inefficient: due to the costly decentralized verification process and huge annual electricity use needed to verify Bitcoin transactions.
    • Dependency on regulators: For crypto-currencies having a fixed value (stablecoins) as they are pegged to a currency like the dollar.

Way Forward:

  • 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.
  • For a secured and decentralized digital payment system, there should be multiple providers, multiple bridges and multiple technologies in the payment arena.