Cross-border implications of the modernization of payment systems
‘The modernization of payment systems has cross-border implications and presents both significant opportunities and notable risks. As we embrace these innovations, we must remain vigilant and proactive in managing the associated risks to ensure the stability and resilience of our financial systems.’ said Olaf Sleijpen in his presentation at the CGFS workshop on payment system developments and financial stability in Tokyo today.
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- It is a privilege to address you today at the CPMI-CGFS Workshop on the critical topic of the cross-border implications of the modernization of payment systems. As we navigate through an era of rapid technological advancements, it is important to understand both the opportunities and the financial stability risks that come with these innovations.
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- A steady increase in both the value of cross-border payments as well as the volume of the payment messages is noticeable, enabled by the transformative shift in the payment landscape.
- Although adoption is progressing at various stages, five key developments are at the forefront of payment system modernization: Interlinking Fast Payment Systems, Distributed Ledger Technology and Tokenization, and Central Bank Digital Currencies might shape the future of cross-border transactions, whereas Cloud Computing and Artificial Intelligence are increasingly deployed at core payment systems.
- The modernization of payment systems offers numerous opportunities. Faster payment systems for instance enable 24/7 instant payments, 365 days a year, improving cash flow management for businesses and convenience for consumers. Distributed ledger technology might simplify and accelerate cross-border transactions by eliminating intermediaries, resulting in lower costs and quicker processing times. Central bank digital currencies have the potential to promote secure and reliable cross-border payments, reducing costs and settlement cycles.
- Cloud computing and AI also greatly impact the global payments industry by optimizing processes and providing personalized financial products. AI’s powerful applications in payments also provides opportunities, such as a better pattern detection for fraud.
- Even though the adoption rate of each technology varies, they all hold the potential to transform global payment systems. This could lead to shorter settlement cycles, 24/7 payments, more efficiency, lower cost, and increased accessibility.
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- The rapid advancement of technological innovations has already enabled significant changes to the financial system and will continue to have profound consequences in the future.
- Faster capital flows are facilitated by shorter settlement cycles and the wider reach of interconnected fast payment systems and potentially CBDCs.
- At the same time, the financial system's dependence on technology providers, cloud infrastructure, and the chip industry has grown, making these sectors integral to financial operations.
- Innovations like DLT could make jurisdictional borders irrelevant, allowing money to flow freely without being tied to specific locations.
- These consequences lead to three key potential financial stability risks.
- Faster capital flows can amplify and spread shocks more rapidly and thus give rise to spill-over effects. If capital moves faster from institution to institution, but also from country to country, liquidity issues on a larger scale can arise. Without additional regulation, liquidity risk and risk for digital bank runs will increase.
- The second possible financial stability risk relates to operational risks. These operational risks are heightened by the concentration of market control among a few major technology providers and the increased reliance on their technologies. A breach or outage at one of these providers could simultaneously impact numerous financial institutions and thus impact financial stability as a whole.
- Finally, with fading borders of economic jurisdictions and faster capital flows, the effectiveness of monetary policy may lower, limiting central banks’ ability to intervene during crises. Divergence in policy stance could trigger rapid cross-border capital movements, and thus undermine the effectiveness of monetary tools. This would constrain central banks’ ability to achieve price stability, making it more challenging to stabilize their economies. Additionally, in future scenarios, the extensive cross-border use of certain payment methods from one jurisdiction, could limit the policy space of others.
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- Lately, geo-economic fragmentation has been on the rise, driving countries and regions to strive for a greater strategic autonomy. This trend is also evident in the payment landscape, with the emergence of alternatives to existing cross-border infrastructures.
- Geo-economic fragmentation may impact the cross-border effects of payment system modernization in two distinct ways.
- Fragmentation may limit the benefits that follow from payment innovations. It can limit the speed of capital flows, decrease efficiency, and increase costs, ultimately hindering overall economic growth. For example, political tensions can increase the size of sanctions lists and requirements, which in its turn would hinder the speed of cross-border transactions.
- However, geo-economic fragmentation also amplifies financial stability risks such as operational risk, specifically related to cyber-attacks. Payment systems might be vulnerable to cyber-attacks, where these attacks can aim to disrupt services, steal sensitive data, or damage infrastructure. Additionally, geo-economic conflicts can disrupt supply chains for critical technology components, causing delays in maintenance, updates, and security measures. The emergence of alternative payment solutions, such as crypto and meme coins, might also flourish in a geo-fragmented context.
- Central bank driven payment modernisation is key to contribute to financial stability in a rapidly changing world with fragmented payment systems. Therefore, I am a strong supporter of central banks, in cooperation with private entities, playing a key role in modernizing the payment systems in a robust way (e.g. wCBDC, DLT experiments, project Agora).
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- To mitigate the financial stability risks, it is essential to monitor the adoption of new technologies and their financial stability impact. The payment world rapidly changes, and for sound analysis and policy recommendations, monitoring and, as a follow up, data-sharing between jurisdictions, but also data reporting by NBFIs and third-party providers, have to increase. Besides this, the implications for financial stability of individual technological advances might have been analysed, further research is needed to understand the implications if these technological developments occur simultaneously.
- Secondly, I would like to stress that we have to harmonize and adjust regulations to overcome challenges in the changing financial landscape, where we see an increased dependency on non-banks and third-party providers in a cross-border setting.
- Lastly, I would like to stress the importance of cooperation between jurisdictions and both public and private entities to ensure global consistency through international standards and to work together in investigating risks. International standard-setting bodies play a crucial role in this process, ensuring that regulations are harmonized and effective. Equally important is the role of public-private partnerships in achieving these goals. These bring together the strengths of both sectors, leveraging private sector innovation, efficiency, and investment with public sector oversight and social responsibility.
- In conclusion, the modernization of payment systems has cross-border implications and presents both significant opportunities and notable risks.
- As we embrace these innovations, we must remain vigilant and proactive in managing the associated risks to ensure the stability and resilience of our financial systems.
- Central bank driven payment modernisation is however also key to keep up with the rapidly changing payment landscape and to safeguard financial stability. By fostering cooperation, adapting regulatory frameworks, and conducting thorough research, we can harness the benefits of these advancements.