Explore the impact of central bank digital currency (CBDC) on payments and banks
Today, we have found that the habits and patterns of payment methods are changing. Although cash is still ubiquitous in our lives, among the younger generation, cash payment is no longer the main payment method of this generation. It is being replaced by electronic payment, digital payment and other different types of payment.
According to statistics, as of 2017, in terms of the total number of transactions in Sweden, only 15-20% of retail payments were made in cash. In 2010, it accounted for about 60% of all retail payments; in my country, in 2017 In offline consumer payments, mobile payments accounted for more than 65%. In 2018, the total scale of third-party payment transactions will reach 312.4 trillion yuan, a year-on-year increase of 42.8%.
At the same time, in addition to payment habits and personal preferences, the payment system model believes that there are other trends that have a major impact on the payment system.
The first is the “Internet of Things” . “A network of physical devices, vehicles, household appliances, and other items embedded in electronics, software, sensors, actuators, and connectivity that enable these things to connect and exchange data” and related machine-to-machine (M2M) payments. These networked devices Payment can be executed automatically without human assistance.
There are many other influencing factors, such as the “virtual economy”-the commercial use and trade of digital data and content; new purchase models, customers want more convenient micropayments and instant processing, and increased demand for data privacy protection .
Therefore, the combination of the above factors and trends, along with the large-scale transformation to digital payment methods, will promote the development of point-to-point, 7×24 hours, fast and low-cost payment systems.
The original idea of such a payment system is based on blockchain technology, which can directly exchange and transfer assets without the presence of a third party. Based on this idea, different institutions and organizations have created cryptocurrencies, and based on this idea A new payment system as the center.
Although this new payment solution seems very interesting and modern at first, after years of development, many problems have also appeared (such as large fluctuations, running out of money, cumbersome transactions, independent of each other, etc.), so For now, it is almost unrealistic for this type of payment method to be widely used.
Based on the above problems, some institutions or people have been born with the idea of issuing private “stable coins” or encrypted currencies linked by the central bank, so that problems such as large fluctuations and unguaranteed exchange rates can be avoided. But from a monetary point of view, the concept of linking a large currency to a central bank is not feasible, and so far, it has proven that privately issued “stable coins” are either dead or insignificant.
The successful application of stablecoins such as USDT/PAX has made everyone discover that private stablecoins can only become part of the widely accepted payment system if they cooperate with major commercial banks in various markets .
In addition, because countries do not recognize the currency attributes of various types of cryptocurrencies, and at the same time, because of some illegal activities such as money laundering of cryptocurrencies, insufficient protection of customer information, and increasing supervision, in most cases now, The cryptocurrency discovered by private institutions can only be used as speculative assets, not as a typical payment method. In addition to illegal activities (such as drug purchases, online fraud, online gambling, etc.), it can be used as a means of payment.
Central Bank Digital Currency (CBDC) Concept
One way to solve the above problems is to create a brand new central bank digital currency payment system based on the same logic as the existing cryptocurrency. At this point, my country has already taken the lead in European and American countries. This new partially decentralized payment system will be fully developed and managed by the central bank. The central bank will control the issuance of such digital currencies and guarantee the exchange rate between digital currencies and legal tenders. Under this setting, Can solve the problem that hinders the widespread adoption of cryptocurrencies.
Potentially, due to its statutory responsibilities , all central banks should have a strong incentive to implement this program. First of all, they are responsible for the development and introduction of a safe and efficient payment system, which contributes to the improvement of the overall efficiency and effectiveness of the society. In addition, Maoqiu Technology believes that this can create a new payment tool that can replace cash in physical form, and can also guarantee its unique characteristics (for example, the holder’s direct bond to the central bank can ensure its safety) .
Figure 1: Dual currency system-overview
The CBDC system will be a system parallel to the legal tender system. Unlike the traditional fiat currency system, the CBDC system will be based on asset classes held outside the traditional banking system. Therefore, any conversion of existing non-cash assets into central bank digital currency will cause financial assets to flow out of the existing banking system.
Another significant feature of the CBDC system is that payments are made directly between participants. In principle, there is no need for third parties (such as clearing houses, settlement institutions, payment system operators, etc.) to participate, which may eliminate all existing in traditional payment systems. Intermediaries and reduce the income generated by banks.
At present, in addition to my country’s central bank that has officially issued a central digital renminbi (DCEP), countries such as Russia, the United States, and the European Union are actively piloting CBDCs and are studying the overall design of such systems according to the conditions of each country. According to the final application design of CBDC, it will have different influences on the bank. The intensity of this influence will be determined by several characteristics of this newly designed system:
Figure 2: Factors that determine the impact of the CBDC system on banks
1. How to store CBDC
One of the most important issues is how the CBDC will be stored. For this problem, suppose there are three main options: 1. Direct storage in the central bank (that is, all retail merchants open personal accounts); 2. Storage in the bank (that is, similar to the cash distribution method, except that the form of assets is not acceptable); 3. Storage Used as tokens in electronic wallets in various third-party vendors (such as Fintech companies, Google, Amazon, Apple, etc.).
The above three methods, from the perspective of banks, the least impact is to store CBDC as an asset in the bank; and the most impact on the bank is that customers store the CBDC in a third-party provider, because at this time various providers have The right to reserve CBDC, and can provide additional payment services related to legal tender.
2. The exchange method of CBDC
As in the case of storing CBDC, from the bank’s point of view, which entity has the right to convert CBDC into legal tender is of utmost importance. Opening this service to various providers will have the most serious impact on banks, but if it is limited to the central bank, because fiat currency deposits flow to CBDC, it will also deprive banks of transaction processing profits.
3. How to redeem CBDC
How to obtain CBDC will be another important factor affecting the entire financial system and banks. Which method should be selected based on different considerations. The method with the least impact on banks is that only government bonds can be directly converted into CBDC; a more free way will allow the purchase of CBDC in cash; the most influential way is to allow banks to transfer fiat currencies The deposit is directly converted into CBDC.
4. Regulatory requirements
The minimum standards for local regulatory agencies to provide CBDC-related services (such as wallets used for CBDC storage, payment and exchange) will determine the entry barriers of the CBDC system and thus determine the competition of the CBDC system.
Although these four characteristics are the most important when analyzing the potential impact of the CBDC system on banks, there are other factors that need to be considered. For example, the implementation method of CBDC- gradual implementation or batch implementation. Another question is whether CBDC will bear interest rates , and if so, how are they different from fiat currency interest rates. On the other hand, the current interest rate level and the overall economic situation will also be of considerable significance, because they will trigger the overall demand for CBDC (considered as a safe form of holding assets), which will trigger the conversion of total assets to CBDC. value.
Model Study on the Impact of CBDC Introduction on Bank Income
Since CBDC issuance will have an impact on different participants in the current payment system (banks, settlement institutions, clearing houses, ATM operators, payment card systems), the Warsaw Office of Poland has created a model to estimate the potential impact of CBDC issuance on bank revenue . To assess this, they simulated the impact on selected banks in a specific country, while taking into account the characteristics of specific markets and institutions.
The key assumption of their model is that CBDC will only be an alternative payment system. Therefore, it will have a negative impact on the profitability of banks for two reasons:
1. The issuance of CBDC will result in the loss of deposits because the funds held by the bank will be converted into CBDC. In order to maintain the current level of loan business, the outflow of deposits as the cheapest source of financing will have to be replaced by wholesale financing and/or bond issuance, the latter of which is much more expensive.
2. The issuance of CBDC will result in more transactions being transferred to the system, which corresponds to a smaller number of card transactions, thereby reducing the income from exchange fees.
In order to assess the impact on bank revenue, the model consists of two main parts:
In the first part, it deals with all market-specific factors in the selected country. In this model: the structure of the current payment split, the replacement rate of CBDC and its structure (that is, the percentage of all transactions that the CBDC will conduct and which types of payment transactions <cash, card payment, credit transfer> will be replaced), selection The country’s average payment transaction value and currency circulation factors (that is, the ratio of the transaction volume of different transaction types to the overnight deposit volume). Based on these values, the overall reduction in the amount of overnight deposits and the total reduction in the number of card transactions are retrieved (because other types of payment transactions usually do not generate direct transaction revenue).
In the second part, we consider the bank’s specific factors, namely its financing costs in a specific market and income structure. These two parts can be combined to calculate the overall scale of the two factors that affect the bank’s profitability.
Figure 3: CBDC impact assessment model
Although this model can be used for any type of bank in any country, this article decided to analyze a major Swedish bank. This country was chosen because Sweden’s digital payment adoption rate is one of the highest in the world, and the central bank is in a leading position in introducing CBDC.
This model tested three schemes for different CBDC replacement rates (5%, 10% and 15% respectively). Sweden uses all market-specific factors (for example, payment structure, average transaction value…same as Sweden in this simulation) and bank-specific factors of selected major Swedish banks.
Figure 4: Evaluation model results
As shown in the figure above, under certain circumstances, in a country where cashless transactions are more common, a bank is more dependent on credit card transactions and retail deposit financing. Under the assumption that no action is taken, the issuance of CBDC may generate revenue for it Significant negative effects, especially the new transaction system will replace card transactions.
Based on the above model evaluation, and in view of the current social development trend, the launch of CBDC cannot be achieved overnight. The future trend is that digital payment methods will be adopted by many countries. In the long run, this trend will have an impact on banks. Therefore, if banks want to reduce the adverse effects, Maoqiu Technology believes that the following measures can be taken:
1. Participate in the design of the CBDC system : design various services that can be provided in the CBDC system, for example, design classic accounts, payment methods and wallets for consumers; design digital currency collection, exchange, and management for collection accounts such as retailers service.
2. Development of payment card services: mainly services that are not affected by CDBC, such as credit cards and multi-currency cards used abroad.
3. Create attractive offers and solutions for international payments to offset the reduction in domestic payment revenue.
4. Invest in domestic instant payment/RTGS systems to provide payment solutions that can compete with CBDC payment solutions.
5. Expand corporate banking services to fill the revenue gap in retail banking.
6. Consider establishing a stable coin payment system as a joint initiative of banks in specific markets to establish an effective system that can reduce the need for the introduction of CBDC while ensuring a source of income for payments.
Maoqiu Technology finally believes that the impact of CBDC on banks and payment methods mainly depends on the potential design of the central bank. CBDC can never fully replicate all the characteristics of cash and RTGS at the same time, but in some cases, it may have an impact on existing Two payment methods were improved.
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