More than 45 years ago, the US government started testing a little-known network called ACH to electronically deliver social security payments instead of sending cheques. This change was so significant that the actor Rita Moreno starred in a TV commercial to promote the new programme as safer and faster than the mail. The service is now so ubiquitous that it’s taken for granted.
Today’s latest efforts to modernise the world’s payment infrastructure haven’t been given a 30-second celebrity TV spot, but they could eventually affect nearly every person and every economy.
This work to move money in real time and at any hour of the day should help more markets flourish by streamlining transactions and expanding the availability of digital money to hundreds of millions more people. This work is particularly beneficial during the pandemic, with more people and governments seeking alternatives to physical cash.
The new systems being created may bring together cryptocurrencies and new payment technologies to provide seamless, secure and carefully regulated domestic and cross-border transmission of digital money.
Using these faster systems would mean a small business won’t have to wait as long to access money from new sales to spend it, creating a virtuous circle of speedier economic activity. Consumers would benefit, too, by receiving tax refunds or insurance reimbursements in hours instead of days. Both merchants and consumers will gain from more choices, allowing them to spend and save however they want.
Today, moving money across borders requires correspondent banks, a worldwide network of financial institutions. Say you’re in London and need to send money to someone in New York. Each of your banks has accounts with each other and uses the funds in them to transfer money from one country to the other.
But if you’re in London and need to move money to a small bank in San José, Costa Rica – which may not have a direct account with your bank – the number of correspondent links needed to get to that bank could be quite long. Think of it like connecting flights, with the biggest world hubs all having many direct routes and less frequented places requiring several stops.
Correspondent banks, which were first created more than 100 years ago, are now developing ways to modernise some of their systems. That work is vital to support this complex network that keeps the world economy moving while meeting the demands of an always-on world.
There are a variety of efforts to augment this system with today’s newest technologies. One of them is real-time payments, which uses more sophisticated messaging to enable transfers of money that are nearly instantaneous and can happen at any time. These systems have proliferated worldwide over the past decade.
Additionally, cryptocurrency has become a buzzy trend in payment infrastructure. The most useful ones for buying and selling goods are private companies’ stablecoins and government’s central bank digital currencies, or CBDCs, since they maintain consistent values. Because these coins are born online, it may be possible for them to move internationally more easily than older forms of money. They could also give more people – especially those without bank accounts – the ability to spend and save digital money.
Last, a newer concept called open banking makes it much easier for customers to move their money between financial institutions and access loans by letting them share more of their data – if they choose – with their banks and lenders.
These three concepts – real-time payments, crypto and open banking – will expand the possibilities for how consumers and merchants use money. These trends build on decades of work to improve the payment experience, first by introducing charge cards in the 1950s, then adding in more sophisticated technologies to create contactless cards and cashierless-checkout stores.
There is the possibility that these new payment systems will one day create a tech-based correspondent banking network that’s faster and more reliable. It’s unlikely to replace correspondent banks since they are so broadly used and are particularly suitable for larger payments. But this new system would provide a new, powerful tool to move money overseas, especially for smaller transactions. That way, no matter where you’re located, it could be as if you live right by the payment version of an international airport, with direct flights to just about anywhere.
The vision would be a fully interconnected world that would allow you to send or receive money from anywhere in any currency at any time and in the blink of an eye. The same app you use to send money to your friend down the street could be used to forward remittances to your family internationally. This idea is a huge step forward in creating a digital economy that works for everybody.
The future of payments is upon us, but there are several hurdles to overcome. For example, a current limitation of real-time payments is most of these networks are built only for specific countries, so don’t work for cross-border transactions. CBDCs, meanwhile, are still in their infancy, so mainstream international adoption of these government-backed currencies will likely take years.
We have the ability to bring about a better future. Creating new universal standards for privacy and data storage, cyber security and cloud networks would allow all these systems to easily connect. Work can be done with regulators to hash out compliance requirements across nations – such as money laundering and sanctions processes – to streamline the rollout of these platforms. Work must be done to provide liquidity, particularly into smaller markets, to ensure these faster systems can operate properly and to cut down on foreign exchange costs overall.
Above all, trust is the most important ingredient. Trust must be the bedrock of every new technology and every new service, so people are encouraged to embrace these changes.
All of this work should keep us busy, building these new connections, solidifying them and ensuring their safety and efficiency.
Behind the scenes
The time, not that long ago, when social security cheques were the norm hints at how much can change. Shifts in banking and consumer behaviour typically happen over years. Ultimately, people who aren’t busy building new payment networks probably won’t notice what’s going on behind the scenes.
But someday, you may find it a little easier to send money – or funds you requested from a business partner may arrive faster than anticipated. Perhaps your town becomes a little more prosperous.
And that’s the goal, isn’t it? That these improvements are solid and progressive, so you’ll simply take them for granted.
Michael Miebach is CEO of Mastercard.
This article first appeared in the April/May print edition of fDi Intelligence. View a digital edition of the magazine here.