Everyone today realises that the world is moving to a digital reality. Leading world digital agencies forecast that by 2020 the world’s main channels of communication will be digital. We might expect that the same trend should be following in the payments infrastructure – something that would prompt a whole raft of disruptive changes in the market.
Let’s imagine that in the relatively near future – let’s say 20-30 years from now – all financial processes would be automated and the global payments infrastructure would become entirely digitised. This means accounts could be managed, using digital signatures and that only the owner of the private key could carry out transactions.
What does the payments infrastructure look like today? Today you have a wide choice of different communications methods to send a message to a friend in the USA or New Zealand – such as email, WhatsApp or Facebook – and your friend will get the message instantaneously. The contemporary payments infrastructure still lags far behind developments in the communications channels sphere. In this sector, there are a large number of rudiments and restrictions. You can not transfer money in just seconds from one part of the world to another, in a way that your intended recipient will get the money immediately. I ought to mention here that we are not taking into consideration services like PayPal, which offers the full package of services and benefits to those users who are regular clients. This business model very much look like a trusted bank model. Instead, we are analysing the future of global payment systems, that have many independent trust points.
Overall, payment systems are not efficient. There is a huge number of them and their integration requires a lot of resources. Each transaction can accrue commission payments (which are particularly high for international transfers) – and even so, the funds can still take several days to move from the sender to the recipient. Users have no clear idea how long the transfer may take, or how much commission will be charged – nor when the transaction might pass through the compliance processes. Payments can get lost during transactions between the parties. The level of fraud of internet payments is significantly high.
Let’s try to figure out what makes it so complicated to pay online today? There are a number of explanations for this, but the key are interlinked with regulations (relatively minor), and outdated payments infrastructure (relatively major). I would offer to consider that problems in details.
The main and most obvious problem is poor integration between various payment systems themselves. Globally monopolised payment infrastructure supported by the accustomed legal frameworks also play significant roles in this. One example is that many businesses prefer to accept only international payment cards as a means of payment – such as Visa, or MasterCard. Although there are other retailers, who only accept local payment cards. Vending machines might be restricted to accepting only low-denomination banknotes and coins. Minimum values for cashless transactions might be charged a higher commission fee. The whole situation results in lost time and money for users. And here we are only discussing the payment infrastructure, not even touching on the topic of fund markets or similar.
One more problem is that the market for payments processing is extensively monopolised by Visa, MasterCard, Alipay, PayPal, Swift, and several others. Monopolies along with closed APIs act to prevent direct collaboration and integration processes between incumbents and users, aiming to preserve their very special status. Regulators fail to receive real-time market information. The advantages of advanced systems with closed proprietary infrastructure nevertheless inhibit large-scale innovation. You can create a superb mobile app – but it can not be used by many financial corporations at one and the same time.
What is interesting is that we have grown so accustomed to this “limited payment reality” that we can not even easily imagine how things could be different, or easier, quicker, or more efficient. Yet even so, a new dawn is coming. Can you remember the last time you wrote a letter with a pen? Although it seems that the entire world has smartphones now, it was only 5-7 years ago that they first entered widespread use.
The payments infrastructure of the future
For the digital future of financial markets described to dawn, we need to proceed by using the following important principles.
- All assets need to be saved in a uniform digital format (money, securities, etc.)
- All asset management systems need to interact using the same protocols (e.g. as a language of communication)
- Asset management systems need to be able to interact with each other on a principle of mutual trust
To turn it into a reality, it will be necessary to agree on ways to reconcile independent accounting systems. What is important is the openness of the ecosystems – component code and basic modules, and protocols. Standards must correspond to Open Source principles, not require users to pay license fees, and all rules should be described in detail for all market participants.
This will drastically affect the role of states and regulators. It will change to that of “founders of the game rules” and “controllers”, instead of “central resource manager”, as now. The role of banks will be in the KYC process, risk management, and the provision of infrastructure. The requirements of society will also undergo fundamental change – sending money will be as easy as emailing or sending a message in a Facebook chat, with the whole thing taking place virtually, with a single click, and in just seconds.
If to follow this scenario, we’ll see a whole raft of positive transformations. Competition will appear on the markets. User software will be easily integrated with any accounting system. Security will rise, and asset management will be carried out using cryptographic keys. Online experience for users will become simpler and cheaper. А wide range of ways of making payments will be available, and at any specific moment users can choose the one which offers them the optimal speed and lowest commissions.