IT in Banking

Central bank digital currencies poised to disrupt market

Read time 3min 50sec

Central bank digital currencies (CBDC) are predicted to have the biggest disruptive impact over the next 20 years.

This is according to a report by consultancy firm PwC, which notes South Africa has embarked on its second CBDC project to explore the use of both a wholesale CBDC and wholesale settlement tokens for interbank use.

CBDC uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation or region. A CBDC is centralised – it is issued and regulated by the competent monetary authority of the country.

PwC says the financial services industry is in the midst of a significant transformation, accelerated by the COVID-19 pandemic.

Given the key role digitisation plays in the financial lives of more and more of the world’s population, it says electronic payments are at the epicentre of this transformation.

Payments are increasingly becoming cashless, and the industry’s role in fostering inclusion has become a significant priority.

“As digital money draws stronger interest, the financial services industry must recognise the entire infrastructure of payments is being reshaped, with new business models emerging,” the firm says.

The report follows last week’s announcement by the South African Reserve Bank (SARB) that it has embarked on a study to investigate the feasibility, desirability and appropriateness of a CBDC.

The central bank said this will include electronic legal tender for general-purpose retail use, complementary to cash.

This, as digital currencies continue to gain popularity, with several crypto-currency exchanges reporting ballooning volumes and transactions.

The SARB says the objective of the feasibility study is to consider how the issuance of a general-purpose CBDC will feed into the central bank’s policy position and mandate. The feasibility study will include practical experimentation across different emerging technology platforms, taking into account a variety of factors, including policy, regulatory, security and risk management implications.

PwC’s survey reveals how even before the COVID-19 pandemic, cashless payments like sending a text to pay for a bus ticket in Turkey, or using a QR code to buy groceries in China are evidence of a steady shift to a digital economy – a shift that might ultimately lead to a global cashless society.

Global cashless payment volumes are set to almost double from 2020 to 2025, from about 1 trillion transactions to about 1.9 trillion.

According to findings by PwC, Asia-Pacific will grow the fastest, with cashless transaction volume growing by 109% from 2020 to 2025, followed by Africa (78% from 64%) and Europe (64% from 39%). Latin America comes next (52% from 48%), and the US and Canada will have the least rapid growth (43% from 35%).

Kurtis Babczenko, global banking and capital markets leader at PwC, comments: “A cashless world is in plain sight. The COVID-19 pandemic reinforced an already growing shift to digital payments and likely drove a three- to five-year acceleration in their use.

“The acceleration towards digital payments will create new opportunities for the entire payment ecosystem, including banks. But it will also expose weaknesses for those not prepared to adapt.”

Chantal Maritz, strategy and payments transformation lead Africa at PwC, adds: “COVID-19 is a catalyst for change – we have seen the rapid deployment of payment services across Africa. Current market conditions have given rise to the need for more financial inclusion, as well as greater innovation and collaboration among financial services players.

“As an emerging market, unencumbered by large amounts of legacy technology, South Africa has the potential to develop a modern payments infrastructure and a cutting-edge payment platform that places customers at the core.”

In developing countries, PwC says, financial inclusion will continue to be driven by mobile devices and access to affordable, convenient payment mechanisms.

By 2025, it notes, smartphone penetration will likely reach 80% globally, largely via uptake in emerging markets.

“In Africa, mobile operators and retailers are taking the lead in equipping customers with cashless means of payment,” says PwC.

“They’re also playing a key role in bringing about financial inclusion and trust in digital payments. In addition, regulators are stepping in to drive financial inclusion. It is also being strengthened by the need of many African migrant workers to send money home via affordable cross-border payments.”

See also