The involvement of Big Techs in payment systems – are there reasons for central banks to worry?

Burkhard Balz of Bundesbank raises concerns over role of bigtech in payment services:

At present, only global digital platforms provide ecosystems of this kind. These bigtech firms are gaining both, in scope and importance. They grow their networks by continuously attaching new services to their platforms, which then spread easily across their worldwide user networks, thanks in part to the extensive use of data.

The Bank for International Settlements calls this mechanism the “DNA feedback loop”, pointing to the mutually reinforcing effects of data analytics, network externalities and interwoven activities.[5] We can already observe some of the adverse consequences. I will give you three examples.

First, 95% of online merchants in Germany accept PayPal payments, even if this would seem to be the most expensive solution, with the exception of invoicing. The costs are estimated at roughly 7% of the transaction value.[6] It’s a good example of a network where the tipping point towards a monopolistic situation might be approaching. Apart from Amazon, one-third of e-commerce sales are processed by PayPal.[7]

Second, although Google has abandoned its plan to offer checking and savings accounts based on licences from Citigroup and Stanford Federal Credit Union in conjunction with Mastercard debit cards, it is staying in the payments business – generating transaction data. These are of particular value to Google, because if they are combined with user data from Google’s other business lines, such as Search, Map or Photos, it gets a 360-degree view of consumer behaviour.

This results, as former Harvard professor Shoshana Zuboff says, in an “unprecedented concentration of knowledge about people and the responsibility-free power that arises from this knowledge”. A bigtech firm is, to quote her again, “… a company. It’s not your buddy. It’s not your uncle. […] We have no voice or influence there.”[8]

Third, Facebook – which is now called Meta – announced plans in 2019 to join up with a consortium of other bigtech companies to create a stablecoin of its own, Libra. This stablecoin would have been pegged to multiple fiat currencies, in an attempt to create a form of “global” money. Initially, these plans were met with stiff resistance from politics and authorities, which resulted in them being pared back. Now, it would seem that the focus is on stablecoins fully backed by the US dollar, and Libra has been given a new name, Diem. Only recently, the company started a pilot with Paxos to allow stablecoin payments with its dedicated Novi app from the United States to Guatemala.[9]

I am sure that’s not the end of the story. If Meta provided Diem to its 3 billion users worldwide, it could instantly become a global player in payments, depending on the stablecoin’s specific design and market penetration.

Once users have obtained Diem, they probably would not remove it anymore from the wallet as they would be able to pay throughout the vast network. And could become locked in. That could have far-reaching consequences, including for financial stability and possibly also for monetary policy.

By this point, central banks should be concerned, and they already are! What’s at stake and what can be done?

He suggests central banks to get into the game and usher digital payments:

Against this background, we have repeatedly called on European providers to develop a payment alternative that covers all the different use cases, is widely used throughout Europe, and is based on innovative infrastructure such as instant payments.

The European Payments Initiative, or EPI, is a private sector initiative launched by major banks and acquirers, and it could deliver just such a solution. After all, the finance ministers of seven countries in Europe have now spoken out in favour of supporting EPI. This was a very important signal to participants to make their solution a reality.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: