‘The evolving payments landscape demands a recalibration of roles and a transparent framework to facilitate the relationship between public and private entities’, Menno Broos and Ria Roerink from De Nederlandsche Bank share more.
Key takeaways:
Private and public money each have their own strengths. Private money drives innovation and ease of payment for end users. Public money – i.e. banknotes and coins – provide trust, stability, and safety to the system.
This dynamic equilibrium, which facilitates healthy competition while preserving the fundamental safety of the financial system, is becoming skewed due to gradually diminishing use of public money in the digital age.
The introduction of CBDCs could preserve the right balance between public and private money and needs a refinement of roles and responsibilities between public and private entities.
The ambition of central banks should be to strengthen an inclusive, and innovative payments ecosystem by reinvigorating public private partnerships.
Recently we distinguished private and public forms of money in an article on The Paypers. While private forms of money have been drivers of innovation and ease of payment for end users, public money – i.e. banknotes and coins – have been providing trust, stability, and safety to the system.
In a similar vein, the alliance between public and private entities within payment systems has been marked by a harmonious coexistence, each contributing unique strengths to the ecosystem. Private institutions excelled in direct consumer interaction and spearheaded innovative solutions, keeping close track with the innovations in the real economy, that became more and more digital in the past decade.
Public institutions like central banks and ministries of finance, close to their mandate of serving broader policy goals, fortified trust and stability within the monetary framework. Besides issuing public money, public institutions are in charge of oversight in the payment system and have an important role to play as a ‘catalyst’ by fostering and enhancing cooperation (such as standard setting) between the private parties within the system.
This dynamic equilibrium facilitates healthy competition, encourages innovative payment solutions while preserving the fundamental integrity and efficiency of the financial system. Every now and then, major innovations tip the balance between private and public institutions, and a new equilibrium emerges. Such as when private institutions introduced digital card payments at the point of sale in the late 1980s, until then the almost exclusive domain for cash.
The equilibrium is again very fragile in the current age of digitalisation, with a diminishing use of public money. The complexities inherent in the payment market, driven by a network economy and winner-takes-most dynamics, pose formidable barriers to entry. Healthy competition makes way for monopolistic tendencies, potentially stifling innovation and fairness. The objective of evolving public money into the digital domain is to preserve countervailing power in the payment ecosystem and safeguard public interests.
Central Bank Digital Currencies (CBDCs) are often seen as another disruptor in this narrative. They are perceived as direct competition by banks and other private entities. Questions concerning compensation models and obligations in CBDC distribution and acceptance loom large.
However, despite the disruptive potential of CBDCs, the possible introduction of the digital euro will not signify a radical departure in the cooperation between public and private entities in payments. CBDCs should be seen as a complement, instead of a substitute, of private money in the same way as cash is a complement. It is an evolution and not a revolution. This evolution will demand a renegotiation and refinement of roles and responsibilities. The future of payment systems therefore hinges on a redefined collaboration between public and private forms of money.
This is why, for instance, the digital euro rulebook development group consists of private stakeholder groups alongside the central bank. The rules and standards for digital euro processes should provide the basic infrastructure on which advanced private innovations can emerge. The importance of partnerships is acknowledged by the ECB. ‘Cooperation between the public and private sectors is crucial to make the digital euro a reality’, emphasised former ECB Executive board member Fabio Panetta to the European parliament in one of the hearings on the digital euro. Fostering private initiatives to create payment solutions with a pan-European reach is also one of the pillars of Europe’s retail payments strategy.
An ambitious roadmap involves a concerted effort to synergise strengths, leveraging the innovation prowess of private entities alongside the stability and public policy alignment offered by public money. Private entities are best equipped for client facing activities such as customer onboarding or providing digital euros in a user-friendly manner. Public institutions, i.e. central banks, are best equipped to set in motion (infra)structural changes such as promoting the potential of account-to-account rails next to the well-established card-based payment rails. Embracing this ethos of 'better together’, the ambition lies in forging a reinvigorated partnership that not only adapts to the digital revolution and the introduction of CBDCs but also thrives by harnessing their combined potential.
In summary, the evolving payments landscape demands a recalibration of roles and a transparent framework to facilitate the relationship between public and private entities. Private entities must realise that central banks will adapt and try to introduce digital forms of public money. At the same time, public institutions must give leeway to private companies to innovate and expand in a competitive payments market. The ambition is to navigate this transformative phase and emerge stronger, united in the pursuit of a more efficient, inclusive, and innovative payments ecosystem.
About Menno Broos
Menno Broos is programme lead of the digital euro team at De Nederlandsche Bank, the central bank of the Netherlands. He is also a member of the European Central Bank’s project steering group for the digital euro.
About Ria Roerink
Ria Roerink works at De Nederlandsche Bank as a senior policy advisor in retail payments. She is specialised in themes such as CBDCs, market organisation and regulation, incentive structures, and public private partnerships.
About De Nederlandsche Bank (DNB)
DNB is the Dutch central bank, financial sector supervisor and resolution authority. DNB is committed to a stable financial system: stable prices, solid financial institutions, and properly functioning payment transfers. In the fulfilment of all its tasks, DNB puts into practice its mission: working on trust.
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