The Pay Off – Exclusive interview with Gottfried Leibbrandt and Natasha de Terán

The Pay Off : How Changing the Way We Pay Changes Everything is the first attempt to look at payments bottom-up, top-down, inside and out. It’s about the modernity and antiquity of today’s systems; the singularity and universality of payments; the consequences – social, economic, geopolitical and otherwise – of our payment choices. 

It tells of the rapid speed of change and the slow death of habit, of the immutable hold of legacy systems, national customs, and corporate incumbency. And it delves into technology and sociology; liquidity, bits and bytes and cyber thefts; coins and crypto; cards, cash, cheques and all the myriad connections between them. Exploring payments from the layman’s perspective the book deciphers the geek-speak; disentangles the multitudinous layers and processes; and tries to resolve the central conundrum – how it is that money rarely ever moves but still keeps making the world go around. 

What inspired you to write The Pay Off: How Changing the Way We Pay Changes Everything? 

Gottfried Leibbrandt: It was sheer enthusiasm for the topic; I’ve been in payments for most of my working life as a consultant, as an industry executive, and as a researcher during my PhD. I started writing the book before COVID-19 and then it gave me the perfect excuse to keep writing when we had the first lockdown.

The payments system is complex, and new developments as CBDC only add to this complexity. What are the questions we never thought to ask to assess these initiatives? 

Natasha de Terán: I think we need to take into consideration that any part of finance - and payments are no exception - have silos of expertise and silos of interest, thus there are standards experts, credit cards experts, and retail banking experts who tend to overlook what goes on beyond their expertise, beyond the wall, simply because they're engrossed in what they're doing.

I truly believe that one of the problems, when it comes to new things, is that everyone's thinking from their standpoint, from their own area of expertise. Which is understandable. If you have 10-20-30 years of expertise in one particular field or area, you want that field to survive, because you will tend to think that your career depends on the survival of whatever it is that you’re doing.

Gottfried: A key question is: Who is going to provide/how do you provide liquidity for cryptocurrencies?

But of course, the exchanges can be excluded from payments, as we're now seeing with Binance in the UK. Suddenly, people can't access their accounts anymore and the liquidity that Binance provided has evaporated.

A pertinent question to ask is: How is this going to work in practice?

It is expensive to pre-finance every smart contract, to lock-up your Bitcoin in every transaction.  It's like having to pay everything with cash, without having banks’ services behind it. That’s another question that should be asked - how is this going to work in a world of crypto? How are we going to manage risks? These risks were always carried by banks, as their operations are subject to regulatory oversight for sound risk management.

Europe does not have a role to play in the cloud and lags a strong European payments scheme. How could we look at this? Will payments become ‘balkanised’ to geopolitical spheres? 

Gottfried: Payments do tend to differ by geography, and we mentioned several big blocks in the book. The US and the Anglo-Saxon countries tend to be card-driven; continental Europe tends to be transfer-driven. China has gone a completely different road with Alipay and WeChat. The latter was a big discovery while researching for the book. China alone does more electronic transactions than the rest of the world combined. Alipay and WeChat have over 700 billion transactions per year, which far exceeds Visa and Mastercard transactions across the globe.

Then there's India with the Unified Payments Interface (UPI), an instant real-time payment system developed by the National Payments Corporation of India facilitating inter-bank transactions. We notice big systems developing in blocks – balkanising if you will – but that isn’t just about geopolitics, it’s mainly due to historical and cultural reasons. The fact that payment systems are developed on top of cultural differences and preferences leads to disparity.

Even within Europe, there are huge differences - Holland is considering a world without cash. In Germany cash is still used for two-thirds of every transaction in stores – Germany, Switzerland, and Austria are hugely dependent on cash.

Geopolitics is not the sole cause of these differences. They also tend to be cultural, historical and because of the nature of payments, they tend to be sticky.

If you would consider payments sort of an utility in a way, something linked to infrastructure - how important it is for Europe to own the infrastructure? What is the role of Chinese or BigTech companies coming into Europe?

Gottfried: It is important. And that's maybe because I don't think we should be naive about how it works; China (Huawei is a good example) and the US are the biggest players in data services. We should be careful regarding our dependency on data access. You can always get shut off if you don't do what the other party likes.

The Chinese realised early on that they want their infrastructure and networks. In Europe, we've been more relaxed about it, but I believe it’s time to invest in infrastructure because there may come a time when Europe won’t have as many friends as it does today.

Natasha: Payments have always been balkanised and what we're now seeing are geopolitical blocks. I think it will come down to costs and alignment - the latter will be geopolitical but also socio-cultural; about how you look at things like data privacy and so on. That raises the question, what if you are a smaller block or country. If, for instance you're the UK, Canada, Australia, Singapore – are you going to build your own infrastructure in the same way that the Euro block might do, or will you throw in your lot with like-minded countries? It will be interesting to see where some countries throw the dice.

Could you elaborate a bit on the recent initiatives of the EPI, how will it be different this time?

Gottfried: First, the European Payments Initiative is trying to fill a gap that Europe passed upon 10-20 years ago, when it sold its infrastructure. Europe had Eurocard and Visa International, which was owned by the European banks, and they sold it back to the Americans, so to speak. EPI shouldn’t be another card scheme because it would be redundant. And when parties must choose between something that already works and something new, I think it will be difficult to get them to switch.

Now with digitisation, if EPI were to come with good online solutions (e.g. online wallets), I think there will be an opportunity, because that field is still evolving. If they were going to come up with a good alternative to the ApplePay wallet, the Amazon wallet or PayPal, then I could see it going somewhere.

They would have to focus on areas that are developing rather than areas that are already established, like the physical point-of-sale. What we learned from China, for example, is that when there's relatively little infrastructure, you can change a lot. When things are already embedded, it's much harder to change, you can only change things if you build on what's already there. 

What impact will Big Tech continue to have on the payment sector? How pivotal will Diem be?

Natasha: I think Diem – particularly as first announced – has been enormously pivotal already in galvanising things at the policymaker level and the central banks have been moving fast. CBDC is not without its issues and questions, but things are progressing fast and a lot of that can be put down to the spectre first raised by Diem/Libra.

I don’t see BigTech dominating payments in the EU, but it might be pivotal in driving other initiatives. And I don't think EPI has been driven in the first instance by BigTech - it is driven by geopolitical considerations, by the interest of the EU, the Euro block, and by the dominance of Mastercard and Visa. 

Gottfried: That said, I think the role of BigTech is already big in payments. For example, Apple Pay and its in-app store payment, where they take a 30% cut of all in-app purchases. This is becoming a big source of revenue for Apple, it's 10% of their revenue, so they're arguably a big player in payments already. Amazon Pay is another example because they’re developing their wallet.

I think this is influencing Europe’s thinking already. For example, businesses that are perfectly legal in Europe could be excluded because they don't comply with US norms. For instance, we have lots of businesses in Amsterdam that might be considered illegal or undesirable by US standards and they could find themselves excluded by the US infrastructures. 

Natasha: eBay and Amazon completely changed our buying habits, getting us used to purchase online and from overseas. Without Amazon and eBay driving our acceptance and our confidence in online, we wouldn't be doing nearly as much online purchase activity as we do today and digital payments wouldn’t be where they are either.

Digital coins have surfaced in the past decades. Most recently, central banks have also engaged in this topic. What is your take on the topic? How will CBDC affect the future of payments?

Gottfried: There's lots of uncertainty regarding how it will be implemented. Is it going to be a retail solution - like the one that they're rolling out in China - or will it go wholesale by opening up Central Bank currency or central bank deposits to a larger group of players, such as asset managers and brokers and people that trade in the wholesale world? This would resemble the utility tokens experimented by some banks. 

Against the background of the ongoing digitalisation, all players involved in CBDC need to find answers to issues concerning all citizens: is CBDC going to be interest-bearing or interest-charging, will it be truly anonymous or not, what are the restrictions on foreigners holding it, will there be controls in place or not?

If they were to implement it without any restrictions, it could have far-reaching unintended consequences. You could be facilitating financial crime on a giant scale, you could see deposits leak away from banks to the Central Bank, and the banking system facing a funding shortage etc. We need to think of how big the consequences could be later on. 

Much of the discussions is now centred around these questions, specifically how are we going to get to grips with that, how are we going to get the right balance between allowing new uses without opening up the world to these unintended consequences?

Natasha: We have yet to witness how each country will approach CBDC and or digital monies. They raise hugely important questions about privacy, ownership, anonymity, credit supply and more. These are massively important issues, and I believe every jurisdiction is going to answer those questions differently. It will be interesting to see how each nation chooses to approach these issues and explores the opportunities presented by CBDC.

I believe we could, for instance, go in very different directions as each country (or block) decides what it is it needs to solve for with a CBDC or digital money framework. That said, a central bank might determine something that needs solving for and the public at large and the government might think otherwise, so there may be tensions there.

However, what strikes me most is that I don't see these issues addressed outside professional circles. I’m not seeing the issues raised by the BIS, Bank of England, ECB and so on being addressed in the general press or on mainstream television. We believe that people should think about them. 

Gottfried: Also, very importantly, what will incentivise people to get people to use a CBDC? Will they embrace it? What is the strategy to persuade them to be onboard with digital coins? Let`s take the case of China, for example, where Alipay and WeChat are very successful and work like a charm. I think it may prove difficult to get people to voluntarily switch to something new.

Natasha: With the disappearance of the physical manifestation of cash and the emergence and possible proliferation of stablecoins and private forms of money, there are questions to be asked as a central bank:  will the anchoring role of the currency survive when there is no physical form – not in our minds so much, but in the minds of the people who are now 5, 10 or 15, or who don't work in payments? 

While stakeholders in the current payment ecosystem argue about regulation and Open Data economies, an entirely new financial infrastructure on web 3.0 is developing, where Decentralised Finance (DeFi) is a promising manifestation. How should the incumbent payment industry look a this? Is it truly disruptive? Will code reduce the number of regulators? Will financial market infrastructures become redefined in the coming 20 years?

A lot of it so far is regulatory arbitrage, it is trying to do things that you could perfectly well do in the physical world, but you don't want to do because of scrutiny, or because it's not allowed.

DeFi today comprises a variety of independent projects with the same shared goal: improving availability of and efficiency in financial services through disintermediation, seeking to eliminate the need for intermediaries in financial transactions (e.g. banks).

However, people need to realise that the functions provided by banks go further than what most of them think, especially in managing financial risks. For instance, DeFi users do not receive the benefits of transacting with regulated intermediaries (such as banks). Protocols are not subject to risk management requirements, such as the capital and liquidity requirements that protect against loss of consumer funds and risks. 

So who is responsible if something goes wrong? Unlike traditional banks, which can be sanctioned, there is nobody who can be held accountable when something goes wrong. This is because the applications in DeFi are built on decentralised systems, which distribute functions and power away from a central authority.

Natasha: Judging by the current regulatory trends of greater KYC and other compliance and conduct requirements, and the potential for consumer harm, Defi would seem to require regulation, difficult as it may seem. Regulators will need to approach things differently when it comes to DeFi, but I wouldn’t expect them to tolerate any sizeable kind of wild west for long. 

About Gottfried Leibbrandt

A self-confessed payments nerd, Gottfried Leibbrandt is also a networks geek. A former partner at McKinsey & Company, he was the CEO of SWIFT, the cross-border payments network, from 2012-2018.

About Natasha de Terán

Natasha de Terán is a former journalist, specialising in financial regulation and market structures. Formerly the head of corporate affairs at SWIFT, she sits on the Payment System Regulator and Financial Services Consumer panels and is a Non Resident Scholar at the Carnegie Endowment.