Back to the future: The payment landscape in 2045

Ron J. Berndsen: In 2045, all euro retail payments in the Ultimate Warehouse are instant, digital, end-to-end encrypted using quantum computing, always and everywhere wirelessly available

Professor Ron Berndsen is the author of Financial Market Infrastructures and Payments, a Warehouse metaphor textbook which aims to provide his students at Tilburg University with a structured way of learning about financial market infrastructures and payments.

The first part of the Back to the Future trilogy is one of my all-time favourite movies with time-travel from 1985 to 1955. But I do not want to discuss Payments in 1955 (or 1985 for that matter). It is more interesting to see what payments vision the movie producers had 30 years ahead (yes, I know the second part of the trilogy where they travel from 1985 to 2015 is the weakest one). Through the lens of 1985 the movie predicted that 30 years later it would be possible to pay using your fingerprint as authentication. This was spot on as for example in the Netherlands, this form of biometric payment was indeed introduced in 2015! But in the movie the driver of a flying cab was paid... hmm we are not quite there yet. The second instance of a retail payment was paying cash, again correct although it was used to buy a soda from a robot in a diner. This begs the question what would Back to the Future part IV look like? It means extrapolating 30 years into the future from 2015.

The advantage of taking a decades-long view is that it facilitates extreme extrapolation, as even payment infrastructure can be renewed a couple of times then. A convenient concept for such extrapolation is the Warehouse of Financial Market Infrastructures and Payments.  It is a metaphor that I use to teach students and newcomers about payments in a structured way. The innovation of the Warehouse is driven by four factors (see Table below). If we extrapolate those four drivers (harmonization, speed, user experience and information security) to the max we arrive at what I call the Ultimate Warehouse.

In 2045, all euro retail payments in the Ultimate Warehouse are instant, digital, end-to-end encrypted using quantum computing, always and everywhere wirelessly available; they are processed centrally as a commodity, stored in the cloud in multiple copies, attract only a low flat fee and are initiated through a multitude of channels including robot-to-robot payments. Society will be cashless in the sense that banknotes and coins are replaced by digital currency but still issued by central banks (Central Bank Digital Currency). This replacement was possible because CBDC outperforms the privacy of banknotes as retail payments will enjoy very good privacy which means that payment service providers cannot inspect the content of the payments they process and store, unless explicit permission is given by the sender and the receiver of the payment. In addition, privacy of a payment can only be lifted by a competent Court in case of suspicion of criminal activities.

To avoid misunderstanding, the Ultimate Warehouse improves a lot on the current Warehouse but it is not necessarily the most stable or desirable Warehouse. For example, bank runs are then possible in a few seconds, so for financial stability reasons this risk has to be mitigated.

And then there is also the “but”… the trap of any extrapolation is that existing trends are simply extended without taking counteracting forces into account. In the case of the Ultimate Warehouse the following counteracting forces may manifest themselves and the question is how strong they will be.

The first counteracting force is cost efficiency versus vested interests. Because of the essential network character, payments are most efficiently processed if they are fully harmonized and processed with as few intermediaries as possible. However, the vested interests of incumbents and challenge by new players who only take care of a small portion of the supply chain can prevent the industry of getting there. On the other hand, if only one processor would remain, anti-trust concerns need to be addressed.

The second counteracting force is regulation. Here the question is whether compliance can be automated sufficiently and quickly enough.

The third and final counteracting force is what will function as money. Although the medium of exchange and the store of value functions of money may be taken up by various currencies or settlement assets in 2045, essential is what will gain or keep the trust of general public as the unit of account. The Ultimate Warehouse could be what I have termed a pseudowarehouse which contains a cryptocurrency (see Berndsen 2018, p. 123). However, it is more likely that it will be a Warehouse which  still contains a fiat currency. The reason for this is that cryptocurrencies (at least bitcoin and its variants) are trying to solve an extreme  problem:  peer-to-peer payments in which there is no trust in any intermediary, good privacy and no control by any central authority which is open 24/7/365 and operated cross-border. The ultimate warehouse solves those problems except there will still be intermediaries.      

In 2045 the ultimate warehouse as depicted above may be laughed upon: not because its prediction didn’t come true but “with the benefit of hindsight” everybody could see that it already materialized in 2029.

About Ron Berndsen

Ron Berndsen is an independent director on the board of LCH and chair of the Risk Committees. Ron is full Professor of Financial Market Infrastructures and Systemic Risk (endowed chair), Economics Dept. at Tilburg University.     He is editor-in-chief of the Journal of Financial Market Infrastructures and a member of the Advisory Council of the SWIFT Institute. Ron has held several high profile roles at De Nederlandsche Bank since 1992, in Economic and Monetary Policy, Head of Oversight and Head of Market Infrastructures Policy. He has also served as a Member of the Committee on Payments and Market Infrastructures in Basel and the ECB’s Market Infrastructure Board. He co-chaired the FSB Group on Cross-Border Crisis Management for Financial Market Infrastructures. He was awarded a doctorate of Tilburg University in 1992 for his PhD thesis in the area of Economics and Artificial Intelligence.