Competing digital monies
Summary
Focus
After decades of relative stability in the market structure of retail payments, new contenders are vying to challenge bank deposits as retail money. These contenders include the private tokens of digital platform operators, such as big techs; private stablecoins; and digital forms of cash. Beyond this, some central banks have launched fast payment systems, which allow for instant payments between account holders with existing bank deposits and, in some cases, non-bank payment service providers.
Contribution
We consider the implications for the market structure of a world where digital means of payment compete. We look specifically at how new non-bank digital platforms compete with bank deposits, with or without public sector provision of digital money or payment infrastructures. To do this, we draw on both two-sided market theory and payment economics. Based on a theoretical model, we assess the likely impact of competing digital monies and of public infrastructures on the industrial organisation of payments.
Findings
We have three key results. First, when payment systems are not interoperable ("walled gardens"), access to accounts (financial inclusion) and trade volumes are inefficiently low. Second, when a fast retail payment system ensures interoperability between payment systems, financial exclusion disappears at the cost of some degree of disintermediation. Incumbent intermediaries lose market share to non-bank payment service providers. Third, we show that digital forms of cash and retail fast payment systems can have equivalent effects. Both help to achieve an outcome superior to the laissez-faire approach, ensuring that different payment instruments are interoperable.
Abstract
We compare three competing digital payment instruments: bank deposits, digital platform tokens and central bank digital currencies (CBDCs). A simple theoretical model integrates the theory of two-sided markets and payment economics. We use the model to assess the impact of a public option such as a fast payment system that makes private payment instruments interoperable, or a CBDC that provides general access to public digital money. We show that both options are essentially equivalent for the industrial organisation of the payment system. We find that, even if they may lead to some degree of disintermediation, both options can contribute to increasing financial inclusion and improving social welfare.
JEL classification: E42, E58, G21, L51, O31
Keywords: payments, CBDC, fast payments, banks, big tech, platforms
