Payment card markets are globally dominated by a few large card networks, which give significant rebates to issuing banks. Policy makers are concerned about rising merchant fees and the overreliance on these networks’ payment services. A common assumption is that profitable entry is blockaded by the entry costs to set up the payment system and network, resulting in a monopolistic or duopolistic market structure. The question analyzed in this paper is under which conditions a card network sets rebates at a higher level such that competitors cannot profitably enter the market. Deterrence becomes more profitable for a large card network when transaction benefits increase - especially if issuing banks pass rebates through to cardholders. At the same time, entry becomes more blockaded if issuing banks face costs to switch their card issuance to a different card network - indicating that large card networks may use rebates to increase switching costs. These lock-in effects explain why domestic card networks are pushed aside and new card networks struggle to gain ground and may have important implications for payment regulation.
Retail cross-border payments remain costly and inefficient, especially for small-value remittances. We examine the structural drivers of the high costs that prevail despite recent technological advances, focusing on market structure, business models and compliance issues. Using the US-Mexico corridor as a case study, we evaluate how online platforms and crypto-based technologies have reshaped these dynamics. While these emerging technologies have the potential to reduce costs and improve speed, fundamental challenges relating to trust, regulation and operational efficiency persist. The full benefits of technological advances can be realized only if foundational constraints are addressed. We raise questions about whether such models can maintain advantages once they have been brought fully within the regulatory framework.
This paper reports key findings from the International Monetary Fund's "Sub-Saharan Africa central bank digital currency and digital payments survey", shedding light on the motivations, benefits and challenges of central bank digital currency adoption, as well as the developments of digital private money and cryptoassets in sub-Saharan Africa (SSA). It emphasizes the pivotal role of collaboration and shared knowledge in navigating the intricate landscape of digital currencies and assets in SSA. As the evolving digital frontier is explored, the experiences and aspirations of the region's central banks, as expressed in the survey, will help harness the potential for digital currencies, assets and payments, and foster cooperation among countries in SSA.
Quantum computers may in the future break today's widely used encryption. This paper provides a framework to support the financial system in the transition to quantum-safe cryptographic infrastructures. It emphasizes the need to start the transition today, with a broad awareness and a cryptographic inventory as critical foundations. While post-quantum cryptography offers a viable near-term solution, implementation challenges, including performance trade-offs and system integration, require coordinated planning. We caution against regarding this change as a simple algorithm replacement. Ensuring the continued security and resilience of the global financial system may involve cryptographic agility, defense in depth, hybrid models and phased migration. Quantum key distribution may hold long-term potential, but several national security agencies note that it still faces infrastructure challenges that limit its immediate applicability.
This study analyzes the volatility of Bitcoin returns in comparison with that of three cryptocurrencies commonly referred to as "junk coins" or "shitcoins": Dogecoin, Shiba Inu and Baby Doge Coin. To achieve this, we employ generalized autoregressive conditional heteroscedasticity models, a methodology frequently used to identify volatility patterns in financial time series. Our empirical findings reveal that Bitcoin's returns exhibit significantly lower volatility than the three alternative cryptocurrencies. This outcome reinforces Bitcoin's role as the benchmark cryptoasset within the cryptocurrency market. In contrast, Baby Doge Coin displays pronounced volatility, highlighting its heightened susceptibility to speculative trading. The other junk coins, Dogecoin and Shiba Inu, while more stable than Baby Doge Coin, still show a considerably higher degree of volatility than Bitcoin. The prevalence of such destabilizing behavior amplifies long-term investment risks and undermines market credibility, potentially hindering the broader acceptance of these junk coins as viable alternatives to fiat currencies.
This paper presents a methodology to detect potential failing participants in large-value payment systems and to measure the intraday impact of outages, considering liquidity, systemic and receiver impacts in an automated way. Medium and high risk thresholds are established to create a combined risk indicator. Outages of large banks can be detected within 10 minutes, while smaller banks may take more than 30 minutes. Impact and risk levels vary by the size of the bank and the start time of the outage. Large banks can reach high risk levels in 30 minutes, highlighting the need for timely detection, whereas smaller banks rarely reach high risk levels.
Proposals for new payment system architectures abound. To understand their opportunities and challenges, it is paramount to be able to describe and compare them in a consistent and standardized manner. This paper therefore proposes a formally defined model to represent three key functions of payment system architectures: issuance/withdrawal, holding and transfer of funds. The model defines payment diagrams, using a precisely defined syntax. We illustrate the application of these diagrams for domestic and cross-border account transfers, as well as cash, card, emoney and stablecoin payments. However, the payment diagrams can be used for any type of funds and can be applied across different payment system architectures. We also demonstrate how the diagrams correspond to the balance sheet approach commonly used in economics, and show that it offers added value by providing an end-to-end visualization of every stage of the payment journey. Our model provides a tool for central banks, regulators and the payment industry to better understand and compare existing and new payment system architectures.
Legal changes to strengthen the risk profiles of global systemically important banks (G-SIBs), such as the "orderly unwind" regulatory mandates, have also bolstered the risk profiles of central counterparties (CCPs) and their ability to provide payment, clearing and settlement services in catastrophic scenarios, such as the bankruptcy and resolution of a G-SIB. We examine the extent to which prepositioned liquidity at G-SIBs may now be readily available to CCPs after a G-SIB resolution has commenced and before a forced closeout is necessary, allowing the G-SIB to continue trading with CCPs unless and until this liquidity runs dry and a payment default occurs. This approach differs significantly from traditional insolvency analysis, whereby the debtor's on-balance-sheet resources are unavailable until distributed by the court, an approach of little help to CCPs, which generally rely on daily margin posting. We explore the regulatory framework that bestows preferred-creditor status on CCPs and use a commonsense catastrophe scenario to highlight that prepositioned liquidity at G-SIBs (as required by resolution plans, Basel III's liquidity coverage ratio and other regulatory mandates) may be sufficient to meet even catastrophic loss scenarios (which could materially impact surveillance, counterparty risk assessment, bank funding plans and certain rating agency outcomes) without CCPs needing to rely on their default resources.
Improvements in information and communications technology (ICT) have driven changes in the time structure of money and finance and seem to push towards universal immediacy and continuity. We review these time structure phenomena, including those derived from the time structuring of market activity, and how they are affected by progress in ICT. While progressing technology is a key driver of the evolution towards immediacy and continuity, settlement lags and discontinuities have remained unchanged in some areas for long periods, and we identify cases in which even ideal ICT would not seem to imply immediacy and continuity.
The paper examines the concentration of the US clearing ecosystem following the 2007-9 global financial crisis, focusing on central counterparties. It highlights that the ecosystem is now more concentrated than in 2007, with a significant role played by a few global systemically important banks. The study uses the Herfindahl-Hirschman index to measure concentration and discusses the implications of increased collateral requirements and market exits. The findings suggest potential financial stability concerns but also acknowledge benefits from improved transparency and risk management standards.
We introduce a quantitative framework to design the capital contribution of a central counterparty (CCP) to its default waterfall, known as CCP "skin in the game" (SITG). We show that, under inadequate SITG levels, nondefaulting members are more exposed to default losses than CCPs. The resulting risk management incentive distortions could be mitigated by using the proposed framework. Our analysis addresses investor-and member-owned CCPs; we also analyze multilayer and "monolayer" default waterfalls. The broader central clearing mandate of US Treasuries may take place under monolayer CCPs. Viewing the total size of SITG as the lower bound on CCP regulatory capital, the framework can be used to improve capital regulation of investor-and member-owned CCPs. We also show that bank capital rules for CCP exposures may underestimate risk.
In March 2022, nickel prices on the London Metal Exchange (LME) nearly quadrupled in just three trading days, threatening to put several clearing members into default and exhaust the default fund at LME Clear, the exchange's central counter- party (CCP). The LME responded in an unprecedented fashion, by cancelling eight hours of nickel market trades. Though challenged in court, its authority to do so was ultimately upheld. This paper documents the market stress and LME's response in order to understand the implications of the trade cancellation decision for financial stability and CCP powers going forward. While LME's trade cancellation helped to alleviate distress, its decision runs counter to the function of a CCP, which is to ensure contract performance. In upholding LME's right to void contracts, the court's verdict could change how CCP rule books are applied under financial distress, potentially creating scope for moral hazard or other adverse consequences.
The digitalisation of payments has accelerated over the last three decades with the internet and ever faster and cheaper computing capacity. At the same time, many believe that decentralised finance ("DeFi") offers fundamentally new possibilities for trading, payment and settlement. Concurrent to the rise of innovative technologies has been the rapid advent of new terminology, which is widely used, but which often seems to be biased, confusing, or is used inconsistently. By providing an etymology of key concepts and reviewing terminology and definitions, this paper also provides a new approach to clarifying the essence of new technologies in the field of payments to facilitate ongoing discussions about their eventual merits and use cases.
This paper examines the impact of retail payment technology on money demand. Our study provides three main findings. First, using a unique quarterly data set from China spanning the period 1999 Q1 to 2020 Q4, we analyze the ratio of payment through point-of-sale machines to retail sales to measure payment card penetration in retail transactions and show that payment card penetration increased from 0.02 to 3.16 over the sample period. Second, by estimating a semi-logarithmic money demand function, we show that higher payment card penetration reduces money demand, with an elasticity estimated at- 0.16. Third, we assess the welfare cost of inflation by employing a consumer surplus approach, showing that this cost would have more than doubled in the year 2020 had payment card penetration remained at its 1999 level. Finally, our results are shown to be robust across alternative money demand functions.
Through its Trans-European Automated Real-time Gross Settlement Express Trans-fer System (TARGET) services, the Eurosystem facilitates the settlement of whole-sale financial transactions in central bank money, the safest and most liquid settle-ment asset. The Eurosystem is continuing to modernize its settlement infrastructuresand to adapt them to changing user needs, and it is analyzing the potential impact ofemerging technologies, including distributed ledger technology, on the settlement ofwholesale financial transactions. The initial analysis by the Eurosystem consisted ofmarket outreach and an analysis of possible responses in the event of a significantuptake of distributed ledger technology. Following this initial analysis, the Eurosys-tem has started exploratory practical work. This paper discusses the rationale forthe Eurosystem exploring central bank money settlement of transactions registeredon distributed ledger technology platforms, the results of its analysis so far and theenvisaged next steps
