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Who gets what in the world of payments? 07 July 2021

Payments companies have proliferated in recent years, with everyone wanting a slice of the lucrative payments pie. Now, with cryptocurrencies and Central Bank Digital Currencies, money and transaction debates abound. 
The way money moves around the world is fueling innovation and sparking debates. Innovation comes in the form of payments companies like Wise that have dramatically reduced the cost and time needed to send money across borders. Then there are payment apps like Venmo and Lydia that have transformed P2P payments. Splitting the tab at the bar is done in a few taps. Square and Stripe have similarly made B2B transactions a much smoother process. No matter the country, payments are becoming faster every single day. But underneath all of the impressive digital architecture that has been introduced in the last decade remains a traditional bank account, maintained at an accredited financial institution. The primary objective of payments-focused fintechs has been to speed up payments within the parameters of the traditional financial system.
 
Now, that is starting to change. The traditional financial system, or at least the one we have been living with since the gold standard was ditched in 1971, has relied on fiat currencies. You may be able to transfer money to the son of a Nigerian prince in record time thanks to a fintech, but all of the currencies used in transfers remain backed by some government somewhere. They are fiat currency transfers.
 
With cryptocurrencies, blockchain, and discussions around Central Bank Digital Currencies, we are seeing the first tremors of what some claim to be the formation of an alternative financial system. Cryptocurrencies are exploding at an unprecedented rate. Blockchain ledgers are settling transactions all around the globe. New companies such as Unbanked are allowing people to pay with digital currencies on our traditional payment rails. Your account can consist entirely of Bitcoin but when you swipe your debit card, it’s sending dollars to the vendor. Coinbase, the biggest US crypto exchange, does the same thing. They have to convert the cryptocurrency into fiat currency because, well, vendors want money they can use anywhere. 

The hardcore crypto believers see the blockchain and cryptocurrencies revolutionizing the financial world as we know it. Finance will become decentralized as transactions are all carried out on-chain. The mediators of old – banks, central banks, stores – won’t be necessary because each individual will have their own personal chain on which they can transact. But governments, with central banks leading the way, aren’t just ceding the world of digital currencies to Bitcoin and Ethereum. The U.S. Federal Reserve is exploring the idea of its own digital currency. So is the European Union. These digital currencies would be an extension of the fiat system, not the alternatives being put forth by crypto enthusiasts.

China is far ahead of virtually every other country when it comes to digital currencies. Instead of letting a stateless cryptocurrency become heavily involved in their transactions, their central bank acted quickly to create their own digital currency, becoming the first major country to launch a digital currency. Richard Turrin has written an incredible book on this very subject and what it portends for the west. As he puts it, “The digital renminbi is not intended to replace the dollar as a reserve currency. Instead, it’s laser-focused on one goal: facilitating trade with China.”
 
So, with everything that is going on, I return to the titular question: who gets what in the world of payments? Maybe more important is the question of who wants what? Fintechs want to build successful companies that send, receive, and store money easily for customers. Customers – whether they are individuals or businesses – want digital, easy-to-use products that make their lives more convenient. Crypto enthusiasts want to make money and maybe, just maybe, transform the financial system of old. Central banks want to maintain control over the money supply in their respective domains and provide a stable, reliable currency. These sometimes-competing interests are colliding and manifesting in fascinating ways.
 
Fintechs, banks, and crypto exchanges might be slowly attenuating the links between payments and fiat currencies, but are the dollar and Euro living on borrowed time? To my admittedly novice mind, it appears crypto currencies are presenting themselves as solutions to problems that don’t necessarily exist. Or problems that already have reasonable workarounds and are getting solved via other means. Sure, they can speed up certain transactions, but payments in many cases have already become near instant. And faster payments are just that. Same with a decentralized ledger at a bank. It might cut down on operational costs but it won’t replace the dollar. I will leave the digital RMB debate to Mr. Turrin. 
 
There are specific and viable use cases for distributed ledger technologies and cryptocurrencies. The predicted market for these creations will continue to grow as banks adopt the technology to serve certain purposes and people add digital assets to their investment portfolios. But when it comes to payments, it is probably safe to expect fiat currencies to remain the basis of our world. They are (usually) stable and there is plenty of space for companies to innovate around and within our existing financial system. Even the digital dollar and Euro that are being bandied about have yet to coalesce into a concrete business case. Payment service providers already have a strong base on which they can invent and create, though the debate around CBDCs is ongoing and Mr. Turrin feels strongly that CBDCs will be our future.  
 
The payments landscape may seem fractured, but looked at another way, that is evidence of a healthy market that attracts entrants and innovation. Fintechs and banks will compete with one another to be the digital keeper of your deposits. And the line will continue to blur between digital wallets, payment and banking apps, and digital currencies. Cryptocurrencies are here to stay and will be a part of the payments ecosystem (Although given their volatility it’s probably wise to not shift your entire life savings into Dogecoin). As with any healthy marketplace, who gets what will be determined by the constant churn of competition, innovation, regulation, and customer preference.

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