Why stop privatization of digital payments in a cashless economy?

November 7, 2018 By Luke Harrington

Cash is gradually losing its power as the main means of payment. Bills and coins are replaced by digital alternatives, which are regulated not by the state, but by the private sector. Should governments take control over e-money or give way to private companies?

The share of digital payments is steadily growing. Capgemini and BNP Paribas expect people around the world to make 726 billion transactions using digital payment technologies by 2020. "Non-cash payments have increased in volume due to the rise in adoption of digital payment services across all market segments," Christophe Vergne, cards and payment practice leader at Capgemini, told CNBC.

Banknotes and coins are gradually flowing from wallets to bank accounts. At first glance, this seems to be an organic continuation of the digitalization of society. There’s no modern social service, be it medicine or education, that would do without new technologies. However, despite all the innovations, nobody even thinks about devolving regulation of these structures completely to private hands. The finance is no less important, but why do we so readily agree to private regulation of our funds?

Private companies are overtaking governments

Cash is issued and regulated by central banks, such as the Federal Reserve System in the US, the European Central Bank in the EU, People’s Bank of China and others. It is their sovereign prerogative to regulate quantity of money, set the reserve requirement and interest rates, as well as to introduce other measures to keep the economy stable. Their actions directly affect our quality of life in the form of availability of loans, inflation rate, deposits on our accounts and other essential aspects.

However, central banks lose some of their power when it comes to digital payment providers. Turning into their electronic form, money changes its essence. In fact, it becomes just an accounting entry, and even though e-money can be easily converted into cash, it still exists within a closed infrastructure. In turn, this system is managed by those who own it, that is, private operators. And they always keep themselves busy.

Rapidly developing sphere of financial technologies - fintech – is offering new solutions almost every day. Large payment systems are not lagging behind, either: Visa and MasterCard are included in the Forbes World's Most Innovative Companies List.

At that, the digital payment industry tends to consolidation. McKinsey says that from July through September of 2017, eight payments companies announced European payments M&A deals totaling more than $20 billion. This brought total deal value in 2017 to nearly $40 billion, a huge jump from the total of $5.3 billion in 2016. And Capgemini expects a huge forthcoming unification among payment vendors and banks.

What happens when the market is controlled in such a way? Private companies begin to control the situation and resort to dubious approaches to keep a tight grip on the market. It has already happened in the US in the nineties, when Visa and MasterCard ruled the credit card market, and AmEx was one of their few competitors. Both giants took the gloves off to fight for their place in the sun, at the same time gaining huge influence over consumers. Their main weapons were parallel policies (“exclusionary rules”) and blacklisting any bank that might dare deal with AmEx. At some point, they made a miscount by putting their exclusions in writing. Consequently, the Justice Department was able to intervene and remedy the situation, but there's no guarantee it won't happen again.

Catching up with fintech

In the meantime, cumbersome mechanisms of regulation are not fast enough to follow the fintech development. As a result, watchdogs have no choice but focus on the most sensitive spheres. They introduce requirements that are mostly aimed at verifying identity of clients, combating money laundering, terrorism financing and evasion of international sanctions. At that, states pay little or no attention to more mundane problems like low confidentiality of payments, data leakage problems and hacking of private bank accounts, high cost of financial transactions and many others. And do we really have to say that private operators have succeeded even less in solving these issues?

Some are still trying to protect ordinary citizens. For instance, the US has the Electronic Funds Transfer Act (also known as Regulation E), which is meant to protect not only large corporate payments, but also regular debit and credit cards. Yet, it hardly works as the country has the third-highest rate of online payments fraud worldwide, and was the only one to remain in the top three from 2014 to 2016. Others are far from the ideal as well.

A financial oligopoly

The process of currency privatization has already been launched. The industry seeks consolidation, and part of the market is already fully controlled by large private companies. This practically turns the market into an oligopoly, creates many problems and weakens the very foundation of the system. States are gradually losing their sovereign privileges of currency issuance and regulation. In addition to the aforementioned consequences, the current situation entails more remote, but also more serious risks like undermining of the economy’s power structure and risks to democracy.

Is there a way out of this situation? Definitely, yes, but only in the form of a holistic approach and cooperation between the state and citizens. The sphere of finance is too important to fully transfer it to private hands. Of course, private companies cannot be completely excluded from this environment. Yet, it is still possible to limit their influence and pay more attention to old trusted solutions, such as cash, in-person customer service, extended ATM networks and so on. After all, we cannot change what has already been done, but we can prevent new problems in the future.

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