As countries continue to battle global supply chain disruptions and the destabilization of energy markets in the wake of the Covid-19 pandemic and the Ukraine-Russia war, central banks and fiscal authorities have taken extraordinary measures to quell the fallout amid a challenging global economic outlook. But issues have been developing for a while, and slow, disjointed payment systems play a role.
COUNTRIES LEADING THE WAY TO DIGITAL PAYMENT ADOPTION
During the Covid-19 pandemic, government-to-person (G2P) payments became critical in developing countries – 84 countries implemented social protection changes to aid financially ailing populations. However, without ubiquitous internet connection and payment systems that facilitate wide-scale aid, most low-income countries lack the resources to identify where payments should be distributed based on need.
Governments in Latin America and the Caribbean have relied on both face-to-face and digital payments to include banked and unbanked populations. But because vulnerable populations lack access to the internet and banking services, non-face-to-face payment systems prove difficult to implement. Unified payment systems could reduce many of the pain points low-income countries face due to the digital divide.
DEPENDENCY ON A SINGULAR SYSTEM: EXACERBATING THE PROBLEM
Beyond security concerns, the ability to make payments globally is being used as a tool for sanctions—and countries are compelled to find short-term workarounds. Economic sanctions on Russia have impacted not just the Russian economy but countries transacting in rubles or on SWIFT with Russian entities. Dependence on SWIFT as the single system for the execution of financial transactions has had a crippling effect on economies globally.
HELPING THE GLOBAL ECONOMY
Many economies have implemented real-time unified payment systems to help drive economic growth. These systems help stabilize economies by increasing the efficient use of financial resources, decreasing transaction costs and enabling access to the fast and affordable movement of money across borders.
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In some cases, governments are pushing both centralized and decentralized innovation to foster affordable, accessible, fast and secure transacting among citizens. China is on track to replace its fiat currency with a central bank digital currency (CBDC), known as digital yuan, or eCYN, which has been rolled out over the past two years.
CBDCs are gaining momentum, with JPMorgan analysts reporting that these currencies could save global firms more than $100 billion annually in transaction costs for cross-border transactions – a huge sum given the estimated $120 billion in total costs to execute cross-border wholesale payments each year.
LOWERING TRANSACTION COSTS AND BOLSTERING VOLUME
As the third-ranked country in total volume of real-time payments in 2021, South Korea presents an interesting use case for a unified system. With roughly 7.3 billion real-time transactions recorded in 2021, the country saw a cost savings of $2.0 billion for businesses and consumers, unlocking $8 billion in additional economic output.
According to the results of BCG research, transitioning to digital can also improve annual GDP by three percentage points. Developing economies are outpacing developed nations when it comes to real-time payment modernization. Brazil, where real-time payment ecosystem PIX has been implemented, recorded 8.7 billion real-time transactions last year, providing $5.5 billion—0.34% of the country’s GDP—of additional economic output.
REDUCING FRAUD AND FINANCIAL CRIME
Cashless economies have been shown to increase accountability and reduce financial crimes, especially black-market transactions. The Danish instant payments system Straksclearingen, for example, has fraud pattern detection and anti-money-laundering screening built in.
ENABLING INTEROPERABILITY IN DEVELOPING COUNTRIES
The Unified Payments Interface (UPI) in India has gained momentum as a fee-free real-time payment system for interbank peer-to-peer (P2P) transactions enabled by a national digital biometric identity. Interoperability underpins much of its success.
UPI has also helped create healthy competition between payment providers, opening the market to foreign competitors, driving additional transactions and forcing local players to level up. The transformational shift could spread like wildfire, given India’s generosity in offering to share UPI technology with other Commonwealth Nations.
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How Unified Payment Systems are Helping Global Economy Zoom Forward
Illustration: Freepik
FACILITATING REMITTANCES AND DEFYING BORDERS
The Reserve Bank of India (RBI) aims to expand UPI to include cross-border remittances by taking steps to link with Singapore’s peer-to-peer fund transfer service, PayNow. In addition to offering lower-cost cross-border remittances, the link is expected to help solidify the flow of trade and travel between both countries. Users can make instant remittances between the two systems, fostering transparent and inexpensive cross-border interoperability. PayNow is also connected to Thailand’s instant fund transfer service, PromptPay—the world’s first linkage of real-time payment systems in 2021.
ADOPTING UNIFIED PAYMENT SYSTEMS IN THE U.S.
Citing the success of UPI and Southeast Asian payment systems, Google underscores in its 2019 letter to the Federal Reserve Financial Services Policy Committee the urgent need for the private sector and government to work together to promote interconnected payment systems that foster inclusivity and economic growth for all.
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FedNow, the U.S. central bank’s unified payment system, is currently being piloted. However, the adoption of the country’s existing real-time payment solutions—Zelle and The Clearing House’s RTP network—remains limited. Real-time payments in the U.S. accounted for just 0.9% of total payments in 2021, resulting in additional economic output of $1.4 billion—only 0.01% of GDP.
As systems like UPI and PromptPay illustrate, unified, real-time payment systems that interconnect globally offer the possibility of improving the global economy. The enhanced efficiency, lower risk and lower costs of such systems can be a way forward, especially in this time of daunting economic outlook.
Zareef Hamid is Founder of Velwire, Advisor to BCG and is a Forbes Councils member. This write-up was originally published on the Forbes website.
Source: United News of Bangladesh