The impact of technology on payment methods
A payment system is a set of tools, methods, and rules that enable participants to transfer funds. The foundation of these methods is advanced and safe transfers. We must keep ourselves updated with the changing world of payment systems because they are critical to the functioning of an economy. Cash (instruments) and banks (institutions) that have driven payments in the past are being disrupted by technology and digital innovation. According to a statement by the Bank for International Settlements (BIS), it is urgent to rethink these systems in order to make them easier, faster, and less expensive to use.
Payment systems for wholesale and retail
High-value transactions, primarily between banks, are the basis of wholesale payment networks. They usually require a small number of members and are led by the central bank, which assists the approach that works to reform. Consequently, developing and implementing changes in the systems is simple and straightforward. They have, after all, witnessed a series of advancements during the last few decades. Ecommerce transfers, on the other hand, are limited but increased transfers between businesses and consumers. Entry and cross-border operations are two areas that are particularly troublesome. Many people in developing and undeveloped nations still lack access to banking services, while cross-border transfers are still cumbersome, costly, and time-consuming. Between 2011 and 2018, the number of correspondent banks decreased by 20%. This is concerning since it may result in increased cross-border payment costs and more difficulty in accessing the global banking system.
Cross-border payment services are progressively being offered by fintech and big IT companies. A peer-to-peer collaboration, which connects payers and payees directly by reducing the number of intermediates, is the most transformational alternative in this circumstance. They typically employ Distributed Ledger Technology (DLT), which involves recording payments in various locations at the same time, culminating in a decentralized, synchronized ledger.
The role of central banks
In order to revolutionize existing systems, central banks must play a key role. They must take a larger role in enhancing the safety and efficiency of such systems. Central banks are increasingly looking for ways to determine a peer-to-peer structure using digital currencies. Until this becomes a globally accepted and trusted method of payment, it must be accessible, affordable, convenient, and robust, as well as protect the privacy of customers. Tokenization, or the digital representation of assets, may aid in the transfer of funds.
Information from BFSI – The Economic Times