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What role will payment interface providers (PIPs) serve within a retail central bank digital currency (CBDC) ecosystem? A Bank of England forum offers some suggestions.
The Bank of England (BoE) has published the minutes of a CBDC Engagement Forum that it hosted last month, with new details and possibilities for payment companies to mull on.
The bulk of the minutes relate to the question of PIPs and what their business model would look like within the framework of a retail CBDC.
In one presentation, a member of the forum argued that PIPs would likely undertake activities such as onboarding clients, conducting know your customer (KYC) and anti-money laundering (AML) checks, authenticating users and providing consumer protection and overlay services.
As noted by the BoE, these activities align with the suggestions made by the bank in its 2020 Discussion Paper on CBDC.
In particular, discussion turned to the costs that PIPs would likely incur by offering these services.
In the modelled scenario, it was assumed that PIPs would not be able to lend CBDC, nor use it as a source of funding. Therefore, a banking-like model based on revenues from net interest rate margin would not be possible.
It was suggested that the BoE should define what non-financial corporates would be able to do with their CBDC holdings, in contrast to what is possible currently with commercial bank money balances, as this would need to be factored into a revenue model calculation.
The forum also considered whether end-users of CBDC should be charged for using a CBDC wallet, but it was generally agreed that this would be undesirable for PIPs, given the current availability of fee-free payment alternatives.
Nevertheless, some members argued that customers may be willing to pay for such services if they provided increased functionality, such as programmability, or if costs were lower than existing options where customers currently pay (e.g., cross-border payments).
Other members suggested that a model where merchants pay a fee for accepting CBDC payments is more likely to be viable for PIPs, but adoption would depend on the costs of setting up the required infrastructure.
Moreover, any limits applied to CBDC holdings or transactions could influence how much customers use CBDC for day-to-day spending, which could in turn have an impact on how much revenue this model could generate.
The forum also considered data monetisation and cross-selling opportunities that could potentially serve as revenue streams for PIPs under a retail CBDC.
Overall, the forum agreed that there is no single business model that currently stands out from the rest.
Although some argued that finding a workable business model will be difficult, it was also pointed out that, similar to open banking, opportunities may be difficult to see at present but will become apparent in future.
It was suggested that payment providers should consider the whole transaction lifecycle when identifying revenue opportunities for a new payment method, not only the payment element itself.
This would include considerations such as the “halo effect”, i.e. the value to merchants of generating brand loyalty by accepting a specific payment method that customers prefer.
It was also noted that if merchants and payment service providers had already incurred the costs of building an infrastructure and onboarding customers, they would look to leverage this to the fullest extent possible for any new payment product, which would also influence the revenue-cost calculation.
There are also public policy considerations that would need to be factored into the cost calculation, as authorities may want to incentivise the use of CBDC to meet certain public policy goals, such as improving financial inclusion.
Key G7 public policy principles for retail CBDC
Following its discussion on retail CBDC business models, the forum moved on to a discussion on public policy principles when designing retail CBDC.
Referring back to the G7 Principles on CBDC, published in October 2021, one member argued that public-private partnerships should be pursued in the design and implementation of retail CBDC.
Where applicable, private sector expertise and experience ought to be made available to the BoE and Treasury in its handling of CBDC.
Further, the private sector could help guide policymakers with regard to four specific principles that should be upheld by retail CBDC, namely operational resilience and cybersecurity, competition, illicit finance and data privacy.
Forum members noted that it was imperative to ensure operational resilience and cybersecurity in the CBDC payment chain from end-to-end to build trust among users.
Given the payment chain will involve different players, the BoE was encouraged to create clear rules and standards of participation, requiring resilience and security along the chain.
Central banks would need to ensure that CBDC capabilities are “secure by design” and as forward-looking as possible to tackle new threats such as quantum computing.
Non-technical resilience elements, such as behavioural rules and consumer protections, were noted as integral.
The forum also reaffirmed the importance of interoperability between CBDC and existing payments systems, helping to ensure user choice and a level playing field.
In particular, it was argued that leveraging existing infrastructure for on- and off-ramps into and out of CBDC would be desirable to alleviate costs for merchants.
