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Abstract
Despite the narrative of a globalized economy, there is no effectively working global payment system. Although there is an infrastructure that allows the transmission of data about global payments, the movement of actual money is executed indirectly, making it an incalculable endeavor. The reason is that money is not simply data, but a complex bundle of rights closely tied to the nation state. In the absence of infrastructure that reliably links payments with guarantees of the nation state, intermediaries that facilitate global payments are forced to create trust in a different way. This is only possible by occupying a highly centralized and therefore powerful position. In this article, we investigate which actors were historically able to hold such a position and how these actors are challenged by digitalization. We suggest that there are three models of payment infrastructure provision. Bank-based systems were dominant until the 1980s, but in the following decades, a second model emerged: the provision of financial infrastructure by global companies. Since the early 2000s, we see a third model: the entrance of tech-driven companies in the payment sector. We conclude that digital technologies will not necessarily solve the problems, but might in fact exacerbate them.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Based on the prices published on https://www.westernunion.com/us (prices for the option ‘pay cash’ in a Western Union store). The prices for payments via bank account are lower, while payments via credit card are much higher. In addition to the transfer fee, Western Union makes money form currency exchange. The exchange rate Western Union charges differs from the actual exchange rate, which we retrieved from https://www.exchange-rates.org/ on February 5, 2021.
2 An exemption is Maurer (Citation2012).
3 For the definition of major banks, we refer to the list of systemically important banks, which is published and updated by the Financial Stability Board.
4 See Appendix 1.
5 “Technology instead of institutions? The blockchain technology as a threat to the banking system” funded by the German Research Foundation (DFG).
6 In every economy there exists some kind of tiering, which means that not all banks are direct participants in a payment system. While top-tier banks settle with central bank money, low-tier banks use instead the services of top-tier banks to make and receive payments from other banks. For example, in the most important German settlement system (RPS provided by the German Bundesbank), some 75% of the financial institutions are direct participants. In Fedwire, the most important settlement system in the US, the degree of tiering is mixed and ranges between 25% and 75% (Committee on Payments & Market Infrastructures, Citation2003, 90 ff).
7 A list of exemptions can be found here: Committee on Payments & Market Infrastructures, Citation2003, Annex 3, Table C.
8 US dollar, Canadian dollar, Mexican peso, Israeli shekel, South African rand, Danish krone, euro, Norwegian krone, Swedish krona, Swiss franc, pound sterling, Australian dollar, Hong Kong dollar, Japanese yen, Korean won, New Zealand dollar and Singapore dollar.
9 Recent studies have shown that more and more banks have withdrawn from countries where governance and controls on illicit financing were poor. Rice et al. (Citation2020) show that the number of correspondent banks fell by 20% between 2011 and 2018, even as the value of payments increased. Rella (Citation2019) sees this decline as a result of de-risking strategies and shrinking revenues in cross-border payments. To better understand the reasons and circumstances certainly more research is needed here.
10 E.g.: ‘Directo a México’ was set up in 2005. It facilitates remittances from the US to Mexico by linking the Federal Reserve’s automated clearing house (FedACH) with the Mexican RTGS (Real Time Gross Settlement) (SPEI).
11 Front-end services of banks describe services that connect customers with the bank such as digital platforms to initiate payments.
12 According to company’s website: https://www.paypal.com/us/webapps/mpp/about
13 In 2018 iZettle was acquired by PayPal and in 2021 renamed Zettle.
14 Distributed ledger technologies (DLTs) are a type of database that is spread across multiple sites, countries or institutions (Government Office for Science (UK), 2016). DLTs are largely based on the same technological principles as blockchain (for differences see Voshmgir Citation2019).
15 An updated list of all members of the Diem Association (formerly Libra Association) can be found on the Diem homepage (https://www.diem.com/en-us/association). In addition to blockchain startups such as Coinbase and venture capital companies, members include tech-driven companies such as Uber and Spotify.
16 Stablecoins are tokens that are pegged to existing currencies (or a basket of currencies) and backed by collateral. The value of stablecoins is, in contrast to the highly volatile cryptocurrencies, relatively steady.
17 On the (then) Libra homepage (March 12, 2021) we found the following information about the structure of the Reserve: ‘We will require the Reserve to consist of at least 80 percent very short-term (up to three months’ remaining maturity) government securities issued by sovereigns that have very low credit risk (e.g., A + rating from S&P and A1 from Moody’s, or higher) and whose securities trade in highly liquid secondary markets. The remaining 20 percent will be held in cash, with overnight sweeps into money market funds that invest in short-term (up to one year’s remaining maturity) government securities with the same risk and liquidity profiles’.
18 Nicholas Megaw: Amazon seeks to revive its faltering loans business. Financial Times from June 14, 2019.
19 Laura Noonan: Goldman Sachs talks with Amazon to offer small business loans. Financial Times from February 3, 2020.
20 This process was possibly accelerated by the fact that traditional payment service providers such as PayPal, Master Card and Visa left the association prior to its first official meeting in October 2019.
Additional information
Notes on contributors
Barbara Brandl
Barbara Brandl earned her PhD at LMU Munich and is currently Professor for Sociology with a focus on organization and economy at Goethe University/Frankfurt.
Lilith Dieterich
Lilith Dieterich is a research assistant at Goethe University/Frankfurt.