Where’s the Money? The Challenge of Managing Change

In polite society, people don’t talk about money. Forgive us, therefore, for this.

Some problem areas

The London Climate Technology Show, which took place end September, was full of start-ups and other more established companies offering solutions to measure your environmental footprint, to offset your carbon, to sequester your carbon in the soil/ocean/trees etc. etc. etc.

But until there is a global price on carbon emissions, all of these organisations depend on either their solution reducing the cost of the product/service on offer, or on the customer wanting to be a good citizen irrespective of the cost. Unless every company wants to be a good citizen, the risk is that investing in environmental sustainability will make you uncompetitive. The bottom line doesn’t lie.

October’s ATMIA Europe and Emerging Markets event ends with an advocacy panel that will discuss how the ATM industry can help maintain payment choice. When demand for cash leads to lower cash volumes in the system, eventually the discussion comes to who pays. Yes, there is work to do to make the cash cycle lean and to drive out cost, but if cash is required at uneconomical volumes, who pays?

Recently a central bank was asked why they were building a new state printing works at a time when cash volumes are declining. The answer was because the private sector was struggling to survive with low volumes and low prices.

Traditional economic theory says that market forces should ensure that prices rise as the number of suppliers fall. But at the moment they aren’t, and over supply continues to exist. Perhaps we’ll put to one side the distorting market impact of government printing works producing for export at this stage. The decision of the central bank to build their own print works is, in a sense, logical in these circumstances. But without profit, where is the money to invest in R&D for the next generation of security features?

One topic that only occasionally raised its head at the recent CBDC conference in Istanbul was the cost of CBDCs and who would pay. Two tier systems are now the assumed model for CBDCs: the central bank runs the central ledger and issues/redeems CBDCs, while third parties handle the consumer interface, bearing the costs of on-boarding customers and innovating to offer new payment options.

While there was still talk of CBDCs lowering the cost of payments, there was less of this talk.

An awareness that the third parties are used to earning fees and income from payments and won’t give that up, as well as incurring costs that have to be paid for in addition to what they normally do, means that the clarity on the costs of CBDCs is less. In addition, of course, the cost of the CBDC system still has to be paid for.

Perhaps no surprise, therefore, to hear central banks talking about CBDCs being a public good and part of core payment infrastructure.

Making it pay

For environmental sustainability, while money is a difficult topic, the bottom line is real and is a brutal master. Perhaps central banks need to put a price on carbon so that their suppliers face a level playing field.

For the cash cycle, the opportunity for innovation around access for cash is significant; think shared banking, utility models, Smartsafe roll outs, local recirculation etc. Look also, at the Reserve Bank of New Zealand’s work with paying retailers in remote areas where there aren’t ATMs to handle cash (and cross-charging commercial banks for their costs).

Creativity is needed. Many central banks were quick to outsource cash management, pushing the costs to the private sector. Now that margins are thin, is banknote seigniorage a source of funds to pay for the cash cycle?

As for cash production, if state printing works export, should their domestic indent have to be tendered as well (as already happens, albeit along slightly different lines, in the eurozone)?

And as for CBDCs, can these earn seigniorage to be used to pay for the payment infrastructure? If CBDCs are legal tender, should cash have the same status? Could a fee on all digital payments be used to launch CBDCs and to sustain them until volumes and usage build over time?

The private sector is driven by the bottom line. They work with market forces to do what they do. Central banks are a key market force and have the opportunity to shape what happens across every part of the cash cycle.

Impolite as it is, central banks need to get their hands dirty and engage with the profit motive if payment choice is to be maintained and societal good delivered.