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What foundations are we building the future of money on?
Ultimately, the future of money depends on users. Acceptance and adoption rates will define the success, or otherwise, of digital money. For consumers and businesses, cost, speed, security and convenience will be critical. For providers and policymakers, the digital future of money will demand an ecosystem that is trusted implicitly by all participants, and robust yet empathetic regulation to balance the needs of innovation and access with the necessity of appropriate controls to protect the environment and flow of value – whatever form money may take.
Historical foundations are already shifting. To understand where we are going, we need to understand where we are starting from. We will begin by investigating six underlying trends that will continue to influence how the future of money unfolds.
#1 Incumbents’ business models are being challenged as new standards, regulation and modern technology enable new competitors, and put pressure on payments margins
The outlook for some firms is challenging. Low margins will be the order of the day for those who fail to evolve and are relegated to a utility future. Such firms will be left to manage the payments pipework, ceding more profitable, customer-focused ground to other players.
The margin erosion resulting from this shift will be further accelerated by new standards and regulation, as well as the intensification of competition from big techs and fintechs. Meanwhile, nimble disruptors will focus on increasing the ease of transactions, eliminating cost and friction, and delivering more attractive and connected consumer experiences.
The implied threat here to legacy business models will, we think, inevitably drive defensive mergers and acquisitions (M&A) activity and a fresh search for new revenue streams. Against this backdrop, leading firms will continue to focus on digitisation, costs and operational efficiency to both survive and thrive.
#2 An increasingly complex ecosystem of providers driven by competition and innovation requires a commensurate evolution in risk management
Increasingly, consumers are making payments and gaining access to other financial services via firms outside incumbent banks and schemes, such as big tech players and challenger fintechs.
The digital wallet is increasingly seen as the focal point for customer engagement in payments, and potentially additional adjacent services, both financial and more broadly. We expect big tech firms to continue to challenge the dominance of existing payment scheme providers through initiatives like digital wallets on smartphones. This, in turn, will put further pressure on established business models.
At the same time, the complexity of the resulting ecosystem will require scrutiny and evolution of risk management frameworks to maintain stability and trust in the system.
#3 Unification of messaging standards increasing pressure to renew ageing legacy infrastructure
The global ISO standard for financial messaging (ISO20022) continues to see widening adoption, defining the format and content of financial messages exchanged between financial institutions, businesses and other organisations. By providing a common language and framework for financial messaging, the standard allows for more efficient and accurate communication between different systems and parties, addressing many of the issues facing institutions now, particularly when it comes to payment scheme interoperability.
Nevertheless, while the standard includes a range of features to enable the efficient and secure processing of financial messages – such as enriched data, digital signatures, message authentication and encryption – major infrastructure renewal is required at many firms to capitalise on these benefits, with a number of projects already in flight.
This, in turn, is triggering a ripple effect across the industry as participants and providers start to transform to adopt, integrate and create new value-added services built on renewed infrastructure, creating a once-in-a-generation opportunity for the industry to push forward.
#4 How data is used and managed is improving insights and risk management
The richness, accuracy, accessibility and completeness of data are currently limited.
Moreover, data definitions are applied inconsistently by different parties. There are difficulties in linking and processing data. And questions over data ownership, privacy and sovereignty further complicate attempts to derive value from data.
The adoption of common standards, as noted above, alongside investment in tools and solutions to enhance the quality of data is already happening.
This, in tandem with advances in processing and analytical capabilities, including those using more complex AI, is delivering firms a far richer view of the customers they serve, creating new possibilities for both risk management and customer value creation. For example, the application of advanced payments data analytics can be used to support the ESG agenda through analysis of payments flows to understand supply chain sustainability.
In the public sector, many governments are seizing the opportunity to use better, more accurate and granular data to transform financial crime monitoring and enforcement, enhancing both the collection of tax revenues and the distribution of benefits. Two live examples are the Making Tax Digital (MTD) initiative in the UK and the Central Electronic System Of Payments information (CESOP) in Europe.
Similarly, analysis of payment flows can improve the understanding of customer behaviour and business activity to enable improvements to both financial and non-financial products and services.
#5 The global fight against illicit finance and the need to comply with anti-fraud, anti-money laundering (AML), know-your-customer (KYC) and sanctions requirements will continue to be a key area of focus
As the nature of money and the ways in which it can be moved around the world continue to evolve, so too will the associated fraud and financial crime risks. The need to prevent misuse of new modes of value transfer, while enabling access to the opportunities they provide, will be an ever-present balancing act and societal imperative.
Enriched data combined with smarter AI-powered analytics (for example, topographical data mapping that can create alerts based on patterns in large datasets) is already enabling higher standards of transparency and protection. Meanwhile, as digital identity and verification schemes emerge, they will further enhance payments transparency.
Moving forward, the safety of payments and the financial system depends on the quality and coverage of identity solutions for individuals and corporates, and the advanced payments flow-monitoring capabilities needed to identify and prevent illicit finance. These will become critical components of maintaining trust in any future digital, decentralised financial services landscape.
#6: Payments and the value of money remain intrinsically linked to established banking infrastructure and nation-state economies
Alternative options for the storage and exchange of value using decentralised digital assets and currencies are continuing to evolve.
However, the paths ahead are unclear. There are regulatory, tax, macroeconomic and liquidity consequences of breaking the current link between money and value and sovereign national governments, regulators and tax authorities.
In this context, the rise of Central Bank Digital Currencies (CBDCs) and stablecoins represent a shift towards less volatile, more regulated digital solutions.
Particularly in the wake of unprecedented volatility and uncertainty in the digital assets space following the collapse of crypto-currency exchange FTX and others, many stakeholders are, to a greater or lesser extent, reconsidering how they want to move forward.
Coming up: Having understood these foundational trends, in our next article, we explore some of the most influential drivers of how the future will unfold.
