As the current experience is stabilized and wearable technology becomes the norm, we expect payments to become a part of lifestyle of individuals and businesses, which will earmark the next era. The flourish of Central Bank Digital Currency has the potential to become the singular force for seamless operations for both domestic and cross-border payments.
Transcript:
Swati (00:10):
So very good afternoon and welcome to session one of Track five and we will today be talking about crypto digital currencies and metaverse, right? All in future state, future generation evolving concepts. So we will try to keep the session interactive. We've tried to create a small capsule so that you can get some information around these topics and also hear from our experts on his views in this area. Before we go there, I wanted to start with the concept of Payscopium, Okay. Payscopium as a concept is a payments telescope. It is a journey that payments transformation will take over the next two to five years. We believe that the era of payments is a product is long gone As we are moving into the realm of customer experiences, we currently live in a world of AI, Artificial Intelligence, Machine Learning, and cloud. Everything is driven towards immersive, frictionless experiences and while we focus on that, it is also important to make the processes smooth, to improve security and basically offer the customers what they need. And that's what we call as payments as an experience. And this slide helps you a little bit about the generational shift. The starting point of payments future is cryptocurrency as you can see in the second tab. And based on its current relevance and degree of adoption, it also has challenges and it lends itself to a regulated alternative. That is what we are looking at from a central bank digital currency perspective and that's this session today, the flourish of state own crypto also has the potential to be a singular force in seamless operations between domestic and cross border transactions. And we call this as payments as a lifestyle in the medium term future CBDC will enable financial inclusion, which will actually make payments a mainstream economies across the globe. Financial inclusion will also enable embedded finance, which is the future of banking, where banks will meet the customers at their point of need and not the way around and which is what we call as invisible payments. Just wanted to leave you with that thought process. Before we move into further into this track. A quick round of introduction, Abhijit has joined us from Pentagon Credit Union. Thank you Abe. Thank you. Pleasure to be here. Abe comes with over 15 years of experience in the financial services world. He has great extensive work in delivery channel operations, customer journey optimization, analytics, business intelligence, business transformation, and product management. My name is Swati. I have about 23 years of experience in banking. I started off my career as a banker and I currently work with Hexaware Technologies where we consult banks and enable business outcomes through technology. So a little bit about us before we start. I was thinking Abe before we start, just to set some premise of what is digital currency, what does it entail? Because it's an evolving concept, different countries, different banks are looking at it in a different way. A digital currency could be a deposit with a central bank. It could also be a E-Deposit and distribution mechanism through private sector banks. It could also be distribution mechanism through licensed financial institutions. There are multiple options in which digital currency is perceived today. While privately owned, cryptocurrencies have become incredibly popular and accepted for some traditional institutions, there is still concern around crypto assets, cryptocurrency, volatility, and their vulnerability to abuse. And that is the reason why today we are talking also about regulated alternative to crypto and I will request you all to look at digital currency in this session from that perspective also to think of what are your typical challenges of crypto, right? Today, I know there's a session coming up on crypto where we will hear a little more about it, but just to set some context, correct, we are looking at uncertain regulatory status in terms of what are the policy guidelines, what are your taxation rules? Is there a lack of reporting mechanism? There is a lot to think about in terms of lack of awareness and technical understanding of crypto, which acts as a barrier to mass adoption. If you look at it that way, only a select few people are today dealing in crypto who understand the asset class and are able to leverage it today. That's a barrier to mass adoption. Technical challenges of scalability again is an issue. We are also looking at concerns regarding security, privacy and control today and misuse of course, that's one of the largest negatives from a crypto perspective today as we view it. What is the misuse of virtual currencies? It could be tax evasion, which could be money laundering among others. The perceived future of digital currency today is an ecosystem. Let's just move on here. It's an ecosystem which is expected to bring together a variety of players with government at the epicenter, creating a framework that will bring sustenance not just to the ecosystem but to the players. And that's how we look at CBDC today. Some of the three principles that really should form a part of digital currency is if we have a balanced approach, a balanced approach, not only to look at the privacy of the individuals involved, but also how we can combat illegal activities. A participation approach, a participation approach between banks and non-banks where not only deposit but the payment aspect of digital currencies taken care of between the multiple entities, the ability of individuals and businesses to make payments between banks, non-bank and other entities to basically create a free movement of money in the economy. That's another guiding principle. Last but not the least, know your user. We talk about know your customer and banks, we all are aware of that concept. Know your user from a perspective of banks and payment providers. Identifying the identity of the person who's accessing CBDC, right from that perspective. So those are some of the principles. So, CBDC is issued like a legal tender just like cash is today, right? It's just that unlike bank deposits, the claim would be made to the state or the central bank. So in that sense, while banks will be custodians, owner will be the state and they will underwrite it. Yeah. Abhijit, one question I had since we were looking at the ecosystem FinTech, and I know a lot of people in this event who are coming from that background. What is the role that FinTech are going to play in this ecosystem and actually what is the opportunity for them here? Yeah, that's a
Abhijit Patil (08:54):
Yeah, That's a great question, Swati. First of all, just want to thank everyone here for attending this session and Swar you very well kind of encapsulated the concept and the principles behind CBDC. So I think this is somewhat a little more esoteric topic and needs a little bit of introduction. So thank you for that. We understand real time payments. Let's talk about payment Fed Now and many other things, but this is sort of an evolving space. So really what are the opportunities for FinTech? So definitely at a very broad level as a service provider, but I see basically two sets of opportunities. So there's a primary set of opportunities and that is what I called an indirect secondary set of opportunities. And what do I mean by that? So what I mean is that I want to go back to a point Swati you made earlier about the distribution of CBDC. So the distribution models are still not set in stone. I mean there's discussion about how it's going to be implemented. There's obviously the centralized ledger format, which some governments across the world or some central banks across the world may prefer to suit their agenda. That there's of course the retail channel and depending on how it plays out, that has impact on commercial banks and to the end user. So that's how basically these opportunities step out. So irrespective of how this plays out, there's always got to be a one primary set of opportunities, which is around helping the central bank or the commercial banks who are going to distribute the digital currency to build out the financial intermediary ecosystem. So you've got to have some sort of a core system essentially. And on top of that, you build out these services which act as financial intermediaries or systems that do some of the regulatory oversight. So there's a lot of application building that needs to happen. There's a whole ecosystem that needs to be created. So that is your primary opportunity that's obviously going to exist. Then you've got to focus on designing the system and building out the user interface. You've got to build out the digital wallet. So there's a complete set of opportunities there. Now what I meant by the secondary opportunities, let's say this plays out to the point where, okay, that there is some disintermediation happening in the banking side, which I don't think it'll happen to a significant degree, but then be some sort of distribution. So there may be some flight of deposits over to the digital currency maybe, but there could be influencers in terms of the ability for commercial banks to originate loans because the flight of, so again, it may or may not pan out, but based on that, there are opportunities to build out more customized products for these commercial banks as so banks are going to react to that if they're going to feel some of the heat and they're by the second set of opportunities environment.
Swati (12:10):
Thanks for that Abhijit. I think sure, if I'm understanding correctly, opportunities spanned right from front office to back office, right? Absolutely. So right from your UX to actually setting up the infrastructure, whether it is DLTCL, like you mentioned, distributed leisure or centralized leisure and taking it back to the cloud as well. So I think there are opportunities for FinTech in all those areas.
Abhijit Patil (12:33):
Absolutely. With the distributed ledger systems, you have the opportunity to build out more innovative financial products. You have opportunities to build out more robust payment channels. You can integrate Fed now into this that's coming. Yes, hopefully in July.
Swati (12:50):
Hopefully in July. Yes, We've been having a moving date on that very, you know, spoke about new products and services and innovation. I wanted to bring in a use case of cross border because that has been outed as a big impact area for CBDC right now. We understand the inherent challenges of correspondent banking as also the inertia for global adoption of such similar trends. Where do you think how that plays out from an overall perspective?
Abhijit Patil (13:27):
So if you look at cross border payments, I mean there's multiple channels for that. I mean as mundane as debit card payment, credit card payment to digital payments to transfers, wire transfers. So there's a plethora of channels there. And with e-commerce booming, I mean I think that's a given. I mean, you've got to have some very seamless cross-border payment and mechanisms to facilitate the level of boom and e-commerce that we are seeing right now or we are going to expect in future. So from that perspective, I don't think CBDC are going to replace all these alternatives overnight, but they're going to come up with a very, very sustainable value proposition. And what do I mean by that is that all these channels that we have today have a variety of intermediaries coming in. So it's not really a frictionless channel. There's definitely a lot of impediment, there's a lot of steps clearing, there's a lot of regulatory burden and there are issues with settlements and things. So these are not really the most optimized channel. So that adds to your transaction costs. And this is where I think the promise of CDBC basically can make it a lot more seamless, less expensive, and it can promote e-commerce to a large degree. Now the way this is going to play out, we really don't know. I mean there's again things like direct settlements or cross borders from digital currency to digital currency. So if I want to settle a digital currency in India, the Rupay through a digital wallet in the US, I mean there's models that could potentially need to do that, do that settlement. There could be other payment channels that are built out of this ecosystem that will be integrated into it. So what it says is going to provide everyone with some very alternative strong alternative channels and it's going to facilitate e-commerce going to be helpful for merchants actually to find additional sources that are reliable and seamless and it's going to give more options in the hands of the end. So I definitely see a role forward, but again, it has to play out. It's not going to completely design or make all other channels feel relevant overnight.
Swati (15:56):
Correct. Well, I think one success story I'd like to share here with the audience, and this is not directly CBDC, but it's more DLT distributed leisure. So this is a current state, right? As we all know, when money moves between borders, it takes the root of correspondent banking, and this is actually the mBridge model which Hong Kong, China, Thailand, and UAE have adopted where they have eliminated the correspondent banks by creating DLT and cloud infrastructure for their cross paid border payments. And as you can see with that elimination, there is a direct interface between the two countries and you can see some of the benefits below from FX risk to settlement times to higher transparency. All these elements are brought in with the simple use of technology. So I would say technology is, it's a question of reimagining the business and creating new models that can support what we really want to do from this aspect. Yeah, I thought let's also talk a little bit about end users, you and me and all of us, and whether this is going to bring further ease to our transactions or is it going to create a fear of absolute control and lack of control rather and fear of transparency. Let's look at some of the fears that we might have and those are not unfounded, right? Because we are looking at things like prohibition of cash. Are we heading towards a cashless economy? Kind of takes away the anonymity which cash brings into transactions, correct? People are looking at increased government control. We are also talking about threatening of democracy and the absolute evasion of privacy. What is our right to privacy? Will finance be used as a lever of repression? Those are the kind of concerns people are having about this ecosystem. I think one way Abhijit I look at it is that how does CBD C complement the correct pay, the current payment ecosystem? Should we be looking at, like you said, it's not a replacement, it's not going to replace all your e-payments. You are continue to have your internet banking, your mobile banking, even cash for that matter. It is an alternate channel to facilitate the transactions which can be optimized through this process. That's one way to look at it. Then I'm looking at some of the advantages. If you look at a CBDC wallet, it has the possibility to do offline transactions across channels. How that can enable some of your business models is something to look at, right? There is security by national currency, I mean what better security to have than that? Correct. We are looking at free and faster transaction settlements and then consider it in comparison to the two to 3% merchant fee. We fare pay on credit cards today or even a higher fee in commission that we pay on FX and correspondent banking. And this is not to say that banks will lose on revenue and fee and income. There are models to abate that as well. Obviously everybody's cognizant of the current business models as well. The stability of central bank in terms of the optimal form of storing money digitally rather than just using it as a high risk investment tool, the right to use e-money will be civil law moving from banks to public sector. Last but not the least, I know we've spoken about transparency and transparency being fear, but transparency also means that there is effective fraud management. So as payments are going real time as payments are going instant, there is also a need to create that risk mechanism which can basically solidify what you're building on the front end. So I think that's something that I thought we should mention here.
Abhijit Patil (20:20):
Absolutely.
Swati (20:21):
We spoke a little bit about technology, right? So maybe a little bit more about how technology is helping reimagine this process and faster adoption of business models. If you could throw some light on that as well, please.
Abhijit Patil (20:37):
No, definitely there is a huge influence of technology here and there's some interesting business models that I think can become really important going forward. And this is, we're looking definitely a few years because this is all in motion right now at this point. We're still designing this system, understanding what the guardrail should be, understanding all the considerations around policy. So earlier I talked about cross border payments and everything. Well you've still got to, it's all great, but you still have got to have the policies behind it, the regulations behind it, the overall compatibility of systems and wallets. So there's this definitely some work that needs to be invested into before this becomes a channel. So same thing with the business models. They're going to evolve with time, but they're going to be some very interesting business models. And I can clearly see things like pay per use type models for example. So let's say want to rent out a machine or something from Home Depot, say you want to clean out, you want clean up your basement and rent out a mega vacuum cleaner from Home Depot or something. So you could have some sort of an IOT type application that builds according to the usage of the machine. Then you can have machine to machine type payments when you are kind of let's say charging your electric vehicle, there's opportunities there. I see a lot of business models getting moved around in the supply chain systems like smart supply chain systems where event driven triggers come out and payments are made based on smart contracts written. So based on the inventory turnover, certain event points, you're able to release funds. So there's definitely a lot of flexibility built in how you can program the movement of money. I think those business models will definitely bring a lot of efficiency, unlock a lot of efficiencies on sure sides of supplier and the producers.
Swati (22:54):
We have around seven minutes. I wanted to touch on a couple of more topics and then maybe we can take a few audience questions as well. Since you mentioned about smart contracts and the IOT piece of it, I also wanted to talk a little bit about use cases for different players. That's another important thing that we always think of within emerging trend and who would be the earlier adopters? So obviously there is retail, I mean you can use digital currency like cash you do today purchase goods and services. You could use it for micropayments on for online transactions, you can do P2P payments and you can also do programmable money. So basically from a monitoring and social policy perspective, think COVID loans when the government was sending out SPA PPL payouts, it's programmable money use case actually right there. So if we had that infrastructure at that point in time, it would have been much easier, faster, better. Obviously there are businesses, businesses can look at it from internal treasury perspective, from vendor payments perspective, from a perspective of facilitating wholesale payments or cross border payments, banks and payments provider. I look at a little differently Abhijit in terms of what innovative products and services they can bring to the market through this right breaking ground on their traditional business models and really thinking through what new they can add into their suite of what new demographics of customers they can cover through this. And of course government government is a no-brainer since they would be the ones who would be sponsoring this in the country. Obviously there is tax collection, there is anti-money laundering abatement, there is benefit payments directly to customers and likewise. So I think those are some of the areas which find fast and easy resonance in terms of where we can leverage.
Abhijit Patil (24:55):
And if I may add about the financial inclusion. we should mention that that's a big part of what's driving this. There's different driver behind why different central banks are in a rush or not so much in a rush to get to this, but financial inclusion is got huge for most central banks here, even in the US I think that's going to be driving this forward, driving this forward.
Swati (25:22):
Absolutely.
Abhijit Patil (25:24):
That's going to help you tap into a lot of markets. I mean I talked about the e-commerce opportunity earlier that is going to help you go to certain sections which are somehow deprived of certain opportunities to participate in the marketplace or the geographical barriers and things like that. So this is going to open up a lot of segments as well from the commerce side.
Swati (25:47):
And just to leave the audience, since you mentioned that point about the worldview, there are some differentiating approaches and then you touched on it a little bit abm, and there is obviously the consultative and the inclusive approach that some of the countries are following. Then there is an approach where there's wait and watch and there's still countries who think that they are probably don't know CBDC right now and they're sitting on the fence. So there are different approaches that you will find that countries are following today. And I think it also, like you mentioned, the basis of that is really their maturity in the home, whole payments transformation space. Talk a little bit about that.
Abhijit Patil (26:34):
Yeah, I think what I hear sometimes from people is why is the US a little behind on this? Why is there not that enthusiasm? And,My answer is I think you're going to see a lot of announcements. 2023 is going to be the watershed here. I mean we've already seen a lot of movement in terms of what the Fed is doing with a lot of financial research labs at MIT and various other institutions coming up with experiments on this, playing out scenarios, war gaming. So there's a lot of thing that are happening in the background and I think the Fed has tried to do is first of all set out the payments, the real-time payments network. So what are you going to do with the digital currency if you don't have the necessary policy guardrails and the payment structure. So coming back to India, you know how they set up their UPI payments? Piece up front and then they got into digital currency. Really the central bank issued digital currency. So that's kind of what the US is doing. So it's not that there is no enthusiasm, there's no movement, there's a lot of movement on the real time payment structure. There's a lot of conversations happening right now in terms of the guardrails, how this is going to impact commercial banks. I mean there are significant impact to commercial banks in terms of being disintermediated or being able, there's a possible flight or deposits. I mean you want to control all those things. So I think it's a lot of things are happening in the background. You've got to hear a lot in 23 about these things.
Swati (28:16):
Yes, please.
Audience Member 1 (28:30):
Hi. Thanks. I was just curious how much of the back pedaling in the US do you think is due to politics? I've seen some chatter on the right about CBDC's being a method of surveillance and it seems like with the crash of FTX and everything that I'm just trying to tease out how much of that is really that. Oh thanks, we're good. And how much of it is too radioactive right now?
Swati (28:59):
Yeah, Good question. And the way I would like to view it is that some of it is bad press, right? And we like to kind of look at things in that perspective and blame certain things on politics and stuff. But like Abe said, there is a lot of serious talk amongst players of what it means to have digital currency. Right now we are looking at instant payments as an adoption and hence you don't see that much movement in the US but there is enough talk of ideas going on because the reason is, look at it in this perspective, there's a commodity, let's say petrol for a lack of better, right example and the Middle East, and let us say Asian countries are up from a digital currency perspective and their bail balance of payments becomes much easier due to digital currencies and they follow the route. It would become important for us to get into that game as well. Maybe not now, maybe in six months, 12 months, 24 months time period. So it's only a matter of time till the financial economy reaches that maturity from payments perspective only. I'm talking right? So maybe right now the focus is on instant payments and enabling that for banks and central banks. Since that is underway and through I think the next thing on the cards is digital currencies. So till that we will hear the charter is how I look at it. I don't know if that answers your question though. Thank you.
Audience Member 2 (30:40):
Hey, great conversations, Swati and Abhijit. What do you think should be the role of banks in terms of adoption to these digital currencies?
Abhijit Patil (30:50):
So I think there's a lot of ways banks can prepare for this movement or a potential disruption. I think there's definitely going to depend on how this is going to pan out. If there are certain banks or certain financial institutions that are selected as the keepers or the distributors of the currency from the fact. So who gets to qualify on what grounds? Okay, if institutions one, two, and three can participate, well what happens to the rest of them? What happens to the smaller banks players? Are they able to participate? Are they able to provide digital currency based repositories to their customers? Let's say there's a credit union where I come from, I mean one of the largest credit unions that I work for, but from the smaller credit unions, are they going to have these services white labeled from the designated banks so that they can go back to their own end consumer? So there's a lot of things that are uncertain depending on how it's going unfold. To the earlier question, to the gentleman's question here earlier, I will also point out that look at privacy and this being controlled totally by a central ledger mic thus, that's not how it's going to pan out. That's how it pretty much panned out in China. I think if you look at the MB, that is a very centralized or a decentralized little currency. But I think in the US we're trying to make sure that there is certain amount of transparency, but at the same time we're able to address the privacy concerns. That's the delicate balance that needs to be played out and that's why it's taking a little longer. But to your point to coming to banking, I think there's a lot of things banks need to think about in terms of the user experience. Think about it, okay, are you going to be able to directly deal with it and create your wallets or your user experience or you are at the mercy of certain providers or certain chosen institutions or going to white label their platform? And then how do you leverage a lot of your digital banking assets? There's a lot of work that have gone. So your digital currency access wallet and your digital banking needs, how do you combine those two? Leverage what you have, not start from scratch and build out the holistic experience. So these are things banks can start thinking about. I mean, it's going to come, it's not going to come in 23, it's probably going to come in, I don't know, in the next two, three years. But it's going to come all of a sudden and you don't want to be caught flatfooted at that point. You want to understand what your ecosystem will look like. You want to understand how this is going to play out with your end users, build out the user experiences and be prepared for that. Absolutely. Want to add anything?
Swati (33:41):
No, I think we are all also up on time. So I think thank you so much for being part of the session and thank you all. And in case you want to read a little bit more about digital currencies at CBDC, you can visit our website www.hexawar.com. There are some thought papers around this area we'll be able to read. Thank you so much for your time today.
Abhijit Patil (34:05):
Thank you
Track 5: Opening new frontiers with digital currencies
May 23, 2023 12:30 PM
34:15