In the final article of this series, I will take a “non-financial analyst” look at the effect that Central Bank Digital Currency (CBDC) will have on commercial banking, payment services & customers.
As mentioned in previous articles, CBDCs are expected to create a new payment system paradigm, especially as it relates to retail payments services and international transfers e.g. remittances. Currently, local retail payment systems are monopolised by commercial banks. With CBDCs, more players will be able to provide innovative payment solutions for both the banked and unbanked. Many of these offerings will boost economic activity. This new landscape of payment services will also allow peer-to-peer payments and more diversified payment options.
The effect on Commercial Banks
The role of commercial banks, depending on how our CBDC regime is implemented in Jamaica, could fundamentally change. Early indications are that the Bank of Jamaica will issue CBDCs through commercial banks to perhaps reduce risk and exposure associated with direct interface with the general public.
This, however, would make for an interesting situation as, where the use of CBDCs increases in popularity, commercial banks may find it hard to justify exorbitant fees associated with traditional currency operations. This will undoubtedly affect their profits and commercial banks will then have to find alternative ways of shoring up their bottom line. This could see the cost of some traditional services (e.g. home or auto loans) increasing.
In an overly simplified explanation, traditional central bank money (cash) is really only useable in the local context. As such, international/cross-border transactions involving an exchange of currencies can be an extraordinarily complex undertaking for financial institutions and systems.. This complexity equates to high-cost transactions which invariably are borne by the customer. CBDCs, when properly implemented, will see a more efficient approach to these types of transactions, both regionally and internationally. Costs for international transactions are expected to decrease significantly while occurring in near real-time. While this works for the consumer, it may again have a negative impact on the profit margins of commercial banks. Hopefully, attendant laws and regulations will be instituted to protect consumers.
Trevor Forrest is CEO, 876 Solutions and a Certified Blockchain Architect with over 29 years of experience in the IT Industry in Jamaica and overseas.
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