The coronavirus pandemic has led to a marked rise in the use of digital and contactless payments, but it has also exposed some of the shortcomings of the global payments system, according to the Bank for International Settlements.
"The ability to use contactless payments in physical stores and for online purchases has supported economic activity. Yet digital payments are still not sufficiently convenient or accessible to all," said a June 24 report from the BIS on payments and central banking.
Even in advanced economies such as the U.S., large swathes of the population have limited or no access to formal payment systems and are dependent on cash, the report said. For example, nearly half of Black and Hispanic U.S. households are either unbanked or underbanked.
Central bank digital currencies
The COVID-19 health crisis has also resulted in an "acceleration in momentum" in the development of central bank digital currencies, or CBDCs, Benoît Cœuré, head of the BIS innovation hub, said during a press conference.
CBDCs are fiat money but in digital form. They are a store of value in and of themselves, in contrast to regular digital payments, which are representations of money.
According to a BIS study published in January, 20% of central banks are looking to launch a digital currency of their own in the next six years.
Cœuré said he could not predict when the next CBDC would launch as it was a matter for individual central banks to decide.
Commenting on China, which is trialing its own digital currency, Cœuré said that the country was "blazing a trail" with CBDCs, and that the BIS has a good relationship with the People's Bank of China, the Chinese central bank.
Resilience and risks
It is encouraging that the global payments infrastructure has been "one of the more resilient parts of the financial system" throughout the pandemic, Hyun Song Shin, economic adviser and head of research at the BIS, said during the press conference.
"Even during the height of the stress, we didn't see any real episodes of freezing up of the payments system itself, both in developing and developed economies," he said.
But one potential risk arising from the pandemic is that the economic strain could result in a concentration of power in the hands of a few large companies.
"There is a chance or a risk that this crisis could result in a lot of creative destruction in the smaller fintech section. [If] this were to happen, it could make 'big tech' even bigger and stronger. In that case, industry structure and competition will become even more important for regulators. The jury is still out [on whether this will happen] but it's a very tangible risk," Cœuré said.
The BIS previously said in a June 2019 report that while the entry of tech giants such as Facebook Inc. and Amazon.com Inc. into financial services and payments was welcome news for financial inclusion, it could pose fresh risks to the financial system. These include the risk of "digital monopolies" or excessive concentration, according to the report.