News & Insights

Retail Central Bank Digital Currencies (CBDC): Should banks start getting ready for them?

Written by Julie Guetta | 20 July 2021
 
These days, it is almost impossible to look at the financial services industry news or attend a webinar without Central Bank Digital Currencies (CBDCs) being mentioned. It looks like it is not a question of “if” anymore, but “when” CBDCs will happen. But what is behind this surge of interest by all the main central banks in CBDCs? And what does it mean for banks?


CBDCs are on every
one’s lips
 

If you have been reading the news or attending industry events you must have heard a lot about this. Let's look at some examples. The virtual launch of the Bank for International Settlements (BIS) London Centre is a case in point! First, Benoît Cœuré, head of the BIS Innovation Hub, reaffirmed the focus of BIS on digital payments and CBDCs. Then only a few days later the UK released the responses to the Bank of England’s March 2020 discussion paper on CBDCs.  And, if that wasn’t enough, just as the Singapore Fintech Festival was organising a "green shoots series” on digital currency, the Monetary Authority of Singapore (MAS) announced a global challenge for Retail CBDC Solutions


So, what does this tell us?
 

There is significant interest in CBDCs for the retail customer segment, i.e. for payments made to and from both households and businesses*.  This is especially true if you consider that:  

 

1. The new BIS centre is in London, which is known for pushing the boundaries of innovation and for being a window on the future of payments. CBDCs are at the top of BIS’ agenda, and, the role of BIS is focused on increasing coordination among central banks on technological innovation 

2. The wholesale space is already looking at the next level of CBDC implementation through projects like mCBDC and Project Dunbar in Singapore, which have the ambition of linking various CBDCs. 

So to summarise, it is indeed not a question of “if” anymore, but “when” CBDC will happen. CBDCs are an inevitable part of the future of payments! 


What are the challenges for banks? 

To be fair, there are still a lot of unknowns for retail CBDCs, particularly around the target operating model. Are CBDCs really needed in the first place? Will it be a new payment method only, or a store of value too? What is the role of the commercial banks within the new ecosystem? What is the full impact of the introduction of CBDCs? What will the technical implementation look like? Will central banks interact directly with end customers, holding their money and performing the required Know Your Customer (KYC) checks?  

 

Although most central banks have already communicated that it is unlikely that they will hold customers’ money, there are still many unanswered questions. And these uncertainties make planning more difficult for banks. 


Will there be any benefits for banks if CBDC is introduced?
 

Despite the uncertainty, we can already see potential use cases that will enable banks to increase their revenue and reduce their costs. My top three are: 

1. Improved efficiency and resilience- Leveraging the efficiency of CBDCs, banks can simplify their operations and reduce risk. 

2. Innovative Value-Added Services- Building on extended operating hours, improved interoperability, and instant settlement finality offered by CBDCs, banks can explore new areas of product and service innovation. Cross-border payments are a natural candidate, as the experience for customers still contains many pain points, starting from the cost. Or, looking forward, payments initiated by the Internet of Things (IoT).

3. New Customer Segments- CBDCs is often seen as a vehicle to increase financial inclusion. Many developing countries are looking at CBDCs as a central payment infrastructure that will connect with and reach the 1.7 billion adults that remain unbanked, particularly when combined with the concept of interoperability mentioned earlier. 

What should banks do to prepare for the potential introduction of CBDCs?
 

While many Central Banks such as the Bank of England or the European Central Bank have not yet made a firm decision on the introduction of CBDCs, they continue to collaborate on solving some of the main outstanding challenges such as privacy, security or offline usability. Therefore, my top three words of advice to banks during this period of uncertainty are: 

 

1. Monitor the market constantly- although many unknowns remain, the decision-making process and actual implementation could accelerate quite quickly, particularly if the collaboration between the public and private sectors increases. If your team cannot dedicate time or resources to this, engage with a consultancy like RedCompass Labs who have their fingers on the market’s pulse and experience from CBDC-related projects such as Project Ubin in Singapore.

2. Build nimble infrastructure- Prepare for the probable introduction of retail CBDCs by implementing infrastructure that can: 1) easily accommodate another payment rail, 2) can operate 24/7, and 3) is API-enabled.

3. Consider your longer-term Payments Strategy- Refresh your payments strategy to offer some CBDC-related benefits and customer propositions, because the cost to support this new payment method may be significant.  

If you are struggling to see the benefits for your bank and your customers, or the benefits seem to be hindered by the implementation challenges, please reach out to RedCompass Labs. My team and I would be more than happy to discuss this and provide insights from our monitoring of the market, deep industry knowledge, and first-hand experience.