Future of money in the digital era: regulation as a levelling factor

The past decade has seen many different digital transformation trends reshape the way consumers and businesses interact never more than in the wake of the covid-19 pandemic. The financial services sector has seen an acceleration in payments innovation, with online intermediation and e-commerce’s exponential expansionbeing perfect examples of this new reality.

As we analyze the recent evolution, we see the blooming of new business models in the industry and new players participating in an increasingly competitive payments market. The entrance of new players has had some positive impacts as they are helping innovation to break through. They are also quite innovative in the way they understand the power of technology to transform how financial products and services are rendered.

Innovation in the payments business has been at the forefront in the last decades: clearing houses, card schemes, final customer and corporate value-added services (treasury and currency services), etc. and different competitors, large digital players and challengers have played a role spurring the whole industry innovation efforts in this field.

Payments have evolved into the cornerstone of the financial relationship with customers because they are a daily activity and touchpoint with the financial system. Payments are also a data-rich business in a world where data has become fundamental — fueling great efficiency and personalization. This is especially true in the case of digital payments. A clear sign of this is the huge change that has shaken the market and its dynamics over the last times.

Is in this context where PagoNxt has emerged in the payments space, being a one-stop-shop to provide the most disruptive services and solutions to merchants, SMEs, corporates and consumers. PagoNxt puts together the best of the two worlds: being a fintech with a great banking inheritance is quite unique, and its agile approach is what we feel makes PagoNxt a key player in the payments landscape.

To ensure that these positive trends are sustainable, we believe that the “same activity and risks deserve the same regulation and supervision” should be the underlying principle from the regulatory standpoint. We need a level playing field in regulation and supervision of all players in the payments chain and for that we need a revision of the current regulatory framework, which was designed for the analogue world but now it has to be applied to a digital context. Digitalization, consumer protection, data security and privacy are key concerns and should become an integral part of the new regulatory and supervisory approach to payments.

Current payment systems can be streamlined, especially in the cross-border space. But they work and pose low risk.

As we look at the future of money, digital assets are clearly on our radar screen. Current payment systems work well and respond to current needs. However technological change is the new normal and we see new opportunities arising from this changing environment.

We are seeing different trends:

• We see a trend, strongly supported by a political will, to move to instant payments as the new standard. This is very clear in different jurisdictions, and the EU is probably a good example of this. Adopting instant payments as the new standard may bring obvious benefits (especially in the P2P or P2M space).
• There is a solid demand from individuals and corporates (i.e. Bizum in Spain has reached c. 20 million users), and both for domestic and international payments.
• But it is also important to recognize that instant payments may pose some risks that need to be addressed and where a clear regulation adapted to this new reality is very much needed. Relevant issues such as financial crime compliance or fraud that has been core to banks strategies in payments over time, may be somehow compromised in an instant payments context.
• Interoperability of these instant payment systems might be the next industry’s challenge in this space.
• We also believe that current payment systems are working fairly well in general. But we also think that they can be more efficient, faster, more accessible and cheaper for customers, especially in the cross-border space. Currently, there are initiatives underway in that direction. We also see the BIS Innovation Hub with some streams that put the focus on the interoperability of current domestic instant payment systems.
• If we move away from retail payments, we also see a chance to improve international trade operations in order to reduce time, operational risk and costs by streamlining and automating trade processes. In this area Santander is a founding partner of we.trade, the world’s first enterprise-grade blockchain-enabled trade finance platform.

But the crypto world needs to be considered from the business and regulatory perspectives

As mentioned before, we are also witnessing the appearance and development of new elements related to payments in the area of the crypto world. Many different private and public initiatives, from stable coins to CBDCs, are gaining traction as long as more platforms allow consumers to access these instruments.

• Blockchain has played a relevant role as a technology and has urged older technologies to improve its capabilities and think out-of-the-box. It has solved some pain points and brought new use cases in different fields, like faster/easier/cheaper settlement and clearing, lower operational risk through smart contracts or traceable value exchange, to name a few.

As digital assets start to enter the traditional payments’ space in a more significant way, we see their use as a natural extension of our existing business — both from the perspectives of facilitating payments and money transfers and maintaining the role of stewards of the financial system with respect to compliance obligations.

As a company born and raised in the intersection of fintech with the inheritance of a leading financial institution, we balance our desire to push technology forward with appropriate attention to risk management to protect our customers.

That’s why from the regulatory point of view, we would like to highlight two issues:

• Players need to have regulatory more clarity in the different jurisdictions on assets/products/actors regulated in the crypto world. It is key that we all are able to compete in these new markets and offer our customers access to products and services in new digital forms while maintaining the highest standards of compliance and risk management. The potential inclusion of new forms of digital payments (e.g. e-money) in the revision of the PSD2 by the European Commission is a great example.
• It’s time to regulate Crypto markets as they are starting to become widely used, with clear responsibility schemes, AML and tax compliance and customer protection. We believe that good steps are being taken in the right direction. It is very good news that the FSB is going to lead the discussion to build a common framework. Also, the EU is regulating them through MICA.

In conclusion, there are clear signals in the market about regulators’ intentions to provide clarity to the stable coin and broader crypto sector sooner rather than later. These will be a net positive for the larger space. Bringing digital assets safely and securely is very important. Most people interacting with digital assets today still do so via an unregulated intermediary. For larger scale adoption, there is a lot of important and hard work that remains to be done to manage the environment safely and securely.

This is part of a broader regulatory framework revision to adapt it to the digital context that should ensure that all participants in the market (including the new players and new forms of digital payments) are subject to the same regulation according to the activity and risks they pose.

And finally, it is important to recognize the value of the current payment methods and their ability to respond to customer needs, also acknowledging the possibilities to improve (especially in the cross-border space) to keep on being the backbone of the payment system.