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Why is a strong payments system important?

Payments is tightly coupled with economic success and failure

I had a great meeting with PaymentsNZ last week, which finished with a chat about why is the payments scheme relevant.  You may think that’s a non-question, but it’s an important one if we are to keep track of why payments is worthy of dialogue when we look at things like bitcoin and Ripple, for example.

Why is the payments system important?

Because it keeps the world working.  It’s key for economies.  It’s a critical part of maintaining stability and order.

No-one gets up and thinks about paying.  They think about receiving, consuming, giving and owning.  A payment is actually the least important part of the process for the person receiving, consuming, giving and owning.  It’s the thing they are buying and selling that is important.  The goods and services are important, and the value you place against those goods and services can be anything.  I could pay you in bananas, toasters, haircuts, airmiles, Diablo gold or bitcoins, as long as you feel the value I pay you is acceptable.  In other words, it’s nothing to do with payments but with value exchange.

I have something to sell.  You have something that has value.  In exchange for your value – which may be money or anything else I accept as value – then you can have my product or service.

That’s what it all comes down to.  However, and this is the really critical part, the value exchange needs to be monitored and recorded by government officials in order to ensure that the economy runs efficiently.  That tax is collected and that the things being bought and sold are legal.

That is why fiat currencies are the core engine of most economies, and why the payments system and the banks are the financial police for that engine.

Without an efficient payments system, you have no policing of the system.  You have no tax engine on things being bought and sold.  This is why the war on cash is not a war on cash at all, but a war on tax avoidance.  If governments can get everything off the network to be registered on the network, or on their blockchain in the future, then they can monitor, police and tax it.

That’s the real point of the payments system.  It’s not for paying for things or buying and selling stuff.  It’s for keeping control and order, ensuring trade is legal and that tax is paid.

Sure, governments could come up with other tax systems – increase personal and corporation taxes for example – but if they have no sight of the flow of trade, they have no control and that’s where it all breaks down.

A strong payment system provides a strong economy and therefore a strong society.  Similarly, a weak one creates a weak economy and weak society.

So, why are payments relevant?

  • the payment processing system keeps the economy strong;
  • it facilitates trusted exchange across borders through standards and security;
  • it provides relevance for consumer and corporate needs;
  • it maintains stability; and
  • it creates job growth through innovation.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • Sometimes we do need to ask fundamental questions as to why things (processes, systems, frameworks etc.) work as they do and Chris summarises the pivotal role of payments systems in enabling the financial services industry to serve the needs of the real, as opposed to black, economies.
    To highlight their importance turn to the newly established, still a work in progress, Payment Systems Regulator (PSR). It has a remit to ‘regulate the £ 75 trillion industry that underpins UK’s everyday financial activity’. Effectively the PSR is tasked with regulating those payment schemes deemed by HM Treasury to be systemically important to the economy.
    The schemes most likely to appear on the PSR’s radar are those covering UK interbank and major credit cards transactions and the coming months will reveal more on the issues and proposed options for tacking them.