Oded Salomy and Yoav Soffer Spoke at an International Fintech Conference
Link to a video of the conference
Oded Salomy’s presentation, titled “Breakthroughs and Innovation in the Global Payments Industry: Where Does Digital Currency Stand?” is attached.
Salomy explained that most methods of payment currently in use by the public, except for cash, are digital (Slide 2), with checks also migrating to the digital domain. Almost all digital payments are made through payment systems, with payment service providers (PSPs) playing a critical role as intermediaries for payments between the two parties to a transaction, the payer and the payee (Slide 3). With the exception of cryptocurrencies, almost all innovation in digital payments takes place on existing payment systems, using bank accounts, settlement systems, payment card infrastructure, and so forth (Slide 4).
Salomy provided a review of the reforms being advanced in Israel, some of which are already being implemented, and some of which are planned for the future (Slides 5 and 6). He explained that while banks used to control a broad range of segments in the world of payments, the trend in recent years has been for fintech companies to enter narrow niches, with each company generally specializing in one niche and trying to bring value to customers in a specific area of specialization. This trend unbundles financial products and services. As a result of the fragmentation that results, the number of collaborations among fintech companies and banks is on the rise. (Slide 8).
Salomy outlined a business model for the payments industry. The number of transactions made by a typical consumer or business using advanced payments is huge, the number of transactions using current accounts is smaller, and number of transactions using credit is much smaller (Slide 9). In contrast, from the perspective of revenue and profitability, the pyramid flips (Slide 10), with profitability from credit being the highest and profitability from advanced payments being the lowest. And yet, advanced payments provide financial players an opportunity for high levels of engagement with consumers, providing data to manage risk and identify sales opportunities, as well as opportunities to upsell and cross-sell other financial products such as credit, as well as nonfinancial products.
Salomy presented a distinction between three main types of digital currency (Slide 11): Central Bank Digital Currencies (CBDC), which are issued by a sovereign monetary authority and maintain a stable value; Stablecoins, which are backed by stable assets and thereby maintain a stable value, but are issued by private entities; and cryptocurrencies, which are issued programmatically, have no intrinsic value, and are generally volatile. Because of their high volatility and the fact that they are not ubiquitous, they are so far not generally used as a payment method, but rather as investment assets (Slide 12). Salomy presented some of the regulatory challenges presented by cryptocurrencies, and provided a brief review of the potential uses of cryptographic technologies in the world of payments (Slide 13).
Later on, Oded Salomy and Yoav Soffer focused on Central Bank Digital Currencies (CBDCs) and the Digital Shekel project being examined at the Bank of Israel. Soffer explained that the public currently uses two main types of means of payment: cash, which is issued by the central bank and exists in the physical realm, and an account at a commercial bank, which is managed digitally and forms the basis for the public’s various means of payment—checks, money transfers, credit cards, payment applications, and so forth. CBDC could provide the public with the security, immediacy, and liquidity that exist with central bank currency, alongside the advantages of the digital dimension.
Soffer reviewed the global trends in this area. While no advanced economy has yet decided to issue a CBDC, more and more central banks are working on the issue, with the likelihood increasing from year to year that they will issue digital currencies within a few years.
Salomy explained that in view of the advancement of the payment system in Israel, the need for a digital currency is now a relevant question. Soffer added that in view of the risks inherent in such a process, the potential benefits must be examined in depth. A report published by the steering committee for a potential issuance of a digital shekel presented six possible motivations for the Bank of Israel to issue a digital currency:
1. A competitive alternative to the existing means of payment, as well as new ones in the digital sphere.
2. Encouraging innovation in the world of payments and adapting the payments system to the needs of the digital economy.
3. Increasing the redundancy of the payments system and its resiliency against failures.
4. Making cross-border payments less expensive and more efficient.
5. Maintaining the possibility of privacy when making a digital payment, as long as the payment is made lawfully.
6. Supporting the government’s policy against the shadow economy.
Soffer noted that while it is possible that no single motivation would be sufficient for the Bank of Israel to decide to issue a digital currency, the critical mass of all the motivations together may in the future tip the scales in favor of such a decision.
In summary, Messrs. Salomy and Soffer called on entrepreneurs from around the world to consider the possibility of initiatives in the world of payments in Israel, in view of the accelerated developments and digitization processes that the Bank of Israel is advancing in the payments ecosystem.