Chairman’s Views of Global Payments Developments – Jean-Michel Godeffroy [Episode #4]

Podcast Intro (00:00:00) – Hello. Welcome to P.I.T. Exchange, a podcast by Currency Research. Join us as we discuss the latest in payments, innovation and technology with the industry’s most innovative thought leaders. Today’s payments are changing and moving around the world faster than ever before and P.I.T Exchange gives you the knowledge and insights to keep up. Sit back and relax as we join Currency Research, exchanging ideas with today’s special guest.

Gonzalo Santamaria (00:00:33) – Hello, everybody. Welcome to P.I.T. Exchange. My name is Gonzalo Santamaria. I’m the vice president of Currency Research transmitting from Madrid, Spain. But in this virtual world, I could be anywhere. So today joining me in this podcast is Jean-Michel Godeffroy, the chair of the flagship Central Bank Payments Conference event. And what we thought we would do today was talk a little bit about, what is going on around the world in terms of, payments especially as they relate to central banks. So we’ll look at trends, we’ll talk about a few of the key areas. And Jean-Michel, welcome and, over to you to ask probably the primary question, what do you see as the main trend that is going on in in payments, from a central bank perspective? And how is that affecting payments and market infrastructure on a global scale?

Jean-Michel Godeffroy (00:01:32) – Thank you Gonzalo, thank you for the question. I think there are perhaps three trends that I’d like to mention to start this interview. I would say three trends which are potentially changing, the world in the field of payments. The first one is, of course, cross-border payments. I think what has happened is that basically the world has globalized, the business has globalized, and payments we’re still, caught between the national barriers. And, there are a lot of efforts which are done, under the pressure of the public sector, but with the help of the private sector to improve cross-border payments. This is not really a revolution. This is probably an evolution which was a little bit delayed for whatever reason, but which is going to materialize progressively because there are a lot of hurdles to overcome. The second trend I would mentioned is artificial intelligence, because artificial intelligence is going to change a lot of things in the way we are working, and inevitably this will affect payments and this is also affect central banks and the way central banks intervene in the payments field.

Jean-Michel Godeffroy (00:02:59) – It is a field. It is a domain which is not yet fully explored. I mean, interestingly, when I prepared the Central Bank Payments Conference, I mean, I tried to find central bankers willing to speak about, artificial intelligence and payments in central banks. And then I realized that it was probably a little bit early for that because, banks has probably not come to an end. There are still a lot of unknown and what we are going to do in the Central Bank Payments Conference, we are going to speak about artificial intelligence, and probably next year we will really see how it could change, central bank, the way central bank run and oversee payment systems. And the third trend, of course, is Central Bank Digital Currencies. Because if this materializes and there are still a lot of unknown in particular on the way, central banks will convince banks and convince users to use CBDC. But if CBDC materializes, if central banks are successful, then I think we are going to, see one of the few revolutions that have occurred in the field of money, since, centuries.

Jean-Michel Godeffroy (00:04:20) – So this is a major possible change in the way, payments circulate and in the way money is created.

Gonzalo Santamaria (00:04:30) – Thank you, Jean-Michel, appreciate those, starting comments. So I think I agree that everything that we’re seeing, especially being published these days, is very focused in some of these areas. And it’s interesting, as you say, an unknown to us, why it took so long for the FSB and G20, to get those things in motion, to get those building blocks out. But it’s done. It started, I think a lot of the markets around the world are starting to focus in on some of these, there’s a lot of action points, and plans and subcommittees that are being driven on that. So I think it’s very interesting and yes, you’re absolutely right that it’s a hot topic. And cross-border payments, is, is something that is that needs to be, there needs to improve to and to remove the friction. And I find it interesting also that within that topic there’s an underlying one which is the instant payments or faster payments rails which are now, being driven towards interconnectivity between markets and that.

Gonzalo Santamaria (00:05:32) – And I think there’s an area there that that I’d like for you to sort of expand on if you could, because there are collaborations that are going on in some parts of the world, right, where where they’re interconnecting these, these instant payments rails. And this also touches on CBDCs, because at the end of the day, if we’re able to, improve to the point where instant payments can interconnect, and there can be interoperability on maybe, perhaps not a global scale that’s a little bit farfetched, and that would be wishful thinking. But what does that say to CBDCs? Will CBDCs still have a purpose, if you will? Will that use case still be still be useful? So I know I’m, I’m mixing quite a few things in here, but I wonder if you could talk a little bit towards that, towards, instant payments within that cross-border solutions, cross-border payment solutions and how that might affect CBDC as a use case for CBDC still stand up within, within that.

Jean-Michel Godeffroy (00:06:38) – Thank you for the question, Gonzalo. I think there is one trend which I could have mentioned also, but it’s it’s a trend for real time payments. I mean, when I started in payment system, let’s say 20 or 30 years ago, it was no idea of making, a cashless payments, instantly, except in the field of cards. And that was the main benefit and main reason, I think, why cards developed is that you are able to pay with with the card and then to go to take the goods and go. But I mean, the merchant was not paid instantly, but nevertheless it was the only case where you could really, have the impression that the payments, was made instantly. Now the situation has changed dramatically. First of all, Instant Payments has developed with, traditional bank money. and that’s what we call instant payment systems. But then, what happens also is that there are other kinds of money than traditional bank money, which can be processed real time. This is also the case for money issued by non-bank particular.

Jean-Michel Godeffroy (00:07:57) – If you see the development of mobile money in, in, in Africa, you see that this is instant. And if CBDC develops, it will also be instant. The one of the question is whether everything should be instant. And this is indeed one of the questions we are going to discuss in, the Central Bank Payments Conference. Will everything become instant now? the question whether to have CBDC or not is, in my mind, relatively disconnected from this issue, because anyway, we are moving to instant. Whether we are moving 100% or only partially, it will be a large chunk of the payments which will be instant anyway. So the question, the success of CBDC is whether CBDC can prove that they are able to bring something to society from the perspective of the regulators, from the perspective of the central banks, from the perspective of the public authorities in general, they are the case for CBDC is relatively obvious. The key question, as I said already, but I repeat because it’s very important, it’s very difficult also for central banks to speak about this, is how are you going to convince the intermediaries to work with you? How are you going to convince the users to use CBDC? For me, as a former central banker, the case for CBDC do exist, but it exists at the level of society.

Jean-Michel Godeffroy (00:09:37) – How will central bank bring this issue to the level of the individuals, and what incentives are they going to give to the intermediaries, in particular the banks, to convince them to help them developing CBDC? And as this being said, the objective is not for CBDC to replace bank money, because that could create a lot of questions which will interfere in the way money is created these days. But the question is how to make sure that CBDC can find a place in the payments, the range of payments means available so that the objective in terms of society can be met.

Gonzalo Santamaria (00:10:29) – Yes, thank you Jean-Michel. Fully, fully agree. And, so on CBDC specifically, I’d like to point out and I think it’s important also that this is now, you know, approximately six years or so since the Libra project came to light. That drove a little bit of, nervousness, if you will. It woke up the central bank community to CBDCs, previous to that, only a handful of central banks were looking, investigating, researching, piloting, perhaps even China being one of them.

Gonzalo Santamaria (00:11:08) – Sweden, perhaps the most advanced, from that realm and some previous projects that had happened, I mean, to name a few, Ecuador, Uruguay, etc.. but, the fact that now 90% I think of the global, of the highest GDP is, is now investigating and researching, CBDC is partly due to the sovereignty issue, correct? You may correct me if I’m wrong. And at the same time, they’re also, honing in quite a bit on what I understand is the financial inclusion aspect to underscore that there are still a very large proportion of the global, population that is financially excluded. And, and with this type of digital currency, one of the objectives is to get a larger proportion of that of that exclusion into the, into the financial markets to be able to have financial products, etc.. how do you see that aspect, Jean-Michel?.

Jean-Michel Godeffroy (00:12:20) – Okay. Yes. thank you, Gonzalo, for the question. I think indeed, 90% of the central banks worldwide are looking at, CBDC, apparently, but, they are not looking necessarily at the same kind of CBDC. Some of them are looking more at wholesale CBDC, which is, how to make to use, DLT to improve the way we serve the financial markets. We, central bank serve the financial markets. Others are studying CBDC, but, let’s say relatively hands off. Let’s say they are studying it. They are looking at it. They have not yet taken the decision to go and invest in CBDC. There are two cases which are particularly interesting in my mind, it is the case of China and the case of the European Union, or more exactly, the euro system. Because these are two, big, economies in the world and they have now, China has, is in a pilot phase. Very advanced pilot phase with dozens of millions of people involved. That’s one situation, the second situation in the euro system, they have now a plan and so that they are ready to issue CBDC if there is political backing and apparently there will be political backing in Europe.

Jean-Michel Godeffroy (00:13:56) – What is interesting is that in the US they are much less advanced because there is no political consensus to say the least. There are even a lot of opposition towards CBDC, which is seen wrongly in my mind, but nevertheless it’s seen like that, politically has an intrusion of the central bank in the field of payments and possibly in the life of the people. So, this, the situation is very different in different parts of the world. And I think that the possible success, of CBDC in China and in Europe will be determinant for the success of CBDC globally. Now, what are the objectives behind the CBDC? There are two kind of objectives, which are perhaps I would start with what is not necessarily an objective. It is, it is financial inclusion. Of course, every project aiming at, developing CBDC puts a financial inclusion as one of the objectives. But to be honest, there will be other ways to achieve financial inclusion and financial inclusion is rightly a very important objective for all central banks worldwide.

Jean-Michel Godeffroy (00:15:24) – But there would be other ways to foster financial inclusion, than CBDC, for example, mobile money in Africa or, you know, there are a lot of possibilities to do financial inclusion without CBDC. But of course, if CBDC is done, financial inclusion should be one of its objectives. But why CBDC? I would say there are two reasons. First reason is to say we central banks have to prepare for the progressive disappearance, or I would say marginalization, perhaps, of cash in terms of banknotes and coins. And if central bank money disappears from the retail economy or is becomes marginalized in the retail economy because, they are less and less, banknotes and coins in circulation, then, they have to be prepared to cope for a number of problems, like the, progressive monopolization of money by the banks. And that is possibly creating problems in terms of competition and so on. So this first issue, how to cope with the progressive, or the marginalization of banknotes and coins is one reason to look seriously at CBDC.

Jean-Michel Godeffroy (00:16:52) – And the second reason for central banks to look carefully at CBDC is also in a, in a global world, the realization that, the payments providers are more and more concentrated and concentrated in the hands of, operators, which are typically, not from the country. And that raises a problem for the monetary sovereignty of the country. Just to give an example, if there is a decision taken by a home country of a payments provider, that decision could affect the way payments are delivered in my country. So that is the reason why, many central banks are looking what one major reason why, central banks are looking at CBDC seriously. The question of sovereignty.

Gonzalo Santamaria (00:17:47) – Very interesting. Thank you, Jean-Michel. So picking up on that point in terms of CBDCs, and let’s focus a little bit more on retail CBDCs, because as you mentioned, there are quite a host of projects ongoing on wholesale CBDCs on the retail side of things. So based on the fact that there are markets that, yes, have thrived on mobile payments and have done a significant efforts to drive financial inclusion forward, but in those markets where they have implemented mobile payments and it has not succeeded, CBDCs could be seen as a good solution.

Gonzalo Santamaria (00:18:26) – And in fact, if, if I’m not mistaken, there are views that tend to see a retail CBDCs as a more, let’s say, inclusive solution in those emerging markets, more so than the developed markets. How would you see that, those differences, how would you describe those differences between emerging and developed markets when looking at a retail CBDCs pros and cons?

Jean-Michel Godeffroy(00:18:54) – Well, I would say, the question of financial inclusion is, of course, a question, which is primarily a question for countries where the percentage of the population which do not have access to electronic means of payments is, let’s say below, 90 or 95%. In these countries, the economic developments, is linked to, the access to, electronic means of payments. And then, as I mentioned before, mobile money has been successful, but more successful in some countries and others. So you’re right. I would say in developing countries where, mobile money has not been fully successful for, for whatever reason then, and sometimes it is because there is too much competition between the different providers and problems of interoperability.

Jean-Michel Godeffroy (00:20:01) – Then, of course, in this case, CBDC could be an excellent way to, foster financial inclusion. As I said, financial inclusion is on the agenda of all central and even in the more mature economies. This is less, less visible objective of the central banks. But they always have these objective, interestingly, financial inclusion in the more developed economies now tend to focus on banknotes and coins, because the question becomes, when the large part of the population goes electronic, there is a little part of the population, for various reasons, who might have difficulties, accessing this electronic, payments world. And the financial inclusion in this case might be to, help mentioning minimum level of activity for notes and coins. So the perspective is completely different, I would say in the developing countries, the perspective is to bring more people into the electronic means of payments, in the more advanced economy, financial inclusion is more a question of being sure that everybody has access to payments means, including those who have difficulties, getting into the electronic world.

Gonzalo Santamaria (00:21:36) – I think it’s worthwhile also noting here that there are some very specific variables that assist within the financial inclusion, as you say. Access is number one and that means, proper telecommunications, proper Wi-Fi, internet access and then in markets where they are developed, for example, US is a good example. The last statistics I think I read was closer to somewhere about 18 or 20% were financially excluded, many by choice, mind you, many had access, but by choice and at the same time there was still some lacking in the networks, in the communications network. So it is quite interesting that we still having these issues in both emerging or different issues, if you will, in emerging and developing markets. So thanks for that. Perhaps, just to close out a little bit of, of some of these three topics that you mentioned, which were cross-border payments, you mentioned AI and CBDCs. We’ve talked a little bit about two, but we haven’t talked about AI too much.

Gonzalo Santamaria (00:22:42) – So AI, even though it is already a technology that has been in the realm for quite some time, it’s only now starting to really be, I mean, it’s the buzzword, isn’t it? For the last few years within the finance industry, how do you see that developing within the markets? How do you see the effects of that? What do you think the risks might be of that? How are the central banks looking at it from from those perspectives?

Jean-Michel Godeffroy (00:23:11) – As I said, central banks are still wondering. I mean, you’re absolutely right that, artificial intelligence is already present, in our societies for some time. You take Google and you make a translation, I mean, the translation is almost perfect. And, how is it possible? It’s possible because they’re not trying translating word by word, but they are thinking. I mean, they, the artificial intelligence is making an effort, trying to understand what you are willing to say and so on.

Jean-Michel Godeffroy (00:23:47) – But, I mean, what I understand as a non-specialist is that now there is a next step. There is a new step in artificial intelligence, which is, generative artificial intelligence. And I think not everybody, there is still a lot of unknown. There may be some specialists who can speak about how it will change the world and we all listen to that. And central banks listen to this also. And they are still wondering. We know that artificial intelligence today and even more tomorrow will be able to help the central banks on, on some fields, for example in supervising banks in identifying fraud, you know, the artificial intelligence can go in the direction of helping central banks in their mission, but we can also, think easily that, it can also go the other way and, artificial intelligence plus cyber threats. I mean, this is, really frightening for central banks. And as I said, don’t expect me to know more than the central banks.

Jean-Michel Godeffroy (00:25:02) – The central banks are still investigating. They are speaking to specialist of artificial intelligence and trying to imagine what will be the consequences. And as far as I understand, as I witnessed with the preparation of this, Central Bank Payments Conference, they are not ready yet to speak about the consequence of artificial intelligence for them. That will require probably a few more months before some central banks are willing to open in this field.

Gonzalo Santamaria (00:25:39) – Indeed, this is still in its nascent stages in certain areas of finances, even though, as you say, it has, it is being used, generally, especially crunching data and sifting through the massive amounts of big data that has been for the longest time being accumulated in, within the financial institutions. So you have mentioned some of these topics being discussed at CBPC. Thank you very much for that, Jean-Michel. I just, this is a bit of a shameless plug as well for everyone. The Central Bank AI, we’re actually have focused an event dedicated to talking about this subject, which will be in in September, this coming September in London.

Gonzalo Santamaria (00:26:23) – So stay tuned for that. For more details, follow our socials, our social channels, we are everywhere, we’re on Twitter or on X, on all those letters, on LinkedIn and follow us through so you can stay in tune with everything that’s going on. Jean-Michel, thank you very much for your candid comments, for your views, and we appreciate having you on the show today. Thank you everybody, for listening in, and we’ll catch up to you soon somewhere.

Podcast Outro (00:26:56) – Thank you for listening to The P.I.T. Exchange, a podcast by Currency Research. Check out our upcoming events and publications at currencyresearch.com and join us for our next episode to hear what’s trending in payments, innovation and technology.

Hello, fellow podcasters and enthusiasts of technology and finance! In our latest episode, we had the privilege of diving deep into the world of payments innovation with two distinguished experts in the field. We are thrilled to share with you the insights and discussions that unfolded as we explored the evolving landscape of payments from a central bank perspective. Join us as we unpack the key trends that are shaping the future of money and transactions.

The Global Impact of Cross-Border Payments
Our conversation with Jean-Michel Godeffroy, Chair of the Central Bank Payments Conference, shed light on the critical role of cross-border payments in today’s interconnected business world. We discussed the urgency to enhance the efficiency and speed of these transactions, which are vital for global trade and economic growth. Jean-Michel highlighted the challenges that lie ahead and the potential solutions that could transform the way we handle international payments.

Artificial Intelligence: A Double-Edged Sword for Central Banks
The potential of artificial intelligence (AI) in revolutionizing payment systems was a focal point of our discussion. Jean-Michel delved into the dual nature of AI, presenting both challenges and opportunities for central banks. We examined the implications of AI on the financial industry, acknowledging the benefits it could bring, as well as the risks that need to be carefully managed. Central banks are at the cusp of understanding how AI could impact their operations, and we are here to navigate these uncharted waters together.

The Dawn of Central Bank Digital Currencies (CBDCs)
Gonzalo Santamaria, Vice President of Currency Research, joined us in exploring the burgeoning concept of CBDCs. We discussed the revolutionary potential these digital currencies hold for the realm of money and payments. The conversation covered the objectives behind CBDCs, such as preparing for the decline of cash and addressing the dominance of payment providers by non-domestic entities. We also tackled the varying perspectives and approaches to CBDCs across different regions, including China, the European Union, and the United States.

Financial Inclusion and the Role of CBDCs
A significant portion of our discussion with Gonzalo revolved around the role of CBDCs in promoting financial inclusion. This is particularly relevant in developing countries, where mobile payment solutions have not achieved their full potential. We highlighted the importance of telecommunications and internet access as drivers of financial inclusion and the differing objectives between developing and advanced economies.

Instant Payments and CBDC Interconnectivity
The interconnectivity of instant payments and its implications for the future of CBDCs was another intriguing topic we delved into. Gonzalo and Jean-Michel shared their insights on how instant payment systems could integrate with CBDCs, potentially reshaping the financial landscape.

Our enlightening discussion between our VP, Gonzalo Santamaria, and Jean-Michel Godeffroy provided a wealth of knowledge on the latest trends in payments innovation. From the significance of cross-border payments to the transformative potential of AI and CBDCs, we covered the spectrum of possibilities that central banks are facing in this dynamic sector. As we continue to witness the evolution of the global financial system, it’s clear that central banks will play a pivotal role in driving innovation and ensuring the stability and inclusivity of future payment mechanisms.

Thank you for joining us on this journey through the cutting-edge world of payments technology. Stay tuned for more episodes where we’ll continue to dissect the intersection of technology and finance, providing you with the insights you need to stay ahead of the curve.

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