What Central Bank Digital Currency really means for retail
Nearly 9-in-10 central banks are researching the potential of digital currencies, with 60% also actively experimenting with the technology. According to the European Central Bank (ECB), the eurozone could be using a central bank-issued digital currency (CBDC) by 2026 at the earliest; only three years from now. Meanwhile, the Bank of England and HM Treasury are also consulting on the idea of a digital currency, dubbed by close-watchers of the initiative as ‘Britcoin’. At the same time, the US Federal Reserve comments that while no decision has been made yet to implement a CBDC, it is exploring the benefits and risks.
What are CBDCs?
From the ‘digital pound’ and ‘e-Krona’ to the ‘Digital Rupee’ and ‘E Dollar’, CBDCs are effectively digital banknotes designed to sit alongside fiat currencies. With almost 100 digital currencies currently in development, CBDCs are a seismic shift in how money operates - distinctive from digital cryptocurrencies since they are government-backed and regulated.
CBDCs have several advantages over cash and cards. At a national level, the data and insights provided can feedback into how public services are consumed whilst also making it much easier to carry out programmes such as quantitative easing or providing crisis monetary support. By paying directly into an individual’s digital wallet, CBDCs also accelerate the delivery of financial support and enable greater financial inclusion. For the Central Bank of the Bahamas, a primary reason for debuting the ‘Sand Dollar’ as the world’s first CBDC in 2020 was to connect under-banked citizens across the island nation.
However, for many people across the world, their first experience using CBDCs will be at a physical store, or online, paying for goods and services from retailers. From reducing transaction fees to creating whole new business models, retailers and consumers can benefit from CDBCs alike. This includes:
Customer Experience - Great customer experience is a vital part of retail. Here, CBDCs offer several exciting possibilities. For one, being digital takes much of the complexity out of making international transfers since schemes like ‘Britcoin’ likely to enter the market with greatly reduced rates for international payments. For retailers that have large customer bases from abroad or import large quantities of products, CBDCs will create significant financial savings, which could be used to boost revenue or be passed on to consumers.
Boosting loyalty - CBDCs could be transformative for loyalty schemes. According to Salesforce research, 56% of consumers say they’re more likely to buy from a brand with a loyalty program, so it makes sense to ensure they are efficient, effective and consumers can feel their benefits. CBDCs help by reducing the friction associated with offering instant cashback and applying discount vouchers, both made easier to settle by paying directly into customers’ digital wallets.
Smarter service contracts - Built on blockchain technology, CBDCs also enable the possibility of smart contracts; self-executing contracts programmed to automatically proceed once certain conditions are met. This can lead to much more efficient automated processes, especially when purchasing big ticket items or contracted services from a retailer.
Micropayments - Micropayments are small-value payments, less than a pound, dollar, or euro in value. By adopting CBDCs, retailers bypass the high transaction fees that currently make the use of micropayments rare. This could have a dramatic effect on many retailers’ business models. For instance, publishers can charge a few cents to read individual articles, capturing readers who would otherwise be put off by paying a monthly subscription fee.
Preparing for CBDCs by accepting APMs
Although the benefits of CBDCs are plentiful, several challenges exist before widescale adoption. This includes upgrading payment systems and training staff as well as the potential cybersecurity vulnerabilities CBDCs could pose if not properly trialled and secured before use. However, whilst governments, banks, the private sector, and central authorities prepare to mitigate against these risks, retailers can prepare for CBDCs today by already accepting other alternative payment methods (APMs).
APMs encompass any means of payment other than traditional credit cards and physical cash, including mobile payments and bank transfers. Many APMs already offer reduced transaction fees and their popularity reflects a growing desire from consumers for easier, more convenient, forms of payment. Forty-two percent of millennials in the UK say they feel confident using bank transfers and mobile payments, and, for Gen-Z, this figure is 35%. Payment systems are already available that facilitate APMs and many of these are also future-proofed for CBDCs.
In Europe, the ECB will decide on the future of the digital euro by the end of 2023, with it suggested that it could be made available via existing banking apps or a dedicated Eurosystem app. With many schemes likely to emerge soon, retailers can certainly benefit. As such, preparing systems to make for a smoother transition and uptake now should be carefully considered.
About the author
The CEO of MultiPay Global Solutions, David Maisey is a highly experienced entrepreneur with an extensive, proven and successful track record in the card payments industry. Founder of Chip & PIN Solutions, David grew the company into one of the most widely recognised and successful payments organisations in the UK, prior to its acquisition in 2017.
