In an increasingly interconnected world, we depend on digital systems operating 24/7, which aligns with customer expectations on the market as well. Payments are made with a tap of a card or phone, while merchants rely on card terminals and internet connections to process transactions. But what happens when the system fails? Imagine a scenario where power outages or cyberattacks disrupt electricity grids and sever internet connections. Society is suddenly “off-grid,” and the conveniences of digital payments vanish. How do we ensure stability in such crises?
The majority in our younger generations today may never have used cash, as digital transactions have become the norm. In a crisis, some experts recommend keeping cash at home. However, holding cash comes with risks: locked capital, outdated bills, and the challenge of managing large denominations when stores can’t provide change. As the infrastructure for handling cash has significantly diminished, relying on cash alone during a crisis is problematic. An alternative solution, such as an analog credit management system, is necessary.
Consolidating Payment Platforms for Crisis Preparedness
The current landscape for central bank money settlement is de-centralized, with three platforms – Perago, Euroclear, and TIPS – able to settle transactions at the central bank with finality. Sweden’s Riksbank have proposed that we should consolidate the platforms into one single system, such as the euro-platform Target. However, this raises concerns. If the platform is consolidated and located abroad, the risk of losing control of the connectivity increases, making Sweden more vulnerable to disruptions beyond its control. Even more so, consolidating towards one platform could lose the opportunity for a fallback platform where one of the three could enter where we lose connection to one other. All of this implies a greater risk to mitigate.
The concentration of power within a few large card providers is another issue. Should an outage occur, or internet access be disrupted, payment flows could halt, affecting millions. How will payments go through if consumers are unable to use their cards? To mitigate this risk, we need to establish other ways for society to handle digital payments. By reducing dependency on card networks enabling instant transactions, even across borders, would be beneficial.
Creating a Contingency Payment System
Although, one issue remains: the lack of a fully automated contingency system for settlements. In a crisis, processes must be implemented to prioritize payments that are crucial for societal functions, rather than individual households. The evolution of digitalization has allowed banks to automate their tasks, which has allowed competence to be reallocated. If automation is disrupted, who or what will perform these tasks? Since natural life cycles means that the people once working with manual settlement cycles may now have left the banks or retired, further knowledge sharing to younger generations is hard or impossible to achieve. Therefore, a robust crisis solution requires a secure and simplified network with possible manual processes and a knowledge database. For instance, using a USB-based process to physically transport data to central hubs could ensure continuity even when digital networks fail during transmission. Also, having the right competence attainable through either the right resources or knowledge database or through a focused task group, would keep the market more resilient in case of a crisis.
A backup system should also enable banks to continue their usual operations, minimizing societal costs. New processes will also have to be in place. For example, limit handling needs to be accounted for. Centralized ownership of such a system is vital to keep costs down while ensuring efficiency. The system should automatically recognize and prioritize essential transactions, such as utility bills or salaries, while non-essential payments (e.g., purchasing a car) should be deprioritized during crises. Additionally, measures like bank holidays could be introduced to temporarily pause non-essential transactions, reducing the strain on financial systems.
A Possible Solution: A Contingency Settlement Module
One potential solution is to develop a central, standalone settlement module that serves as an intermediary between banks. This module should enable that payments are aggregated, prioritize transactions for manual settlement, ensuring that even during a crisis, critical payments are made. The module would use pre-defined rulebooks to identify and prioritize these payments, allowing banks to function as normally as possible without requiring significant manual intervention. By centralizing this system, costs can be kept low while ensuring resilience and continuity in the event of a crisis.
Conclusion – Will Today’s Digital Settlement Solutions Endure During a Crisis?
As society becomes increasingly dependent on digital systems for everyday transactions, the risks of being “off-grid” in the event of power outages, cyberattacks, or internet failures grow. In such a scenario, digital payment systems collapse, leaving society vulnerable.
In the event of a crisis, manual processes will be necessary to prioritize essential societal transactions, such as utility bills and salaries. One promising solution is the creation of a central, standalone settlement module, which can aggregate, prioritize, and process critical payments manually during crises. Using pre-defined rulebooks, this module would allow banks to continue operating efficiently, minimizing costs and ensuring essential transactions are completed even if digital networks fail.
By centralizing this module and incorporating manual processes, we can ensure resilience and continuity in payment systems, safeguarding society during disruptions.
For more insights on the challenges and opportunities in managing payments during crises, read here.
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