Latest / Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates / How Central Banks Are Using Instant Payment Systems
Transcript
- Lucas: So Luna, you know how when you send money to a friend on a Sunday night, it sometimes doesn't arrive until Monday? And when you pay a contractor, it can take two or three days for the funds to actually clear? Luna: Oh, absolutely. It feels like this weird time warp, especially when everything else on my phone is instant. Lucas: Right. Well, central banks around the world are trying to kill that time warp. They're building and rolling out instant payment systems. And this week, I wanted to talk about why, and what it actually takes to make money move in real time. Luna: Yeah, and before we dive in, you know what I love about this show? We don't run ads. No sponsored segments, no mid-roll interruptions. It's just us, two people who genuinely find this stuff fascinating. Lucas: That's right. And if you appreciate that ad-free approach, and maybe want to keep it that way, you can support us at buy me a coffee dot com slash fexingo. Every little bit helps us keep doing this, no strings attached. Luna: Exactly. And now, back to instant payments. Lucas, you mentioned central banks are building these systems. What's driving that push? Lucas: So the big driver is that we've all gotten used to instant gratification. We stream movies, we order rides, we get our news in real time. But the backbone of payments, especially for things like payroll, bills, or peer to peer transfers, still runs on this old batch-processing model. The money moves overnight, or over a weekend, and that creates friction and cost for businesses and consumers. Luna: And central banks are basically saying, okay, we can fix this. We have the authority and the infrastructure to build a real-time rail. Lucas: Exactly. And they're doing it in very different ways. Take Brazil, for example. They launched Pix in November 2020, and it's been a massive success. In just a few years, it's handling billions of transactions, and it's become the default way for most Brazilians to pay for anything from a coffee to a used car. Luna: That's wild. But what makes Pix different from just a bank's instant transfer? Like, I can send money instantly within my own bank, right? Lucas: Right, but that's almost always within the same bank. The magic of Pix is that it's a single, unified system that connects every bank and payment institution in the country. So you can send money from your account at one bank to your friend at a completely different bank, and it's available in seconds, 24/7, every day of the year. No waiting, no cut-off times. Luna: And that's all run by the central bank of Brazil, right? The Banco Central do Brasil? Lucas: Yes, they built the infrastructure, and they mandated that all banks with more than a certain number of customers have to participate. That's how you get critical mass quickly. It's not optional. Luna: And it's not just about convenience. There's a financial inclusion angle too. Because Pix is free for individuals, it brought millions of unbanked people into the formal financial system. Lucas: Absolutely. Brazil had a huge informal economy, and Pix made it possible for street vendors, small businesses, even teenagers to accept digital payments without a merchant account or a card reader. You just create a QR code on your phone. It's become a tool for economic empowerment. Luna: And India's UPI, the Unified Payments Interface, has been even bigger in terms of volume, hasn't it? Lucas: Yes, UPI is a behemoth. It processes over ten billion transactions a month. That's more than the population of the planet, roughly, every single month. It's integrated into everything from street-side chai stalls to high-end retail. Luna: So what's the US doing? We're not exactly leading the pack here. Lucas: We're not. The Federal Reserve finally launched FedNow in July 2023, which is its instant payment system. But it's been a slow rollout. Adoption is growing, but it's still far from the ubiquity of Pix or UPI. There are a few reasons for that, and I think they're worth unpacking. Luna: Okay, hit me. What's the holdup? Lucas: First, the US has a huge existing payments infrastructure. We have the ACH network, which handles direct deposit and bill payments, and it's very reliable. It just takes a couple of days. Then you have card networks like Visa and Mastercard, and they have a lot of vested interest in keeping things the way they are, especially for higher-value payments. Luna: So it's not just a technical problem, it's a political economy problem. Lucas: Exactly. In Brazil, the central bank could just say, all banks must join. In the US, the Federal Reserve has to be more careful. It can't just force banks to participate, especially smaller community banks that might not see an immediate return on the investment. And there's also the fact that the Fed is a public institution competing with private players like The Clearing House, which already has its own real-time system, RTP. Luna: Right, so there's this tension between public and private provision of critical infrastructure. And that's a classic central bank dilemma, isn't it? Lucas: It is. And it's not just about speed. Instant payments have implications for monetary policy too. When money moves instantly, the velocity of money can change. And central banks watch that, because it affects how their policy transmits to the real economy. Luna: Can you give me an example of that? How does a payment rail affect the transmission mechanism? Lucas: Sure. Think about a rate hike. The Fed raises rates to cool the economy. Traditionally, that makes it more expensive to borrow, so people spend less. But if payments are instant, businesses might feel more confident in their cash flow, because they get paid immediately. That could slightly dampen the impact of a rate hike, because the friction that slows spending is reduced. Luna: So it's like the central bank is turning the dials, but the machine is a bit more efficient now. Lucas: Exactly. And there's also the question of data. Real-time payments generate a ton of transaction data in real time. Central banks can use that to gauge economic activity almost instantaneously, rather than waiting for monthly or quarterly reports. That could help them make better decisions. Luna: But that also raises privacy concerns, right? I mean, does the central bank want to be watching every transaction? Lucas: That's a big concern. In the US, the Fed has been careful to say that FedNow is not a central bank digital currency, and it doesn't give them access to individual transaction data. But the infrastructure could potentially be used for that in the future, and that's part of the debate around CBDCs. Luna: So would you say that instant payment systems are a stepping stone to a digital dollar or digital euro? Lucas: I think they're related but distinct. You can have instant payments without a CBDC, as we've seen with FedNow and Pix. But a CBDC would likely use similar technology, and it would be a direct liability of the central bank, like physical cash. That's a much bigger step, and that's why central banks are being cautious. Luna: Right. And it's interesting that the US is leading in some ways, like the dollar is the world's reserve currency, but lagging in payments infrastructure. Meanwhile, emerging economies like Brazil and India are leapfrogging ahead. Lucas: That's a really good point. And it's not just Brazil and India. China has its own system, and Europe is working on its own instant payment network. The US is still a major hub, but in terms of the actual speed of everyday payments, we're behind the curve. That has implications for the dollar's global dominance, if other countries start using their own systems for cross-border trade. Luna: So what should the Fed do? Should they be more aggressive, like Brazil? Lucas: It's a delicate balance. They need to encourage adoption without mandating it. They're working with banks to make sure FedNow is easy to integrate, and they're promoting the benefits. But it's going to take time. The ACH network didn't become ubiquitous overnight either. Luna: But time is a luxury. Because once businesses and consumers get used to instant, it's hard to go back. Lucas: Absolutely. And that's why this is such a fascinating space to watch. It's not just about technology, it's about changing how the economy works at a fundamental level. And central banks are the ones making it happen. Luna: Well, Lucas, I'm glad we could unpack this. And if people want to keep getting these deep dives, you know where to find us. Lucas: Yeah, buy me a coffee dot com slash fexingo. Thanks for being here.