Go Your Own Way

A bold approach to national payment strategy

Jeremy Light

Jan 23, 2025

National payment visions and strategies are in vogue and have been for a while. Examples include:

- UK: National Payments Vision - 14 Nov 24, HM Treasury1

- Ireland: National Payments Strategy – October 2024, Government of Ireland2

- Europe: A European Retail Payments Strategy – 2019, updated Nov 2023, ECB3

- India: Payments Vision 2025, June 2022, Reserve Bank of India4

- Canada: Modernization Roadmap, 2022, Payments Canada5

- Kenya: National Payments Strategy 2022-2025 23 Feb 22, The Central Bank of Kenya6

- Ethiopia: National Payment Strategy – July 2021, National Bank of Ethiopia7

With the global and local payment landscapes changing rapidly due to digital commerce, new technologies such as AI and new forms of money such stablecoins, I expect we will see more countries producing national payments visions and strategies in the coming years, including refreshed ones among those listed above.

This dramatic change in the payments landscape means, in my view, that payment visions and strategies need to be bolder, much bolder than they have been in the past. Radically different levels of ambition, urgency and approach are needed.

With that in mind, I have produced here ideas for a blueprint for a bold national payments strategy for nations to consider, limiting here to vision statements and principles8 for brevity. Then, to bring it to life, I have outlined how some aspects of these could be applied in the UK as an example.

National Payments Strategy – A Blueprint

Vision Statements

A free and competitive market, with a level playing field for payment companies of all types

The market will be supplied by banks and payment companies of all sizes, big technology companies and Fintechs. None will dominate or be given preferential treatment to shape the market to their own needs at the exclusion of others. The government may set the direction for national payments infrastructure but without choosing winners or dictating solutions. The market will be driven by consumer, business and government needs rather than by government or central bank diktat, or by the actions or inactions of dominant banks.

A coordinated transition from today’s payment landscape and infrastructure to tomorrow’s

As the new digital payments landscape develops there will be a managed transition from current ways of paying such as by cash, cards and other legacy payment methods to digital. Consumers and businesses will retain choice in how they pay and will have support in making the transition to digital without coercion.

New forms of money will coexist with existing forms, driven by consumer and business demand

New forms of money such as stablecoins, d-money (digital e-money), tokenised deposits, even CBDCs9, will coexist with each other and with cash, traditional bank deposits, e-money and central bank reserves.

Shared responsibility for fighting fraud

All market participants are responsible for preventing fraud, a mutualised responsibility rather than solely an internal one, with shared data and shared anti-fraud network operations.

Light touch regulation

Regulation will be light touch to enable a free market. It will create certainty and be proportionate to avoid creating barriers that benefit large organisations. Regulation will be driven by the market, following actual market experience rather than anticipating perceived harms.

Principles

1. Payment Schemes

- Use formalised payment schemes and rule books to govern new payment methods, operated by independent payment scheme companies

- Develop a separate payment scheme for government payments – e.g. taxes, benefits and keep separate from business and consumer payment schemes

- Design payment schemes to make it easy to pay tax and difficult to avoid paying tax e.g. sales tax

- Enable multi-scheme payments e.g. at point-of-sale, a commercial payment scheme for the payment between buyer and seller and a government payment scheme for a simultaneous automated sales tax payment direct to government

- Plan for payment schemes for payments between devices (IoT) and between software agents (agentic AI), as well as between people and between businesses

- Keep scheme governance separate from infrastructure ownership and operations

- Design payment schemes to allow market participants to charge for their services and get a commercial return through competition

- Avoid regulating prices – however, ban or cap interchange fees where the ultimate payer of such fees has no ability to negotiate or seek alternatives10

- Require boards of payment schemes to have skills and experience relevant to the payment scheme, including technology experience relevant to the infrastructure used by the payment scheme.

2. Infrastructure

- Use decentralised infrastructures for clearing payments – no central clearing

- Make clearing infrastructure flexible to cater for all forms of digital money, including commercial bank deposits and e-money, as well as new forms such as stablecoins, tokenised deposits and d-money

- Allow access at any point into a decentralised infrastructure for any participant who wishes to have access

- Enable access to clearing infrastructure through non-bank digital wallets (with no requirement to have a bank account), banking apps and bank APIs

- Design infrastructure to support very high volumes of low value payments, including micropayments, operating in real-time 24/7.

3. Privacy and Identifiers

- Design payment systems to make it impossible to use them as tools for mass surveillance and control of the public (whether by government agencies or corporations)

- Design payment systems to decentralise data and keep it to a minimum to avoid mass or undetected data breaches

- Limit digital id to account authentication, payment authorisation and verification of payee address only – ensure transaction data excludes any digital id data (to guarantee user privacy)

- Implement a common addressing system to make any account, wallet or person reachable and for users to choose their address independent of their provider and to have multiple addresses if they so wish (for example to use with different counterparties)

4. Market Participants and Adoption of New Payment Methods

- Ensure all types of market participants compete on equal terms – banks, Fintechs, big technology companies

- Provide payment choice to consumers and businesses through banks with bank accounts, through wallet providers with digital wallets and through cash

- Plan for the continued use of cash and for a base level of cash usage in the economy, while also enabling the transition from cash to digital payments.

5. Fraud

- design and build fraud prevention from the start into new payments methods, including facilities to share fraud data between market participants and to block fraudulent activities in real-time across payment networks

- Enable two-way sharing of information between market participants and crime agencies, in particular databases for utilising suspicious activity reporting (which is typically a one-way information flow with no feedback to market participants).

Applying the Principles to the UK

New Payment Schemes

1. Implement the following new payment schemes:

a. a new real-time payments scheme with guaranteed finality and instant notifications to end users, with refunds and payment request capabilities

b. an open banking scheme for payment initiation services11

c. an open banking scheme for account information services

2. Create a new payments operator for each new scheme (separate to Pay.UK – leave legacy schemes in Pay.UK).

Infrastructure

1. For the new real-time payment scheme, design and build a peer-to-peer retail payments network using blockchain technology (but without using or issuing a token). Each node (bank) hosts its own peer-to-peer (P2P) ledger connected by messaging integral to the ledger to other nodes that have agreed to connect bilaterally. Each node runs an identical P2P ledger and protocol – see Figure 1

Figure 1 – A High-Volume Decentralised, Peer-to-Peer Retail Payments Network

1. Banks link their core banking systems to their P2P ledger for the initiation and receipt of payments. Entries on their P2P ledger mirror those in their core banking. Each bank’s P2P ledger holds only their own transactions, there is no replication of other bank transactions between P2P ledgers and no bank has sight of other bank transactions

2. Payments between banks are real-time and atomic i.e. either both banks agree (through the peer-to-peer protocol) a transaction is valid, final and identical on both P2P ledgers, or the transaction is nullified

3. Banks choose which other banks to connect to and have bilateral agreements with each other, anchored in a common rulebook set by the payment scheme – it is unlikely that every bank will connect with every other bank. However, every bank is reachable across the network through another bank – transactions requiring three or more banks remain atomic and real-time. For example, in Figure 1, the payment from a customer of Bank 6 paying an account holder in Bank 4 is routed atomically through Bank 5

4. Settlement between banks is done atomically at the same time as the payment through a settlement liquidity pool at the central bank. This pool could be a form of RTGS omnibus account or even a wholesale CBDC ledger12

5. Banks fund and defund the liquidity pool using their central bank reserve accounts operated on the RTGS – these operations are performed only during RTGS opening hours, whereas the liquidity pool is operational 24/7 (but banks will need to pre-fund it sufficiently when the RTGS is closed)

6. All participants on the network have an account in the liquidity pool, but they may use a sponsor bank to manage their liquidity using the sponsor bank’s own reserve account and RTGS operations

7. As an example, customer 1 of Bank 1 pays customer 2 of Bank 2 through mobile banking:

Customer 1’s account at Bank 1 is debited and the transaction is mirrored on Bank 1’s P2P ledger which then connects with Bank 2’s P2P ledger
Both banks confirm the payment is valid
At the same time, Bank 1’s account in the liquidity pool is debited the payment amount and Bank 2’s account in the pool is credited
Both banks commit the payment in their respective P2P ledgers and in their liquidity pool accounts – the payment is now final
Bank 2 credits customer 2’s account on its core banking system

8. Non-banks may also connect to the network with their own P2P ledger and settlement liquidity pool account. For example, a digital wallet provider may connect to one or more nodes (banks or other wallet providers). The wallet provider issues digital wallets to their customers who may make and receive payments to/from anyone else on the network with a bank account or a digital wallet. There is no need for a digital wallet holder to have a bank account, the wallet can be funded by cash if necessary (through an agent with a physical outlet).

Conclusion

The purpose of this article is to raise awareness that radical new approaches are both necessary and feasible to address national payment strategies for the digital payments landscape. The blueprint provided here is incomplete but gives a flavour of the detail and forward thinking needed in a national payment strategy.

In particular, huge monolithic centralised payment clearing systems are no longer necessary – decentralised, peer-to-peer networks are far cheaper and quicker to implement, allowing market participants of all types (more than just banks) to join at their own pace, resulting in the network growing at the speed of the participants fastest to implement rather than the slowest. Such networks are also very resilient and secure – there is no centralisation or replication of data and if a node has issues, payments are routed round it through other nodes.

Centralised retail clearing systems cost typically hundreds of millions of dollars and take years to complete13. In contrast, a decentralised system as illustrated in Figure 1 could be operational in a less than a year at a fraction of the cost of a centralised system, while individual banks could set up their node within a few months with very little change to their existing core banking and other systems.

As the psychologist Abraham Maslow said, "In any given moment, we have two options: to step forward into growth or to step back into safety." For national payment systems the world-over, that moment is now – growth is the only option, bold action is required.

Agenda: Payments

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