now a day in the 21st century our world has been achieving an impressive level of development that effect our life personally and the society in general. Those changes effect our life on society and personal level as on Micro and macro level. All those changes in general direction where things, ideas, concepts change or developed called Megatrend. According to Frost & Sullivan a leading growth consulting and research firm defined Megatrend as global, sustained and macro-economic forces of development in which that impacts society, business, economies on two level micro and macro level, culture and people lives, thus defining our future world and increase level of change (Efrat.2017.p-2). in relation to ICT as Megatrend and from finance point of view, we all depending in doing our transactions on having intermediaries like banks, credit card companies, clearing house, brokers and so on, all of those intermediaries initiated in the first place in order to build trust in our financial system (Jedraszek. 2016). Intermediaries like banks their work with businesses transaction is an essential part of their job they facilitate business, identify people, clearing, settling and recording, banks and other intermediaries’ institution do well but there is still some problems starting from being centralized meaning that they are open to the risk of being hack, or they slow things down not like an email which could be send in second, transferring money through the banking system could take days and we don’t forget the percentage that they take for their actions(Nakajima,2011, p.5-7). Banks ask for our data and they know everything about our purchases, sell, income, etc which could be use in a way to manage our lives disturbing our privacy (Hoven et al., 2014). All this call for a concept named the internet of thing where the concept had been introduced for the first time in 1990s when it was known notion for computing and transferring power to object (Hvistendahl, Mara. 2012). The internet of thing show an important role in developing country such as merging technology in the food safety industry in china by using solar power sensors at farms in the Yellow River delta and collect data on climate, water, soil quality, fertilizer use, and population, all those information remain in the product like a CV for every piece of food using sensors at farms (Hvistendahl, Mara. 2012). The internet of thing also has been improved in the financial industry as a solution to many problem as an example the Bitcoin, where the world has been suffering from the financial crisis or in other word legitimacy crisis from the current system as the central bank kept interest rate too low, banks issued too much credit and financial players such as the manager of big banks commit fraud and banks bailout by government invalidate the market mechanism, all this called Satoshi Nakamoto to interduce the engineering solution by combining cryptography and peer-to-peer network to interduce the first virtual currency the Bitcoin (Ammous. 2016).
Bitcoin is an innovative counterproposal that presents an alternative monetary and payment system “sub-trend” where the system proposed for the first time in 2009 as a response to the problems associated with the current system which has been clearly uncover by the crisis, the response with bitcoin as an alternative currency and payment system provide the user with a platform allowing them to produce money and transform then anonymously with each other without using intermediaries such banks or any other financial intermediaries (Weber, Beat. 2016. P-2).
Interdicting the Bitcoin consider as disruptive innovation and as a solution to the current payment system problem is one of the most concern of most of the researcher around the world where such innovative idea lead to many question about our payment system and how the payment system will be in future and how to be preparing to deal with all those changes which could build a new industry and demolish another industry. This one of the top trend now a days that will effect societies and people life’s moving economics to another stage which personally I think its important to study in more details and expect the future impact of it on the payment system around the world.
It is fair to say that payment systems have become one of the most vibrant areas of reform, be it in terms of policy, technology or products. This is shown by the rapid pace of change we observe in national and international payment systems around the world. One of the reasons for this reform process is the realisation – not so long ago – of the importance of the financial market infrastructure, of which payment systems are an important part, for a safe and sound financial system (Nakajima,2011, p.1-2). During decade the financial sector as whole has been working on improving the market infrastructure and epically by focusing on removing the unnecessary counterparty risk from financial system. The technological advance has a big role in this area where technology progress contributed by offering innovation to enhance the soundness of payment system. A payment system plays a pivotal role in circulating funds all over the economy. If some malfunctions were to happen to a payment system and hinder the flow of funds, the impact would be extraordinary and disruptive (Nakajima,2011, p.2).
payment system refer to the mechanism that insure the “smooth transfer of funds between financial institutions” or in other word “payment system are the indispensable infrastructure for financial market and business activities” (Nakajima,2011, p.viii). The payment system facilitates the smoothness transfer of money/ fund between the buyer and seller and or between banks.
The simplest form of payment system includes two parties the payer (consumer) and payee (Merchant) where the settlement will be done immediately at moment using paper money. as the economics developed and the technology development interduce in the financial market banks other financial institutions had been interduce as intermediaries to facilitate the funds transfer between parties and to offer a better financial service in order to facilitate the operation of financial market activities and business activities when financial market become more complex. Financial institution such as bank interduce to ensure the exist of safe and efficient payment system where payment system is an important mechanism that enhance functions of financial markets and system.
Settlement refer to as the core of financial institutions such as banks and its take different forms, cash forms, banks-related settlement, Fx settlement, securities settlement (Nakajima,2011, p.3-4).When technology introduced in financial system, financial institutions adopt development by introducing electronic systems using host computers which linked to the terminal/ computers of the participants using internet network, this improvement simply emerged to the financial system and refer to as “payment system” without with a need to a word to differentiate. ((Nakajima,2011, p.4).
Process of traditional payment system:
The process starts with the payment where the participants of a payment send a payment order to the system and receive orders from the system, a “payment order” is a massage to the payment system requesting the transfer of funds to the payee, and it also called “payment message instruction” or “payment message”. The second process is called “Clearing” the process deal with aggregating all the payments in the system in order to represent the “net credit” for all participant. Net credit refers to as the difference between what send and receive where if the participant in negative called “net credit position” and if the net credit positive name. (Nakajima,2011, p.7).
The third process called “settlement” at this stage each participant made the payment as the actual fund transfer made at this stage and this settlement becomes final (Nakajima,2011, p.7).
In the current system the Central bank play a big roller in the financial market and have a multiple function in the payment systems where CB play a role as a liquidity provider to banks and a supervisor over the payment system.
The smoothness function of payment system pushes the financial system to become more interdependent and systems become more related to other system at the same time this interdependency rich after understanding of the nature of risk and the appropriate risk management from being depending on independent settlement system.
Classifications of payment systems:
In payment system some payment administrated by central banks and other by private sector’s. Other payment systems make a settlement on a net basis and other settle on gross basis. Some payment system are mainly for large-value payments and other for small-value basis. Some payment systems execute the settlements at designed times and the settlement take a place in real-time in other payment system. Some payment system use central bank as a settlement asset and others use commercial banks money (Nakajima,2011, p.13). Theses classification are not mutually exclusive, they can be used as a combination.
The current system includes many kinds of risk start with “Settlement risk” refer to settlement that does not take place as its expected which could lead to liquidity problem or could lead to loss to party involved in the settlement process. There are two types of settlement risk, the simple settlement occurs in the process of transferring the fund between payer and payee and the second type of risk refer to as “exchange-for-value settlement” risk where the funds are exchanged with other financial assets for example foreign currencies or securities (Nakajima,2011, p.17).We have classification to settlement risk start with Credit risk, liquidity risk, systematic risk, legal risk, and operational risk (Nakajima,2011, p.18-19). All those risk could lead to losses to one of the two party such as the replacement cost risk that cause by the fluctuations in the market prices where the seller of securities may face a bankruptcy situation before the date of settlement as the value of securities does not fulfil the deal (p-20). In 1974, a German small bank named Herstatt Bank suffered a huge loss cause by failure in FX trading where the German authorities withdraw the bank licence and liquidate the bank and the main reason behind this loss a fund transfer through the German payment system to other bank in US, the Us bank the time different between the two country and as the bank had been active in FX trading the payment value in Dutch currency didn’t match the expected value causing beyond $200 million dollar as loss (Nakajima,2011, p.21).
Time-lag in simple settlement risk arise as when the trade executed and disappear when the other party confirm the receipt of the fund, the time lag between the trade execution and confirmation is an issue if we dealing with currency trading as the price fluctuation continues. One of the solution offered by the market to minimize the time-lag risk refer to “Netting” where the two parties agree to offsetting of positions or obligation (Nakajima,2011, p.19).
Moving forward, there are two types of payment system know as “DTNS- Designated-time Net Settlement2” and “RTGS- Real-time Gross Settlement” (Nakajima,2011, p.30). the DTNS system had been used before due to the absence of IT technology post 1990s, then the ICT development made it achievable to reduce the settlement risk (Nakajima,2011, p.30). Each system have his advantages and disadvantage and still used in parallel in many countries.
The DTNS process start where a payment orders submitted over a day and accumulated in the system using netting at the end of the day to finalize the deals. In contrast the RTGS system follow a real-time basis strategy where each payment utilized individually if the the two parties has the efficient balances or credit availabilities in their accounts.
In the two system we face a trade-off between safety and efficiency as DTNS system have an advantage regarding the efficiency but have some safety issue as the system required a small amount of liquidity for settlement so achieving the “intraday” finality are limited in compassion to RTGS system where the level of safety high and the efficiency level consider as one of the disadvantage of this system (Nakajima,2011, p.32-33).
The idea behind the liquidity being efficient by adopting the DNTS system is that the central bank can provide participants with liquidity during the day process while RTGS system required large quantity of liquidity for settlement and because of that its inevitable to central bank to meet this liquidity requirement on time the participants need. There are other strategy where central bank could support the participants liquidity shortage by O/D “overdraft” agreement where the participants account become on negative and they have to rebalance their account balance at the end of the day. The risk with following this strategy related to the collateralization posted by participants which contain a hidden cost so the participants loss an opportunities cost.
Other risk accompany the DNTS system refer to a concept known as “Gridlock” refer to the situation when a transaction of payment face a failure due to some wrong instructions to executed preventing another number of transaction from being executed, the series of reaction lead to a stop in the liquidity recycling on the payment system. (Nakajima,2011, p.39).
In 1990s, there was a wide trend around the world to adopt a new payment system, mainly two systems was introduced, the “Hybrid system” and the “integrated system” (p-42-43).
The hybrid system a combine of DNTS and RTGS payment system taking the advantages of the two systems at once by combining the liquidity-saving efficiency with frequent net settlement. Thus, the hybrid system achieved the merit of two systems at once. The Hybrid system fully adopted by in US and clearing house interbank payment system in France in 1999-2001and flowing the net settlement on continually based instead of using a regular time interval.
As I mention before there is a trade-off between the DTNS and RTGS as DTNS payment system consider as high efficient in term of liquidity requirement, but the settlement risks still exist in contrast, the RTGS payment system deal on real-time basis so the risk of execute a settlement pretty low but required higher liquidity level by participant in short time and by that being less efficient but safe (Nakajima,2011, p.45). The new hybrid system combine the two systems merits lead to upward shift in “indifference curve” (see appendix -1).
Example of first use of hybrid system was in Germany moving from DTNS to hybrid payment system using the bilateral net settlement each 20 minute instead of a one daily settlement in the DTNS system.
Another evaluation was the transition to a system called integrated system, this payment system uses both the RTGS payment system and Hybrid payment system giving the option to the participants to choose one of those two system in accordance to their need. Thus if the participants in urgent situation with time-critical payment he can use the RTGS other wise he can use the hybrid system instead for non-urgent payments.
Share of advanced payment system:
Beach et al. (2008) in his calculation present that only 3% of wholesale payments by value settled using the Hybrid and integrated systems in the G10 countries but this percentage continues to be higher reaching 32% in 2005 as the two-system become more in use in other countries (p.48-50). There is a relationship between adopting of these two systems worldwide and the ICT technology advancement where those system supported by sophisticated machines with cost.
Future trend :
The field has been developing over time and time and some economics has been innovative in developing a new payment systems such as BOJ-NET (bank of Japan) and MAS ( Mentary Authority of Singapore) they implement MEPS refer to as the MAS electronic Payment system where money transfer quickly through the MEPS. (P-53)
The MEPS system process the payments quickly without any delay, nake a real-time inter-bank payment to domestic accounts, and keep the participants informed instantly with SMS and email alert. (P-53)
All this systems changes aim to change in the financial landscape which lead for more better liquidity management, better risk management, abetter stream of payment flow. (P-53)
Problematization and positioning:
The problem with all implemented payment system reflected on the probabilities or the risk from using a central system its being open to all kind of securities risk such as fraud and chargeback, complicated cross border transaction, card securities, multi-currency and payment methods (Feinstein ,Eran. 2017). The solution of all problems associated with current systems had been introduced post the financial crisis by Satoshi Nakamoto (Kharpal ,Arjun. 2016) the inventors of Bitcoin, the first electronic currency as this currency offer a great solution to financial stability improving the economic efficiency with the speed of transferring value between entities with low cost and high security level support by the blockchain where each bitcoin consists of a unique chain of digital signatures and this transaction recorded with time stamp by the network and bounded together with other transaction to form a block (Bjerg p.56-57). The conventional money has been abused by banks or central authorities like central banks, so the nature of Bitcoin as decentralized currency solves the problem with the current system regarding building trust and solve the problem of currency exchange value avoiding the market competing currency supported by governments (Bjerg p.59). so, the bitcoin as a payment system could not abuse because it does not rely on central or private banks or central authorities providing “soundness” by keeping bankers and politicians clean and honest (Bjerg p.60).
The problem with implementing this system is reflect the same problem with implementing the previous systems by integrating the new system of payment using Bitcoin in the financial system where adopting this system take time and required the support by societies in order to achieve success, and at the same time this system will have a big effect on the financial system structure where central banks and banks and other financial institutions.
potential research design:
following the current trend with the development of payment system in relation to the use of Bitcoin as a mean of payment the question is about what kind of effect the financial market will face in case of adopting the bitcoin as a mean of payment in the system? This question will affect the financial system in many angel starting form banks ending with governments and society. May main concern in this paper to expect the change in the payment system following the bitcoin introduction in 2009 (Kharpal , Arjun.2016) where bitcoin solve all the problem with previous systems regarding safety, efficiency, and anonymity for the participants where everything stored as block on the network. So the main question would be what are the changes in the current system caused by the trend of using Bitcoin on banks for the next 20 years?
this trend of using cryptocurrency as a mean of payment will lead a major societal change as a global change as well regarding the payment system. Where the traditional payment system using the usual money as a mean of payment has been under the control of government or central banks so being centralized using bitcoin in my expectation for the next 20 years will achieve the decentralization effect cause by intermediaries such as bank and central banks and increase the trustworthiness on Bitcoin at the same time there are some challenge intermediaries and central banks will face where banks will not have the efficient information about their customer and their customer base will be less than before due to the number of service Bitcoin system will accomplish instead of banks in more safety and efficient manner, at the same time banks will be one of the major player in market in mining activities at the same time central banks and government will faced some challenge in controlling the system where its hard to verify the user identity make it hard to oppose control or prohibition on sales a particular items such as drugs (Böhme ,Rainer.219).
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