The immediate fallout of the fracas over Visa’s high fees may be to give a boost to rival Mastercard Inc., and not just in Amazon’s U.K. business. The long-term effects, however, may run far deeper. E-commerce platforms are gaining an upper hand in negotiations with card networks.
In the not-so-distant future, they could use this market power to restrict customers to only using their in-house payment tokens, a possibility raised by Princeton University economist Markus Brunnermeier and others. We won’t be able to say no, because we simply can’t bear the thought of not being able to buy sneakers online, or at least an NFT version of them for our digital avatar.
E-commerce and social media giants could use this cash flowing into their tokens to offer credit to merchants, with repayments deducted on every sale at zero collection cost. Realizing that banks’ conventional business models won’t stand a chance in this connected world of payment, lending and commerce, some countries might accelerate plans to provide digital cash as a public utility, which could be made illegal for any platform to refuse. But in doing so, policy makers may end up hurting sellers to protect buyers.
Small merchants want credit at cheaper rates than banks provide, and it’s beginning to look like they can get it from platforms by committing themselves to accept payments in tokens issued by Big Tech. However, if central banks push their digital currencies as mandatory legal tender, then the transactions would go dark: E-commerce sites won’t be able to automatically collect loan repayments via self-executing software code, or smart contracts, and small businesses may be denied their shot at really inexpensive credit.
This is just one tradeoff among several. Think of how banks’ card business might be impacted by the arrival of central bank digital currencies, or CBDCs. You decide to buy a book on Kindle, using your brand-new credit card. Before you’ve drawn down your credit line, the lender’s balance sheet — in the words of Stanford University economist Monika Piazzesi — is “empty” and free. (If you’d used a debit card, the bank would have required a deposit from you, and a loan asset on the other side of its balance sheet before you bought the book. It would have entailed costs.) When you pay by credit card, the bank creates a deposit liability in Amazon’s favor, automatically backed by an asset: what you owe the bank. It is this “complementarity between deposits and credit lines,” Piazzesi says, “that makes it cheap for banks to handle these payments.”
The game will change if the central bank signs up as a player. Yes, deposits held by citizens at the monetary authority, accessible via digital wallets, may be just as convenient to use in online purchases as a bank debit card linked to a PayPal wallet. But central bank digital currencies won’t offer an alternative to credit card purchases because no public-sector authority wants to be a lender to the public. As consumers, we all benefit from payment costs that are kept low by credit cards. Upsetting the equilibrium might leave all of us worse off.
Central banks aren’t sold yet on the need for CBDCs, but for different reasons. They worry that in the process of providing a means of payment that can compete with cryptocurrencies like Bitcoin and their less volatile cousins — such as Diem, the upcoming stablecoin backed by Meta Platforms Inc. — they would end up supplying a safe-haven asset superior to bank deposits.
But while a per-wallet limit on zero-interest digital cash (and negative remuneration on higher holdings) could ward off the threat to deposits, policy makers have yet to assess the more practical aspects of sovereign electronic money, such as its impact on banks’ profitable credit-card franchises. Similarly, there’s a case to be made against introducing CBDCs as mandatory legal tender if they prevent tech platforms from offering innovative loans that restrict consumers’ choice of payment instruments. Should consumer internet firms be allowed to go that far?
While the answer to that question is still unclear, what’s unmistakably true is that the old order in finance is yielding to the new. Visa’s dispute with Amazon gives a glimpse of that change. Authorities need to weigh the pros and cons before they wade into the shifting sands of power between banking and tech.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
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