The Encyclopaedia OpenPayddia, quenching your curiosity around every type of payment you can think of.
Businesses wouldn’t get very far without payments. As soon as humans moved past the point of swapping goods, we needed a way to exchange our products and labour for something that stores value and that will be accepted in future transactions.
From that moment, we had money. And when we had money, we were making payments. Over centuries we have developed and improved the ways we exchange money. But the biggest changes have come in the last 50 years, when digitisation substantially increased our ways to pay.
Now, we live in a world with an abundance of payment methods, which has changed the game for businesses. No business on the planet offers every single payment method available, nor do they want to. They pick and choose the methods that are best for their business and their customers. Payments infrastructure is now a strategic business decision, something that can be leveraged to a business’s advantage instead of just a way of receiving money.
That's why we put together this encyclopaedia, to outline the contours of the landscape today, across every major payment method that a business might need.
Let’s start at the beginning. Well, not quite, if we were really starting at the beginning we’d need to write about bartering chickens. So let’s start at the oldest business payment method that is still in use.
Archaeologists debate when coins were first used as money, with some arguing that it could be as early as 2000 BCE. But the oldest coin minting site we know of was in Guanzhuang, China, and began striking spade coins around 640 BCE. Over the centuries, the use of coins expanded across the globe and were used as the sole currency for parts of Europe until the 16th century.
The move to paper notes represented a big step in the evolution of money. While the origins are again debated by historians, it is widely believed paper notes were introduced in China between the 9th - 10th century CE when merchants would exchange receipts for stores where they had deposited money or goods. This was the first time the value of a currency was not in the material it was made from, but because it represented a claim on an asset held by a secure third-party.
In the 1020s the Chinese government of the time began to produce the world’s first government-issued paper money. Eventually Europe followed suit and banks issued notes representing a value in metal, which depositors could exchange. In 1816, gold became the standard of value in England and bank notes were tied to gold. In the United States a similar process happened in 1900. The gold standard continued until the Depression of the 1930s caused the United States to end the relationship between gold and bank notes (although the relationship only fully ended in 1971) and over time gold standards across the world came to a close.
It was over this period of perhaps 4,000 years that human civilisation began to move away from physical stores of wealth, in the form of coins or bars of precious metals, to a more abstract representation. Over time, paper notes no longer needed to be representations of shiny metals - their ubiquity gave them value in their own right.
Today the UN recognises 130 independent currencies and physical money is still the world’s most popular way to transact. However, that masks huge differences between different parts of the world.
Is your barber, local Indian restaurant or quiet pub still cash only? There are a few reasons why many businesses prefer to stick to cash. First, they’re able to avoid the fees that come with card payments. Allowing customers to pay by card means that a percentage of the sale will go to the card scheme (Visa, MasterCard, AMEX etc) - usually between 1% - 3% of the payment.
Physical money is also inclusive. Many people have little interest in technological improvement and like to deal with what they know - which applies to both businesses and consumers. But it’s not just a question of a desire to use new tech, but the ability to do so. Large parts of the world continue to be drastically underserved by basic infrastructure like electricity, let alone digital banking infrastructure. So businesses hoping to make an impact in these areas have to run on physical money by default.
In 2017 debit cards became the most common form of transaction in the UK, and in 2019 credit card payments pushed physical money down to third. In 2021 cash accounted for just 15% of all payments in the UK.
Reasons for this are not a far cry from those in 16th century Europe when banknotes were introduced. While modern day currency is, on the whole, not as cumbersome as the metal coins of times gone by, they still carry a security risk. If you leave your wallet on the bus and someone steals it, you can cancel your bank card with a phone call or even ‘freeze’ it using an app. The same can’t be said of physical money.
Holding money in a bank and accessing it with a card also prevent people from having to regularly visit cash machines. We’ve all been in situations where we didn’t know we’d be spending as much as we would be that day. Card payments and digital banking completely remove this pain point. For businesses, it also removes the need to count up their earnings at the end of each day and make routine trips to the bank to deposit their takings.
While physical money undoubtedly still has a place in society - in 2018 the UK Access to Cash Review stated 8 million UK adults would struggle in a cashless society - the dominance of digital payments is likely to continue.
Cheques can be traced back to the Roman Empire and were popular in ancient Arab countries, primarily as they prevented merchants and businessmen from having to haul large amounts of gold and silver across a desert terrain.
Cheques act as an instruction for a bank to authorise a payment. The required information of the payee’s account number, sort code, serial number, date of issue and payment amount must all be included, and the payee’s signature authorises the transaction.
The recipient would then traditionally take the cheque to their bank (though now many banks allow for cheques to be scanned using an app) and the information is sent to a clearing centre. The centre will check the details and contact the payee’s bank for authorisation that there are sufficient funds in the account. When the details have been authorised the cheque is approved - if there are insufficient funds the cheque will ‘bounce’.
This whole process can take up to six days. Cheques now come with certain security features built in, but in the not too distant past cheques were valid as long as they had all the required information correctly filled out. In 1978, a businessman in Newcastle paid the local council by writing a cheque on a halibut - he was protesting the condition of the roads outside his frozen food depot.
While cheques have declined in popularity over time, they are still used all over the world - In 2020 a total of 185 million cheques were processed in the UK. Just how long cheques will continue to be used is very difficult to predict, but they’re not going anywhere for the time being.
Perhaps more importantly though, cheques represent a key milestone. Because they’re an instruction to a third-party (a bank) to initiate a payment, cheques were an important step towards our modern system of digital payments, card payments and bank transfers.
What’s causing everyone to abandon the methods of payment that have served us for millennia? Little pieces of plastic as it turns out, connected by a digital network.
And it’s that network which is the key thing. But before we delve into how card payments work, it’s worth exploring their history.
As the story goes, the first ‘credit card’ was devised when Frank Mcnamara was out to dinner and forgot his wallet. He came up with the idea of a card ascribed to a person which could be used to cover the cost of their meal, or meals, which would then be paid in full at the end of the month.
Within a year of their inception, 41,000 Americans had Diners Club cards and card payments developed from there: American Express launched the first official credit card in 1958. Today, the most commonly used cards are debit cards and credit cards. Debit cards allow you to make payments using money you already have in an account - your account is ‘debited’ as you spend. Credit cards allow you to make payments without having that money in your account. Instead, you pay it back to the credit card company at a later date.
The very first cards just had a unique number for each cardholder, which the merchant recorded to correctly charge the payment back to the customer’s account. This evolved in the 1960s by adding a metallic strip to the card which could be read by a card machine at the point of sale. Over time, this functionality evolved to chip-and-pin verification and most recently to contactless payments. Online card payments on the other hand still rely on unique information recorded on the card: its number, expiry date and card security code (CSC).
In terms of the payment itself, the flow is exactly the same whether you use a debit or credit card. But what is actually happening when you make a card payment? It’s all to do with the four-party model.
Also known as the four party scheme, this model explains how card payments work and the key parties involved (some argue it should be the six party model, but we’ll get on to that).
The four parties are the customer, the merchant (for example a restaurant or a shop), the issuer (the customer’s bank or card provider) and the Acquirer (the merchant’s payments provider). Here’s how the process works:
A customer pays for dinner by tapping their card against a restaurant’s card machine.
The acquirer processes this transaction by sending this information via the relevant card scheme.
The card scheme performs fraud checks and contacts the issuer.
The issuing bank checks the customer’s information is legitimate and that they have enough funds in their account to cover the purchase.
Finally, we have the movement of funds. If the issuer authorises the payment, it debits the customer’s account and settles the payment with the acquirer.
The acquirer then sends the funds on to the merchant's bank, minus its own fees.
We mentioned that this four party model technically has six parties. The card scheme is the first of the two extra parties; Visa or Mastercard for example. The second is the payment gateway: the point-of-sale machine or online portal that the merchant uses to collect all the relevant information and securely sends it to the acquirer.
Like all payment methods, card payments have their pros and cons. On the pro list, they allow for payments to be made online, they alleviate the need to carry cash around and they come with additional security features such as cancelling or freezing cards.
As for the cons, these are predominantly on the merchant side. While card payments make it easier for businesses in terms of banking and bookkeeping, they lose a sizable percentage of every card transaction they make to the card scheme and acquirer. Card payments usually come with a two day settlement time (the time between the start and end of the payment journey) and require brick-and-mortar businesses to be set up with a card reader at the point of sale. Availability and accessibility of card readers has improved, but they are still not available in many parts of the world.
If you don’t think gift cards are important enough to feature in a payments encyclopaedia, you might want to check out the figures. A recent study forecasted that in 2027 the global gift card industry will be worth $1.6 trillion. What’s perhaps even more staggering is that in the US alone retailers make up to $3 billion a year from unused gift cards expiring.
It’s something we’re all guilty of. Most of us can probably find a gift card at the bottom of a drawer, either because we forgot about it or never had quite enough reason to use it. That being said, the vast majority of gift card balances will get spent with retailers. So what is the flow behind these payments?
Firstly it’s important to distinguish between two different types of gift cards: open-loop and closed-loop. Open-loop gift cards are issued by a payment network and can be used in multiple places - for example, a gift card connected to the Visa card scheme can be used anywhere that accepts VISA.
However, the majority of gift cards are ‘closed-loop’, meaning that they can only be used in particular stores or online retailers. This considerably cuts down the number of parties involved in the payment, as retailers will use their acquirer to provide and handle the gift card payments.
When a customer first purchases a £25 gift card for a coffee shop, that payment happens as usual - via card or cash. However, when the gift card itself is used, the payment journey is much simpler. For a closed loop card, the acquirer also acts as the issuer, as they provided the card, so all they need to do is send a certain value to the merchant bank when the card is used and adjust the card’s balance.
If the purchase is made in store, the acquiring bank will set up the POS card readers to recognise the value on the card. As they are the ones that provided the machines, this isn’t difficult for them to achieve.
There are other cards which act in the same way as open-loop gift cards, but can be used for specific purposes. Employee expense cards would be one. Prepaid travel cards, which can be used abroad in one or more countries without incurring the same level of bank fees, are another.
Bank transfers have long been the preferred method for individuals paying individuals and businesses paying other businesses. However, new technology and changes in regulation are making bank transfers from customer to business more commonplace.
But how do banks transfer money between each other? It all depends on where both banks involved are.
Domestic bank transfers are easy to conduct for both individuals and businesses, but there are many variations in how they can be performed, each with their own specific benefits. As such, their speed can differ from seconds to days.
For domestic payments made in the UK and the European Economic Area, all that is needed to initiate a bank transfer is the recipient’s name, and either their IBAN or their account number and sort code. When making a bank transfer, the recipient may also require specific reference information to be included so that they can reconcile the payment.
Domestic bank transfers have become significantly faster in recent years. The UK’s Faster Payments is a payment rail connecting all UK banks, enabling customers to make bank-to-bank transfers in real-time. While Faster Payments states that payments can take ‘up to two hours’, the vast majority of bank transfers are completed in seconds.
The EEA’s SEPA Instant has the same timeframes, allowing people all over Europe to send money to each other instantaneously.
However, real-time payments are far from being a strictly European trend - Japan has been offering real-time payments since 1973. Around the world over 55 countries currently offer real-time payments, a number which will only rise in the coming years.
While not yet as common as in the UK and Europe, real-time payments are becoming more popular in the US, along with many other jurisdictions.
The Clearing House Automated Payment System (CHAPS) is another UK payment rail that is specifically used for high value transactions. It is typically used by banks and very large businesses to settle payments and foreign exchanges, but is also commonly used by solicitors when completing property transactions. This is because CHAPS is particularly useful for processing high value transactions in a short amount of time.
Unlike Faster Payments, CHAPS payments are not instant, nor are they available 24 hours a day - the system opens at 6am and closes at 6pm. The SWIFT network, which has an entry later in the encyclopaedia, conducts the transfer between the banks involved.
To access CHAPS, businesses need to have a banking partner (or become a Direct Participant, but this is a lengthy and expensive process). For the end user, CHAPS payments usually cost between £25 - £30.
SEPA Instant has an upper limit of €100,000, so for any EEA transfers above that value, SEPA is used. SEPA transactions can take up to 48 hours, but the vast majority are completed in 24 hours. You shouldn’t have to worry too much about reaching the upper limit, as it’s €999,999,999.99 (in other words, one cent short of €1 billion).
SEPA charges no basic fees, though some banks may charge a nominal bank fee. If your funds need to be converted to EUR, you will be charged a conversion fee - the exact amount will be set by the bank or transaction service.
BACS (Bankers’ Automated Payment System) is a UK domestic bank transfer service used to process bulk payments. It is split into two main features: BACS Direct Credit and BACS Direct Debit.
BACS Direct Credit allows organisations to make batch payments to individual bank accounts and is what is used to pay 90% of salaries in the UK. Other examples of batch payments that use BACS are pension payments, refunds, dividends, employee expenses and insurance payments.
BACS Direct Debit works the opposite way, where a business is collecting many different payments from customers - we discuss this in more detail in the next section of the encyclopaedia.
In the early days of the service, payments were sent to BACS by couriers on motorbikes, in the form of computer tapes. BACS would then sort the payments by sort code and send new computer tapes to bank processing centres.
The bank would then apply the payments to bank accounts, with the process taking three days in total. While relevant data is now sent via internet protocols and high speed data connection, BACS payments still take approximately three days.
There is often a lot of confusion between standing orders and Direct Debits as they are similar, but there is one key difference that separates them.
A standing order is a regular payment from one party to another which is transferred automatically. The payment is set up by the party making the payment and it can be amended or cancelled at any point by the person who set it up.
Standing orders are a useful way for consumers to guarantee a payment goes out regularly at a certain time, making them perfect for things like rent payments. The payment can be made weekly, monthly, quarterly, yearly or at a custom interval. The standing order is managed only by the payee and their bank.
A Direct Debit is also a regular bank transfer from one party to another which is transferred automatically. However, for Direct Debits the payment is set up and managed by the party receiving the payment. The payee agrees to a mandate of terms set by the recipient, and the payment is processed via the BACS payment rail.
This mandate enables the recipient to change the amount and frequency of the payments and still receive them routinely without further authorisation from the payee. This is especially useful in situations such as phone contracts or utility bills, where the customer’s usage may change from month to month.
For a business to set up a Direct Debit they will need a banking partner with access to the relevant payment rails. For standing orders, everything is left to the customer and their bank, the business simply provides the account information to initiate the regular payments.
There is one final method for regular domestic payments which is known as a Continuous Payment Authority (CPA). Often used by payday loan companies and gyms, this is also a way to create automated recurring payments, but a CPA does not require any involvement from a bank.
A contract is instead made directly with the merchant which gives them the ability to take payments from your debit or credit card when they decide a payment is due. As such, these payments aren’t actually bank transfers at all, but a form of recurring card payment.
While consumers still have the right to cancel a CPA at any point, they generally have less control over the charges reaching their card.
Given that domestic bank transfers have become so fast, and they avoid the fees associated with card payments, it is understandable that businesses increasingly want to offer them as a method of payment.
With Open Banking, this has become much easier. Introduced with the Second Payment Services Directive (PSD2) in 2018, Open Banking sought to open up the banks’ stranglehold on their customer’s data and payment potential. Payment Initiation Services are now able to directly make a payment from a customer’s bank account, providing they have consent to do so. Instead of entering card details, customers are provided with a link to open their mobile banking app. Within their app, they then authorise the payment - the whole process takes a matter of seconds.
Making the payment journey for bank transfers smoother enables businesses to receive their payments faster than through real-time payment rails and pay less in fees, with no additional burden passed on to the customer. In the near future we may see an increasing number of businesses not only offering Open Banking as an option, but only accepting payments this way, due to the benefits that it brings.
These developments are making paying by bank transfers a more attractive option for both businesses and consumers. It’s an option that more and more businesses will be considering in the coming years.
Sending money internationally requires slightly different processes to domestic transfers, with currencies needing to be exchanged and different regulations needing to be adhered to.
We have already mentioned the SEPA Instant payment rail, which offers instant transfers for those in the Single European Payment Area. But SEPA is a bit of an anomaly, as it comprises multiple countries using the same currency within the same monetary union.
For international payments, the majority of international bank transfers are conducted by the SWIFT - the Society of Worldwide Interbank Financial Telecommunications.
As the name suggests, SWIFT isn’t so much a payment rail itself, but a network of financial institutions through which international transaction instructions can be sent and received.
For example, a consumer in the UK buys an artwork from an artist in Australia. Providing that the two banks have an existing commercial relationship, a message is sent via SWIFT from the consumer’s bank with information and instructions regarding the transaction.
The consumer’s bank then debits the money from their customer’s account, while the same figure is credited to the receiving bank. The bank then sends the funds to the merchant’s personal bank account, minus any processing fees incurred. In the likely scenario that the merchant wants to receive funds in their own currency, then an exchange rate will also be applied.
If the two banks do not have an existing commercial relationship, one or more intermediary banks within the SWIFT network are needed to complete the transaction. This can increase the amount of time the payment takes as well as the costs involved.
SWIFT payments usually take between 1-5 business days. The SWIFT payment network has been operating for over 40 years and has helped many businesses expand internationally.
Target 2 is another payment rail facilitating bank transfers solely within the eurozone, though works slightly differently to SEPA. Using Target 2 (or the Transeuropean, real-time, gross-settlement, express transfer), a consumer in Spain can buy a product from a business in Belgium. When the payment is initiated, money is debited from the consumer’s bank account and sent to the Spanish central bank (The Bank of Spain).
The Bank of Spain then sends this money to the European Central Bank (ECB), via Target 2. The central bank in the recipient country, in this case the Bank of Belgium, also sends a payment request to the ECB. Again via Target 2, money is sent from the ECB to the Bank of Belgium, which then pays out to the business’s bank account.
The rail is open from 7am to 6pm CET every day except major public holidays. Its objective is to support the financial health of the euro money market and minimise risks of collapse. 52,000 banks and their customers can be reached via Target 2 and 99.99% of transactions are processed within a minute.
In recent years another solution for cross-border payments has appeared: multi-currency accounts.
Instead of FX payment instructions being sent via SWIFT, a business can set up a multi-currency account which allows them to hold multiple currencies, within a single account infrastructure and with a single IBAN. The business can then hold funds in one place and convert their funds between different currencies as required.
This is possible as long as the business has a banking partner with the capacity to hold funds in different currencies for them. Then, it can receive funds in a certain currency and payout to another account in the recipient’s currency, and initiate the exchange themselves or simply retain a balance in each currency. One centralised ledger can make multi-currency accounts a faster and cheaper way to accept payments all over the world.
If ‘Alternative Payment Methods’ seems a little vague, that’s because it is. But it’s not a term we’ve created. Alternative Payment Methods, or APMs, refer to any payment method that doesn’t involve a card scheme.
As such, many of the payment methods featured in this encyclopaedia such as closed loop gift cards, prepaid cards, cheques, bank transfers and cash are all considered to be APMs. However, they also represent a more specific form of online payment, in the form of eWallets.
eWallets can be experienced in several forms. Firstly, you have mobile wallet payments that are achieved via tokenisation. Services like ApplePay, GooglePay and SamsungPay tokenise card details and allow you to pay with them on your phone. This alleviates the need to carry a card, providing that wherever you’re making a purchase accepts contactless payments.
Then there are eWallets such as PayPal, which act as a method of receiving funds and making payments without being attached to a bank account themselves. While PayPal is popular in many parts of the world, there are hundreds if not thousands of alternatives, with many specific to certain geographies.
APMs have become a dominant force in payments. In 2020, 44.5% of all eCommerce payments were made using APMs, smashing credit cards in second (22.8%) and debit cards in third (12.3%).
Alipay, for example, has over 711 million active users, and eWallets are the primary source of payment for Asian eCommerce, representing 78.6% of transactions. In Africa, where many of the population remain underserved by banks, mobile wallet services such as MTN and M-Pesa are hugely popular.
The success of these services is largely down to their role as ‘Super Apps’ - they package together many services within one app and become the user’s financial hub. For example, with Alipay you can also buy insurance, call a taxi, get a credit card and more.
Buy Now Pay Later (BNPL) payment schemes give consumers the option to make a purchase by deferring some or all of the agreed payment to a later date.
This is usually seen in two forms. Firstly, the customer can divide the total cost into segments and pay them off at regular intervals, such as the end of each month for three consecutive months. In the past, if you wanted to make a purchase that you couldn’t afford at that time, you had to either save up for it or borrow money from an overdraft or creditor.
The issue with that is that by the time you saved the money, you may no longer have wanted or had a need for the purchase. Loans are not always easy to get - particularly for young people or those with a poor credit rating. BNPL enables you to reverse the process, getting what you want now and then paying it off over time, similar to a credit card, overdraft or other traditional lending product.
With BNPL, the customer can defer the entire purchase for a certain amount of time, then pay it in full or instalments. The most obvious example of where this is useful is being able to make a big purchase before payday, then making that payment once you have been paid.
It also incentivises many retail purchases such as fashion and clothing. If the customer knows they can send the item back if they do not like it, and they don’t have to wait for a refund, that retailer is now a much more attractive option compared with competitors.
BNPL has experienced a surge in recent years and it is expected to be worth $3.98 trillion globally by 2030. It’s a form of lending, where a creditor performs a check on the customer and then agrees to lend them the funds to be repaid. Lending services have existed for decades, so why is BNPL so popular among consumers?
One factor is that these loans usually come with no additional interest or charges on top of the amount you’ve borrowed, as long as you make your payments. For businesses, BNPL offers a way to enhance the payment journey and provide a better experience for their customers.
A second factor would be the ease in which this is now available. In the past you may have had to speak to your bank or a payday loan operator, sign contracts, then remember to make repayments.
BNPL has proven to be highly successful in certain sectors and is earning its place as an additional payment method for customers.
There are times in life when we are able to make payments without spending any money at all. Loyalty and reward schemes can offer customers credit to spend on their own business or others in exchange for a certain level of spending being reached.
This includes everything from your local coffee shop offering you your 10th drink free up to airline companies providing you with an air miles balance you can use for your next holiday. The basic premise of these schemes is that businesses will happily take a loss on a reward (a free drink, a plane ticket) in exchange for establishing a relationship with a customer through sustained purchases.
There are many advantages to this. Firstly, customers are encouraged to create a habit in their spending - using a particular card when purchasing or simply buying their coffee from the same place every day. After the reward has been given out, the customer is far less likely to break that habit as it has become what they know and, hopefully, enjoy.
Secondly, even if the loyalty programme does not lead to a habit being formed, the business can benefit from a rich level of customer data due to the amount of purchases made. This data will be far more valuable to the business than the cost of reward.
Loyalty and reward schemes can be very diverse, but, like bank balances and cryptocurrencies (coming up next), their value is basically just an entry on a ledger. This ledger can be incredibly basic, like the piece of card your barista stamps to record your purchases. But most times they are far more complex and digitised, such as our air miles example, which essentially rewards your spending with a closed currency issued by the airline.
Digital assets aren’t a payment method in themselves, but a new category of assets and currencies which run on a dedicated ledger and can be held in a digital wallet.
Cryptocurrencies are the most known of these, but there are variations which use cryptographic technology while being regulated or pegged to a fiat currency, such as stablecoins. To understand all of these, it is useful to first understand blockchain technology.
A long time ago, people came to realise that keeping all your money in a hole in the ground was not a practical or sensible approach. That’s when we created third-parties; banks, that allow you to store your money and transfer it to others while keeping a record of all the money you hold.
Banks are heavily regulated and have a lot of security and capital requirements (and insurance). All of those consumer protections mean we can feel safe that when we check our funds, the correct amount will be there and that if we transfer money to someone else, it will get there securely. But there’s no way around the fact that when we use a bank, we are trusting the safety and security of our money to a third-party.
Blockchain technology represents a way to guarantee that safety without relying on a third-party. A blockchain is a digital ledger that is shared across many different computers within a network. If someone makes changes to the ledger, to add money to their account or send funds to another, for example, the ledger is updated across every copy.
So what maintains the security? In order for those changes to the ledger to occur, a majority of the thousands of computers on the network must agree upon it. The only way for a nefarious actor to manipulate the blockchain’s record would be to control 51% of the network, which is almost impossible for a large, international blockchain.
For many people this concept is the future of finance. Not relying on any centralised body to handle our funds, while still benefiting from fast, free and secure payments across the globe.
That brings us to cryptocurrencies. Cryptocurrencies are digital currencies which run on a blockchain. Bitcoin, the world’s most popular cryptocurrency, was launched in 2008, but there are now thousands available that are traded across the world every day.
As with all other currencies, crypto can be purchased using another cryptocurrency, or a fiat currency such as USD or GBP - this is how the majority of people access cryptocurrency. As well as not relying on external regulators, cryptocurrency advocates point to the privacy that comes with this approach - while the ledger is transparent, no one can know who is behind each cryptocurrency account.
As of December 1st 2022, the global crypto market cap was $858.43 billion. With improvements continuing to be made on the relationship between crypto and fiat currencies, it is likely that more and more people will use it as a way to buy goods, send money to others and store wealth.
Central Bank Digital Currencies are digital currencies that are issued and managed by a nation’s central bank. The currency still operates on a digital ledger system (which may or may not be a blockchain) but the “coins” themselves are a digital representation of that country’s fiat currency.
Their purpose is to allow finance to benefit from many of the advantages of cryptocurrencies - fast, secure and accessible payments - without inheriting any of the risks.
CBDCs are usually thought of in two different forms. General-purpose CBDCs are available to the public, giving them the ability to convert their fiat currency into a CBDC and make payments at all times, with the added anonymity and security benefits.
Wholesale-use CBDCs are only for banks to use when transferring with the central bank or other banks. It is a way of transferring large amounts which could be more efficient and safer than the current approach, in which the central bank does not actually transfer any money but credits and debits the accounts of banks.
There are currently 28 countries that have either fully issued CBDCs or launched a pilot scheme, including China, Australia, Saudi Arabia, Nigeria and 10 countries in the Caribbean. Many more countries such as the UK are currently considering a CBDC.
Stablecoins represent an attempt to utilise the benefits that come with cryptocurrencies while minimising their drawbacks.
Price volatility has always been one of the biggest challenges for cryptocurrencies. We are all aware that even the largest cryptocurrencies have experienced wild variations in price which make them unsuitable as a store of wealth. It wouldn’t be wise to, for example, receive your salary in Bitcoin, when the value of that Bitcoin can change so drastically.
Stablecoins on the other hand are, as the name suggests, stable. These cryptocurrencies are able to keep a fixed price via a number of ways. Most commonly, they are ‘pegged’ to the value of a fiat currency or a commodity, like gold.
For example, a stablecoin can be created which matches the value of GBP, so one of these stablecoins is worth £1. The number of stablecoins within the network can be derived for the number of assets backing them - if they are being backed 1:1, every one of the stablecoins in circulation will have a pound ‘backing’ it.
This enables crypto users to enjoy the benefits of crypto in terms of fast, cheap, secure and anonymous payments that can be made all over the world, without the worry that they wake up the next day to find their wealth has plummeted.
Stablecoins differ from CBDCs as they are not issued or regulated by a central bank. Many stablecoins are backed by other assets like fiat currency, while others maintain their stability algorithmically, with the number of coins available decreasing if the price goes too low, and increasing if the price goes too high. The tradeoff is that if a stablecoin is backed by a pool of fiat currency, that pool is probably managed by a third-party, so they introduce a trusted party back into an otherwise trustless ecosystem.
As with so much about digital currencies, stablecoins offer an interesting new approach to payments that many feel will play an increasingly key role in the future.
Over millennia, humans have developed and finessed their ways of making payments. Security has increased and will continue to do so, and payments have generally sped up - particularly when transacting internationally.
But while different methods have changed in popularity over the years, every method we’ve covered in this guide is relevant today. Cash still has a place in all societies despite technological advancements and cheques remain to be the preferred method of payment for many people.
The clearest takeaway from all this information is that, ultimately, people like to pay in different ways. When businesses accept payments it’s understandable that they will use payment methods that make most sense for them, perhaps even encouraging their customers to use a new approach that comes with previously untapped benefits.
However, there is also a responsibility to respect different preferences, simply because it makes business sense. The wide variety of payment methods that exist show that attempting to rely on customers using a small number of payment methods will always limit you in comparison with competitors offering more.
If you’d like to know more about offering different payment methods, get in touch with OpenPayd today and we can guide you through it.
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