Business
The next big shift in global finance is happening in payments
The digital tech revolution is transforming geopolitics and global economic relations as Western payment systems begin to lose their de facto monopoly
For decades the post-Second World War western financial institutions have dominated the global economy. In terms of setting economic policy, advising on governments in distress, and loans to emerging economies, the World Bank and the IMF have held leading roles. At the level of the financial plumbing, the Swift banking system and credit card giants Visa and Mastercard have been dominant.
This is changing, as more emerging economies become advanced, as regional economic powers seek alternatives to the dollar, and with opportunities arising from digital technology. In part, alternatives to established western systems may be due to geopolitical rivalry, although it can also represent a desire for autonomy, and as a means to accelerate local economic growth. The digital revolution creates options for accessible, real-time international payment systems under the control of a corporation, a government, or a regional consortium of governments.
The US has weaponised the dollar through its sanctions policy, encouraging those nations affected, principally Russia in the current context, to seek alternatives to the western platforms.
In 2020 Brazil set up Pix, an instant payment platform for digital transfers in reals, which has rapidly become the most-used payment system in the country. It operates 24/7.
The mBridge project is a multi-central bank initiative to establish an international digital currency platform, enabling peer-to-peer cross-border payments. It includes China and Saudi Arabia. It can be used as an alternative to the Swift network and its use is gradually increasing by Chinese banks for cross-border payments.
Europe also seeks a degree of autonomy from the dollar. The European Central Bank president Christine Lagarde has promoted the idea of a digital currency run by the ECB, while nine European banks have formed a consortium to set up a euro-denominated stablecoin.
The Gulf Co-operation Council nations have launched AFAQ, a regional payment system that enables real-time settlement of payments for a low fee on a secure platform. It replaces a legacy system of bilateral correspondent banking arrangements, which was inefficient, featuring differing standards and platforms. There were six different payment systems, each with their own file format and methods of connectivity.
The system is operated by the Gulf Payments Company, a private company whose shareholders are the central banks of the GCC.
AFAQ promises more than an improvement in transactional efficiency: Swift, easy and secure cross-border payments will help economic development. Corporate treasurers will be able to establish a regional hub for payments and collectables. While the foundation of the Gulf economy’s wealth has been oil and gas exports to the rest of the world, there has been increasing diversification and regional growth. The value of intra-regional trade between Gulf nations grew from $58bn in 2010 to more than $146bn by 2024, and is set to grow much further. Tourism, AI and fintechs are among the sectors that are developing. The tech sector in particular is likely to be boosted by a single regional digital payment system. As well as making trading relationships easier, it will encourage investment.
The development of AFAQ is not, in itself, a geopolitical power play, but rather a pragmatic initiative to modernise and simplify regional payment systems to help trade and economic development. It could be a precursor to a single currency for the six Gulf nations.
Despite this eastwards shift, and despite the huge US government debt, the role of the dollar is not declining significantly. One way in which it is retaining a global role is through stablecoins. Most stablecoins are linked to the dollar. As stablecoin issuers such as Circle and Tether become major buyers of US government debt, this offers relief to the US Treasury at a time of high borrowing and persistent deficits, and while foreign governments such as Japan and China reduce their holdings. But it means that the Federal Reserve has less direct control over monetary policy.
The legitimised role of stablecoins, the rise of fintechs and of national and regional digital payment systems, reflect two powerful dynamics in the 2020s: increasing technological sophistication in payment systems as they migrate to real-time settlement, and the switch from a unipolar political world dominated by the US and western institutions to multipolar geopolitics.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.