Huw van Steenis On What Central Banks Will Do Next

Episode Summary

Executive Summary: The episode examines Mark Carney’s Jackson Hole speech on synthetic hegemonic currency and uses it as a springboard to discuss how technology, low/negative rates, and big tech are reshaping payments, banking, and central banking. Hugh Van Steenis argues payments are now the key battleground, banks face profitability pressure, regulators must update rules and data capabilities, and cash is likely to become increasingly cash-light rather than disappear overnight.

Main Topics: Carney’s synthetic hegemonic currency idea (Priority: 5/5): Discussion of Mark Carney’s proposal for a multipolar virtual reserve currency and why it reflects broader central-bank concerns about the future of money and payments. Payments as the new battleground (Priority: 5/5): Payments are presented as the most contested growth area in financial services, attracting banks, fintechs, and big tech because of the shift from cash to digital commerce. China and global payment innovation (Priority: 4/5): China’s Alipay/WeChat Pay ecosystem is used as a model for how network effects, promotions, and integrated financial platforms can rapidly transform payments. Negative rates and bank profitability (Priority: 5/5): Van Steenis argues negative rates weaken bank profitability, constrain tech spending, and make the financial system more brittle, limiting monetary policy transmission. Regulatory reform and leveling the playing field (Priority: 5/5): The conversation emphasizes updating payments regulation, imposing comparable standards on big tech and payment firms, and improving central bank access to data and technology. The future role of cash (Priority: 4/5): The decline of cash raises inclusion concerns for elderly, disadvantaged, and disabled users, suggesting a political debate over maintaining viable cash infrastructure.

Key Arguments: Technology is transforming financial services by shifting advantage toward scale, data, and cyber capabilities, forcing regulators to catch up. Payments are the main growth battleground because commerce is moving online and firms want to be the gateway into that ecosystem. Big tech’s advantage is not only technology but also distribution and an ability to operate with different regulatory burdens than banks. China’s payment dominance came from existing platform distribution, aggressive promotions, and a more integrated financial-supermarket structure. Negative rates reduce bank profitability, limit technology budgets, and make banks more fragile, weakening credit transmission. A less profitable banking system becomes more brittle and may require consolidation, scale, and efficiency to remain viable. Payment firms and big tech should be held to similar standards as banks on cybersecurity, resilience, KYC, and AML. Central banks need better data science, cloud tools, and tech expertise—not just economics PhDs—to supervise modern financial systems. Cash is likely to become cash-light rather than vanish immediately, but society must decide whether and how to preserve access for excluded groups.

Data Points: Length of Stock Movers reports: five minutes or less - Described in the promotional intro as the format of Bloomberg’s short audio reports. BOE review outreach: over 300 entrepreneurs, tech CEOs, cyber experts, and policymakers - Van Steenis described the scope of the research he conducted for the Bank of England review. China online payments concentration: 90% - He said Ant Financial and WeChat Pay control roughly 90% of online payments in China. Customers in China and India combined: over 1 billion - He used this to illustrate the scale of Ant Financial/related platforms compared with Citigroup. Citigroup comparison: five times Citigroup - He compared the combined customer base of China and India payment ecosystems to Citigroup. Sweden cash transaction decline: 80% reduction over the last decade - Used as evidence of how quickly cash usage can fall in advanced economies. UK cash adoption lag: four or five years behind Sweden - Van Steenis estimated the UK trails Sweden in the shift away from cash. US cash adoption lag: another four or five years behind the UK - He suggested the US is further behind the UK in moving away from cash. Less than 10% of transactions: less than 10% - Referenced for Norway and Sweden to describe how cash-light those economies have become. Cashless decline horizon: 10 years - He suggested the next decade will likely be about becoming cash-light rather than fully cashless. Bank regulator data load: the complete works of Shakespeare twice a week - A metaphor for the volume of data regulators must process. EU bank tech budget comparison: almost half the proportion of their tech budgets - European banks spend less on digital transformation than US peers.

Pivotal Quotes: "payments is the battleground between big tech, payments firms, and banks." — Hugh Van Steenis: Explaining why digital payments are the central contest in financial services. "I thought it was a really great speech because it put its finger on a number of the dilemmas that policymakers are wrestling with." — Hugh Van Steenis: His reaction to Mark Carney’s Jackson Hole address. "I would be heartily against any further moves more negative." — Hugh Van Steenis: His personal view on additional negative-rate policy.

Implications: Payments, banking, and monetary policy are converging into one tech-driven contest. Winners will likely be scaled, secure, and data-rich firms; losers may be undercapitalized banks and unprepared regulators. Cash will likely persist in reduced form for inclusion reasons.