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Retail CBDCs (part 2): what's in it for the banks?

In my last article I talked about how Retail CBDCs are gaining momentum globally and how they’re expected to work, with commercial banks as important participants. But offering CBDC services even with capped wallets may result in an outflow of deposits and a reduced balance sheet, obviously not good news. So why would banks want to do this?

What's in it for the Banks?

On one hand there will be pressure to participate, coming from customer expectations, the competitive market, and possibly the state in the form of regulation. If retail CBDCs are launched they will likely be an intrinsic part of a country’s financial system and banks will be obliged to follow.

So what could banks get out of this, how could they monetise it?

Making customers pay for CBDC payments would be a major dis-incentive for uptake. No-one wants to pay fees for payments today! But in many countries, we do pay for access to cash in the form of ATM fees. So it could be that banks charge small fees for CBDC conversion services. Or they might only charge the businesses who are receiving CBDC and would need depository and exchange services. Such charges might be offset by reduced merchant transaction fees compared to credit card networks, assuming the central banks make the CBDC network cheap or free to use.

Then as CBDC progressively replaces cash banks may be able to save money on infrastructure and the logistics required to support physical cash.

Furthermore we would likely see new services evolve that could be monetised. With fast settlement times CBDCs could open new efficiencies in the way liquidity is managed. Privacy rules permitting, transactional data could allow insights to new trends and allow positioning of new products. Future use cases around automated payments – think smart cars with automatic payment for recharging or parking - would require wallets and infrastructure to gain access to the CBDC network that could be charged for.

There is also the question of future readiness, being ready for other potential use cases such as if CBDC was ever expanded to commercial bank loans, or just keeping an open door to yet to be thought of uses.

Assuming banks do then participate in CBDC networks, how would this fit into their banking model?

CBDC systems

First let’s have a quick look how CBDCs are being built. This is a vast topic in itself (see this excellent Oliver Wyman & AWS paper for a detailed look) but a few key points are worth noting.

Underpinning everything is of course the CBDC network. It’s where the central bank mints, issues and controls the CBDC, and where data storage, transaction processing, and the governance model reside. The trend is towards distributed ledger technology (DLT), although centralised CBDC systems such as in China also exist. For DLT systems intermediaries connect to the network through node infrastructure.

Then there are different types of wallet. Non-custodial wallets hold all information (such as private keys for cryptographic systems) required for a user to sign their own transactions. The downside of this kind of wallet is - like a physical wallet - if you lose your phone, without proper backup you could lose your assets. They are best suited to small amounts.

Custodial wallets on the other hand delegate transaction signing responsibility to an intermediary who manages connectivity to the DLT ledger. This kind of wallet can still support bearer instruments when assets are held within a segregated (as opposed to omnibus) structure, that is, with customer-specific on-ledger accounts. If for any reason the bank failed, those assets could be traced and recovered.

CBDC services in banks

As a first step central banks may well mandate creation of generic wallet apps for their populations. The challenge in a standalone app however is getting users to download it, register, and link a payment method for initial CBDC access, all potential causes of friction.

So we could see such apps become white-labelled by banks to facilitate integration to the existing financial system, and as adoption grows, the embedding of custodial wallets directly into existing mobile banking apps.

Banks can provide origination capabilities to support customers’ opening wallets and on-ledger accounts. With some CBDCs we see requirements for multiple wallet tiers with different balance limits offering varying degrees of privacy and imposing different levels of KYC. Banks are ideally placed to support and manage this complexity.

Then the key advantage for banks – they can provide slick conversion facilities to allow users to link their deposit accounts and easily ‘top-up’ or ‘cash-out’ their wallets as and when they want. In this way they can provide an integrated experience, aggregate holdings across deposits, savings, loans, cards and CBDC – all in one place. They have ready-to-go customer-facing support services to help in case of customer difficulty, for example if transactions fail due to surpassing limits.

On the back end the bank can orchestrate CBDC issuance and redemption with the central bank to their vault account and manage their liquidity. They have the expertise to handle the processing for customer conversions - fund reservation, balance checks, the on-ledger CBDC transaction from the banks to the customer’s account, and finalising deposit balances. They can provide depository services for businesses accepting CBDC. They can offer payment processing and AML controls, where these are not offered at CBDC network level.

Modern banking platform

In short, there are several potential CBDC touchpoints where banks may act. Yet for banks to fully unlock the potential requires a modern, composable, banking platform. A platform that can scale for the banks business. That allows for the straightforward addition of new products and the robust flexibility to enable the processing required for CBDC. And that brings an open architecture to facilitate integrations to the DLT nodes.

This is a fundamental first step for banks to fully access the potential opportunities that digital currencies will bring.


The digital payments space is ripe for innovation and CBDCs are gaining momentum globally as one option to fill that need. Commercial banks are expected to be key participants in these networks as they emerge, providing accessibility to CBDC and supporting adoption by the wider population. Banks can look to this new technology as an opportunity for investment and development of new products and services as the world moves forward into the era of digital currencies.


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Jeremy Boot

Jeremy Boot

Product Strategist


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22 Sep 2022



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