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The Evolution of National Payment Systems and the Rise of Digital Sovereignty

Countries are increasingly modernizing their national payment systems to include the 1.4 billion underserved individuals within the digital economy, particularly those who rely on mobile phones and have limited access to traditional bank branches. Integrating unbanked and underbanked citizens into the digital economy allows central banks in emerging nations to help individuals build financial track records necessary for applying for loans and insurance, while also mitigating the risks associated with cash usage.

Traditionally, nations have often opted to engage foreign firms to implement proprietary solutions for developing national payment systems. Yet, numerous low-income countries have realized that this reliance on foreign vendors' proprietary systems can result in a loss of sovereignty over their infrastructure. For instance, emerging nations encounter risks like compromised user experience and privacy when employing foreign proprietary systems. These systems are customized for their original countries and can only be adapted to a limited extent based on the provider's ability to market their features to other clients.

These systems also create long-term dependencies for maintenance and adaptation. Although maintenance is always necessary, foreign companies often charge rates based on their own market, which may be prohibitively expensive for emerging economies, leading to high-end user costs or even foreign debt. Additionally, foreign payment system companies must comply with the privacy laws of their home countries, which may conflict with the interests of the emerging nations using the systems. Additionally, relying on foreign systems overlooks the opportunity for emerging nations to develop and strengthen their local tech ecosystem.

To address these challenges, central banks are commissioning locally built systems that leverage in-country talent and open-source digital public goods. This approach ensures both sovereignty and the modernization of their systems. For example, Rwanda is installing a new national payment system entirely built, owned, operated and maintained by Rwandans, under the leadership of the National Bank of Rwanda, RISA and RSwitch. Similarly, Higala, which will be built, owned, operated and maintained by Filipinos, is the first live digital public good-based national inclusive instant payment system in South East Asia. 

What Are Digital Public Goods and How Do They Help?

According to the Digital Public Goods Alliance, digital public goods are defined by their compliance with privacy regulations, their promotion of sustainability, and their contribution to advancing the UN's Sustainable Development Goals (SDGs). These assets, which include open-source software, open data, open AI systems, and content collections, foster inclusion and connectivity within the digital economy.

It's important to highlight that certain solution providers attempt to capitalize on the appeal of terms such as "digital public goods" and "open source" by asserting that their software is "built on open source." All proprietary software is built on open source. What's crucial for sovereignty and control is whether the code is accessible for scrutiny, maintenance and modification by individuals within the country.

When used as the foundation for national digital public infrastructure, digital public goods help maintain sovereignty and achieve other important goals, such as the creation of inclusive instant payment systems (IIPS).

Leveraging Global Expertise

Digital public goods provide the “right kind of shortcut.” When countries develop their own system from the ground up, leveraging a digital public good as a foundation, they gain the advantages of ownership and control while tapping into the expertise of global professionals inherent in the system. Digital public goods usually offer free training opportunities, empowering local developers to become familiar with their mechanisms. Consequently, they can leverage this understanding to develop a system customized to their nation's unique needs, nurturing a more profound comprehension and ownership of the technology.

National Control Throughout the System Lifecycle

Adoption of proprietary payment systems created by foreign-owned corporations may result in conflicts of interest, pitting the economic goals of the foreign entity against a nation's pursuit of self-determination and financial inclusion. Reliance on foreign countries or their technology can have dramatic influence and long-lasting geopolitical repercussions on a country's sovereignty. 

Dependence on foreign-manufactured systems presents additional challenges, particularly the high costs and impracticality of integrating new use cases tailored to local markets. This issue is magnified in dynamic market settings, like cross-border payments, where a wide variety of local needs can be addressed. For example, accommodating small business owners in border town markets who need the capability to accept electronic payments in multiple currencies. Another instance is countries with dispersed populations working abroad, relying on efficient remittance channels to support their families back home. The corridors and consumer behavior will be different for each market and regularly change, which is an opportunity for proprietary providers to charge more.

In essence, the system must be tailored to handle large volumes of small transfers and meet the needs of non-bank institutions used by low-income and rural individuals, such as microfinance entities, mobile money services, and savings and credit cooperatives (SACCOs). This involves incorporating mechanisms to effectively manage security, diverse messaging, and liquidity risks, instilling confidence among larger banking institutions to participate in a network that includes these smaller entities and services. The requirements of these smaller institutions differ significantly from the bank-centric models provided by most foreign payment companies. While a proprietary solution from a foreign company might meet many of these needs, the high costs would lead to transaction fees that many end users could not afford.

Continued support is another crucial factor to consider. After the system's construction, dependence on a company located outside a client nation's jurisdiction for system maintenance can be precarious, as countries have limited recourse in case of breaches of service level agreements.

Lowering Costs

From the perspective of emerging economies, foreign software vendors charge premium prices for the systems they sell. Even travel for face-to-face meetings can be much more expensive for teams that are based thousands of miles away. Foreign financing for the deployment of these systems can create a double layer of dependency. Countries aiming to develop modern payment systems may end up incurring foreign debt to pay foreign workers to build and maintain systems that could be developed locally. Sometimes foreign vendors offer reduced pricing or free implementations, but they will recoup their investment in the future, and always at the cost of local citizens.

Development costs inevitably get passed on to end users in the form of transaction fees or joining fees for financial institutions, effectively excluding low-income citizens. In fact, there are many payment systems already in existence today, but because fees are so high (often in the double-digit percentages) people living on $2 a day or small merchants with slim margins simply can’t afford to use them.

In contrast, digital public goods are often available license-free and help operators lower costs to build and maintain their systems. This in turn offers an opportunity to lower financial barriers to low-income end users.

Using Local Talent and Growing Local Economies

Leveraging local skills and talent enables countries to unlock economic opportunities within their own tech sectors. As one hub operator recently noted, “Microsoft, Google, and others all have support centers in our country. If they trust our engineers, why shouldn’t we?” While it may be easy to blame a foreign company for issues, holding them accountable and ensuring timely resolution is often challenging. Utilizing domestic companies ensures prompt maintenance and support, and positions countries as producers, not merely consumers, of new technology.

Engaging local companies in building and integrating the system not only ensures future maintenance and upgrades but also future-proofs it. The initial planning and development stages offer the best opportunity to gain a deep understanding of the system, which is crucial for its long-term sustainability. While some foreign observers suggest a model where external countries construct the system and then provide training afterward, this approach is far less beneficial than the hands-on learning experience gained during the implementation process.

Ensuring True Inclusivity

By embracing open-source digital public goods and asserting digital sovereignty, central banks in emerging nations are not merely updating payment systems but also establishing the foundation for a more inclusive, resilient, and prosperous future for all citizens. This transition toward open-source interoperability demonstrates a dedication to leveraging technology for the common good, ensuring complete inclusivity in the digital revolution. As central banks advocate for transparency and cooperation, they accelerate the expansion of their digital economies and contribute to shaping a more inclusive global community for everyone.



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