The Importance of Evidence Based, Customer Led Design

OMFIF’s Digital Monetary Institute has worked with Giesecke + Devrient (G+D) to issue a paper ‘Consumer Attitudes to CBDC: considerations for policy makers’. The paper includes an introduction to CBDCs and an overview of the rationale for CBDCs, the work being done around the world and the challenges being addressed. 

An Ipsos MORI survey of a 1,000 people in both America and Germany and 500 people in each of Indonesia and Nigeria provides the base consumer attitude data. These countries providing regional variation and a developed/developing world split. The importance and relevance of the work being to answer the question, will anybody use a CBDC even if all the problems are solved?

What is a CBDC?

Central banks see CBDCs as a public currency in a digital age. Their role is to complement cash giving the public freedom of choice, the increase financial inclusion and to future-proof the digital payment infrastructure. Given every society is different and the payment landscape is changing fast, the core system will need to be flexible.

When considering the benefits of CBDCs, Central banks will often say they want them to be a driver of digital innovation, to boost the growth of the digital economy and to extend digital financial inclusion. But what are consumer needs and concerns? What features should a CBDC have and what barriers do they need to overcome?

The paper suggests that CBDCs represent an existential question for central banks. Should they provide the public with an electronic form of money, complementing physical banknotes? One could argue why the concern when the research shows that cash is the most frequently used payment means in Indonesia (52%), Germany (49%), Nigeria (30%) and the US (20%). Cash is in the top three payment tools in 70% of these countries.

What is driving central bank interest in CBDCs?

The move to digital economies has been underway for some time and has accelerated during the pandemic. Retailers have invested in technology to accept digital payments, whether using QR codes or point-of-sale hardware, and the growth of e-commerce has played a significant role. This change has been happening around the world with Asia leapfrogging cards to use apps (or super-apps, retailing and payment in one tool). New sectors, such as health and education, have joined the change, and governments have encouraged digitisation as a way of making benefit payments.

In many parts of the world there are significant numbers of people who don’t have bank accounts or who are not connected. The World Economic Forum estimate one in five people in the least developed countries are not connected. The Roland Berger consultancy estimate 31% of adults in South East Asia are digitally excluded. The World Bank suggest 45% of adults in Latin America are unbanked. 60 million Nigerians, out of 200 million, are unbanked.

The challenge is that these people are not attractive to the commercial sector. Societies cannot be confident that private sector digital payment tools will reach them, which is why CBDCs are considered as a possible solution to this societal problem.

The paper does make the point that to enable CBDCs to fulfil this requirement, central banks need to spend time understanding the needs of the unbanked and the underbanked, to identify what excludes them (and if a CBDC can solve those problems) and to focus on their financial needs and not the needs of the institutions in the financial system. In terms of the priorities of a CBDC, where does this sit relative to the central banks other CBDC priorities?

What matters to consumers?

Consumers were asked what matters in the design of a CBDC:

There is a divide between the developing world where acceptance and security are the priority, and the developed world where security, no fees and acceptance rank highest. The differences may well be explained by gaps in the existing payment options faced by consumers in those countries. Nigeria launched its own CBDC in October, so perhaps it is not a surprise that so few people say they would never use a CBDC.

Understanding this data is important when a central bank is deciding how to design a CBDC as well as whether and how to launch a CBDC.

The research also provides details of the payment tools people use frequently. The data shows debit cards (21%), credit cards (13%), mobile payments (4%), apps (6%), online bank transfers (14%) and cryptocurrencies (1%) being used most frequently by people (cash 38%). This emphasises the need for CBDCs to be able to interact and work across this wide range of payment solutions.

What are consumers confident in?

Asked how much confidence, if at all, they would have in digital money issued by a range of providers, the answers were:

  • Central bank: 15%

  • Payment Service Provider: 7%

  • Commercial bank: 7%

  • Credit card company: -6%

  • Large technology company: -14%

Rationale for CBDCs 1

Central banks are uncomfortable that the monetary exchange of stablecoins are untethered from central bank control. Central banks are concerned about the decentralised nature of stablecoins due to the risk they bring to implementing monetary policy and financial stability. The thought of big tech companies entering the payment sphere with their ability to scale up, including the gathering of data, without the traditional regulations applying to them, is concerning. These tools could entrench market power, concentrate data while not including poorer elements of society.

Central banks believe the new payment tools need to work for society as a whole, that the foundation of monetary systems is trust and that decentralisation implies a loss of public good.

Design principles

The Bank for International Settlements (BIS) laid out three principles in one of its papers for CBDCs, they should be:

  • Based on the public and private sectors to ensure interoperability and co-existence with broader payment systems

  • Based on the public and private sector to future proof the systems and allow related innovations

  • Designed and implemented to allow the existing financial system to adjust, and flexibly to use safeguards

It believes that CBDCs can be a more powerful payment medium than private offerings because they can be retrofitted onto, and take advantage of, existing financial market infrastructure such as settlement systems. The paper provides no evidence to support why this is true.

G+D Filia solution

The paper briefly describes the attributes of G+D’s Filia CBDC solution. These are that it is:

  • Token-based

  • Secure with high availability and no single point of failure

  • Balances privacy and transparency

  • Able to secure consecutive off-line payments

  • Programmable

The goal is for the CBDC to operate as cash to the digital world.

Key findings from the research

  • Knowledge of CBDCs is higher in developing markets

  • Emerging market consumers are ready for digital payments

  • Developed market consumers remain sceptical about CBDC usage

  • Security and universality are major positives for CBDC

  • CBDC should be as close to cash as possible

  • CBDC can be a broad complement to existing forms of payments

Achieving widespread acceptance

The paper concludes by looking at the apparent acceptance of CBDCs in these countries. Nigeria launched its e-Niara in October 2021, which may explain the 91% likelihood that people will use a CBDC. It may also reflect the government’s long term efforts to promote the use of digital payments, including levies on cash withdrawals over a certain level.

Similarly, Indonesia set out in 2019 to move its economy to being digital by 2025. It has run long term digital financial literacy programmes and during the pandemic has taken initiatives to encourage digital adoption. 60% of respondents said they were likely to use a CBDC.

For both Nigeria and Indonesia, a CBDC may address, of course, perceived or actual shortcomings in today’s digital payment provisions.

In the US there is low awareness of CBDCs (15%) and only 24% of respondents said they were likely to use it. The Chair of the Federal Reserve Board, Jay Powell, has said that the decision whether to issue a Digital Dollar depends on whether there is a clear and tangible benefit that outweighs any costs and risks.

Similarly, Germany only had a 17% awareness of CBDCs and a 14% likelihood that people would use it. Privacy appeared to be a major issue for the German public in the ECBs October 2020 Digital Euro survey, half of whose respondents were German, where 50% of people were concerned primarily about privacy. This Ipsos MORI poll contradicted that finding with only 11% being concerned about privacy. Perhaps those answering the ECBs survey were self-selecting sceptics.

For both America and Germany, their low likelihood to use CBDCs may reflect a sense that today’s status quo is meeting their needs.

Final word

The need for and interest in CBDCs clearly varies dramatically between the developed and developing worlds - 3% of Nigerians and 4% of Indonesians would rule out using a CBDC compared with 32% of Americans and 29% of Germans. Equally the attributes desired differs similarly between regions. A clear message from this useful research is just how important it is for central banks to spend time researching and understanding what their public’s want and why. Only then can they design and implement a CBDC with confidence.

1 - A comment on the paper. The paper makes the statement that ‘consumers are experiencing and demanding faster and more convenient ways to pay’. While experiencing may be true, the paper does not provide evidence of demand. It is true that stablecoins such as Tether have gained some traction and cryptocurrencies have entered general public awareness, but they remain rarely used. The level of lobbying, particularly in the US, for these tools does indicate how much ‘noise’ and ‘energy’ they are generating.