What: A piece looking at how new payment options born in other parts of the world could challenge Western dominance.

Why it is important:  Any player aiming at a global audience needs to be fully aware of what is going on the payment front worldwide.

Historically, trade began with barter, then evolved to include early forms of currency such as shells and coins. Credit, first used around 5000 years ago, improved liquidity and commerce, but came with its own challenges around trust and verification. Physical cash has long been the standard for transactions, with banks initially serving as safeguarding institutions for commodities before expanding into consumer payments with checks and credit cards.

The advent of digitization, spurred by smartphones and the internet, has brought a new wave of changes to payments. Digital payments reduce friction in transactions, enable remote payments, facilitate trade from afar, and leave a clear, auditable trail. Emerging technologies, such as crypto protocols, fintech wallets, and digital central-bank money, promise to overhaul the global payment system, which earned about $2.1trn in revenues in 2021.

Though the transition to digital payments has been global, there's considerable variation in the systems being developed. In some countries, like India and Brazil, new state-sponsored payment platforms have become dominant, bringing large numbers of unbanked citizens into the formal financial system. The bank/card model remains largely intact in Western countries, despite the rise of fintech.

Digital payment platforms also raise questions about the relationship between money and the state. Governments might use digital finance to monitor their citizens more closely. The shift could also decrease Western financial clout. Meanwhile, there are concerns that frictionless movement of money could increase financial instability by making it easier for customers to withdraw bank deposits.

However, despite the hype and subsequent market downturns, three significant changes have emerged:

1. Crypto and fintech firms are unlikely to overthrow banks and card networks. Despite their growth, the traditional banking system has adapted effectively to digitization.
2. Emerging markets have developed open payments systems, providing an alternative to the bank/card model in the West and the closed fintech systems in China.
3. Many governments are reducing their dependence on Western payment networks and the US dollar, building national and multilateral payment systems.

These changes may challenge Western dominance in international finance, as control over payment systems confers significant political power. Lastly, this report will assess the role of cryptocurrencies, central-bank digital money, and government strategies for reducing Western dependence.

How emerging economies built alternative payments models