Central bank digital currencies will force traditional lenders to innovative, give small businesses access to funds, says report

CBDCs will disrupt the banking industry, according to a report by Standard Chartered and PwC China
They will transform retail, trade and supply chain finance, and help plug the financing gap facing SMEs, it says

Banking & finance

Iris Ouyangin Shenzhen

Published: 7:00am, 2 Jun 2023

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Central bank digital currencies (CBDCs) will disrupt the banking industry, forcing traditional lenders to innovate and helping small businesses access financing, according to a report by Standard Chartered and PwC China.

In addition to facilitating cross-border payments, the CBDCs – fiat virtual currencies issued by central banks – are expected to motivate lenders to integrate their traditional services with other payment service providers to provide more innovative products and services to customers.

“Beyond digitalising physical cash, CBDCs could disrupt existing local and cross-jurisdictional payment systems, leading to a paradigm shift in the way banking services interact with the rest of the economy,” said the report released on Thursday.

As at least 68 central banks have been developing their own virtual currencies, which are expected to transform domestic and cross-border transactions. The report shed light on how these initiatives will disrupt the US$240 trillion global payment industry and create opportunities for businesses, particularly small and medium-sized enterprises (SMEs).

CBDCs will transform retail, trade and supply chain finance, the report said. In the vast retail industry, the CBDC infrastructure can be integrated with other payment methods such as cash or debit cards.

It could help bridge the financing gap facing SMEs too. Not only will businesses be able to assess to funds at a lower cost, the data in the CBDC system can also boost the credit profiles of smaller companies, the report noted.

“Enhanced credit assessments using CBDC data could be key to enabling SME financing for small merchants and businesses,” it said. “For example, trade and supply chain financing could be developed by extending liquidity and financing from the buyers to their suppliers.”

The offering of an additional CBDC payment method is also likely to help companies engage with customers and provide a better customer experience at a lower cost, it said.

CBDCs, which emerged as a response to the rise of underregulated cryptocurrencies, are seen as a key way to enhance cross-border transactions. Their development was accelerated by the rapid growth of cashless payments during the three years of the coronavirus pandemic.

Hong Kong launched a e-HKD pilot programme on May 18, with 16 lenders and payment companies taking part in the trial by allowing some of their clients to test six potential uses for the digital version of the local currency.

Mainland China has been making strides in expanding the use of its e-CNY across different cities, while the European Central Bank is expected to wrap up its two-year investigation into creating a digital euro in October.

The global payments market is valued at around US$240 trillion, according to EY.

It is not all likely to be plain sailing, however.

The development of cross-border payment schemes faces hurdles in the form of technical, regulatory and tax related complexities across different jurisdictions, the report said. Thus collaboration between industry participants and regulators is essential.