In the 1990s, the global financial system was anchored around the US system. It was described by the metaphor ‘hub and spoke’, with the global economy dominated by the US as the sole financial superpower. The situation has recently become much more distributed in a multipolar financial world, featuring both benign outcomes and certain risks.
Two major developments have altered the landscape. First has been the rise of emerging economies. In 1992, the ten leading emerging economies, including China, accounted for around 12% of global economic activity. By 2022 that had become one third. The other significant trend has been the rise of geopolitical tensions, over security and trade. This has featured tariffs, bans on foreign direct investment in defined strategic industries, and the widespread use of financial sanctions by the US, especially against Iran and Russia, in pursuit of geopolitical aims, which has multiple and complex consequences.
Following the invasion of Ukraine in 2022, Russia was banned from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. This has caused inconvenience for Russian businesses, but the Russian state had been developing alternatives: The SPFS, a financial messaging service that replaced SWIFT for interbank transfers; and MIR, a card-payment network replacing Mastercard and Visa.
The Chinese CIPS system, which is also a financial messaging system, has been growing rapidly. Established in 2015, by 2023 it was processing $67bn of transactions per day. This is small compared with SWIFT’s $34tn, but it was 24% higher than the year before. China also has an alternative to Mastercard and Visa for card payments, called UnionPay.
The Indian Unified Payments Interface (UPI) system enables cost-free digital payments by text or scanning a QR code. By March 2023 it was processing Rs139tn-worth ($1.7tn) of transactions annually, accounting for more than 75% of India’s digital retail payments.
UPI is linked to a digital-identity system enabling a more secure way of making welfare payments within India. Also, it is being extended internationally, being linked to payment systems in Qatar, Sri Lanka, the United Arab Emirates, Singapore, Mauritius and Bhutan, and is set to be expanded into other territories.
The Modular Open Source Identity Platform (MOSIP), based on Bangalore, has made a publicly accessible version of the code underlying India’s digital-identity system available to other countries. The Indian payments system could become an alternative to both SWIFT and CIPS.
The Gulf Co-operation Council nations have an established system called GCCNET, which creates a single ATM network linking all GCC national switches. It allows account settlement between member countries in the nations’ own currency, without the need to open a non-GCC currency account. The NAPS system within Qatar facilitates payments by debit cards issued locally.
Such alternative payments schemes are developed for pragmatic economic reasons, to do with convenience, reduced transaction costs and better security. It would not be realistic to imagine that Mastercard and Visa should be the only card payment systems, or that SWIFT should have a global monopoly.
The rise in emerging economies and of non-US financial systems has not, so far, diminished the role of the US dollar as the principal reserve currency. The ubiquity of the dollar, and the sheer scale of the challenge in replacing it, mean that its share in key financial transactions remains dominant, accounting for 85-90% of currency trades, and 47% of cross-border payments via SWIFT in early 2024, up from 38% three years earlier.
While diversification and maturation of financial systems in emerging economies have many benign effects, there is a risk that financial rivalry could fuel geopolitical rivalry. If it became the case that the choice by a nation as to which payments system or currency it uses is seen as an indicator of which side they were allied to, tensions could increase.
This is not inevitable however, and in general the proliferation and maturation of different payments and banking systems is an inevitable feature of the rise of emerging economies.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
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