Digital ruble: new form of money that to make banks fight for customers

What the third form of payment will look like along with cash and non-cash

The Central Bank has formed a pilot group of twelve banks to test the digital ruble system. According to the plan, the prototype of the platform is to be completed in December 2021, and testing in several stages will begin in January 2022. All this will allow banks to configure their systems and processes from a technical and technological point of view. Artur Safiulin, a columnist of Realnoe Vremya, economist with many years of banking experience, suggests understanding what the digital ruble is, what advantages this form of money brings, and what risks there are for the banking system.

The essence of digital ruble

According to the Central Bank's plan, the digital ruble will take the form of a unique digital code that will be stored in a special electronic wallet, the transfer between users will take place in the form of moving this code from one wallet to another. It is assumed that the digital ruble will become a full-fledged means of payment along with the regular ruble and will be used by the population, businesses, and the state in the payment system, providing simplicity of calculations, their high speed, low costs and high reliability. Naturally, many people will say, what is the difference from the regular non-cash form of money?

The Central Bank says that this tool will have the properties of both cash and non-cash money, providing the same conditions and tariffs for transactions throughout the country, regardless of the service bank. For example, when making a transfer now, we are forced to do this operation according to the rules of the credit institution where we have an account opened. As a result, the bank itself sets the tariffs and other conditions. The digital ruble platform is unified and is implemented in banks' applications through the Central Bank's software module. As a result, the client can replenish his digital wallet in one bank, transfer through another, and pay from a third. And all according to the same rules and tariffs, which are much lower than the current bank ones. In general, the Central Bank believes that transfers between individuals should be free of charge.

In addition, the digital ruble gives the opportunity to simplify the storage of large amounts (so as not to split up into 1,4 million and carry it to several banks), protects money from physical loss, allows you to make payments remotely. Plus, there is additional functionality that can be used by both businesses and the state. Customers will get access to their wallet through the bank's mobile application. A second wallet will be provided, which will be located directly on the smartphone and will be responsible for offline operations — for payments in stores. One can top up such wallet by transferring money from the first type of wallet.

Four models of digital currency proposed by Central Bank

Model A: The Central Bank creates the so-called digital currency of the central bank (hereinafter referred to as the CVCB — in fact, a virtual form of the official currency), issues the CVCB, opens wallets to banks for interbank settlements and securities transactions on the Central Bank platform. In this model, individuals and legal entities do not have access to the CVCB. As a result, there are no plans to develop this option further, since there are no obvious advantages compared to current payment systems.

Model B: the Central Bank creates a digital currency exchange platform, issues digital securities and provides direct access to it to individuals and legal entities, opens wallets to customers, performs calculations. The Central Bank can also open current accounts of customers and carry out the cash and settlement service without opening an account for settlements in the CVCB. Settlements between clients are carried out directly by the Central Bank, without the participation of banks and other financial intermediaries. This model has caused a storm of protests among banks, who are seriously afraid of an outcome of up to 4 trillion rubles, which will cause a liquidity crisis in the classical banking sector. More on that a bit later on.

Model C: The Central Bank creates CVCB platform, issues CVCB, provides access to CVCB to individuals and legal entities, opens wallets to clients in CVCB, performs settlements on them. The wallet is opened and accessed through a bank or other financial intermediary connected to the platform.

Model D: The Central Bank creates CVCB platform, issues CVCB, provides access to CVCB to individuals and legal entities, opens wallets to clients. The client's access to the wallet for making settlements is carried out through a bank or other financial intermediary connected to the platform.

Naturally, banks and other financial companies have supported the models in which banks and financial intermediaries open and service their wallets and customer wallets on the Central Bank platform. A terrible nightmare for banks will be a situation when the Central Bank itself issues currency, serves transactions — wallets are located in the Central Bank itself, and not in banks that currently use customer funds for lending, and the issued financing is credited to current accounts, thus preserving liquidity in credit institutions.

At the first stage of the pilot project of 12 banks, which includes Kazan Ak Bars Bank, the simplest operations will be tested — transfers between individuals; payments from individuals to legal entities for goods and services. After the banks learn how to work with the system, and the Central Bank is convinced that the new tool does not create problems with liquidity, they will start testing more complex operations, such as paying taxes and budget transfers.

What are banks afraid of?

The banking sector was wary of the idea of the Central Bank of the Russian Federation regarding the new form of our national currency. Banks do not want to see their competitor in the regulator for the funds of citizens — there are serious concerns that there will be a mass transfer from bank accounts to digital wallets in the Central Bank.

There is an opinion that banks will have to raise tariffs for other services, since it is necessary to compensate for the lost income. It should be reminded that every year the cash and settlement service brings 600 billion rubles of income to the entire banking sector of Russia. It will be especially difficult for large banks that receive the lion's share of these revenues and do not understand how to integrate into the digital ruble system and save their business.

In addition to the loss of income from the cash and settlement service, as already mentioned above, banks expect a liquidity crisis, due to the overflow of client account balances into the digital form. As a result, interest rates are expected to increase. The possibility for other financial intermediaries to enter the settlement market is also alarming for regular banks, which are not at all happy with the idea of the Central Bank of Russia to bring more competition to this market. As customers, an interesting time awaits us — reducing tariffs and fighting for customers. A potential risk is also the feature of mutual settlements in digital currencies — theoretically allowing you to accept deposits and issue so-called P2P (peer-to-peer, or from person to person) loans without involving credit institutions at all.

What the regulator responds to this

The Central Bank expects that after the launch of the digital ruble, bank customers will receive higher interest rates on balances on current, settlement, salary accounts — traditionally purely symbolic at the moment. To prevent an excessive flow of these liabilities into the digital ruble and to preserve the opportunity to earn on such liabilities, banks will be forced to raise rates on balances.

At the same time, the Central Bank does not plan to charge interest on the balances in digital wallets, this is seen as a kind of curtsey towards banks, so as not to take away their income at once.

In response to the banks' statement about the growth of interest rates, the department of Elvira Nabiullina rightly notes that when determining the cost of loans, banks are guided by the so-called transfer curve (formed on the basis of comparing the yield of alternative “risk-free” placement of money for the same period as the loan, for example, OFZ government bonds), not on the cost of “cheap” liabilities that will flow into digital form.

In conclusion, it is worth noting that an interesting time awaits us — we can say that the Central Bank risks damaging the banking sector with its actions. Perhaps, this lies in the strategy for further purge of this market, which has slowed down in the last few years. The Central Bank would be satisfied with the presence of 50 large banks in the country, which will not fall due to their size. On the other hand, there is a digitalisation of everything around, and it is not surprising that new tools give rise to new challenges. After all, Kodak film cameras also disappeared. How the banking industry is going to survive is an open question.

Artur Safiulin

The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.