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Weaponising payments: from division to innovation

Ross McGee
Ross McGee

Trading has taken place since the dawn of time for one reason – to gain. Initially it was for materials or food, very soon it then became for currency. Inadvertently, it also led to innovation. Through trade, people discovered new resources, knowledge and potential business partners. Now however, in times when cooperation on a global scale is becoming increasingly fragile, trade is being taken off the market between some nations. Despite this lack of cooperation, the payments industry still somehow continues to innovate.

It therefore seems that contrary to how progress is typically made through collaboration, it can in fact also be driven by division. In this blog, we will therefore explore how weaponisation of payments technology is already changing the sector on a global scale.

How are payments being weaponised?

When Russia invaded Ukraine in 2022, western powers moved to exclude Russian banks from the SWIFT network. As the Society for Worldwide Interbank Financial Telecommunication which links 11,000 banks and institutions across more than 200 countries, this calculated move was designed to disrupt and slow down Russian business. However, the impact of weaponising the world’s leading financial messaging system has proved debatable.

What is the impact of weaponising payments?

SWIFT has been the world’s leading financial messaging system for half a century since 1973, processing 42 million messages per day. It’s influence is therefore perceived as enormous. However, despite its operations nearly completely ceasing in Russia, their internal economy has not been damaged as greatly as expected. In fact, despite the sanctions against Russia, out of the G7 nations, it is Britain’s economy which is forecasted by the IMF to have the worst performance in 2023.  

Some might therefore argue that using payments infrastructure as a weapon is ineffective. Yet this might have been a very different story had Russia not taken precautionary action following America’s threat to cut them off from SWIFT when they invaded Crimea.

In reaction, they invested in huge sums of gold and set about launching national payment infrastructures. For example, during 2014 they created both Mir (otherwise known as their National Payment Card System to replace Visa and Mastercard) and SFPS (their System for Transfer of Financial Messages to replace SWIFT). Despite the latter not operating 24/7 like SWIFT and being limited to messages of 20 kilobytes, already 400 financial institutions are part of it, significantly decreasing how damaging SWIFT’s recent withdrawal from Russia might have been.

Ultimately, from an industry perspective, the main impact of using payments as a threat therefore appears to be stimulating innovation as a defense. However, when something is unleashed into the world, it typically also generates unexpected consequences …

A changing world order

Using payments as both a deterrent against nations and as a source for weakening their economies is not a recent idea. In fact, America and other western powers have levied such threats against North Korea and Iran the past. Consequently, regimes which do not align with western principles have had a long period of time to develop solutions which neutralize such threats.

Now that we are in the third decade of the twenty-first century, it appears that the reactionary technology of countries like China, Russia and India have evolved to a capacity which makes them not only able to defuse threats, but also pose a risk to the nations who made them in the first place.

For instance, along with Russia’s Mir and SFPS, China has created their Cross-Border Interbank Payment System (CIPS). In contrast to the SFPS, China’s equivalent appears to be a far more viable threat to SWIFT’s current dominance. Not only does it have connections to 1,280 financial institutions in 103 countries and regions, it also comes with the added weight of China’s growing influence across the globe.  

Whilst the numbers don’t lie, maybe the most telling developments which signal a shift away from the west’s hegemony are those of SWIFT’s. Recognizing the need to engage with rather than lose out to emerging markets from the east, they have added Chinese characters to its messaging system and even established a unit in Beijing. Undeniably, weaponising payments has therefore inadvertently led to the creation of new technology which could not only give nations independence from the whims of the western world but also eventually usurp the status quo.  

Can economic sanctions improve public life?

It can feel as though the actions of world leaders are far removed from the everyday lives which so many others experience. However, what happens on the global stage inevitably impacts everyone, from business owners to consumers.  

Considering that political developments are shaping payments technology, this should not be doubted. After all, just in the last decade, we have all experienced significant changes in how we interact with money thanks to the payments industry.

Already, Russia’s development of Mir and SFPS have protected their economy, and citizens of other countries have felt similar benefits through nationally led payments initiatives too. For instance, in Kenya extreme poverty has decreased by at least 2% thanks to M-PESA, and a third of India’s GDP is now spent digitally via their Unified Payments Interface (UPI), increasing commerce and economic empowerment of individuals. Whilst these are all isolated instances within individual countries, the minds behind these creations harbor wishes for them to spread internationally. Again, this will impact everyone.

For starters, merely the intent behind this will signal a wakeup call to the established players. Due to competition emerging for the first time, they will have to find new ways to retain their position of power by increasing their appeal to clients.

Plus, from a high level, with international payment options emerging, trading via American currency will no longer be the norm. As a result, this could see the dollar’s precarious position as the globe’s largest reserve dwindle (already between 1999 and 2021, the US dollar in international reserves fell from 71% to 59%). Also, businesses might become more inclined to succumb to the expectations and wishes of other international governments. How the latter could pan out is impossible to say but for some people it could be seen as a positive to deviate from America’s apparent monopoly over culture and global policies.

Find peace with new technology

Payments is a restless industry but the weaponisation of it has clearly only made it increasingly volatile. Whereas peaceful international relations might have made any alternatives to the likes of SWIFT irrelevant, now various alternatives exist. Whilst this can be seen as beneficial for certain countries and even consumers thanks to the creativity it will drive, it does also mean that financial data will be become more convoluted.

Fortunately, no matter how many new variables are created, and no matter how complex financial data might become, software already exists to ensure that transactions can continue to operate smoothly. A prime example of this is Aurum’s automated reconciliation software – the ideal way to stay compliant with regulations, gain accurate cash positions and free up resources all at once.

To get your financial operations prepared for the next wave of payments technology, book a demo today.

If you’d like to know more about how geo-political relations are transforming the financial world, make sure to look out for our next CFO Chapter at the end of June 2023. You can preview it here.

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