07 Jul 2022

International payment systems are a public good with a long tradition

In her Financial History Lecture, Catherine R. Schenk of the University of Oxford outlined developments, changing technical requirements and current challenges of international payments

International payment flows are a necessary side effect of international trade. Therefore, reliable solutions for international payments represent a public good that still exists today largely as a non-state infrastructure. As Catherine R. Schenk explained in her Financial History Lecture on 29 June 2022, as part of the Financial History 2022 Endowed Visiting Professorship made possible by Bankhaus Metzler and the Friedrich Flick Förderungsstiftung, the international payments system appears to be approaching a turning point. The lecture was jointly organized by the Leibniz Institute for Financial Research SAFE, the House of Finance at Goethe University Frankfurt, and the Institute for Banking and Financial History.

Regulatory requirements and technological developments in times of blockchain and digital currencies are apparently contributing to the thinning out of the global correspondent banking network on which private payment transactions have essentially been based since the 19th century. As Schenk pointed out, the network of correspondent banks evolved not only at the pace of global trade expansion but also through improved communication capabilities. Examples of this development range from the expansion of the overseas telegraph network in the era of the first globalization at the end of the 19th century to the use of telex and fiber-optic internet connections during the second globalization.

Professor Catherine R. Schenk during her Financial History Lecture in Frankfurt.

Schenk further emphasized that even after World War II, the expansion of the infrastructure of the international payments network was often the result of private initiatives. The establishment of the private Clearing House Interbank Payments System in the U.S. for large-volume payment transactions is an example of this, as is the payment information system SWIFT founded in the early 1970s.

The private character of the international payment traffic infrastructure was maintained, even though it became the focus of state regulation in the wake of the historical bankruptcy of the private bank Herstatt. It was not until the 1980s that real-time gross settlement systems were introduced by central banks. But this did not change the growth of the private SWIFT payment information network and reliance on inter-bank correspondent relationships.

Catherine Schenk concluded by addressing why the international payments system, which is about 150 years old in its main features, could lose its importance. In addition to inefficiencies caused by the time taken for settlement and the political influences that have a disintegrating effect, the transformation thrust comes primarily from new blockchain technology, which could possibly even make the existing payment traffic system obsolete.