The International Monetary Fund’s latest Fintech Note, supported by research insights from institutions such as the Bank of England, Bank of Canada, Bank for International Settlements, and studies from the Kansas City Federal Reserve and multiple central banks, offers a sweeping assessment of how central bank digital currencies (CBDCs) could reshape competition in retail payments. As digital transactions accelerate and private platforms consolidate market power, the Note argues that CBDC could become a subtle but powerful counterweight, challenging entrenched fee structures, reducing barriers to entry, and opening space for new innovators across the payments landscape.
CBDC as Both Payment Method and Platform
The Note emphasises CBDC’s dual identity: it is both a new payment tool and a new platform competing with card networks, e-money issuers, big-tech wallets, and even public fast payment systems (FPS). This distinction matters because platforms, not just payment instruments, determine access rules, fees, and the distribution of value among intermediaries. In many countries, private sector platforms wield significant market power, using loyalty schemes, merchant contracts, or exclusivity arrangements to sustain high fees and limit competition. A CBDC platform designed with open, transparent participation rules could weaken these advantages, allowing smaller fintechs and new players to enter more easily and compete more fairly.
What Drives Users to Switch?
The Note presents a framework explaining how consumers choose payment methods by balancing price and value. Value reflects a mix of acceptance, convenience, security, speed, privacy, and the availability of bundled services. Each method excels differently: cards offer wide acceptance but come with merchant fees; e-money services offer a strong user experience with varying costs; FPS promise instant settlement but require bank accounts; cash remains private but inconvenient. CBDC’s impact depends on where it positions itself in this landscape. If CBDC offers legal tender status, robust cybersecurity, modern authentication, low or zero user fees, and quick settlement, it could become a compelling alternative. Yet trust and familiarity remain hurdles, especially in markets where private platforms have years of brand advantage.
Where CBDC Can Reshape Competition Most
The analysis shows CBDC’s strongest competitive effects arise in markets where private platforms dominate and regulation remains light. In such environments, high merchant fees and strong network effects limit consumer choice and stifle innovation. By introducing a low-cost alternative, CBDC can exert downward pressure on fees, prompting incumbents to improve services or adjust pricing. Even modest CBDC adoption can trigger competitive responses. However, the Note warns of a potential unintended effect: as platforms compete harder for consumers, they may shift costs back onto merchants, the classic bottleneck of two-sided markets. This means that unless carefully monitored, CBDC-induced competition could lower costs for consumers while raising them for merchants.
A Complement, Not a Revolution, in Strong FPS Markets
In countries with robust public fast payment systems like India’s UPI or Brazil’s Pix, CBDC’s competitive impact is expected to be milder. Since these FPS already deliver low-cost, instant payments and foster participation across banks and fintechs, CBDC may provide only incremental improvements. It could still enhance financial inclusion, support unbanked users, and help formalize small merchants, but it is unlikely to dramatically reshape fee structures or market power. Moreover, CBDC cannot by itself solve persistent adoption challenges in existing FPS unless design choices address the underlying obstacles, such as limited incentives for intermediaries or insufficient integration tools for developers.
Adoption: The Decisive Battleground
Across all scenarios, adoption is identified as the central factor that determines CBDC’s competitive relevance. Users and intermediaries must find CBDC reliable, convenient, and aligned with their needs. This underscores the importance of thoughtful design in areas such as interoperability with existing systems, simplicity of wallet interfaces, privacy protections, and incentives for intermediaries. Interoperability in particular emerges as a powerful tool for reducing switching barriers and ensuring that CBDC contributes to a more open, competitive payments environment rather than becoming a siloed alternative.
The IMF’s Fintech Note portrays CBDC as neither a magic solution nor a disruptive shock, but as a strategic public infrastructure capable of nudging payment markets toward greater fairness, transparency, and innovation. Its impact will vary across jurisdictions, shaped by the strength of existing payment systems and regulatory frameworks, but its potential to improve competition, if executed with precision, is both meaningful and far-reaching.