Payments without banks

Published: Mar 2017

The current arrangements for storing and transferring value evolved over centuries under organisational, legal and technical constraints that are now mostly irrelevant. Rather than delegating account holding and payments to banks, central banks should bank us all directly.

We take money for granted, but through most of history, exchange was based on the (perceived) intrinsic value of things like sea shells and coins. The origins of paper money date back to the 14th century bills of exchange of Venetian merchants and the drafts of the piaohao in China.

In 19th century USA, there were more than 5,000 different types of bank notes issued by various commercial banks, and it was only in 1913 that the Federal Reserve Bank was granted exclusive rights to issue notes and coins.

Even after issuance was centralised, money was still based on central bank gold holdings through the end of the Bretton Woods agreement in 1971. Since then we have had pure fiat money, ie the currency is worth something because the government says so and because we all believe it.

Modern banking evolved at a time when there were no computers and no telecommunications. It was impossible for central banks to deal directly with people and institutions across the country. So, central banks used commercial banks as intermediates to reach their markets.

Bank accounts

Modern bank accounts are a claim by the account holder on money at the central bank. Simplistically, the bank is a large netting operation whose net balance is their account with the central bank. All money (other than bitcoin and its ilk) is fiat money issued by central banks. So money in your bank account is a claim on fiat money at the central bank.

Likewise, modern payment systems are bank intermediated transfers of central bank money. Payments are backed by transfers from the paying bank’s account at the central bank to the beneficiary bank’s account at the central bank – either directly or by net settlement.

Bank intermediation of central bank money imposes massive costs on society. Although the central bank by definition cannot run out of money, individual commercial banks can. Banks exploit their monopoly position to extract rents from the real economy, and take risks for profit. To mitigate the systemic risks caused by bank intermediation, governments regulate the banks, adding further costs on society.

Central bank accounts for all

Now that we have the technological resources to eliminate bank intermediation of central bank money, it makes sense to end this costly and risky arrangement.

When we all have our accounts directly with the central bank, we eliminate all of the liquidity risks in payment systems. The system requirements are trivial compared to what is being done in ‘tech land’. Scale economies – one central bank system vs hundreds of banks reinventing the payment wheel – will result in further gains for society. Whatever it costs to implement and run, the system would be paid for ten times over by savings in regulation alone.

Banks still needed

Eliminating bank intermediation of money by allowing everyone to have central bank accounts directly does not mean the end of banking. Store and transfer of money is a natural government monopoly, and will be provided as a government utility for all. Cleaning up this basic service will open space for banks (and others) to provide the myriad financial services required in modern economies.

Banks (and others) will still be required for investment and lending services, for foreign exchange and cross border remittances, for a host of value added services required by individuals and institutions. Since all money will be at the central bank directly, these services can be provided at much lower risk and cost.

Banks will benefit from getting out of their role in account holding and payments. They complain incessantly that they make no money from payments, so presumably they will welcome being relieved of this burden. Account balances were nice in the days of decent net interest margins (NIMs) but those days are long past and unlikely to return any time soon.


Eliminating bank intermediation of money will drastically reduce many systemic risks that plague current arrangements. We will all have accounts with our central bank. Since central banks are the ultimate holder (and creator) of fiat money, there cannot be a run on a central bank – they simply cannot run out of money. We can still lose value to inflationary devaluation, but that risk is the same in the current arrangements.

Without banks intermediating payments, there will be no liquidity risk in payments. Banks will still have plenty of risk around credit, duration and banks will continue to pose liquidity risk from a balance sheet perspective.

Central banks will go with real time settlement because without bank intermediation there is no need for all the complex and risk creating settlement arrangements we currently have. For instance, when Alice pays Bob, her account will be debited and his account credited in the same transaction – no more waiting for payments to wind their way through complex interbank systems, and no more intermediary credit risk.

Investment banking

I assume central banks will not want to get into the business of providing investment service and loans. It is probably better that they focus on basic store and transfer services to keep things simple. For instance, if the government wants to encourage people to invest in treasury bonds, it will be better if that service is provided by treasury rather than by the central bank.

We will still need banks (and others) to provide such services, and hopefully to manage the risks. Thus, money can be swept from people’s central bank account to bank deposits or MMFs and so forth. People might even elect to keep all their money at banks (under mandate) to maximise yield or benefit from, for example, offset mortgage arrangements – whereby the bank charges mortgage interest on the net of the mortgage and any available cash.

Fractional reserve banking and bank creation of money by lending will continue with few regulatory adjustments, since it is only the store and transfer of money that will change.

Notes and coins

The elimination of bank intermediation of money will provide a perfect opportunity to get rid of notes and coins altogether. If this is not deemed desirable, current ATM networks can continue to provide their services.

Either the banks sell their ATMs to the central bank for it to run as a service, or banks provide ATMs as a value-added service for those who want notes and coins using mandate arrangements to transfer money from their customer’s central bank account to their own.

Current ATM networks are interoperable between banks, and this would be similar – except there would no longer be any need to settle through archaic systems like ACH.

Cross-border payments

Assuming that central banks will not interoperate, cross-border payments and FX will be a value-added service provided by banks (and others). In this context, Ripple could provide a very interesting service.


Mandate arrangements will be required to enable value added services from banks (and others). This is akin to current arrangements for direct debit and investment services, so nothing new here. The key factor is that the service provider is operating your account at the central bank under mandate or power of attorney, so all the benefits of liquidity management and risk reduction remain intact.


Compliance will be radically simplified. Banks will no longer risk massive fines for compliance lapses, and regulators will no longer have to worry about bank box ticking – because the central bank will do the compliance itself.

One can imagine that accounts will be created at birth for individuals and upon incorporation for institutions. Once the base account exists, adding extra accounts within the established identity will not require extra checking.


Some people may be concerned that this sounds too much like big brother watching us all. Governance issues must be addressed. We already have lots of precedent for Chinese walls between different government functions that can be applied to our central bank accounts if so desired.

In any case, banking secrecy has long ago disappeared in this world of AML, KYC, BEPS, etc. Whether the tax authorities or other government departments have to subpoena a bank or the central bank to see your account does not make a big difference.


It may seem technologically daunting for a central bank to provide accounts for all individuals and institutions. There is plenty of precedent for large scale systems that are much more complex – medical records, for example. Store and transfer of money is very simple – the balance is a running total and transfers debit the paying account and credit the beneficiary account.

The scale will be large, so some kind of distributed and modularised system is likely required. It might be a use case for blockchain but I do not think the specific database technology is a primary concern.

The future is now

The current arrangement for store and transfer of money is an anachronism that brings high costs and massive risks as well as monopolistic rent extraction to the detriment of the real economy. It is time to do away with bank intermediation of money and let us all open accounts at the central bank directly.

David Blair, Managing Director

Acarate logoDavid Blair, Managing Director, Acarate

Twenty-five years of management and treasury experience in global companies. David Blair has extensive experience managing global and diverse treasury teams, as well as playing a leading role in eCommerce standard development and in professional associations. He has counselled corporations and banks as well as governments. He trains treasury teams around the world and serves as a preferred tutor to the EuroFinance treasury and risk management training curriculum.

Clients located all over the world rely on the advice and expertise of Acarate to help improve corporate treasury performance. Acarate offers consultancy on all aspects of treasury from policy and practice to cash, risk and liquidity, and technology management. The company also provides leadership and team coaching as well as treasury training to make your organisation stronger and better performance oriented. |

The views and opinions expressed in this article are those of the authors

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