I am fascinated by the implications of driver-less cars in terms of what it will do to liabilities. In a world where vehicles are all driven by cars, there would never (technically) be any driving under the influence offenses ever again; and when there is an accident, who will be liable for the damages? – the manufacturer of the car, the developer of the software that runs the car? What will happen with insurance companies when there is no liability to ensure against anymore? It is all interesting discussions and very thought-provoking.

Lately, there has been a lot of work done to create bots that will perform financial transactions – especially buying and selling investment instruments (read here) or acquiring scarce tickets (Read here). It strikes me that we may then have the same challenges here. Who will be responsible for fraud or identity theft? If payments are made by robots (and payments are accepted by robots), how will we be able to allocate liabilities? The bots will of course be acting on behalf of some legal entity, but can this entity be held liable for a bot’s action when something untoward is done?

There are also other interesting ideas that one should discuss:

• Could a Bot open a bank account and what would the status be regarding KYC?
• How would you be able to verify a Bot’s “identity” when the Bot claims that its identity has been stolen? Would it even be possible to steal a Bot’s identity? Would a Bot have an identity and if it does not have one, how would it be able to interact with digital financial systems?
• Would the channels to access financial systems be changed to accommodate bots? Today when we get stuck we phone the support center; what alternative channel would bots use?
• Do we even want bots to be in our payment eco-system?
• Can we stop them…?

It is likely that more payments will get automated in future, it is likely that Artificial Intelligence will be harnessed to do payments on our behalf, it is likely that devices (connected to the Internet) will perform payments on our behalf. We will need to embrace these changes, but we will also have to solve the challenges.

In a previous post, I discussed the complexity of the current settlement systems and how a process of cash-sweeping could simplify this complexity significantly. Cash sweeping is a scenario where cash is transferred from one bank to another totally independent of the actual process of payments. One could look at this as decoupling settlement from the actual payment process itself.

There are many direct benefits to such an approach. I touch on some of these benefits below:

It will be a cheaper payment system

The cost of performing a payment is directly influenced by two factors: the number of tasks that are required to complete the payment and the risk associated with the payment. In bot these instances, a system based on cash sweeping would be much less costly. In the first instance, cash sweeping would require much fewer tasks to complete. Because the money never leaves the balance sheet of the bank, the bank will have control over and insight in a transaction for much longer. This reduces the risk associated with such a transaction.

It will strengthen the balance sheet of banks

In traditional payment schema based on a four party model and thus settlement, value immediately moves out of deposits on the balance sheet of the bank when the transaction is authorized. The bank immediately creates a settlement position – a kind of a holding account. In a three party model, money effectively moves from one bank account to another – both as deposits on the balance sheet of the bank. Because the money stays in deposits, the bank’s balance sheet is strengthened and the bank immediately has a higher capital adequacy.

It will improve the liquidity of retailers

In the case of traditional payment systems, retailers can only get access to their money after it has settled. This may be rather quickly in some instances, but in others, they could wait as long as a week for the money to arrive in their bank account. By implementing a settlement approach based on sweeping, there would be no reason that the retailer could not have access to their money a second after completion of the payment.

It will streamline dispute management

In traditional payment schema, dispute management are a complex affair where the actions of multiple entities (the issuer, the acquirer, the card association etc.) must be meticulously coordinated. Without this coordination, it would never be possible to resolve a dispute accurately. In a cash sweeping world, the number of entities involved are reduced significantly. It would make it possible to resolve disputes in real-time, which would be highly unlikely in the old system.

In my mind, there is very little reason why not to implement a system of cash sweeping rather than the existing complex system of settlements, except that it will be very costly to rip out the old system and replace it with a new one.