(Bloomberg) — Scarred by the financial crisis and reminded by the pandemic that the world is a precarious place, Iceland’s central bank wants new domestic retail payment tools that would reduce its reliance on global card giants.
The Reykjavik-based Sedlabanki wants to add a solution to the interbank system to let banks offer retail payment tools to customers for seamless transactions with shops and service providers, Deputy Governor Gunnar Jakobsson said in an interview. He named Sweden’s mobile payment app Swish as a model.
The virtual disappearance of cash in several Nordic countries has sprung from a wave of innovation in retail payments. In Iceland, the effort is driven mainly by national security, as nation’s financial meltdown in the wake of the 2008 financial crisis exposed the risk that global credit card giants could block credit cards issued by Icelandic banks.
“The primary driver is national security so that we have domestic instant payment solutions if for some reason Visa and MasterCard could not or did not want to service the Icelandic market,” Jakobsson said.
Visa and MasterCard stopped using the Icelandic krona in the settlement of credit cards in 2008, when Iceland was forced to turn to the International Monetary Fund for help, according to a report by the Bank for International Settlements published last year.
The clearing of credit card payments “would have seized up with drastic consequences for the Icelandic payment system” if Visa and Mastercard had not accepted the assurances from the central bank after it declined to provide a blanket guarantee, it said.
“Debit cards are now cleared on the Visa and MasterCard infrastructure,” Jakobsson said. “So if the same situation would arise as in 2008, where it looked like credit cards could not be used in Iceland, we could in the worst possible scenario be in a situation where neither debit or credit cards could be used.”
The vulnerability has increased since the crisis, as the clearing of Icelandic debit card payments that was previously handled domestically is now done offshore.
Fully Committed
“Visa is fully committed to the Icelandic market,” and would be pleased to talk to the central bank about its strategy, Visa said in an emailed response. Visa’s offering “includes settling in local currencies as a core capability, thus enabling the Icelandic market to remain open and active at all times.”
Jim Issokson, a Mastercard spokesman, said “our support of our Icelandic customers and cardholders is the same as we offer in other geographies.” The company’s efforts in Iceland “come with the continued engagement with the central bank on payments technology and innovation,” he added.
The central bank hasn’t yet done detailed analysis of the economic benefits of the move, Jakobsson said. The cost is likely to be lower than using credit and debit cards, of which a “considerable share is paid to providers outside of Iceland,” he said.
Central banks across the world are increasingly focused on instant payment solutions, such as the European Central Bank’s TIPS system and FedNow in the U.S., amid concerns that their monetary authority is being eroded as the global technology giants gain ground in the payments market.
Read more: Nordic Digital Wallets Merge to Stave Off Apple, Google Pay Apps
As part of the solution to ensure secure payments as cash use dwindles, more than 85% of global central banks are exploring their own digital currencies, according to BIS. Along with China, Sweden leads major economies in developing a central bank digital currency, or CBDC.
While Iceland is “closely” following the developments in the other Nordic countries, “it is unlikely that we will be a leading nation when it comes to implementing an e-krona or CBDC,” Jakobsson said.
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