The digital pound is still in the consultation stage, so it is not clear how it would affect the invoice finance and the financial services sectors. However, some possible scenarios are already being proposed:
- The digital pound could reduce the cost and complexity of invoice verification and reconciliation, by enabling real-time settlement and automated smart contracts. This could make invoice finance more accessible and affordable for businesses, especially small and medium-sized enterprises (SMEs) that often face cash flow challenges.
- The digital pound could enhance the standardisation and interoperability of invoice finance platforms and providers, by using a common digital currency and protocol. This could increase the choice and flexibility for businesses, and allow them to switch between different invoice finance options more easily.
- The digital pound could improve the security and reliability of invoice finance transactions, by providing a traceable record of ownership and payment history. This could reduce the risk of fraud and error in invoice finance, and protect both businesses and lenders from losses and disputes.
- The digital pound could support the green and inclusive agenda, by enabling lower-carbon and more socially responsible invoice finance solutions. This could align with the sustainability goals and values of businesses and lenders, and create positive social and environmental impacts.
Could the Digital Pound Actually Hurt Banks?
These potential benefits of the digital pound could encourage the growth of the non-banking funders sector, which provides alternative sources of finance for businesses. Non-banking funders could leverage the digital pound to offer more innovative and competitive invoice finance products and services, and challenge the dominance of traditional banks in this market. On the other hand, the digital pound could also have a significant impact on the financial services sector as a whole. According to the Bank of England, the digital pound could help maintain trust in money and protect the financial system, while also improving payments by increasing efficiency and enabling innovation. However, it could also pose some challenges and uncertainties, such as:
- The impact on monetary policy and financial stability, as the digital pound could affect the demand for cash and bank deposits, the transmission of interest rates, and the balance sheets of banks and other financial institutions.
- The impact on privacy and data protection, as the digital pound could raise questions about who can access and use the transaction data generated by users, and how to safeguard their personal information.
- The impact on cybersecurity and resilience, as the digital pound could create new vulnerabilities and threats to the payment system, and require robust safeguards against cyberattacks.
Therefore, it is important to engage with a wide range of stakeholders to ensure that the digital pound meets their needs and expectations, and balances the potential benefits and risks. The Bank of England and HM Treasury have published a consultation paper, which invites feedback from stakeholders on various aspects of the digital pound. The consultation period will run until 30 June 2023, after which they will decide whether to proceed with developing a digital pound.