Bank of England to Challenge Commercial Banks on Digital Innovation
The Bank of England (BoE) is signaling a potential shift in its approach to retail payments innovation, with Governor Andrew Bailey suggesting that the central bank may need to step in with its own digital currency if commercial banks fail to modernize their services.
Speaking at the Group of Thirty’s Annual International Banking Seminar in Washington on Saturday, Bailey emphasized that while commercial banks remain “the best home” for payment innovation, their current pace of development may be insufficient to meet evolving market needs.
“We have not yet seen enough evidence that the innovation will happen in commercial banks,” Bailey stated, highlighting particular concerns about slow progress in cross-border payment modernization. He pointed to issues of speed, cost, transparency, and accessibility as areas requiring significant improvement.
The Governor’s remarks appear to serve as both a warning and an encouragement to the banking sector. While maintaining that a central bank digital currency (CBDC) is not his preferred outcome, Bailey made it clear that the BoE would continue preparing for such a possibility. “If for some reason innovation is unlikely to happen, then the central banks have to decide whether they are the only game in town,” he explained.
Bailey also addressed concerns about the future of cash, reassuring the public that any digital innovation would not replace traditional currency. “We should supply cash for as long as the public want it,” he affirmed, noting that current evidence suggests continued demand for physical money.
The BoE’s stance reflects a broader tension in the financial sector between traditional banking infrastructure and the need for technological advancement. Bailey suggested that current market structures might be stifling innovation, particularly noting how some payment infrastructures and technologies have developed in ways that “have stymied incentives to innovate.”
While the central bank won’t make a final decision on a retail CBDC before 2025, its preparatory work signals a clear message to commercial banks: innovate or risk being left behind as payment technologies evolve.
The bank’s approach balances caution with preparation, as it seeks to ensure the UK’s payment systems remain competitive and efficient while maintaining financial stability. This strategy appears designed to encourage private sector innovation while keeping a public sector alternative in reserve.
