As governments reassess the resilience of critical financial infrastructure, domestic payment networks are gaining attention as a way to reduce dependence on global payment providers. Iceland’s effort to develop its own retail payments infrastructure illustrates how payment sovereignty has become not only an economic consideration but also a matter of national security.
Iceland’s experience during the 2008 financial crisis demonstrated the potential risks of relying heavily on international card networks for essential payment services. With both debit and credit card transactions increasingly dependent on infrastructure operated outside the country, policymakers are considering how a domestic payment network could provide greater control and continuity during a financial or geopolitical disruption. Similar developments in other countries suggest that national payment infrastructure could become an increasingly important part of the global payments landscape.
An article in Bloomberg punctuates the trend towards the nationalization of payment networks. This follows an article written just yesterday that my colleague Steve Murphy wrote regarding the Canadian B2B solution running on Interac’s (the domestic debit network) e-Transfer network. This could have been created on one of the global networks’ well developed debit push payment solutions. Nations not only want to keep profits within their own borders, they prefer to have oversight of payment networks as a matter of national security.
Iceland is the latest example. They now building its own network for retail payments. Here’s the rationale:
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 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.
The push toward domestic payment networks reflects a broader reconsideration of how countries manage critical payments infrastructure. Global networks provide substantial benefits, including scale, interoperability, established technology, and widespread consumer and merchant acceptance. However, relying too heavily on infrastructure controlled outside a country’s borders can also introduce vulnerabilities.
For Iceland, those concerns are grounded in experience. The disruption surrounding the 2008 financial crisis demonstrated how difficulties involving international card networks could potentially affect consumers’ ability to make everyday payments. With domestic debit transactions now also relying on offshore infrastructure, the consequences of a future disruption could be even more significant.
Developing a domestic retail payment solution could provide Iceland with an additional layer of resilience rather than necessarily replacing established global networks. An instant payment system modeled on solutions such as Sweden’s Swish could allow banks to provide consumers and merchants with another way to transact while ensuring that essential payment capabilities remain available domestically.
Other countries exploring their own payment infrastructure face similar considerations. Economic benefits may provide one incentive to keep payment activity within national borders, but resilience, oversight, and national security could prove even stronger motivations.
As payments become increasingly digital and essential to everyday economic activity, governments are likely to pay closer attention to where transactions are processed and who ultimately controls the infrastructure. Iceland’s initiative demonstrates that domestic payment networks can therefore be viewed not simply as competitors to global card networks, but as strategic infrastructure designed to ensure continuity when international systems become unavailable or unreliable.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
