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The country of Iran has
had a very unique setup for payments since 1979 when
there was the hostage crisis.
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And many people will remember that here in
the United States. How that payment system has developed is a
unique process.
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And what it does and how
it allows them to continue to operate on a daily basis is
an interesting story in itself.
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Pleasure to be joined
on that and much more by Philip Nichols, Professor
here at the Wharton School.
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Phil, great to catch up with you again. How are you, sir? Good. Thank you. Always good to talk to you, Dan.
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Yeah. Thank you as well. You know, obviously we're talking about
Iran in the scope of what has been going
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on the last couple of weeks with the
conflict with the United States and Israel.
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But the sanctions that Iran has dealt with
for almost 50 years now really do tell an
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interesting story of how they have had
that structure, their banking system. Yeah.
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Yeah. It's easy to think of, and
sometimes I run across people who are, oh, they must just
use wheelbarrows full of cash.
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No, they have a very
sophisticated system that can do just about anything that you would
find in Europe and Southeast Asia.
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And they're moving ahead with it. Their cryptocurrency, digital real. They have talked about becoming cashless
society.
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So it's a really interesting kind of
microcosm that's developed, often with
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limited connections to western financial
systems. Right. Because with the sanctions in place,
it's probably very challenging for them to
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try and do traditional
business with Europe or the United States or other
countries around the world.
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Yeah. Now, to be clear, Europe
did not impose as severe sanctions as the United
States until relatively recently.
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And so there were payment mechanisms,
particularly for the sale of oil, that went through Europe,
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even though those— those were not— they did assiduously
avoid designating any of
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those transactions or payment methods in
dollars. But with the European joining the
sanctions, with Iran being kicked out of
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Swift, that's when you really see this
kind of development and isolation. So should we
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expect that Iran probably does have the
ability to work some sort of banking and
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payments relationship with countries like
Iran? I'm sorry, like Russia, who are probably,
you know, ones that are more like-minded
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to the type of operations that they will
try and run throughout the globe at times.
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Yes, it is. Is that the best way to kind of work my
way around that? Yeah, you did fine.
- Yeah.
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- It's ironic that you asked that exact
question, because just recently, just in—
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recently in terms of financial
structuring, the Mir system, which is the system that Russia has
developed, connected with—
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there's now a digital connection with the
Mir system and Iran's Shetab system.
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And so a Russian person who's using a
credit card that's based in the Mir
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system can use that credit card just as
effectively at a point of sale in Tehran.
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And they were talking about connecting
with Venezuela's financial system. Whether that will happen or not is really
interesting given that the United States
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seems to be leaving Venezuela's regime
alone. It's also interesting that now,
just as an illustration,
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a couple of weeks ago, about a week and a half ago,
Iran floated the idea of charging shipping
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that's paying a fee to Iran
to get through the Strait of Hormuz, through— I mean
with yuan, Chinese yuan.
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And there's speculation that the Shetab
system may be connecting to China's
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system, the cross-border interbank payment
system in China. The— CPI is the
abbreviation for that.
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Where, then, is the impact mostly felt
because of the sanctions that are in place?
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Is it more with the consumer or is it more
with the businesses that are in Iran?
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More with— well, that depends on the
particular consumer. Right. So the average Iranian citizen
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probably doesn't—
Iranians travel. Right. The average Iranian citizen, just like the
average citizen in the United States,
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probably doesn't travel extensively. And so the credit card— well, the cards are
not really credit cards. They're
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issued through the Shetab system,
through the nine or so major banks in Iran. Those work fine throughout Iran.
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But an Iranian who travels, particularly
travels to Europe. They need to set up an overseas account.
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They need to jump through
a lot of hoops to connect to particularly the cashless
societies of Scandinavia, etc.
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But for the businesses, those businesses
that are engaging in transnational kinds
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of business, they do have to— it's more
expensive to use the kind of payment
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mechanisms that have developed to get
around the sanctions. They have developed,
but they don't have the
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efficiencies that Swift
or similar systems out. And certainly going the other way,
if you're talking about companies that are
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US-based, that would potentially want to
do business in Iran, that obviously is
something that the sanctions
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have blocked for probably
a long period of time. Probably the banking entities
here in the US like Visa and
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MasterCard, credit card companies,
just cannot do business there. No. No, there's no— literally zero ability
to use your Visa card in Iran.
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What does this tell us about where Iran
probably needs to go moving forward? Obviously they have a system and it works
to a degree.
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But certainly if they were to probably
change quite a few things— obviously, if they were able to move away from the
concerns around missiles and the nuclear
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material that they have, they would be
able to open up to far more countries to be able to have access to a lot more
banking systems around the world.
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Yeah, that's a really interesting
question. It is a really interesting question.
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Iran— I mean, the money flows into Iran. Iran sells oil to a number of countries,
particularly India.
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And there's no— again, they just have to—
they've built very effective means of
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moving money from India, for example,
to Iran. Whether Iran would want to just jump back
on board the Swift is a really interesting
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question, where if they're going to be
more inclined, China very quietly is pushing the CPI and yuan-designated
payments as a more resilient system and an
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alternative to the US- dominated Swift
system. Where Iran would fall in that's a really
interesting question.
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And as more and more businesses around the
world, for a variety of reasons, are trying to become less reliant on the
United States, are they going to build
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systems that Iran would say— would
naturally fall toward? Or would Iran just fall back into the kind of Western
institutions?
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It's a great question. We don't really know the answer to that
question.
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So it's a wait and see at this point. Exactly. Absolutely. I mean, they've got— they've got much
bigger fish to fry right now.
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Yes, exactly. No question about it. They're not really focused on that,
but eventually they will.
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Right. And I— whatever the solution is to this
conflict, they are going to have to start
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considering these options. I would think sooner rather than later. Yeah. It's really hard to make predictions about
the kinetic. About the war.
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And a lot— most people that I know who
have experience in that part of the world
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say this is going to be very protracted
and there's going to be a lot of all kinds
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of fallout from this. Right. Huge economic damage. If, in the rosiest of situations,
there was something like Venezuela,
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where the United States said, "As long as
we get, you know, our piece of the
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economic pie, do whatever
you want," that, then— how that would work
would be really interesting.
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How the money would flow would be really
interesting. And would probably, as I think you're
hinting at, lead to some kind of Swift light—
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Yeah. rapprochement between Iran and the
Western-oriented kinds of financial systems.
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So that is definitely a possibility and
definitely something that Iran would have
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to think of if that very rosy outcome,
you know, were to happen anytime soon. Phil, great to talk to you as always.
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Thanks very much for your time today. Dan, always great to talk to you. And you always have a great question.
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Thank you, Phil. Philip Nichols, professor here at the
Wharton School.