Payments and The Laws of Physics: Let's Begin with Liquidity
London, 31 March 2025
I’m one of the few people who liked Physics at school despite not being very good at maths. What appealed to me was that an understanding of some basic principles could be useful in many situations. And I do mean useful.
When I am doing DIY electrics I still use my school physics to stay safe and avoid a shocking mistake!
I also see some fundamental principles applying in banking and payments. Some are analogous to physics and some, surprisingly, are directly related to how our universe works.
So, if you want to learn about spooky action at a distance and what on earth it has to do with payments, make sure you stay tuned!
In the meantime, the first blog of this series is below...
Let’s begin with Liquidity.
It’s like watching paint dry.
What does liquidity mean in payments? Put simply, it means how quickly can you move the money.
Is your money, so to speak, liquid?
And don’t confuse liquid money with money laundering, that’s something else altogether!
At one end of the liquidity spectrum, you have long dated bonds and term accounts; at the other end, cash with a bank, directly connected to an instant payments scheme, ready to move.
So why do we call it liquidity? I think it’s really to do with how easily, or quickly, the money can move. Or, put differently, how fast can it flow?
In Physics, the speed of flow of a liquid is said to be governed by its viscosity, or how thick or viscous the liquids.
Some fun facts on viscosity: It turns out that water is very liquid indeed compared to many fluids. But if you really want to shift the dial then you’ll want some liquid helium, which is about 40 times slippier than water. Don’t go jumping in though, as it will be at a chilly -270°C!
On the other hand, pitch (bitumen) is so viscous it often gets mistaken for a solid.
A famous experiment in Australia has a sample of pitch dripping from a flask. In one hundred years it has dripped 14 times. The experiment has had three custodians, none of whom happened to be in the room when it did, indeed, drip!
“The seventh drop fell at approximately 4:45 p.m. on 3 July 1988, while the experiment was on display at Brisbane's World Expo 88. However, apparently no one witnessed the drop fall itself; Mainstone had stepped out to get a drink at the moment it occurred”.
Like watching paint dry – but much less exciting.
So what does this have to do with payments?
Do you want your cash tied up in highly illiquid (read viscous) instruments, or do you want it readily available, on demand?
There are times when you want your cash squirrelled away, but at other times you will need to access it, immediately. To facilitate this your bank will need to have two things;
- A safe place to house the cash, and it has to be cash. This means held with the central bank as so-called M0, or central bank money. Traditional banks hold some cash in liquid reserves, but much of your deposit will be lent out to other clients.
- Your bank needs to be directly connected to instant payment schemes, so when you need it, it can move. Immediately. Your bank should have no intermediary partners between you and your cash.
If your payment provider can’t provide these two ingredients, your money is effectively less liquid. So, which do you want? Water or bitumen?
Thanks for reading, and see you in the next instalment!
