By Manie Eagar, Co-founder and Chairman, Digital Finance Institute
As we mull all the latest innovations in digital finance from mobile payments to digital banking to cryptocurrency plays – a discordant picture is emerging.
But first, our current reality.
What we all know and want, if we are in a financially ‘developed’ environment, flooded with credit card options and mobile payment choices thrust upon us; or in an emerging market where our direct access to our money is now intermediated by a mobile phone company; we will come to realize that we still have a long way to go where our money is readily accessible; the value is not diminishing or fees being syphoned off out of our control; user friendly, frictionless, flexible and almost free.
It is after all ‘our money’ as any sane consumer will argue. It can be a boggle to figure why the money that you have earned has be to be kept safe and secure by a third party – whilst not providing you access to it whenever you wish and for whatever reason. When is your money really YOUR money is a highly relevant question as we hear about even more or ‘tighter’ regulations, and more hoops we need to jump through, and the latest and greatest fintech innovations that is going to deliver OUR money whenever and wherever we need it.
This is a refrain I hear repeatedly at cryptocurrency conferences with the overall message that we need to ‘take our money back, and the means by which we earned it and wish to distribute it’. But is this feasible?
Currently consumers have been cajoled into paying fees for literally everything – to insure access to their money at point of sale, to share their money or investment, or set aside savings for the future. And if you try to remit or transfer money it can cost you an arm and a leg – up to 40% fees have been recorded by diaspora Africa, Asian and Hispanic communities to support their families at home.
If we want the digital economy to flourish globally, reaching all communities – urban and remote, not to mention areas of strife and cultural and environmental distress - we will need more seamless and cheaper solutions that provides equal and affordable access to all. The emerging markets don’t need more banking, regulations or fees – they need simple access to be able to spend or distribute their money and exchange the value of their goods and services.
Currency was adopted as a medium of exchange thousands of years ago as a substitute for the transfer of physical goods and services, to exchange and store value, and simply get on with the business of life, and the life of business. One has to spend some time in an emerging economy to understand the vast untapped wealth that is already transacted through informal trade, barter and a variety of exchanges as we speak.
No one wants to be anonymous in any of these environments – they all want to be known – it is good for business, to build trust and reputation – increasingly as we build our global platforms of exchange. What they do want is for their identities and money to remain secure and private, to be protected from theft and abuse, and to ensure their store of value is still there and theirs tomorrow for them to access.
It is a misnomer to still talk about the ‘unbanked’ of the world. The digital economy will be one of interactive value exchange, digitally and cryptographically secure. Any device, especially mobile, will be the means of access, storage, distribution and transfer. Current offerings are so-called ‘walled gardens’. The world still awaits open, yet secure and transparent digital finance innovations fit for all.
Fast forward to the future.
Then along came bitcoin. There are many ambitious projects currently under development that promise that bitcoin and related innovations can address everyone’s value exchange challenges in a ‘frictionless and almost free’ manner. It aims to offer new and innovative ways to do all of the above in a manner that delivers some modicum of control back to the consumer, but only to the extent that we can all agree in a fair and equitable form of exchange, that the value remains stable, and like money under the proverbial mattress, it is still there tomorrow to buy a meal or a car or a house as we had originally intended.
There is currently a lot of marketing hype proclaiming a utopian model for the franchise of digital value exchange solutions that are yet to prove sustainable. The focus should be on human-centric design of these solutions, from the ground up (grassroots intiatives) and engaging directly with the users that it is intended for. It must take account of the dynamics of geographic boundaries, cultural leanings and territorially defined protectionism all with their own regimes, currencies, networks, regulations, jurisdictions etc. And yes, the ‘central authorities’ that want to underwrite, and control it all.
And we have seen in leading economies in the world from Russia to China and now even the USA - how easy it is for any country to decree if any of the emerging crytptocurrency and fintech solutions are welcome on their territories or not or fit their incumbent regimes, service providers, stakeholders and legacy gatekeeping systems.
Without having to state the obvious, what most legacy service providers want to achieve is to stay in the game and gain an even stronger foothold in this highly lucrative and growing world of money/value exchange; whilst new financial technologies are looking for points of entry. They all simply want to move your money from A to B for a fee.
One could say, as with the spate of new altcurrencies - let a thousand flowers bloom. In the end we need consistency, sustainability and fair exchange of value everywhere in the marketplaces, streets and homes of the future producers of goods and services, especially digital economy offerings. In principle, no one should be left behind.
The levers of change
In 2013 alone, private fintech companies raised nearly $3 billion in funding.
With this rapid investment-fueled innovation (Marc Andreessen of Andreessen Horowitz predicts that digital finance will expand faster over the next five years than the internet itself did over the past fifteen) and increasing scale and range of investment what will it take to provide the platform for the future of our money and the digital economy that we all wish to embrace?
There are three key areas that hand in hand will form the cornerstones for digital finance specifically, and the global economy in general:
Support globally is growing for digital finance ecosystem startups, entrepreneurs, and investor communities that are integrating distributed digital banking, mobile transactions and cryptocurrency solutions and delivery platforms; and participation in the emerging digital economy market areas, such as carbon emission credits, environmentally motivated initiatives, and other sectors.
A point of convergence between legacy financial systems and fresh innovation in the financial sector will drive the new business models that will fuel the digital finance future. The challenge will be favourable regulatory regimes and compliance rules that do not ‘throw the baby out with the bathwater’ and restrict or redirect development, especially in areas where it could be most beneficial – reach the poorest of the poor and a broad range of excluded communities.
Transparent processes lead to trust and increase the bandwidth of value exchange. As with the digital marketplaces that constitute the share economy, success hinges not on simply providing a service but on the quality of the experience. And, most importantly, is it affordable, secure and accessible?
There needs to be broader involvement and greater development of international collaborations and initiatives for standardized and balanced regulation over digital payments and remittances, and emerging technology issues; and the monitoring regulatory performance and reform for effective consumer and investor protection in digital finance.
For instance assessments, compliance directives need to be ‘light touch’ for instance microfinance, crowdfunding, peer-to-peer lending of nominal amounts, especially in emerging economies. Full-scale business activities and investments could fall under a more stringent tier of regulations.
Financial inclusion is a key driver of a future sustainable global society with fair and equitable access to resources, wealth, value exchange and affordable and relevant financial services. The availability of banking and payment services to the entire population without discrimination should be the prime objective of any financial inclusion public policy.
The development of innovative solutions is required to solve the problems of financial inclusion; to support sustainable economic growth; and to advocate for greater participation of women and excluded communities in financial technology and the digital economy.
An estimated 2.5-billion working-age adults globally have no access to the types of formal financial services delivered by regulated financial institutions. 1 in 12 USA families do not have banking. 1m Canadians (specifically first nations) do not have banking. Increasing access for more people across both geographies and incomes drives greater equality of opportunity in society.
For example in Sub-Saharan Africa only 24% of adults have a bank account even though Africa’s formal financial sector has grown in recent years. It is argued that as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination is the prime objective of financial inclusion public policy.
The United Nations defines the goals of financial inclusion as follows:
- access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance;
- sound and safe institutions governed by clear regulation and industry performance standards;
- financial and institutional sustainability, to ensure continuity and certainty of investment; and
- competition to ensure choice and affordability for clients.
A study commissioned by the Gates Foundation “A digital pathway to financial inclusion’ indicates there is a growing body of evidence which indicates that connecting poor people to a digital financial system will generate sizable welfare benefits.
The authors argue that digital financial inclusion will accelerate when stakeholders step outside their comfort zones to test new commercial and regulatory models. Banks, for example, are unlikely to cultivate “bank-led” pathways to digital payments in poor and rural communities if they try to maintain a tight grip on all aspects of their distribution channels. Instead, they will have to give their distribution partners (e.g. mobile operators, retail distributors) enough compensation and branding space to incent them to do the heavy lift of building a national cash-digital conversion network.
Mobile operators are unlikely to facilitate the migration from payments to financial services unless they loosen their grip on the user experience. Indeed, we suspect mobile operators will have to convert their closed application programming interfaces (APIs) into open platforms that make it easier for banks and other application providers to integrate with their payment systems. And policymakers are unlikely to see material gains in digital financial inclusion if they cling to regulatory models, which fail to distinguish between the risks posed by payments from those posed by financial intermediation.
They conclude that those willing to revisit long-held assumptions in financial regulation, telecommunications, and banking will indeed carve the digital pathway to financial inclusion.
And one could add to the new cryptocurrency innovations. As Bill Gates himself recently stated in an interview on Bloomberg Street Smart TV “Bitcoin is exciting because it shows how cheap it can be.” “Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.”
Gates felt that in the future, financial transactions will eventually “be digital, universal and almost free.” “The customers we’re talking about aren’t trying to be anonymous, they’re willing to be known, so Bitcoin technology is key and you can add to it or you could build a similar technology where there’s enough attribution where people feel comfortable that this is nothing to do with terrorism or any type of money laundering.”
Gates said that his organization is “involved in digital money, but unlike Bitcoin it would not be anonymous digital money.” He went on to predict, “digital money will catch on in India and parts of Africa and help the poorest a lot” over the next five years.
An additional study by the Bill and Melinda Gates Foundation and McKinsey & Co. that found in countries where more than 70% of people can pay digitally, financial inclusion is over 85%.
Cryptocurrency innovations initiated by the bitcoin protocol and later iterations have opened up a range of applications and potential solutions for an increasingly globalized economy and invites further exploration. Emerging digital finance models and technologies for financial inclusion can positively impact those who are ‘unbanked’ or excluded, and create greater access, equality and efficiencies in established markets.
Then, just maybe, a digital finance future where future money is ‘flexible, frictionless and (almost) free’ might just become a reality for all.