Bash the cash: the future of currency
I remember growing up and trading games, toys and Pokémon cards with my friends, not realizing that I had just bartered. Bartering, used in early civilizations, eventually gave way to different forms of currency such as shells, stones, beads, fur and coins. Over the past millennium, cash has been king, but in the 21st century, digital may dominate.
Cash and the dark economy
In the current climate of increased surveillance, the case against cash has become more pronounced. Cash facilitates transactions in the dark economy, where people can underreport their income since it can’t be tracked by tax investigators. It’s also the default mode of payment for individuals or organizations conducting illegal activities, because it’s difficult to detect and trace.
According to a study conducted by the Justice and Criminology department at Georgia State University, research shows a strong correlation between cash and street crime. For instance, there was a 10% decline in total crime in neighbourhoods that transitioned from federal welfare benefits in cashable cheques to preloaded debit cards.
Furthermore, it costs money to make money, which is why Canada eliminated the penny from circulation. What will be eliminated next?
Our world is becoming increasingly digitized. For instance, music, mail, movies and money have all gone digital. Global electronic payment systems are revolutionizing the way we pay for these, and other, services. As a result, buyers are saying sayonara to carrying cards and turning to a more tech savvy solution – the digital wallet.
TrendForce, a global market research firm based in Taiwan forecasts that mobile payment volume will rise from $620 billion in 2016 to surpassing $1 trillion in 2019.
Mobile smartphones are used by more than half the global population, and it’s no surprise that banks are partnering with technology developers to create payment applications for a cashless future. As mobile phones become more of a necessity than a luxury world wide, experts predict a rising trend for digital wallets.
David Wolman, author of The End of Money suggests in his book that the single most impactful contribution from the invention of smartphones is the applications that transform the device into a seamless digital wallet. Although credit and debit card transactions still account for the majority of electronic payments globally today, digital wallet usage has risen to a clear next step in the e-payment evolution. A survey conducted by Oxford Economics and Charney Research states that 72%
of executives claim that accepting mobile payments can boost their sales, and failure to adapt and do so will place them at a competitive disadvantage.
Figure 1: Oxford Economics and Charney Research March 2017
China and WeChat Pay / Alipay
Today, you no longer need a wallet while visiting China – a smartphone can easily accomplish transactions for any product or service. Online payments have dethroned cash as king in a digital revolution that’s being led by two players: WeChat and Alipay. These have put China lightyears ahead in tapping into the digital pay revolution.
The fast penetration of smartphones and mobile internet, coupled with a sizeable young population of avid gadget-lovers and early technology adopters, makes this revolution possible. The dominance of mobile transactions lends itself to greater data collection by the Chinese government, which in turn feeds the rapidity of transactions only to double its volume. The growth of mobile pay in China comes off a solid base of smartphone users where WeChat has reached 963 million active users and Alipay has over 520 million. Even panhandlers will refuse your cash donation and insist on receiving money via Alipay or WeChat.
Figure 2: Daxue Consulting 2019
Cashing in on cash-less-nes
Consumer demand for the smart phone payment option has compelled most retailers, and even street vendors, to “cash in” on the opportunity. According to iResearch Consulting Group, which measures online audiences in China, the gross merchandise volume (GMV) of online payments in the country reached 57.7 trillion Yuan in 2016. This amounts to approximately 50 times the GMV of similar transactions in the United States. The U.S. GMV is estimated by market research firm Forrester Research at $112 billion USD.
iResearch also predicts that annual online transactions in China will reach 116 trillion Yuan by end of 2019. Unlike Apple pay, where sellers have to buy technology to receive a payment, in China, a simple piece of paper printed with the QR code is enough to initiate a transaction for an exchange of goods or services.
It’s easy to see how digital wallets will become more attractive as technology evolves, but there are some risks, such as data security breaches and fraud. If your phone is lost or stolen, there’s a lot of financial – and personal – information that could be jeopardized.
However, digital wallets have a level of protection that debit and credit cards lack. With a physical wallet, cards can be stolen and quickly used before you’re even aware that your account has been compromised. One way to quickly catch any unauthorized activity is to sign up for automatic alerts to your phone and/or email account whenever your credit or debit card has been used. Most banks and credit card providers offer this service. Because a digital wallet is locked with a pin code in addition to the code on your smart phone, credit and banking details are heavily encrypted. This makes it much more difficult to access the information.
There’s a false perception by many that digital wallet technology is less safe than traditional debit and credit card transactions, so most major retailers are still on the fence about accepting digital wallet payments. Companies such as Starbucks are teaming up with Square, and Home Depot with PayPal, to change this perspective by accepting digital payments via smartphone applications.
One of the main impediments to more mainstream use of digital wallets is the fact that there’s no central application accepted everywhere. But as more consumers begin to demand the convenience that a digital wallet affords, more merchants will begin to upgrade their payment systems. When that happens, it will ultimately lead to more security and protection for the end user.
Cryptocurrency – why we’re not there yet
Cryptocurrency has some fundamental differences from digital currency. For instance, digital currencies are centralized: there’s a central point of control that regulates the state of the transactions in the network. Cryptocurrencies, however, are decentralized and the regulations are made by the majority of the community using blockchain technology, combined with a decentralized ledger. Consequently, cryptocurrency is lagging in comparison to digital currency because it’s predominantly used in peer-to-peer payments, and requires a drastic increase in usage before it will be accepted as payment for real world goods and services.
There’s also a dark side to cryptocurrency. Although it’s considered secure and reliable, it’s paved the way for illegal activity via the dark web, because any transaction processed in the blockchain does not require a third party to audit and approve. The dark web requires specific software, configurations, or authorization to access, and is typically used by those buying or selling illegal products or services. Silk Road, infamously known as the original dark web market that became notorious for enabling individuals to sell illegal items such as drugs or weapons, would use Bitcoin as a method of payment due to its quasi- anonymous characteristics.
Cryptocurrency is still in its infancy, so it’s hard to know where it’s headed. But until it becomes more centralized and used as a mainstay in retail, digital wallets are ready
Sameer Amin, Research Analyst
T.E. Wealth, Toronto
This article was published in Leon Frazer’s Strategies newsletter, Volume 1, Issue 1. Read the full edition here.