The era of disruption and innovation is upon us. Recently I was able to attend the Wall Street Journal’s “Future of Everything” festival in New York City. The festival included topics ranging from artificial intelligence to art, and we joined world leading thinkers and the WSJ’s top editors, as they discussed the changes that are transforming our world.
One of the sessions that stood out to me the most was the ‘money’ session, where the financial editors and top thinkers discussed topics including: what will a digital money society look like? Will cryptocurrency be king someday? Should we bank on bitcoin?
The Journal’s editor-in-chief, Gerald Baker, along with Dan Schulman, president and CEO of PayPal explored the transformation of digital payments, and if they will eventually replace cold hard cash and debit/credit cards. “Why do you need cash? It’s fundamentally less effective”, said Schulman. Nowadays, it is easier than ever to make payments via your mobile device, and it makes sense now that shopping often starts and ends with your mobile device. Millennials are opening up Venmo, another mobile payment service owned by PayPal, at least 3 times a week to pay rent, send money to friends, split the bill and more. Opening cashless businesses is also gradually becoming more common – demonstrated for instance by the founder and CEO of Sweetgreen, Jonathan Neman, who decided to get rid of cash because it makes the business a “safer place” for his employees.
The idea of a digital wallet is to easily, instantly, and securely move money around without cash or “plastic”. The basic principle of a digital wallet is to move payments to the smartphone and digital space. Finally, checking out at retailers is now faster and easier than ever.
Digital payments work with near-field communications (NFC), QR codes and text based communications. QR codes are the dominant force in many points of sale because they are simple, easy to use, and low tech. Text based communication is how digital payments are growing in developing nations, as people can transfer money in places where it’s difficult to access a bank, and without even needing a data plan.
Even with the growing popularity of these technologies, many consumers are wary of the security of mobile wallets. One survey for instance found that 55% of consumers are sticking with credit cards, due to safety concerns. The systems security is known as “tokenization technology” which creates a unique code for each transaction to protect the user’s data. This process replaces your bank or credit card information stored on the mobile wallet with an encrypted key that creates dynamic codes. While adoption is still slow, the technology is growing gradually through people who use it routinely.
Founder of Crypto.IQ, Charlie Shrem, well-known as a Bitcoin pioneer, started his talk by stating that we need to ask: “why is bitcoin?” and “why is blockchain?” By that he meant, it’s important to know where we have come from, in order to know where the industry and the technology is heading. Shrem went on to explain, that what was really created with bitcoin is a “censorship resistant, immutable ledger system and database”. It’s a system where no single party can change it or reverse it. So the genius of the creator of bitcoin, was that “we’re all in a boat together and if someone pokes a hole in it we all sink”. This emphasis is on trust, and enabling trust between different parties. As he highlighted, in the USA, we take a level of trust in our government and other institutions as a given. But there are many other countries in the world, where this level of trust simply does not exist – and it’s in these places, where the benefits of cryptocurrencies will be much more appreciated.
The largest cities in China – Shanghai, Beijing, Guangzhou have become virtually cashless – you use your mobile device to pay for everything. Estimates suggest that in 2016 there were $9 trillion of mobile payments made in China, whereas only approximately $100 billion in the United States. What essentially happened with China is they “leapfrogged” from cash to mobile, skipping the credit/debit card stage.
As the speakers at the event mentioned, this revolution has transformed how people live in China – for example, you “can be on a street corner and order McDonald’s and in a few minutes someone will walk up to you with your order”. The speakers explained the factors that have led to mobile payments dominating in China and lagging in the USA. In China they filled a critical need due to the lack of credit cards. In the USA, there is simply “inertia” and an incentive structure for merchants and consumers that doesn’t favor the adoption of mobile payments – for example, there is a strong monetary motivation to continue to pay with credit cards.
Now back to the million dollar question of when will cash actually go extinct? During the discussion with Gerald Baker, Dan Schulman mentioned that cash still exists is because to some people it feels good paying for a large transaction in cash, or paying a transaction with their American Express Platinum or the stainless steel/carbon made – Black Card. Even PayPal still acknowledges the “plastic” (PayPal recently rolled out a “Cash Mastercard” essentially a debit card). Yet, there is other research to contradict what Schulman said. That research says, that spending cash can trigger a part of the brain associated with pain. So is it pain or pleasure? Will we follow China’s steps and eventually become walletless? I’m looking forward to seeing how money and finance will continue to evolve in the coming years.
July 08 / 2020
April 23 / 2020
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