Three developments indicating the future of money, finance, and payments
The year began with an emphasis on the acceleration of digital, mobile payments and ended with the introduction of Apple Pay leading the way. Yet in between my market research and industry reporting have led me to look at the coming year in terms of three developments and the long-term shift they portend for the future of money, finance, and payments:
- The legitimation of bitcoin
- The internationalization of the Reminbi
- The resilience of the existing payments system
The Legitimation of Bitcoin
I did not start out the year much of a bitcoin believer.Through my research and interviews, however, I have gained an appreciation of the technology underlying the cryptocurrency.
As a currency and especially as a means of making payments, bitcoin is an infant. Payment volumes are miniscule, but bitcoin gained legitimacy as major companies like Microsoft, Time, Dell, and a number of online computer retailers started to accept it.
The last research I saw suggested that most bitcoin were not circulating (dormant) and the currency likely will have a difficult time overcoming the stigma of being a major means of payment for illegal goods, though that has never stopped anyone I know from accepting USD cash.
All the more remarkable to me that bitcoin was the toast of the Sibos international banking conference. After a day of presentations on bitcoin, global bankers were saying that bitcoin proved digital money works, even if the currency itself “is not it.”
Chris Larsen, co-founder and CEO of Ripple Labs, which has developed a cryptocurrency and a protocol for transferring value over the internet, is most articulate on this point: “Bitcoin proved that you could confirm transactions without a central operator, like a central bank.”
Distributed financial networks show great promise in lowering the costs of payments; broadening markets like foreign exchange; and providing more direct connections between financial institutions, individuals, and companies. Bitcoin as a currency may or may not make it to mainstream acceptance, but the investors backing the technology and the products that are coming to market suggest it is nearing the adoption state between innovators and early adopters.
Bloomberg provides a good overview of efforts to make bitcoin maintstream.
The Internationalization of the RMB
As developments in finance, bitcoin and the Renminbi (RMB) share characteristics. Bitcoin is an international currency by design, and RMB is becoming increasingly legitimate as a settlement currency as it becomes more international in scope. (Renminbi is the name of the currency of China while the better known term “yuan” is its basic monetary unit.)
Since 2013, trade settlements in RMB between China and Germany has increased 151%, between Canada and China by 346% and between China and Malaysia by 48%, reports SWIFT, the Brussels-based international bank messaging network. “Last year, 17 percent of China’s trade was settled in renminbi, according to Deutsche Bank, up from almost nothing five years ago,” reports The Financial Times.
Much of the reason lies in lower transaction costs when companies pay in the local currency, rather than the far more common USD. “By removing the complex and often expensive process of transacting and hedging with the US dollar, renminbi trade settlement should help lower the cost of business for China’s exporters,” the FT writes in a special report on RMB.
International banks are positioning themselves for RMB business, while London and Hong Kong vey as centers for RMB trade, reports Euromoney. SWIFT, for its part, is most concerned with how the RMB will affect the revenues of its member banks. “The full implications of the internationalisation of the RMB are still not clear,” states its recent white paper.
Growing niche markets like RMB hold potential for fintech firms, as they require technologies to gain efficiencies and advantages. Trading systems, exchanges, payments applications, and the like will need to be developed or modified as both payment transactions and trading in the currency grow as expected.
The Resilience of Existing Payments Systems
The main payments and financial stories for the year as a whole show the resilience of existing systems. Technology is being developed to accommodate or work around legacy hardware and software, burdensome and outdated regulations, or entrenched interests.
It’s a generally accepted truism—something said by enough people that it would be difficult to say who said it first—that the U.S. has never shut down a payment system. A similar problem for banks is reflected in their branches, drive-throughs, ATMs, telephone banking centers, online banking systems, and mobile banking. Merchants face a similar situation with point-of-sale systems that manage cash and an increasing number of card and payment methods.
Apple Pay, the most widely reported and discussed payments story of the year, reflects this. In Apple tradition, its innovation is in user experience, as adoption figures appear to prove. It also builds in a security mechanism, through the use of digital security tokens, that provide a welcome counterpoint to the other most widely reported payments development this year: card data breaches at major retailers.
Existing electronic systems are straining as commerce, both consumer and corporate, becomes more digital and realtime. Banks and payments processors are striving to keep pace, and startups are using their nonregulated status to gain advantages.
For the 30 years I have been involved as a marketer and journalist in the financial industry, banks have remained secure in their position in payments, despite warnings to the contrary. Existing payments sytems and reserve currencies may be safe from a future of bitcoins and RMBs for now.
Yet,technologies that can lower costs and increase competition by making business connections more direct win in the long run. Digital networking technologies and applications ahve created remarkably diverse markets of content and commerce, some of which are highly profitable. I have little reason to believe that similar markets will emerge as the future of money, finance, and banking.