Growing our connections

Growing our connections Growing our connections

Technology is creating a brand new system for spending—and safeguarding—money

The proliferation of hand-held computers has shaped the modern communication landscape—facilitating the rise of social media platforms, internet dating and video chatting. But one aspect of the smartphone revolution often overlooked is its impact on commerce. Put simply, technology is restructuring how money moves.

According to a 2016 Pew report, nearly 30 percent of Americans had bought something using their phone. Peer-to-peer payment applications—phone programs that allow individuals to exchange money directly—process billions every year. And the impact of this revolution extends beyond smartphones. From cryptocurrencies to biometric security, modern innovations are shifting the basic payment infrastructure of our economy—and offering more equitable and secure opportunities to participate in financial systems.

A wallet in your phone

The traditional cash-based economy is not yet obsolete. A 2015 issue of MIT Technology Review reported that 85 percent of consumer transactions worldwide still are done with bills and coins, and even in the U.S., more than 50 percent of financial dealings use cash. “I think we’ve been seeing an accelerating diversification of both forms of money and forms of transactions,” said Guillaume Lepecq, a payments consultant and author of “Cash Essentials—Beyond Payments,” a study on the uses and benefits of money. “But that diversification hasn’t meant the disappearance of older forms.”

The balance, however, is shifting. Today, digital transactions are more popular than ever—fueled by cellphone ownership. “It is at heart a technological story,” said digital money consultant David Birch. “We tended to think of checks and then cards as the vehicle for getting rid of cash, but now we realize the crucial technology is really the mobile phone.” Money can be exchanged through a range of platforms, including digital wallets, applications, potentially even messaging sites. “If you spend your whole time on a social network,” said Birch, “you don’t really want to come out of that to run a bank application.”

It’s important to note that mobile banking isn’t tied only to smartphones. In the developing world, mobile-based money transfers using basic cellphones are blossoming—bringing banking services to people long excluded from the formal financial infrastructure. “Many people in Africa don’t have a credit card,” said Toby Shapshak, a South African technology journalist. “They are never going have a credit card, and yet everyone has a SIM card.”

Meltem Demirors discusses fintech innovations that remove currency barriers

A brighter financial outlook: Banking the unbanked

Unbanked refers to people who don’t participate in financial services. Their resources may be insufficient to cover the cost of a bank account, or they may be hindered by the travel and literacy required for inclusion. They may rely on informal networks of friends and family as lenders and use cash or money orders to pay for goods and services. The unbanked often can’t buy a home, and they pay a significant amount in fees each year.

About 2.5 billion people globally lack access to financial services, but financial exclusion isn’t only a concern in developing countries. The FDIC estimates around 7 percent of U.S. households are unbanked. (Another 20 percent are underbanked.)

Digitization could reduce the cost cash imposes on these individuals. Mobile banking has exploded in the past decade—not only on high-tech smartphones, but also on the most basic cellular devices. As of 2015, more than 270 mobile-money services were operating in some 90 countries, with over 400 million accounts.

And the stakes are high. These services have been a boon for poor people who were previously excluded from formal financial institutions. A more diverse range of individuals may be able to save and invest, dramatically improving their lot. Since 2008, according to an MIT study, nearly 200,000 Kenyans have risen out of extreme poverty because of mobile money.

The new cash: cryptocurrencies

But financial innovation isn’t only about how people conduct financial business—it’s about what they transact. Cryptocurrencies have emerged as a popular challenge to traditional banknotes. Operating independently of banking institutions, these virtual currencies use encryption techniques to establish the units’ value and verify the transfer of funds. Today, at least 3 million people actively use cryptocurrencies, according to a study by the Cambridge Centre for Alternative Finance. And by 2030, the technology advisory firm Magister Advisors predicts that the most prominent crypto units could be the sixth largest circulating currency in the world.

Cryptocurrencies are built on a fundamental architecture—called a blockchain—that serves as a distributed ledger to validate transactions. Put another way, the currency establishes trust by distributing data across its system. Beside being the norm for these alternative digital notes, this type of validated ledger also could become a mainstream application in the financial world. Magister Advisors also reported that leading financial institutions have already spent upwards of $1 billion on blockchain projects.

This architecture, which allows trust systems to work without regulating third party institutions like banks, has a range of uses. “When you start to zero in on a concept of trust,” said Michael Casey, Senior Advisor at MIT Media Lab, “it’s actually fundamental to so many other aspects.” He argues that the distributed trust concept can be applied to a range of systems. “There could be distributed media systems, so you might have a social media world that doesn’t have a conglomerate in the middle. Another example is ridesharing without a centralized party.”

Are you ready for the digital revolution coming to finance?Take this quiz and find out.

  • question 1

    U.S. retail stores lose how much money annually as a result of stolen cash?
  • question 2

    What country, at 61 percent, has the highest proportion of noncash transaction methods?
  • question 3

    Mobile money services are on the rise. In December 2016, for instance, how much money did the industry transact?

Scaling up, but staying safe

The issue of trust is not only a motivating force for innovation; it is the fundamental challenge of integrating digital transactions. People need to believe their money is safe, which inherently slows the adoption of digital wallets and other transaction platforms. The good news is that progress on security is happening already. One popular application, for example, doesn’t store card numbers directly on the phone. Instead, the app sends the merchant a token linked to credit information, so if the company is hacked the consumer’s information remains secure. The growth in biometrics also is booming. Many phones, for example, offer fingerprint technology for secure access, and companies in Japan have developed a method to identify people by their veins at ATMs. (Global ATM fraud and theft is estimated at around $1 billion annually.) Today, tens of thousands of ATMs in Japan are essentially theft-proof.


Demirors talks about breaches that have compromised financial data

Another challenge is to move beyond peer-to-peer and into purchasing. In the United States, for example, as of 2015 there were only about 220,000 merchant point-of- sale terminals equipped with NFCs, the wireless technology required to process mobile payment platforms. Put another way, you couldn’t use a digital wallet at most retail stores even if you wanted to. Working in West Africa, entrepreneur William Senyo, chief executive officer of Impact Hub Accra, sees a similar problem: “The biggest leap that needs to happen now is in moving from peer-to-peer transfers into every transaction, like buying my gas and going to the grocery store, where it’s the predominant way of doing business.”

Once these issues are overcome, however, digital finance innovation offers widespread benefits. Theft of paper money, for example, which is a big issue for businesses, could be a thing of the past. And transaction services offer new money-making opportunities for industry players. According to Boston Consulting Group, digital payment revenue could grow to more than $2 trillion a year by 2023.


Demirors talks about breaches that have compromised financial data

Cash in hand:
Millennials and the future of mobile payments

Mobile payments occur when users make purchases, pay bills or transfer money using a smartphone. These types of transactions are becoming increasingly popular, spurring a move away from cash that is likely to continue, fueled by a generation of digital natives whose mobile devices are a pivotal part of daily life. Today, fully 90 percent of millennials own a smartphone, and as consumer confidence in security grows, these devices could become key to how money is spent.

A new era of opportunity

But it’s not just businesses that stand to gain. Digital payments could help boost economic activity. According to a 2013 McKinsey report, some 30 percent of the productivity gap between the banking systems in Russia and North America results from the low percentage of electronic payments in Russia. According to the report, “Moving to a digital payments market can curtail expenses for banks, governments and merchants; stimulate economic growth; and facilitate financial transparency in emerging and developed economies alike.”

When economies function efficiently, participants prosper. But the benefits for individuals are more specific. Imagine a world where you don’t have to worry about bills failing out of your pocket or ending up in the wash? What’s more, a digital transition could make goods cheaper. The adoption of blockchain systems, for example, could cut costs by eliminating third-party institutions.

There is little doubt that digital transactions are the future. But first we need to believe in them.

“There’s quite a leap that needs to happen from people just being online to trusting the system to pay for things,” said Shapshak. “Once people are in that digital system, it’s better in the long run. They experience everything the banks allow them to do.”

Want to hear more about disruptors transforming finance? Listen to this Trailblazers podcast episode.