How FinTech innovation is transforming value transfer
From bitcoin and blockchain to crowdfunding and electronified money: How will we pay for goods and services in the future?
Innovation is a driver of economic success, a point illustrated by a range of Thomson Reuters initiatives – for example, the Top 100 Global Innovators and patent analyses that show countries with high levels of innovation activity (and the protection of inventions with intellectual property) have higher GDPs and are overall more competitive globally.
With this understanding, it is natural to look at innovation in the financial services space to see how new technologies are shaping the way we think about, source, fund and use money.
Thomson Reuters recently hosted a panel of disruptive innovators and corporate executives for an intriguing debate about what’s in store for the future of money, covering the sometimes elusive FinTech advancements shaping the outcome. The lively discussion, “The Future of Money: Cashing Out on Cash,” was led by Rob Cox, editor of Reuters Breakingviews, and included Luan Cox, CEO of Crowdnetic; Nathaniel Popper, author of Digital Gold; Sam Shrauger, SVP of Visa’s Digital Solutions; and Mark Smith, CEO of Symbiont.
A simple question about the future of money revealed the varied perspectives of the panelists – leading to more questions about who will be issuing money and how we will move it; whether it will continue to be legal tender and where the greatest innovations will come from.
In Sam Shrauger’s view, the future will be more about the way we move money. He cited that while many of our transactions are now electronic through computers, debit cards and mobile phones, more than 60 percent of transactions are still done with cash – but those too will soon be “electronified.”
“At the end of the day, we need systems capable of moving money globally. It’s more important now than it was 10 years ago. It’s more important now than it was a year ago,” he explained.
Mark Smith describes the future of money as a “value transfer,” believing that the digitization of money is inevitable. He explained that while Sweden says it won’t have paper money by 2030, he feels it should happen faster because the cost of printing money and keeping up with counterfeiting makes it inefficient.
Several questions at the heart of the discussion were raised by Nathaniel Popper: Who will issue the money of the future? Can it be issued by an entity other than a government? More importantly, can it be a unit of value created independent of any institution (as is bitcoin)? He matter-of-factly stated: “It comes down to an issue of trust.”
Popper elaborated on bitcoin, calling it a living economics experiment. He explained that you can see exactly where every node on the bitcoin network is and who is mining the new bitcoins, projecting that there are approximately 6,000 nodes on the bitcoin network.
“The mining process is one in which you need really good hardware, so it has tended to be more centralized over time. Right now, probably more than half of the bitcoin being created are being created in China,” said Popper. “Electricity costs are what determine if you make money mining bitcoin … There is a concern that bitcoin is becoming too centralized. That is a real issue: When does a decentralized system become not de-centralized anymore, because it was obviously advertised as decentralized?”
While it’s clear that the jury is still out on the exact future of bitcoin, the panel was in agreement that there is enormous potential to explore. Smith explained when pagers first came out, doctors used them but drug dealers used them more – but we didn’t get rid of pagers. “Don’t throw the baby out with the bathwater. Nefarious people will always hijack technology first because they’ll always be looking to game the system. The underlying technology and concepts are very, very good, and we’ll see what happens a decade from now as smart people are thinking about this in new ways.”
The rise of FinTech companies is changing the financial landscape, creating an entirely new world of alternative lending. Luan Cox described the opportunities and challenges in this emerging world where technology drives peer-to-peer lending and lending clubs, allowing buyers and sellers to find each other with ease. But with the good comes some downside. As these lending start-ups take off and marketing costs are high, there is often a lack of borrowers which can lead to a tendency for companies to lessen standards and increase risk.
So who loses in this new world order?
Smith explains that in 20 years, with processes in deals happening automatically, many functions that are currently labor-intensive and time-consuming will become so efficient that no one will even be talking about a back office or a middle office. Regulation will keep those functions in place, but banks will be much stronger as a result.
One exciting trend discussed was the innovations being made in developing nations where necessity is creating opportunity. The tremendous rise of mobile technology is allowing financial institutions to cheaply provide a full array of financial services such as micro-lending and better savings tools to underserved consumers with the help of data feedback – services that weren’t possible before.
The panel agreed: It’s about creating effortless, frictionless payment systems. We may see the most innovation in countries where people don’t trust the central bank, where they don’t have access to credit cards, where a digital system is needed to fill a need.
For example, M-Pesa is not legal tender, but it represents 32 percent of the Kenyan economy. Popper explained, “It will be interesting to watch. Banks have the resources, but barriers to entry in the U.S. are so great because of regulation. But we can watch M-Pesa in the developing world. There will be something really great.” And once those innovations take off, they can be adapted for markets like the U.S.
As with any conversation about the future of money, the Fed had to come up. Smith made his projection for the future of money saying: “We live in a world of third-party trust, and bitcoin is a trustless world. We remove the concept of third-party trust. Everyone shares in the information at what we call ‘state’; there is no third party that we look to and say: ‘What is the truth?’ So, when you talk about the future of money, would the Fed ever go into a distributed ledger with complete transparency and share state with everyone who has a dollar? I would say not. If the future of legal tender is to be truly digitized, the Fed has to create digital money. That’s the only way we get there.”
While it often seemed that the group raised as many questions as they answered, their varied perspectives and expertise created a dynamic, thought-provoking debate that will leave you asking many questions of your own about the future of cash, the entire system used to purchase goods and invest for tomorrow – a discussion to challenge your thoughts about the future of money.