How does the future of banking and payments look?
Well to start with, for around one third of the world’s population banking and electronic payment services are completely unavailable and non-existing today. This may come as a shock to the developed world, but according to The World Bank 38% of the world’s adult population do not even have a bank account. That is 2 billion people who’s only means of payment is cash. These people are physically limited to only being able to make a payment to someone they can meet in person and services such as savings, loans, bill payments or cross border transfers is completely unavailable to them.
In today’s world where the sheer number of international migrants has never been higher, cross border transfers are at an all time high. The global financial services provider, SWIFT, who most banks use today for making international transfers are reporting a steady growth during the past years. But what is SWIFT actually? SWIFT stands for ‘Society for Worldwide Interbank Financial Telecommunication’ and is a cooperative society under Belgian law. SWIFT is linked to more than 11,000 financial institutions in more than 200 countries. When banks are facilitating international wire transfers from one bank to another they generally use SWIFT, but in fact SWIFT does not even hold accounts for its members nor perform any form of clearing or facilitating of funds transfers. Confused?
Let’s take a look at how banks actually make international transfers:
If you have ever tried sending money to someone in a different country, you have probably also experienced the $40-50 fee your bank is charging for such a transfer. You may think that this is a fair price for sending money across the planet; money going from your account into your bank’s account, then from your bank half way across the world into the receiver bank and then from that bank’s account into the actual beneficiary account. After all it took about a week, so a lot of people and systems must be involved, right? But is that really so?
This is probably how your bank would like you to think it works, but in reality it does not. When a person wish to send money abroad the bank will debit his account immediately and then simply enter the payment instructions in the SWIFT system. The beneficiary bank will now be able to see this message from the sender bank saying “we wish to pay xx amount to your client”. Again, please note, the bank is not sending money but simply a secured message. The banks have accounts with each other, so instead of actually sending money, they are simply debiting or crediting each other’s internal accounts and then their respective client’s account. That’s it, the “international” wire transfer is done, just like that. No money flying across the ocean. No money leaving one bank to enter another bank several days later. It’s purely a message from one bank to another followed by an internal transaction, but still banking clients are waiting days for such transfer to complete.
This is how the banking and payments situation is today – best case scenario is paying dearly for a slow transaction and worst case scenario is not even having a bank account or such payment option at all. So, is this really a sustainable situation?
Well, luckily there is a lot of buzz around disruptive banking nowadays. Numerous companies, startups and services are giving their view on how to solve or optimize today’s payments issues.
In the small country of Denmark payments between individuals are primarily done through the mobile phone today using a service called MobilePay. In 2013 MobilePay wanted to address the need for very simple money transfers. The ambition was to make transferring money to friends and businesses as easy as it is to send a text message and only three years after the launch more than 60% of the entire population was using MobilePay. Impressive figures showing that mobile payments are definitely the future and even businesses have started using the service.
The usage of the mobile phone for making payments is clearly a huge step forward and is certainly in line with the developments we see today where more and more features are built into our phones. Using the mobile phone can surely improve the ways we do payments today, but to use a service like MobilePay you would still need to have a bank account and in fact it has to be in Denmark. Furthermore it only supports the fiat currency of Denmark called ‘Kroner’.
For more widespread international usages a solution could be to use digital currencies also known as cryptocurrency to also remove the exchange rate fluctuations. Unlike fiat currencies cryptocurrencies are not controlled by a national central bank and not printed like dollars or euros, but are decentralized online assets, created and held electronically. These digital currencies are getting more and more traction throughout the world and the most well known is of course Bitcoin. The creation of Bitcoin started in 2008 but for years it was mainly limited to tech savvy people and had no real usages in businesses. However as time has gone Bitcoin is getting more and more traction for more and more people and in fact many see this as the real fiat currency alternative.
Bitcoins are created or ‘mined’ digitally by a community of people which anyone can join. Bitcoin is using computing power in a distributed network to create or mine its coins and this network is also processing transactions, effectively making its own payment network. This decentralized transparency where accounts are easy to setup, unlike normal banks today, is what appealed to many people. It’s anonymous, transaction fees are minuscule and the transaction speeds are a lot faster than regular international banking transfers.
For this reason many services started popping up over the past few years combining the usage of mobile phones with Bitcoins. Apps like MyCelium, BreadWallet and Airbitz are just a few of the services offering digital mobile payments to everybody with a smartphone. People without smartphones could unfortunately not benefit from these new services and would need to stick to regular banks, if at all possible, or good old cash.
With all the benefits there is however one major drawback to Bitcoin. The fact that it’s appealingly unregulated also makes it nearly impossible to use for everyday businesses. Since the value of Bitcoins is purely based on online bid and demand, the price is extremely volatile. In matter of minutes the price is changing to such degree that businesses will never know how much it receives for its products. It is simply too volatile for every day use. Since Bitcoins are purely based on bid and demand, there is no real value or asset behind the coins. Basically if nobody wish to buy Bitcoins then the price could plummet leaving everybody with nothing. The latest example is September 2017; price of 1 Bitcoin reached its all time high of approx. $5000, but in a matter of days dropped an astonishingly 40+%. Imagine paying $5000 for a product or service and only be able to sell it for $2900 a few days later…
Due to the decentralized network structure of Bitcoin and as the number of coins in circulation increased, the transaction times of Bitcoin has unfortunately decreased quite a bit. The Bitcoin community is discussing how to reduce the transaction times as it can often take more than one hour to complete a transaction, but nobody has yet introduced the solution.
In fact, not many have the solution to solve all of the payment problems of the world today, as we see from the examples above. There are hundreds if not thousands of new digital services every day so it will probably not be long before one or more services really hit bulls eye. One of the more promising solutions is maybe Wyrify. Wyrify is a fairly new service offering mobile payment solutions and bank-account-like features based on a different digital currency called LXCCoin. Unlike Bitcoin LXCCoins are fully asset backed and have no mining making it stable 1-to-1 with the USD.
Wyrify is basically taking the general benefits of digital currencies like low transaction fees, fast transfers and anonymity and combine that with a stable currency in order to package it into one solution on your mobile phone. Wyrify is thereby offering global payment solutions for everybody who has a mobile phone including sms-banking solutions for non-smartphone users. This solution sounds like one to watch, as it unlike many others also appeal to businesses as well as the large unbanked population having only low tech phones.
Going the mobile way is definitely the way forward since the global mobile penetration is higher than the banking penetration, especially in the developing countries. The question is just if we will see global solutions or more local services properly disrupting today’s banking and payments industry. Besides the example above with MobilePay from Denmark another maybe even more significant actor is M-Pesa. M-Pesa is a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Safaricom and Vodafone. It started locally but is spreading to other countries like Tanzania, South Africa and even Eastern Europe. In fact they are benefitting from the people of the developing countries often using airtime as a proxy for money transfer, so maybe it is actually the phone companies who have the upper hand…
We cannot predict the future, but it is probably safe to say that the right solution can help fight poverty and increase economic growth in both the developed world as well as the developing countries.
Sources: The World Bank Global Findex, SWIFT, NXChain, MobilePay, Wyrify, M-Pesa