Cashless trend is redefining money, and a central bank's role as printer
Andrew Sheng sees a potential revolution in rising popularity of online payments bypassing banks
Anyone who has visited Dubai would agree that it is an amazing city. Who would have thought that in Dubai last week for Sibos, the annual Swift International Banking Operations Seminar, there would be over 7,000 bank and payment specialists gathered to exchange the latest information on global payments and technology?
Swift - or the Society for Worldwide Interbank Financial Telecommunication - was established as a co-operative society of its member financial institutions in 1973 to operate a messaging network that enables members to send information about financial transactions securely and reliably. It does not do the actual transfers, but sends the payment instructions that enables the correspondent banks to debit or credit their accounts with each other.
At the seminar, I came across some excellent research by Mastercard on cash and electronic payments. Did you know that 85 per cent of all retail payment transactions are done with cash, equivalent to 60 per cent of retail transaction value? In fact, Mastercard estimated that, in 2011, the total amount of global spending was US$592 trillion. Of this, only 11 per cent was by the consumer (the rest by government and business).
Out of total consumer spending, 34 per cent by value was done using cash, though 85 per cent by the number of transactions. In other words, more than two-thirds of consumer payments by value are in the form of cheques and non-cash instruments. In fact, the world is quickly moving towards cashless or electronic payments. Seven countries, mostly in Europe, have already moved to an almost cashless society (over 80 per cent non-cash).
We all know that the higher the level of cash usage, the larger the informal, or grey, economy. Mastercard estimated that out of the global cash usage, US$8.3 trillion of consumer purchases annually were made in the informal economy, of which as much as US$1.5 trillion was in illegal purchases. Indeed, the study suggested that high cash usage is correlated with corruption and also difficulties in doing business.
The cost of using cash can be very high indeed, so it is not surprising that banks and governments are encouraging the move to cashless electronic payments.
Kenya, for example, was one of the first countries to use mobile payments to replace cash. M-Pesa, a remittance and payment scheme using mobile phones, enabled rural Kenyans to pay each other without using cash. Many countries have not been able to do this because bank regulations do not yet allow mobile phone companies to use their deposits as cash equivalents. But this is changing.
Indeed, a Bank of Finland research paper studied electronic payment usage in 27 European countries and concluded that the higher usage was positive for economic growth. So innovation in cashless payments cannot be stopped.
The traditional world of central bank control of money is being challenged by the arrival of bitcoin and mobile payments.
Bitcoin is an electronic currency which enables the user to transfer value via a computer or smartphone without going through an authorised or regulated financial institution. Currently, payments through the banking system are settled using central bank money, meaning that if you pay me through your bank by cheque or bank transfer, your bank and my bank will clear the payment through their accounts with the central bank.
But if mobile phone companies or electronic technology platforms like Alipay use deposits with them to enable mobile-to-mobile payments, should these deposits and credit created through mobile debt be counted as official money supply?
Throughout the world, central banks have woken up to the fact that their wholesale interbank clearing and settlement systems can be bypassed by mobile-to-mobile payments. If that is the case, bitcoin and the electronic platforms that effect the payments and have a float (the amount that sits with the holder, interest-free) will have the capacity to print money.
Indeed, who will get the seigniorage, or the right to interest on the monetary creation, which traditionally has belonged to the state and been delegated to the central bank?
Of course, we used to believe that central banks could only print money when it is backed by gold or promises to pay by the government. Today, advanced central banks are printing money faster than ever.
After all, when the US Federal Reserve hinted that it was going to withdraw quantitative easing and then did nothing, causing financial markets to go up and down like a yo-yo, the credibility of printed money was dented somewhat.
Central bankers are supposed to take away the punchbowl when the party gets interesting. Not only has the punchbowl not been taken away, they are still adding to the punch. No wonder 69 per cent of the bankers at the seminar thought another financial crisis is in the offing. Ouch.
Andrew Sheng is president of the Fung Global Institute