DIGITAL PAYMENTS

AS WE GO MORE AND MORE ON LINE, THIS ARTICLE IS WORTH A READ As payments systems go digital, they are changing global finance The fight over payments systems is hotting up around the world. There may be surprising winners, says Arjun Ramani May 15th 2023 Share Payment is one of the most fundamental economic activities. To buy anything, you need something the seller wants. One option is barter, but that is beset by friction (what are the chances of having something your counterparty wants at any exact moment?). Early forms of money, from cowrie shells to beads to metal coins, offered a solution: they were always in demand to settle transactions. But they came with their own problems, from counterfeiting and delay to not having enough when needed (illiquidity). The use of credit for trade, first recorded in Mesopotamia five millennia ago, changed the game. It provided immediate liquidity, boosting commerce, but it also required trust and verification, introducing a fresh set of issues. Listen to this story. Enjoy more audio and podcasts on iOS or Android. For centuries humans have mostly used physical objects, including cash, to transact. Banks were originally meant merely to safeguard commodities such as grain, rather than being linked to consumer payments. Later, cheques became tied to bank accounts. The first credit cards (Diners Club in 1950) and cards with magnetic stripes (American Express in 1971) started a broader shift away from paper money and cheques for retail payments. But they were mostly limited to developed economies and to affluent customers of banks, still the central nodes of finance. Now a new wave of digitisation, driven by the arrival of smartphones and the internet, is changing payments systems again. By making possible near-instant, remote payment, it massively reduces friction in the movement of money. This both facilitates trade from a distance and leaves a clear auditable trail. Digitised forms of payment can also become a basis for the provision of broader financial services, an especially important change in poorer countries with less developed financial systems. The arrival of digital-payment platforms promises to create new kings of the highly lucrative global payments system, which recorded some $2.1trn in revenues in 2021. Out with lumbering banks, expensive credit cards and grimy physical cash, it suggests. Instead, in with flashy crypto protocols, seamless fintech wallets and even digital central-bank money. Some of the excitement around this has been excessive. But this special report argues that the system of moving money around is indeed undergoing massive change. The share of cash-based transactions is plummeting, having fallen by an average of 25 percentage points in the world’s main markets from 2011 to 2021. Emerging economies are seeing some of the biggest drops (see chart). Digitisation is a big part of this shift away from cash. Various systems are emerging around the world, each with its advantages and drawbacks. And it is not always new fintech firms, digital newcomers or fancy cryptocurrencies that are leading the rewiring. Often, it is a combination of state-led systems and incumbent banks that are adopting new technology. Thus in India and Brazil, new state-sponsored payment platforms have become the dominant forms of non-cash payment, bringing hundreds of millions of previously unbanked citizens into the formal financial system. In the West the bank/card model has, despite its fintech challengers, remained largely intact even as digitisation takes hold. China’s closed fintech apps and new settlement system may yet spread across Asia and also reduce the region’s dependence on the dollar. Modern digital-payment platforms are clearly challenging the old order There are big implications in all this for relations between money and the state. Some governments may be using digital finance to help police their own people. The West may find that the spread of digital-payment platforms means it loses some financial clout. Frictionless movement of money may make for greater efficiency, but it could foster financial instability by making it easier for customers to withdraw bank deposits, a lesson seen in the failure of Silicon Valley Bank, which was preceded by a bank run. Just as with any new technology, digital finance has had its share of hype. But modern digital-payment platforms are clearly challenging the old order. Traditionally banks were the entry point to formal finance. Now payments through apps that use qr codes, fast payment networks and high-speed internet connections have become the gateway for many. As users begin sending and receiving money, the data that such platforms collect can help unlock other financial services such as loans and insurance. A good example is China’s Alipay, initially an escrow service for Alibaba’s e-commerce platform. Before this, notes Jack Poon of Hong Kong Polytechnic University, “You had to go to a street shop to buy video-game points in-person.” Alipay, which drew inspiration from the servicing of eBay by PayPal, a payments firm, boosted e-commerce by using smartphones and qr codes to scale up fast. Along with its counterpart WeChat Pay, it now processes some 90% of Chinese digital payments. “People look at you funny if you try to pay with cash,” notes Mr Poon. A payments upheaval As the world started going increasingly cashless, and with record-low interest rates making money in effect free, a frenzy erupted around digital finance in the summer of 2020. Hundreds of new crypto protocols were launched, and many earned interest on crypto-deposits of 20% or more at seemingly no risk. The market value of the cryptosphere grew to $3trn in 2021. China’s Ant Group, a payments and lending firm, began gearing up for a blockbuster listing at an expected valuation of over $300bn. By summer 2021 PayPal was worth around $350bn, putting it close to JPMorgan Chase, the world’s biggest bank, and Visa, the largest card network (then valued at $450bn and $520bn, respectively).