Does M-Money spell the end of the financial system? Don’t bank on it

Richard Walker

Mobile banking is expected to be worth US$223 billion worldwide this year. But it does have its limitations – unless a stable digital currency can be established, traditional banking will still have to play a part

Mobile payment systems represent the fastest-growing financial innovation of the era. They are bringing millions of excluded people into the global financial economy, making a reality of the financial global village, and along the way they are also giving a real scare to some of the world’s biggest financial institutions.

But do mobile payments or ‘M-payments’ herald the end of conventional banking, and perhaps even conventional money itself? That’s not likely. In fact, mobile payment may even end up lending new strength to old-fashioned banking. The dollar and the euro won’t suffer too much either – they might well end up more powerful than ever before. But as mobile payment becomes something closer to the norm, there will be an almighty struggle between those companies that already make money from transactions – like banks and credit card managers – and newer companies, such as mobile phone networks, online service-providers, and computer-makers, who all want part of the action.

One thing is certain – mobile payment is a growing phenomenon. Forrester, a new technology research company, forecasts that in the US alone mobile payments will be worth US$90 billion a year by 2017, compared to a little over $12 billion last year. The World Payments Report from Royal Bank of Scotland forecasts the total of global M-payments to be $223 billion in 2013 – a growth rate of a little over 50 per cent a year over the last three years. But it is growth from a low base: $223 billion is a very tiny slice of the world total of non-cash transactions, which Boston Consulting Group estimates to have been $331 trillion in 2010.

So M-payments are a small part of the financial universe, but they are growing. In terms of the number of transactions, they are mushrooming fastest in emerging economies, although, inevitably, there is more growth in the value of transactions in developed economies. But it is not the mere expansion of transactions that is getting banks and governments hot under the collar about M-payments. What is driving the debate is the potential that mobile money has for changing the way that money works. Consider this: mobile communications are an alternative infrastructure, controlled not by private financial companies, or central banks, or governments, but to a large extent by the people who use them. Governments have already learned that information will flow through mobile communications whether they like it or not, instantaneously and globally. The political impact of this is already immense. The financial impact may only just be gathering momentum. Could it be that mobile communications will become the medium for new forms of unregulated money, beyond the reach of conventional banking and conventional financial regulation?

If that were to happen, the way the world uses and thinks about money would change beyond recognition. Bank regulation, instead of being a topic of urgent debate, would become an irrelevance. Economic management through monetary policy – the control of interest rates and the issuance of money – would be a relic of the past. Capital controls would disappear entirely. There would be no more offshore banking havens, because everything financial would effectively be offshore. Both risk and profit would be in the hands of individuals, along with whichever companies manage to grab a piece of the new commercial action. Far fetched? In fact, there are many who would welcome such a zero-regulation financial world, in which there are no safety nets and no taxpayer-funded bank bail-outs.

But there are plenty of reasons to think it won’t happen.

First, for M-payment to detach itself from the world of traditional banking, it would need its own purely digital currency. Something a little like that is what happened when the first informal mobile payment systems began to emerge more than a decade ago, when mobile users in Africa realised they could use paid-for airtime as a proxy for money, which could be exchanged through text messages. But that was only a proxy, a form of barter – and a currency that has to be bartered is not a true currency (because in the end you can only sell airtime to someone who happens to want airtime). A true currency must be independent of the goods it can purchase.

Enter the digital currency. The best-known pure digital currency is Bitcoin, although there are others – Litecoin, Namecoin, and PPcoin among others. There are also digital currencies that exist in defined online worlds, such as the Linden dollar, which is the medium of exchange in the online virtual gaming world of Second Life, and which can be exchanged for physical world currencies. For the evangelists of total digitisation of commerce, a currency like Bitcoin opens the door to a financial future of total de-regulation.

No more central banks, no more monetary policy, no more tax.

But autonomous digital currencies are in their infancy, and have some rather large disadvantages. If they are stable, like the Linden dollar in Second Life, that is because they are used in closed, managed systems, and can only be used for limited trade in that system. If they are traded in open economies, like Bitcoin, they tend to be very unstable – as a trading currency it is immensely risky (see page 17). As it happens, one thing that all M-payment users are very keen on is reducing risk. For that reason, the chances are that mobiles will actually increase the use of traditional trading currencies such as the US dollar and the euro.

Some digital payment systems like PayPal already offer the choice of currency for transactions – if an M-payment user remitting money across borders has the choice of stable US dollar or unstable Egyptian pound, for example, it is easy to see which currency will win out.

Traditional banking may gain from M-payment too. The question of who will reap the transaction fees from mobile systems remains open: will it be existing payments processors like banks or Visa or Mastercard, or mobile operators themselves, or computing companies like Apple, building on their huge account databases through services such as iTunes? Whoever it is, there is still likely to be a need for a traditional bank account at either end of the transaction. As M-payment reaches more of the ‘unbanked’ poor, those users will need traditional bank services to complete the transaction chain. And, already, emerging economy banks – Equity Bank in Kenya and MTN Uganda, for example – are exploiting M-payment to increase their stock of traditional banking customers.

There is no doubt that digital payment using digital money is the future. But will it be an unregulated future that changes the global financial power structure? That is a question financial regulators are certainly asking themselves. A 2012 study of Bitcoin and the Linden dollar by the European Central Bank examined the implications of digital currencies. It concluded that while Bitcoin could increase the opportunities for fraud, it will remain a niche financial instrument, simply because of its instability.

The chances are that if you haven’t made a mobile payment yet, then you will do so quite soon – but it is likely to be in a currency you recognise, and rely in part on a bank that already exists. In other words, the future might end up looking rather like the past.

About the author:

Richard Walker has worked for The EconomistThe Financial Times, and BBC World Service. He writes about global business, finance and investment, with a special interest in Africa


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