By Jame DiBiasio, Founder of Digfin groups, author of Cowries to Crypto: The History of Money, Currency & Wealth
Money is going digital. We are in the midst of a transformation that is on par with previous innovations: Coins in the ancient Mediterranean. Paper banknotes in China. Commercial banking in Renaissance Italy.
What we think of as money has grown increasingly abstract. It’s no longer a commodity that we consume – like bolts of silk or heads of cattle – or respect as a unit of account – like cowrie shells. It’s not a precious metal that we prize. It’s not even the change in your pocket or the notes in your wallet.
Money has already been freed of the surly bonds of earth, at least since the emergence of the credit card in the 1960s. In 2007, a Kenyan telecom operator invented the mobile wallet, letting Kenyans exchange value like they would a text message.
Some places today, like Sweden, have gone mostly cashless because everyone uses plastic or a mobile wallet.
What’s different about digital currency is that it’s programmable. We haven’t experienced this yet, except in the budding world of cryptocurrencies. And even there, the story is mostly about Bitcoin, which runs on software but is otherwise not changeable. But programmable money is coming.
Covid-19 is playing a catalyzing role. The coronavirus has made us all too aware of how dirty physical money is to handle. Social distancing and working from home have turbocharged online commerce. Changes in how we spend had been gradual; now they are sudden, and widespread. Perhaps just your teenager wanted to move money with a mobile phone, but now it’s grannie too.
But a health crisis is not creating brand new trends. It’s speeding up those trends that were already jelling. It’s speeding us to a future we had already begun to approach, even if blindly. Especially blindly.
Electronic money has proven itself. People like it once they start using it. They will wonder how they ever put up with the hassles of what used to be normal life.
People in developing countries are increasingly paying with their phones, because they don’t need a bank account (or at least a good banking service) to do so, and a merchant can make a payment happen by just printing out a simple QR code, instead of having to buy a lot of expensive point-of-sale kit.
In rich cities like Stockholm and Paris, people happily walk around cashless, preferring their card or, increasingly, phone.
But these transactions are still just digitized versions of the banknotes in our bank accounts. Economists call this “M0”. It is how they count the cash in our pockets, and the deposits in our accounts that we could turn into cash upon request. (A banking crisis occurs when the bank can’t meet this demand.)
What is stirring now is turning this into official digital currency. And that is going to have a big impact on society. On us.
That’s because our use of electronic money is voluntary and private. A corporation like Alibaba, say, makes us an offer and we accept doing business on their app using e-money. For mass uptake of e-money instead of physical cash, those corporations and banks have to convince us. We have to decide it’s more convenient or safer to transact via a phone.
Covid-19 is advancing this argument, but it’s worth noting that in many places, cash is still king. Consumers in the US and Germany haven’t taken up mobile payments with any enthusiasm; Americans still make most of their payments via cheque. Most emerging markets, despite the growing use of mobile wallets, are still profoundly cash economies.
Money is a cultural technology: some people trust cash, they don’t trust electronic stuff, or they’re just habituated to old ways and can’t be bothered to change.
When money becomes programmable, though, this could change. Most of the world’s central banks are seriously exploring digitizing their currency. This means they will be setting new rules for how money gets issued and how it can be used.
To understand what this means, we should start with China. China has good form when it comes to financial innovation. It can claim the first coins, bronzed imitations of cowrie shells. It invented paper banknotes, with its various dynasties financing themselves with fiat paper for centuries before anyone dared try in Europe. China is now going for the fintech trifecta: the People’s Bank of China is road-testing a digital yuan, which could well be in circulation in time for the Beijing Winter Olympics of 2022.
China has been studying this since at least 2014. Other governments have too but China has a special problem. Two giant internet companies, Alibaba and Tencent, now dominate 96% of all electronic payments. Together they have over a billion users using their “superapps”, meaning mobile apps that connect payments to a vast range of services, from food delivery to social messaging to buying insurance.
These two internet companies filled a big hole in China, where banks work hard to serve state-owned companies but have ignored retail customers and small business owners. A lack of an established financial system and, importantly, a lack of trust in official bank services created an opening for technology players. The speed and scale by which Alibaba and Tencent gobbled up this vast market shocked China’s banks and administrators.
The PBoC’s study of digital currency stems from a desire to control these corporate e-money operators. A banknote is a banknote regardless of where it’s spent, but a payment via AliPay is not compatible with one made via Tencent’s WeChat Pay. All the customer data is kept on corporate servers. Together this posed a risk that the government could not properly supervise payments and banking at the most basic level. It has also created a major threat to banks.
That said, China might have tread slowly. Programmable money has many alluring features to a government. It also has risks.
It wasn’t Covid-19 that sped things up. It was Facebook. Last year, the Silicon Valley behemoth announced a plan to issue its own currency, Libra. This would be a “stablecoin”, a blockchain-based token that would track a basket of regular currencies, like the US dollar and the euro. This was Facebook’s attempt to not just mimic the Chinese superapp model, but surpass it. Facebook claims 2.5 billion users across its properties who could use its cryptocurrency for payments, purchases, and investments.
This set off alarm bells around the world. Many central banks from smaller economies fear Libra could displace their own monetary sovereignty. US politicians view it as an attack on cash, or on the dollar. China is different, in that it bans Facebook, so nobody at home would ever use Libra. But it has broader ambitions for a digital yuan than just backstopping M0: it’s a wedge to promote the internationalization of the renminbi and free China from depending on the US dollar.
The fact is that the dollar underpins most foreign exchange trading, trade financing, and settlements of payments. This is true even when nobody is American or transacting in US assets. This gives the US enormous leverage. Look at how it sanctions companies who do business with Iran or with Chinese tech company Huawei.
In the process of issuing a digital yuan (which is not based on blockchain, but will rely on mobile technology governed by the state), China wants maximum uptake among the population, while maintaining financial stability and control. There are a lot of questions that go into designing a government digital currency. It can be programmed to pay people interest for holding it. Money could be programmed to be spent, to stimulate the economy – for example, by giving people a bonus for spending it quickly, or programming it to be only spent on certain projects.
And it can be programmed to comply with the law. All banks around the world have to report payments above a certain amount and run checks on clients to make sure they’re not criminals or otherwise risky. The money itself could be programmed to reject someone on a government list from using it. Or it can be surveilled, so regulators can see if a “coin” passed through a suspicious account.
Some of this is useful, legitimate, and prudent management. The real-time data that a central bank could get from aggregate payment trends would be far more useful than waiting for commercial banks to send over paper-based reports. But it’s also quite possible for money to be made into a coercive instrument.
There are other considerations. A digital currency represents a potential threat to commercial banks. Disrupting the banks risks wounding the economy’s ability to create credit. One supervisor’s boon might be another regulator’s nightmare.
For these reasons, central banks are approaching the issue with caution. But once a big economy like China issues digital currency, others will have to follow, especially if China’s experiment is a success and other countries agree to transact in digital yuan for its convenience or its access to China’s economy.
This does not mean the end of US dollar dominance, nor the inevitable rise of a renminbi-led world. China’s capital markets are too closed, and the political reforms necessary to open them seem unlikely to transpire soon.
But what China could unleash is a multipolar world of digital currencies, along perhaps with one or two Libra-like corporate competitors, that creates an entirely new world of competing forms of money, each with their own specially programmed features.
Any such system will still merit trust in a central bank like the Federal Reserve to serve as lender of last resort, as the Fed has done since the 2008 Global Financial Crisis. But it could also promise investors nervous about the parlous state of American finances a way to diversify out of the dollar.
And for you and me? Programmable pounds, euros and yen could mean we will be convinced to adopt digital money sooner than we might think. Imagine your government deciding to pay health or pension benefits in digital form. Who’s going to say no to that?
Getting the technical design right is one critical mission for our central banks. So too is getting right issues around privacy, security, and fairness. That is a job for politicians and civic leaders. It won’t be long before these issues begin to dominate our headlines.
Futureproofing Your Credit Management Now
By Marieke Saeij, CEO, Onguard
The pandemic has forced a shift in day-to-day operations for the majority of businesses. In particular, finance teams have found themselves attempting to balance long-term growth with the need for resumption of payments from current customers.
Growth depends largely on answering the funding requirements of customers who need finance, while payments rely on customers emerging from payment freezes, often requiring ongoing help. The first half of the year saw digital transformation accelerate under the economic pressures of the pandemic as organisations sough to achieve rapid efficiency gains and underpin business continuity. With so many potential unknowns continuing to affect customers, finance teams must now focus on one critical area – future-proofing their credit management.
This is a critical initiative. Finance and specifically, credit management, concerns the entire organisation and in tough times, will be crucial to survival.
A three-pronged approach is required to ensure growth by transforming credit management for the future. It consists firstly of the implementation of a data-driven strategy, secondly on increasing automation and deployment of artificial intelligence (AI), and thirdly, on retaining the personal touch.
Future-proofing with your data
The advantages of being a data-driven organisation are increasingly appreciated. It is why more than three-quarters (68 per cent) of finance professionals in the Onguard 2020 FinTech Barometer, said their organisation is already undergoing digital transformation.
Credit management founded on data insights can help to reduce the days sales outstanding (DSO) and allow credit managers to create a better understanding of risk profiles. Identifying payment patterns from the data produces better risk analyses and the ability to anticipate trends. The finance team is more rapidly alerted to the first signs that a customer will not pay, for example. Staff can then step in to resolve the situation, approaching the customer to discuss invoice payment. Data analysis will also predict a prospective customer’s expected growth, chance of bankruptcy or payment behaviour. This is not a capability many organisations currently have without laborious use of manual methods.
Once they have these insights, finance departments can better advise management at the strategic level, elevating their role within organisations. But finance professionals’ insights may also help other colleagues. One such example is sharing risk information with account managers, which will allow them to better calculate whether or not to approach a customer for upselling or new business.
Yet despite all the discussion of digital transformation, most organisations still only use a portion of their available business data. This is as true in credit management as any other area. According to the Barometer, only seven per cent of executives think their own organisation is already data-driven. It means the focus in credit management, as in other departments, must be on exploiting an organisation’s existing data riches because this is the most efficient and cost-effective route to becoming data-driven.
Start with your own and move to third-party data when you need to
Businesses should start by using data from their own consumer base, such as their customers’ payment behaviour. This is not only more cost-effective, but risk profiles based on an organisation’s own customers can reveal more about future customers than data from other companies. The risk profile scores based on internal data will therefore have greater predictive value.
External data can be expensive, as pointed out last month (July) by McKinsey, but its use can strengthen an organisation’s own data resources, bringing a wider understanding of the market that makes for better decision-making. An organisation can combine internal and external sources as it evolves to best suits its needs.
The gains from this hybrid approach are tangible and come as enhanced sales, improved products, better finances and more targeted marketing, supplying a better service that boosts satisfaction levels and leads to improved relationships.
Automation and AI
No discussion of future-proofing can take place without consideration of robotic process automation (RPA) and artificial intelligence (AI). RPA automates the hugely repetitive manual tasks in credit management that involve collection and collation of masses of data and divert skilled employees from more valuable work.
AI, however, is the group of technologies with more far-reaching potential, making smart use of all available data. It links everything from CRM and ERP system data, to all the cogs in the order-to-cash process. This includes linking accounts receivables management with data about customer acceptance and e-invoicing. AI integrates these processes, transforming efficiency and delivering new insights through its analytical power. For finance departments it will also link with recognised parties that provide credit information, as well as payment service-providers and an automatic payment processing solution.
This, however, is only the starting point. AI’s predictive capabilities help minimise non-payment risk, support the forecasting of cashflow and advise on follow-up actions. This includes, for example, whether individual customers will respond better to phone calls, or when there is no alternative to commencement of collection proceedings.
Using individual insights based on consumer history, AI can even help identify the best time to contact specific customers. This will this dramatically improve operational efficiency and if customers are approached in the right way, at the right time, will enhance relationships and bolster retention.
The personal touch
Although the future of credit management will hinge on effective implementation of the right technology, the importance of personal relationships must not be neglected. A future in which all contact with customers is automated will soon become unprofitable in credit management, where personal relationships are all-important.
It must be recognised that no two customers are the same and each needs to be taken on their own terms. Although data provides insight into overall payment patterns, it does not reflect the totality of the relationship with the customer. A credit manager, for example, might know that a single call is all it takes to trigger payment from a certain customer. Yet as much as AI will achieve, it still lacks the emotional intelligence to pick up on these kinds of nuances and subtle differences in character that make a difference.
This matters because customers will soon switch providers when service-levels drop or if they start to feel they are just being treated as a number.
One of the ironies, however, is that if an organisation has the right credit management solution, it will understand more about the customer and have a firmer basis for effective person-to-person interaction. If you know more about a customer, saying the right things to obtain the outcome you want is easier. This means finance professionals need to adopt a hybrid approach that combines the best data-driven tools with a heavy degree of personal involvement. This is the most reliable way of ensuring optimal performance, profitability and customer satisfaction.
There is nothing more fundamental to business than getting paid, but times are changing and data-driven credit management is undoubtedly the future. There can hardly be any argument about it. Basing decisions on data insights generates far better outcomes, delivers a substantial edge on competitors and injects agility into a team.
If another global wave of virus-outbreaks or other sudden disruptions strike the world economy, organisations need to be as agile as possible, ready to meet the challenges with credit management that is already future-proof. That requires becoming data-driven and the adoption of proven automation and AI. Yet reliance on technology alone will not guarantee success. Organisations must continue to recognise the importance of human interaction with customers, who may want to see a face or hear a voice when times are tough.
Alongside the implementation of solutions that deliver results quickly and cost-effectively, organisations need a hybrid approach, that uses the best of the conventional world and adapts it to the data-driven future.
Risk Mitigation vs. Risk Avoidance: Why FIs Need to Maintain Risk Appetite and Not Place All Bets on De-Risking
De-risking aims to protect financial institutions from the increasing pressures placed by regulators and threats, associated with clients operating in high-risk GEOs and market segments. Agnė Selemonaitė, board member of ConnectPay, states that FIs should not focus entirely on de-risking to mitigate all potentially dangerous prospects, rather strive to continuously improve their tools for risk control and consider dividing the market among banks and EMIs for more strategic risk management across the entire sector
October 22, 2020. The payments sector has always been under the microscope in terms of regulatory compliance. Now, with a number of scandals and compliance discrepancies, financial institutions have responded in a growing trend of terminating accounts deemed high-risk—a process also known as de-risking. While in the risk management space the term describes hedging against precarious exposures, within the payments sector it has become synonymous with avoiding risks.
Since the financial crisis of ’08, FIs have been hit with approximately $36 billion of non-compliance fines. The significant growth corresponds with the ever-tightening AML/CTF rules, as well as the general tendency of policies becoming more and more strict. With a continuously toughening regulatory environment, financial institutions are less inclined to take on dubious clients and would rather eliminate any viable threats than risk getting fined by the regulatory authorities. Agnė Selemonaitė, board member of ConnectPay, emphasizes that while de-risking is necessary, it should not become the basis of the entire approach to how financial institutions tackle risks.
Although de-risking has been gaining traction in the payments sector, it is important to disclose the shortcomings associated with the practice. The case of Malta, a EU country bordering the Mediterranean sea, is a good example of how strict de-risking policies can impact the payments landscape and alter a country’s image on a global scale.
Maltese FIs have been under mounting pressure from the European Central Bank, as well as local regulatory authorities due to a significant number of ambiguous industries thriving in the country. For instance, the gaming sector accounts for 13.2 % of Malta’s overall economic activity. Called out to re-evaluate their risk profiles and strengthen AML and CFT strategies, FIs chose to not risk sky-high fines, rather terminate riskier customer bases. This has pushed many businesses to direct their payments to out-of-country vendors, while Maltese institutions lost trust due to unbalanced de-risking.
“Now, businesses operating in higher-risk markets are hesitant to rely on a single regulatory jurisdiction to mitigate risk exposure in terms of payments security. Yet provider diversification leads to missing out on a number of benefits, for example, potential discounts, offered due to high payment volume associated with a client,” explained Agnė Selemonaitė. “We’ve noticed this tendency amongst our own clients too. Many are being overly cautious and choose to carry out only a small fraction of payments, fearing for things to take a similar turn, as it did in Malta, and become the ones deemed high-risk.”
“However, higher turnover helps to better mitigate client-specific risks. For instance, the more vendors from any given corporate group are onboarded, the more we can learn about the payment behaviors in their industry, and, consequently, introduce better risk controls to prevent ML, TF and other threats to clients’ funds.”
Ms. Selemonaitė notes that hasty de-risking could contribute to other issues as well, like the growth of the shadow market. “The higher number of such accounts are rejected, the more inclined they become to look for alternatives to continue their business,“ she adds. “In a way, de-risking might increase the very thing it aims to mitigate for a more transparent market.”
That is why it is crucial for governments to establish a clear position on where the entire country stands in terms of risk tolerance. “Regulators implement changes that are passed down to them by the government. If the latter clearly communicates their stance beforehand – there is less room for distrust and ambiguity from the business’s perspective too.”
Selemonaitė argues that FIs should retain a healthy risk appetite and pool more resources into controlling dubious activities, rather than rely solely on de-risking as the basis for risk mitigation. “De-risking is a necessity – we have leveraged the practice ourselves. However, we are more focused on enhancing our overall risk control capabilities.”
She also raises the idea that sharing the market between banks and EMIs may be even more reasonable in terms of keeping risks at bay. “EMIs are more agile and prone to technology innovation, this allows them to have laser-focus on a single sector and become experts on its common threats. Thus deliberate market division creates the conditions for more strategic risk management across the sector.”
According to her, encouraging a dialogue between the regulators, fincrime watchdogs, market players and other institutions is equally important, as they determine the ins and outs of de-risking. Selemonaitė notes Lithuania’s State Tax Inspectorate (in Lithuanian – VMI) initiative as one of the examples of encouraging back-to-back communication: instead of handing out fines for possible compliance violations, they reported them back to the companies and gave a timeframe to address the issues. “In 6 years, this helped cut down on the auditing almost twice, as well as increased general trust in VMI, which rose from 25 to 75 percent, showing just how important it is to maintain a direct line of communication between regulators and regulatees.”
The TMNL initiative in the Netherlands is also a good example of how consistent dialogue can pave the way for more efficient and transparent process control. Following the initiative, banks are working closely with government parties, such as the Ministries of Finance and Justice and Security, to combat threats related to AML/CTF compliance via real-time transaction monitoring network.
“A joint approach on detecting suspicious patterns enables to take a firmer stand towards mitigating risks, emphasizing the point that, essentially, this is a two-way street: further growth and security in the sector depends on both sides’ efforts to keep communication open and transparent.”
Overall, refusing to work with certain customers or markets focuses only on avoiding risks. As she summarized, “the main goal should be not to shy away, but to increase the capacity to control risks on your own terms.”
Cash and digital payments – a balancing act to aid financial inclusion
By Matthew Jackson, Head of Partner Development, EMEA at PPRO
The cashless debate is one that continues to spark both conversation and controversy. The pandemic, which has seen many merchants discourage the use of cash to limit the spread of the virus, has accelerated these discussions. M-Pesa, a Kenyan mobile money transfer service, for example, waved its fees to support the move away from cash during the pandemic. Today, many global economies are now questioning whether they should continue to offer cash payments or go cashless by converting solely to digital. Critics say this move would disenfranchise unbanked, cash-dependent consumers and does not drive financial inclusion, while others claim that a failure to go cashless limits innovation in the fintech sector. So, what exactly is the answer?
The solution lies somewhere in the middle.
The truth is cash and digital payments don’t have to be mutually exclusive; this is not a zero-sum game as the two payment options can exist together. According to recent PPRO data, over half of US and UK consumers will stop the checkout process if it is too complicated or their preferred methods are not available. Consumers prefer having multiple payment options, whether it be using a bank transfer, a credit card, a mobile wallet or even cash. Payment flexibility is a crucial factor in offering a seamless checkout experience. Some shoppers never carry cash while others view cash as the only way they want – or are able – to pay.
The key is for merchants to offer a personalised experience for each and every consumer.
The future of cash
Despite a seemingly rapid shift towards digital payment methods, cash is not going anywhere. Many regions across the globe are tied to cash-based payments. For example, in Latin America, 21% of e-commerce transactions are completed by cash. Via cash vouchers, many consumers are able to access the global, online marketplace: at the checkout page, consumers are shown a barcode for their order. They then take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.
Cash is often preferred for a plethora of reasons: It can be easier to use cash for smaller purchases, older consumers may be wary of digital payment methods, and avoiding credit can help shoppers stay within budget.
Conversely this year, Bristol was revealed as the contactless capital of the UK, with London leading the way when all card payment types were considered. Tottenham Hotspur’s brand new stadium was also the first stadium in the UK to go completely cashless in a bid to provide the best possible fan experience. The stadium claims fans can now expect increased service speed, shorter queue times and better hygiene as staff won’t be handling cash. With many other venues following this trend, merchants must be able to provide multiple options to consumers or risk excluding part of the market.
Ensuring inclusivity with digital payments
Financial inclusion is not just limited to offering cash payments. Each region has its own nuances that influence consumer payment preferences. Consumers want to pay with the payment methods they are comfortable with; a majority of online shoppers will abandon their cart and purchase items on another site if they aren’t offered their preferred way to pay.
Local payment methods serve as the bridge to connect shoppers with merchants across the globe.
A great example of this is the rise of the mobile payment method M-Pesa in Kenya. According to PPRO research, more Kenyan consumers have a smartphone (60%) than a bank account (56%). Payment innovations have helped solve consumer needs and enable financial inclusion by turning a smartphone into a virtual bank account. Similarly, in southeast Asia, GrabPay, which started out as food delivery and on-demand taxi app, has evolved into a leading payment method used by 115 million consumers across the region. These sentiments resonate in the UK as well with 45% of UK consumers believing cash will be a thing of the past in just five years.
Striking a balance
Whatever the way forward, ultimately payment methods need to enhance the consumer shopping experience and a combination of both cash and digital payments is a way to enable this. For many regions the lines between cash and digital payments continue to blur. For example, in Argentina, Mexico and Brazil, cash-based payment methods like RapiPago, Oxxo and Boleto Bancario give many cash-dependent consumers a chance to shop online. Merchants must come to realise that cash can actually complement many digital payment methods, not necessarily restrict them.
To be able to continue to satisfy the needs of all consumers, merchants need to understand the factors driving consumer behaviors around the world and offer the specific local payment methods to fulfil those needs. In some cases, this is cash and others a digital method. Having a choice is what will not only drive inclusion but also increase sales around the globe. Innovation does not necessarily mean cashless, but rather the industry creating solutions to solve consumer needs.
Entersekt provides clarity on Secure Remote Commerce authentication techniques for financial institutions
MEDIA ALERT: Entersekt provides clarity on Secure Remote Commerce authentication techniques for financial institutions New whitepaper from Mercator available: Revisiting...
Thinking Long-Term When Your Shareholders Won’t Let You
By MaryLee Sachs, US CEO, Brandpie In a recent study of nearly 700 CEOs across the US and Europe, my...
Are clients truly getting value from their BR solution?
By Matt Dickens, Senior Business Development Director at Ingenious Financial planners and wealth managers strive to deliver on the needs...
New TransUnion Study Finds Smooth Digital Transactions “Essential to Business Survival” During and After Pandemic
Economist Intelligence Unit report for TransUnion highlights the crucial role emerging technologies will play in balancing fraud prevention and customer...
How technology has made us communicate better in crisis
By Pete Hanlon, CTO of Moneypenny COVID-19 has taught us a lot. We have embraced technology, some might say, survived...
Futureproofing Your Credit Management Now
By Marieke Saeij, CEO, Onguard The pandemic has forced a shift in day-to-day operations for the majority of businesses. In...
Will covid-19 end the dominance of the big four?
By Campbell Shaw, Head of Bank Partnerships, Cardlytics Across the country, we are readjusting to refreshed restrictions on our daily...
Why cybercriminals have ‘Gone Vishing’ during the COVID-19 Pandemic
More than 215,000 vishing attempts in the last year alone As new coronavirus restrictions look set to confine much of...
Risk Mitigation vs. Risk Avoidance: Why FIs Need to Maintain Risk Appetite and Not Place All Bets on De-Risking
De-risking aims to protect financial institutions from the increasing pressures placed by regulators and threats, associated with clients operating in...
Using AI to identify public sector fraud
When it comes to audits in the public sector, both accountability and transparency are essential. Not only is the public...