No-one listens to me about anything, least of all the future of payment systems, but Jack Dorsey is a billionaire so you should listen to him. Ten years ago, he tweeted that “In general, the shift toward a cashless society appears to improve economic welfare” and I remember being excited that he was on my page, so to speak. I can’t say whether he was basing that opinion on research or anecdotes or insight or my blog posts, but I can say that he was right and the evidence is mounting.
A detailed study by the Asian Development Bank (“Less, Cash, Less Theft? Evidence from Fintech Development in the People’s Republic of China”, August 2021) found that a one standard deviation increase in the fintech development level has a significant association with a 0.39 standard deviation decrease in thefts’ density because fintech reduces the density of thefts by reducing cash holdings (and, rather interestingly, providing more job opportunities).
What’s more, a survey to estimate the cost of theft for households suggested a further unexpected source of welfare gain from the development of fintech: an improvement in public security.
Now, fewer robberies and muggings does not, in of itself, mean less crime. Crimes that should grow are those that are suited to the online age and this seems to be happening as fraud is the no.1 crime by far in our United Kingdom. There must be a link, therefore, between cashlessness and other types of crime, so it is reasonable to ask if a growth in fintech use changes the types of crime that a rational decision maker chooses?
(Early evidence at least suggests that it does: stealing smartphones from people to effect instant credit payments or cryptocurrency transfers seems to me to be easy and profitable.)
The question of rational decisions makers caused me to return to the subject of armed robbery that I wrote about in Forbes previously. I cited research that notes that bank robbers thought that their activity had been financially worthwhile aside from the fact that they were eventually caught and punished for their crime. So robbing a bank seems like good idea, if you exclude the possibility (in fact, the likelihood) of being caught.
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While glancing back over that piece I note that the researchers said that it doesn’t seem practical to “expect financial institutions and commercial properties to reduce counter cash much more than they already have”. Now, that may have been true when the paper was written a few years ago, but it clearly isn’t true now, since both bank branches and businesses in many countries are becoming cash free. And this is a good thing, because as that Chinese study has reconfirmed there is direct and measurable relationship between the amount of cash out there and the amount of crime.
Yep, you read that right. More cash, more crime.
It appears that any amount of cash is a problem. As the research on UK armed robbers said, “even when the amount of money obtained was quite small (an element often touted in support of the irrationality of economic criminals), it must be recognised that even apparently small sums may be adequate for the offender’s immediate needs. Hence, gains may be subjectively much larger than they appear”.
This tells me that so long as there is some cash in the till, there will be robberies but with the rewards from robbing banks and businesses falling so armed robbers, like everyone else, will follow the money. This is why cash-in-transit (CIT) robberies are a preferred option acr0ss Europe, where countries that have much higher usage of ATMs have commensurately higher CIT robbery rates than countries with lower ATM usage (see, for example, Sweden and Denmark).
This relationship between cash and crime is is not restricted to bank heists and CIT robberies. A study of America’s Electronic Benefit Transfer (EBT) program — where benefit recipients are paid electronically and given cards that they can use in shops instead of being given cash — found that it “had a negative and significant effect on the overall crime rate as well as burglary, assault, and larceny”. The authors found a 10% drop in crime correlated with the switch to EBT.
(It seems like pretty conclusive evidence, and it’s even convincing if you read the detailed paper, which notes no impact on crimes that do not involve the acquisition of cash.)
In summary, then, it seems that Mr. Dorsey was right and that cash reduction via fintech means an increase in net welfare. People who are trapped in a cash economy, the poor in particular, are the people who get robbed, who have no insurance for loss, who get shaken down.
We should, therefore, act to reduce the amount of cash out there, but that is not to say that we should ignore the fact that there are people who are dependent on cash. The UK’s Royal Society of Arts (RSA) recent “cash census” looked in detail at the use of cash in our increasingly digital economy. It found a clear “bell curve”. Around one in five people said that they would “struggle to cope” in a cashless society and half the population said it would be problematic for them if there was no cash in society and around one in five said they were happy to go cashless.
The people who would struggle to cope should be a focus of industry attention. These are people who don’t have bank accounts, people who don’t have smartphones (and people who struggle to use them), people who have been scammed and no longer trust online payments, people who don’t have the wherewithal to interact digitally and we need to find ways to make a less cash society work for them.
There’s a particular case study that we should pay more attention to. In the UK, the boundaries of inclusion are being explored and tested by the use of apps to replace cash and card payments for parking. This fascinates me, partly because of the interesting intersection of anthropology and technology but mainly because of the strength of feeling it generates. In J.G. Ballard’s wonderful novel Millenium People he wrote about Britain that “when the revolution comes, it will be about parking”. What vision that man had!
I have a couple of parking apps (eg, Ringo) on my phone and I love them. The ability to drive into the station car park then jump on a train and pay for the parking while sitting down is well worth 20p or whatever the surcharge is. But I’m sure we’ve all experienced the frustration of pulling into a car park only to discover it needs a different app or there’s no signal or your phone is out of battery or whatever so there is room for improvement in how they work. But the situation for people who don’t have smartphones or have one but don’t understand app stores or who have a smartphone and understand app stores but don’t trust their phone enough to type in card details is very difficult. I read one newspaper article in which the author said that their 80 year old mother phones them to pay for the parking whenever she goes out shopping!
This is why there’s a financial inclusion discussion to be had and parking is a familiar mass market use case to measure against. Should be make the apps simpler? Move over to voice interfaces? Force councils to keep machines that take cash no matter what the cost? I’m not sure any of those solutions are worth doing, since they are interim sort-of solutions.
When you think about it, parking and payments are both pretty boring, so why would any normal person want to be in the loop? If you look further into a not-too-distant future of 5G and digital cash, then there’s no obvious why there should be a person, smartphone or app involved such mundane transactions: Your in-car computer system will simply flash up “Do you want to pay for parking?” when your car pulls into a space and on your nod, wink or muttered acceptance then the car will negotiate with the meter to agree the fee and transfer the value.
British car parks may not be a universal proxy for payments in the new economy, but they are a useful example to support the view that nations need an inclusion strategy and it seems to me that a well-designed central bank digital currency (CBDC) can provide some of the infrastructure needed here, particularly if it extends to non-person internet-of-things device-to-device payments.
We have the technology, but we shouldn’t leave digital currency design decisions up to the technologists. This is why I have long argued that the shift to cashless society must be planned to help groups that might be marginalised or excluded so that they share in the net welfare benefits of cashlessness, including less crime.
Banks Are About To Face The Same Tsunami That Hit Telecom Twenty Years Ago
I fear global bank regulators are about to make a decision that will unintentionally “obsolete” the banks, by prohibiting a coming tech pivot. Making this mistake would guarantee that the tech industry continues going around the banks, right as internet-native payment technologies are starting to scale.
The telecom sector offers a cautionary tale: When Voice-Over-Internet-Protocol (VOIP) was invented in 1995, most people disparaged it as a technology that couldn’t scale and wasn’t a threat to the telecom giants. Then, circa 2003, the technology to scale VOIP arrived – broadband – and within a flash, most of the telecom industry’s copper-wire networks became obsolete. Useless relics.
Bitcoin is a “Money Over Internet Protocol,” as is Ethereum, potentially. Just as VOIP moves voice data around the internet natively, Bitcoin and Ethereum move value data around the internet natively. Most people disparage Bitcoin, Ethereum, et al. as protocols that can’t scale and can’t possibly threaten the incumbent financial industry, just as they denigrated VOIP. But the scaling technology is now here – it’s called the Lightning Network, which is a Bitcoin layer 2 protocol. Its throughput capacity roughly equals that of Visa, and payments made over Lightning cost virtually zero. There are other scaling technologies, too. If I’m right and scaling technologies for internet-native money protocols have arrived, then many legacy systems operating in the financial system today will be obsolete within a handful of years.
As CEO of a new breed of bank – a dada-bank (“dollar and digital asset bank,” defined as a depository institution authorized to handle both and pronounced like “databank”) – my company lives with the problems inherent in the banking industry’s antiquated legacy systems every day. Culturally, banks have a history of building complex, “walled garden” IT systems. Fintechs sprang up in recent years to provide efficient front-ends that act as “middleware” between antiquated back-end systems and the user experience demanded by customers. Culturally, fintechs build the opposite of banks’ IT systems – fintechs generally build their systems to be as open and “low-walled” as possible to create network effects. Had banks done this, fintechs wouldn’t need to exist! But, until “Money Over Internet Protocols” came along, banks still had a role because fintechs still needed to partner with a legacy bank to settle their customers’ US dollar payments.
“Money Over Internet Protocols” at scale are truly a threat to traditional banking because they enable money to move outside the traditional, antiquated payment rails. To date, the US banking industry has lost roughly $600 billion, or 3% of its deposit base, to the crypto industry – and that happened before the “Money Over Internet Protocols” scaled! Despite all the legal, regulatory, accounting and tax problems faced by their products, and all the criminals and fraudsters running rampant (who should be in jail), the tech industry has proven its ability to go around the banks.
It will take Lightning a few years to lay down that proverbial broadband (scaling) infrastructure before the “Money Over Internet Protocols” hit their tipping point at scale. But make no mistake, it’s happening. The proverbial undersea cables that scaled VOIP are being laid before our very eyes.
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But the “aha!” of these “Money Over Internet Protocols” isn’t cost or scale. There are two “ahas” that matter far more: integration speed/cost and developer communities.
- Integration speed/cost: Anyone in the world can become members of these emerging payment networks in the span of a few hours, using equipment that costs a few hundred dollars.
Banks’ IT systems will never be able to compete with that.
It’s not even a question whether legacy technology architectures can compete with these emerging protocols, for the simple reason that it’s fast, cheap and easy to join these networks. I recall a recent conversation with a B2B payments company, whose executive was very proud that his team whittled down to only 3 months the time required for its business customers to integrate with its system. In the legacy world, 3 months is impressive. But the paradigm has shifted: payment system integration time is now measured in hours, not in months or years – and in a few hundred dollars, not a few million dollars. It’s obvious which approach will win.
- Developer communities: Open, permissionless protocols have huge developer communities, which compounds the speed of their ecosystem development and network effects. Network effects are all about compounding. The code libraries and developer tooling available for Bitcoin and Ethereum are critical infrastructure that banks’ proprietary systems cannot replicate. Moreover, these developer communities organically create interoperability. Banks’ “walled garden” systems with closed groups of developers will never be able to keep up with their pace of innovation.
So, what could be the role of banks in the world I’m describing? Answer: banks become software application providers, providing access-controlled applications that run on top of the open, permissionless protocols and to make them accessible even to unsophisticated users, just as the telecom companies do with VOIP. I’ll bet very few of us use the command line interface to make a phone call – even though we could use it if we wanted to, most of us pay to use telecom providers instead because they make the user interface so easy.
That’s what banks will do, too: provide access-controlled applications to ease the use of “Money-Over-Internet-Protocols.” Huge, successful businesses have been built exactly this way – as access-controlled applications running on top of open, permissionless internet protocols. Auto companies are just one of many examples – they’re software companies now, albeit providing software that runs on a different type of hardware.
What about central banks? What would be their role in the world I’m describing? No different. They’ll become providers of a software application for issuing fiat currency that runs on top of open, permissionless protocols, too.
That brings me back to my fear that global bank regulators (specifically, the BIS) are about to make a decision that “obsoletes” the banks. Why? Because the BIS is proposing bank capital treatment that would effectively block banks from interacting with open, permissionless protocols. If they do that, they are guaranteeing that the tech industry will just keep going around the banking sector.
The biggest concern of global bank regulators with banks using open, permissionless protocols, I suspect, is compliance. But banks don’t need compliance to be built into the base layer of their IT systems. Compliance can be built into applications that run above the base layer, and which control access. In fact, that’s what banks are already doing today with TCP/IP. Every bank uses TCP/IP, and yet strictly controls access to their online banking platforms. Criminals and sanctioned countries use TCP/IP today too, but banks have the tools to block them from using banks’ applications. Same thing with Bitcoin and Ethereum – banks have the tools to block illicit finance from using their applications. It’s easier to police illicit activity on open blockchain systems than it is in legacy systems.
At its pivotal juncture telecom was a heavily regulated industry, just like banking is today at its pivotal juncture. How, then, did the telecom companies pivot to become software companies and avoid obsolescence? Answer: regulators enabled them to make that pivot.
That’s what banks will become, too – software companies – but only if bank regulators enable banks to make the same pivot. If they don’t, then it will be obvious, looking back 10 years from now, why the tech industry won.
Will Putin’s Military Mobilization Mean The End Of His War?
Could Elvira Nabiullina be the next Russian President?
Last Monday evening I was driving along the contours of Cork harbour, not far from East Cork. The area has many claims to fame – for example, a local (Edward Bransfield) is credited with having discovered Antarctica in 1820. Less triumphantly, some local villages like Whitegate, Aghada and Farsid lost one third of their male populations during the Crimean War.
At the time, a great number of soldiers died from disease and the lack of basic medical procedures – whilst the French and British armies fought side by side against the Russians, casualties were far relatively far higher on the British side because of inferior medical equipment and practice – hence the acclaim with which Florence Nightingale’s techniques were greeted.
I thought of this recently when I read a post on the very different medical kits supplied to Ukrainian and Russian troops, respectively. Setting aside propaganda and donations from the West, the Ukrainian kit looked modern while that of the Russian soldiers could well have come from a museum or horror show. In that respect, the apparent wilting of the Russian army is not surprising.
More supporting detail on this comes from the 140 page long diaries of Pavel Filyatev, a career paratrooper in the Russian army who, driven to despair by the chaos within his regiment (in Kherson), wrote a long account of his experience in the Russian army. Armies are not pleasant places but his account of the systematic mistreatment of the Russian soldiers, their undernourishment, disorganization in battle and embarrassing under-equipment is telling, not just of the Russian army but of the Russian state. Needless to say, he is now in hiding beyond Russia.
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In that context, the mobilization of largely experienced soldiers to start with, and the co opting of prisoners into the Russian army, opens up many risks – for both Ukraine and Russia. Additionally, the coming referenda on the accession to the Russian Federation of the Luhansk, Donetsk, Zaporizhzhia and Kherson regions is a sneaky, deadly moving of the geopolitical goalposts. Any attempt to liberate these areas of Ukraine would now, in the eyes of the Kremlin, an attack on Russia itself, and it has the right to respond as it sees fit.
From a military point of view, this elevates the risks around Ukraine, and in particular heightens the probability of a strategic mistake or tail event (i.e. such as the destruction of a NATO satellite or an attack on a Baltic state). Putin’s move also increases the risk of socio-political risk within Russia. As I am not a military expert but prefer to write on economic development and the rise and fall of states, I will focus on that.
The Filaytev diaries say much about Russia. It is a country that until recently had poor levels of human development, especially in healthcare and life expectancy (which has been rising from low levels). In this context, Vladimir Putin’s vision of Russia as a superpower is hollow – unless a nation can sustain improving levels of human development (through education, good healthcare, freedom of thought) it will not sustain the core drivers of growth, such as productivity. This a lesson for China, the UK and the US to follow. In China and the UK (productivity is falling) whereas in the USA life expectancy had dropped sharply (below that of China).
In coming years, I am sure many will write about the surprisingly poor quality of the Russian army, and in the context of this note, it is simply another marker for poor quality development. This is perhaps one reason why when emerging market crises strike, they happen slowly, then very quickly. Incompetent institutions, poor rule of law and a prohibition on intelligent policy making can for some time be camouflaged by superficial growth, but all very quickly melt away in moments of stress.
The risk is that other institutions go the same way. As Putin announced the mobilization there were rumours that the highly regarded head of the Russian central bank, Elvira Nabiullina, had resigned (she had apparently tried to do the same in March). This has not been confirmed but raises the question as to the seaworthiness of the full range of Russian institutions in a stormy geopolitical climate. Increasingly, the pressure will be on Russia, and from multiple angles.
As a last word, I want to return to the Crimean War. It is not inconceivable that Corkmen from villages like Whitegate were shelled by Leo Tolstoy, at the time a young artillery officer. Tolstoy’s experience of war affected him greatly. In the context of Putin’s recent mobilization it is worth recalling some advice he gave to a young man ‘all just people must refuse to become soldiers’. Many young Russians are thinking the same today.
World Will Have Nearly 40% More Millionaires By 2026: Credit Suisse
The world will have nearly 40% more millionaires in 2026 compared with the end of last year, according to a report by the Credit Suisse Research Institute released on Tuesday.
The five-year outlook “is for wealth to continue growing,” said Nannette Hechler-Fayd’herbe, Chief Investment Officer for the EMEA region and Global Head of Economics & Research at Credit Suisse.
Higher inflation “yields higher forecast values for global wealth when expressed in current U.S. dollars rather than real U.S. dollars. Our forecast is that, by 2024, global wealth per adult should pass the $100,000 threshold and that the number of millionaires will exceed 87 million individuals over the next five years,” Hechler-Fayd’herbe said in a statement.
Buoyed by rising stock prices and low interest rates, global wealth increased global wealth last year totaled $463.6 trillion, a gain of 9.8% at prevailing exchange raises, Credit Suisse said in its annual “Global Wealth Report 2022.” Wealth per adult rose 8.4% to $87,489, it said.
All regions contributed to the rise in global wealth, but North America and China dominated, with North America accounting for more than half of the global total and China adding another quarter, the report said. In percentage terms, North America and China recorded the highest growth rates — around 15% each, it said.
The United States continued to rank highest in the number of the world’s richest with more than 140,000 ultra-high-net-worth individuals with wealth above $50 million, followed by China with 32,710 individuals, the report said. Worldwide, Credit Suisse estimates that there were 62.5 million millionaires at the end of 2021, 5.2 million more than the year before.
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By contrast, this year looks tough. “Some reversal of the exceptional wealth gains of 2021 is likely in 2022/2023 as several countries face slower growth or even recession,” the report said.
Rises in interest rates in 2022 have already had an adverse impact on bond and share prices and are also likely to hurt investment in non-financial assets, the Global Wealth Report noted.
Longer term, growth will recover, Credit Suisse predicted. “Global wealth in nominal U.S. dollars is expected to increase by $169 trillion by 2026, a rise of 36%,” from last year, it said.
The beneficiaries will be more spread out globally, the report predicted. “Low and middle-income countries currently account for 24% of wealth, but will be responsible for 42% of wealth growth over the next five years. Middle-income countries will be the primary driver of global trends,” Credit Suisse said.
Click here for the full report.
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