The future of money
It’s easy to get distracted by the hype. Right now new payments companies are launching and packing in funding like a flotilla of over-excitable fishing boats heading into the Atlantic with a set of nets made from previously untested fibres and fuel from a laboratory in California.
In the last year we’ve seen the rise of new online banks such as Fidor, robo-investment advisers including Wealthfront, Motif Investing and Betterment, and the spread of crowdfunding into the venture-capital arena with the launch of Syndicates. Amsterdam-based online payments company Adyen raised £161 million back in December, valuing the company at a very healthy £970 million.
“Money is an area where consumers are traditionally nervous about trusting new entrants, so you might expect consumers to trust long-standing brands like banks when it comes to new technology such as m-commerce,” says Aunkur Arya, general manager mobile at eBay’s mobile payments processing company Braintree. “But really it’s been energetic new startups that are introducing the consumer to new concepts.”
He predicts the rise of beacon technology, allowing consumers to interact with the immediate physical environment through their smartphone, as well as wearables such as the Apple Watch or Pebble, allowing seamless purchasing without the need for a dusty wallet or even and clunky phone.
When Gartner puts together its future of payments hype curve, however, it compares two things: how much hype surrounds a technology innovation; and when is it likely to become a genuine mainstream piece of our lives? For Alistair Newton, Gartner’s research vice president, banking and financial services, many of the bold adventures currently launching are effectively just new user-experience interfaces.
Cashless payments have now overtaken the use of notes and coins in the UK for the first time
“Underneath most of these new launches, including Apple payments, you find the actual payments are running on the same rails as they always have,” he explains. “It’s still the banks that are managing the actual transfer of cash, via credit or debit cards typically.”
Latest 2015 figures from the Payments Council show cashless payments have now overtaken the use of notes and coins in the UK for the first time.
Use of cash by consumers, businesses and financial organisations fell to 48 per cent of payments last year. The remaining 52 per cent was made up of electronic transactions, ranging from high-value transfers to debit card payments, as well as cheques.
The Payments Council expects cash volumes to fall by 30 per cent over the next ten years, with movement towards debit card, contactless and mobile payments driving the continued exodus from cash.
Mr Newton argues that the biggest genuine change in payment may come when the hype surrounding Bitcoin’s digital coin dies away and people understand the payment change that underpins it – and it’s more respectable rival Ripple.
“Every form of payment from me giving you five pounds to a bank transferring £50,000 is fundamentally the same – the stored value leaves on ledger or wallet and is transferred to another,” he explains. “The cryptocurrencies use blockchain, which means all the ledgers are in the same place. It’s much faster, much safer and you can see corporations taking this element up much faster than the mainstream.”
Blockchain’s advantage satisfies two of his rules for anything new to take hold in the payments sector – it either has to be quicker, easier and safer – or at least one of the three – or it has to offer a pretty substantial inducement.
Velocity chief executive Zia Yusuf believes it’s all about the incentives. Mr Yusuf’s restaurant payments app reduces the time taken to ask for and pay the bill to an average of one minute from an average of eleven minutes. “The technology winners won’t be those who purely focus on payments, they will be those who add the most value to venues and to customers,” he says. Velocity, for instance, combines its own rewards programme with merchant’s programmes to double a diner’s benefits if they chose to pay via the app, and plans to add recipe and shopping options.
At the back end of Velocity’s business, of course, its bank is handling the value transfer. If this is to change, the role of the regulator will be key. In some cases, an increase in competition is fuelled by regulation changes. The European Payment Services Directive’s recent updates, for instance, allowed the founding of new banks such as the pan-continental Holvi.
Holvi’s 36-year-old chief executive Johan Lorenzen says the company offers complete financial services for freelancers, micro-businesses, and small and medium-sized enterprises (SMEs), from invoicing to book-keeping. “Small businesses and entrepreneurs are the segments poorest served by traditional banks,” says Mr Lorenzen. “And yet EU figures show 99 per cent of European businesses are SMEs – some 20 million companies.”
Typically, however, regulators are cautious and risk averse, says Ian Pearson, futurologist at forecasting consultancy Futurizon. “Security is the biggest concern,” he explains. “We may see fingerprints with 64-bit codes imprinted or we may see gesture recognition. It needs to be fluid and unfakeable, which is tricky to guarantee.”
One solution, Mr Newton suggests, is quantum money. With bleeding-edge quantum computers issuing currency that can’t be copied, it would be possible for any of us to create our own payment system, using anything from time to bandwidth to supply value. That, he points out, is some way in the future – at least ten years, if not more. In the meantime, he concludes: “Until we have a payment system that’s ubiquitous and stores value in the same way as the £5 note, why would we give up the £5 note?”