Emerging Digital Wallets

Did it ever occur to you that some day you may have to pay extra for the cash stashed in your wallet?  Well, with the emergence of the digital wallet where daily transactions happen with a tap or wave of a registered device, merchants may soon opt to stop accepting cash or actually charge extra for cash payments!  Going ‘cashless’ may offer immediate efficiency benefits to society but over the long term, it could also change the landscape of global currencies altogether.

For centuries cash has been the life-blood of economies allowing buyers and sellers to exchange goods and services both locally and across borders, based on exchange rates that compare their respective buying powers. For many countries including the US, cash is a symbol of national pride. It not only represents the collective success of a nation among nations but also offers privacy and control of how we choose to spend it.  With more and more disruptive technological breakthroughs looming in this space, one might wonder what other trends could emerge when the physical evidence of hard currency is reduced to nearly-invisible electronic digits.

Today’s Technology
Electronic fund technology is founded upon on an ongoing convergence between established banking services and emerging smart gadgets.  At present two trends are battling for market dominance.  The first trend expands upon available credit card services (the lower hanging fruit) and focuses on increasing the number of possibilities where credit cards can be easily transacted.  Two emerging players include Square (www.square.com) and iZettle (www.izettle.com).  Both companies offer free credit card readers that attach to smart devices (i.e. Iphone and Android phones), hence, allowing both merchants and private individuals to transact anywhere and at anytime.  This space is already experiencing competition from Barclay Bank’s PingIt.  Unlike the other two companies mentioned, PingIt eliminates the need to use a physical credit card by offering its British clients the ability to transact using registered mobile  numbers.

The second trend supports contactless transactions where a buyer taps or waves a device that is registered with one or more credit or debit cards.  Based on RFID technology, a company such as LAKS, a UK-based watch manufacturer, offers an elegant wrist watch (www.watch2pay.com) with an imbedded chip that can be waved near a special reader for every day purchases.  The convenience of carrying an indiscriminate digital wallet on one’s wrist for purchases under $20 is both fashionable and practical. (It could also be just what wrist watch manufacturers like LAKS will need to revive their slumping industry.)  Mobil Corporation offers SpeedPass (www.speedpass.com) for gas and grocery purchases at participating Mobil stations, while AT&T and Verizon are developing ISIS (www.paywithisis.com), a grocery store application that registers a purchase at the time the buyer pulls the product off the shelf.

Both trends offer immediate benefits.  For cardholders, the time saved from waiting in line at a counter will encourage early adoption, while for merchants, the convenience of not being tied to a fixed cash register to close a sale can offer more possibilities.  Just the elimination of handling cash on a daily basis from the US Treasury through to the consumer amounts to huge savings.  A 2008 McKinsey Consulting study highlighted that Europe annually spends between 60-100 billion euros to process cash payments, which include bills and coins.  However, as money goes digital, the potential ripple effects caused by the ongoing convergence process of proven technologies could also become a nasty wake up call among elected officials.  Their recent inability to manage public funds effectively could trigger a public reaction to convert a seemingly harmless technological advancement into a global explosion of digital currencies.  Just think.  A similar phenomenon occurred when the number of TV channels exploded after the introduction of cable and satellite services.

Imagine if…
Imagine a world where corporations issued their own digital currency that could be accepted not only in their stores but also at their participating partner establishments.  For example, an individual might earn credits with Walmart (or even a list of other businesses) that would be directly deposited into their digital wallet from their monthly wages with perhaps a 10% limit.  Similar to credit card loyalty points, they might receive additional credits from competing businesses or gain special advantages when participating in a coupon-driven purchase program. Participating consumers with Walmart credits, for example, could spend these credits at Walmart or with any other strategic partners within Walmart’s group.

As the adoption process continues among buyers, a normal progression might be that clusters of related companies agree on accepting one common currency for the entire group.  Controls such as a $20 per transaction limit could help limit abuse. If a buyer did not have enough credits, they could easily exchange one currency for any other based on daily exchange rates governed by a realtime bid and ask system determined by other users.

Not farfetched…
Note that this vision of the emergence of corporate-supported currencies is not farfetched, since it combines elements from proven technologies and programs currently in use, including airline frequent flyer point systems, Skype’s low amount transaction policies, PayPal’s seamless exchange rates for international money transfers, and Google’s keyword bidding process.  When proven programs such as these converge, new ideas emerge that have a greater chance of succeeding.

The implications of a world with hundreds of possible currencies creates numerous opportunities for corporations looking to lower currency risk, share payroll expenses with participating partners, and introduce bonafide loyalty programs.  Less fortunate will be elected officials who will face tough challenges from having less control of the money supply and, possibly, their voting constituents.

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2 Responses to Emerging Digital Wallets

  1. bob says:

    Tom,

    I think we are confusing payment systems with currency. The digital devices still make payments in dollars or yen. In and of themselves, the payment devices don’t have much to do with money supply (though they may slightly increase or decrease the velocity of money). The Feb can still increase money supply by lowering interest rates and congress can still spend more than it takes in–thus increasing money supply.

    So, I don’t think the government is in danger of losing control. The consumer, on the other hand, is likely to get hurt. The government does not charge us for cash–but banks do. In effect, we will all get hit with sales tax–a charge for using our own money.

    • Tom Kadala says:

      Bob,
      Thank you for your observación.

      My proposed thesis assumes that currencies such as the dollar and euro will weaken beyond repair in the next 2 to 3 years. Public reaction which includes business owners and shareholder will convert todays payment system into a portfolio or basket of currencies, which would include the dollar and euro. Each corporate-supported digital currency will be valued based on a floating exchange similar to what we have today with the exception that exchange rates will trade based on real time market demand and be free of outside interventions.

      What I am proposing does not exist today, however I believe that the current payment system that is pegged to the dollar will be easily converted and accepted as more people transition to a digital wallet.

      Let me know if this clarification is helpful and if you have any other questions or observations to share.

      Best,
      Tom

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