Digital money – the new game changer for business
Smartphones will become the new wallets as digital money grows in popularity - but this new and disruptive technology could also have a profound impact on business and the world economy.
The progress of digital money will inevitably surprise us and it will develop in unexpected ways, but it's on the cusp of delivering a remarkable revolution in the international economy.
Since gold coins were first used in Turkey over 2,500 years ago, money has been at the basis of our economy. But with the introduction of banknotes in seventh century China, and subsequent innovations such as cheques and credit cards, it has been steadily moving away from precious metals.
Digital money takes the process one step further. Today digital payments dominate the money supply, with cash accounting for just seven per cent of transactions in the US and the Eurozone, and three per cent in Sweden.
Widespread access to mobile phones and the growth in e-commerce are driving this trend and spawning a myriad of new payment systems - from contactless cards and digital platforms such as Apple Pay, to cryptocurrencies like Bitcoin which bypass the banking system altogether.
According to Professor Mark Dodgson of UQ Business School, an authority on the subject, digital money is not just a more convenient - and hygienic – replacement for coins and notes. It’s a new and disruptive technology which is set to transform the world economy.
“In a very short period of time we have become used to operating in a digital world,” he says. “We use mobile phones to do our banking using technologies that didn’t exist a short time ago. Now digital money is changing the way we interact and the pace of change is going to increase.
“The progress of digital money will inevitably surprise us and it will develop in unexpected ways, but it's on the cusp of delivering a remarkable revolution in the international economy.”
But why is digital money so different and how will it affect this transformation?
According to Professor Dodgson, if money makes the world go round, digital money makes it go round faster and more efficiently. Since it allows payments to be made without relying on a bank or other intermediary, it helps avoid or reduce transaction costs and thus oils the wheels of commerce.
Currency exchange is one example. Just as international travellers can avoid using money changers by withdrawing money directly from a cash machine at their destination, now overseas workers are reported to be sending money back home in Bitcoins to avoid the 4-5% cost of processing a payday cheque.
For companies, digital money will make international trade more competitive. It will also significantly reduce the cost of handling cash transactions - it is estimated that in the US alone, savings will amount to $55bn a year. As digital payments also have the user’s identity built in, they will also make administration and financial reporting easier for companies at all levels.
Faster payments will mean fewer queues. At shop tills, road tolls and ticket booths, digital payments speed the flow of customers and help prevent bottlenecks. In London for example, the introduction of the Oyster Card and wave and pay by the transport authority has enabled the Underground to carry four million passengers a day with minimal delay while buses have stopped accepting cash.
For governments, digital money will help deter tax avoidance and make collections easier, thus increasing revenues. It will also make it easier to process welfare payments.
Charities too will feel the benefit as digital remittances make it quicker and easier for people to donate without the need to fill in forms. There will also be new opportunities for social entrepreneurship and, according to Professor Dodgson, we are likely to see many more public-private partnerships such as SMS for Life, which uses mobiles to distribute medicines in Sub-Saharan Africa.
It is in developing countries like these where digital money is likely to have the biggest impact, says Professor Dodgson. “Fewer than two billion of the world’s seven billion population have bank accounts, so the vast majority is excluded from this essential economic infrastructure. As well as absence of collateral to guarantee loans and liquidity, problems are compounded by lack of access to banking facilities in rural and remote areas”.
“The six billion mobile phone users worldwide bring unprecedented levels of connectivity. Banks and financial service companies are increasingly adopting mobile technologies to allow digital money transactions for millions for the first time. Indeed the impact of digital money will have a profound effect on the world’s poorest people.”
In this new world, digital wallets containing digital identities will be a ticket to inclusion in the global economy for billions of people. But there will also be a darker side. There will be a rise in fraud and cyber-crime. Digital currencies outside the control of central banks will provide cover for drugs and arms dealers, while the traceability of digital payments raises concerns over privacy and human rights issues.
So what can companies expect in this new digital landscape and how can they adapt and thrive? According to Professor Dodgson, they need to understand the challenges and opportunities.
“We will see a plethora of new apps and services, many of which we can barely imagine today,” he predicts. “The innovations that digital money will induce will increase prospects for wealth-creating entrepreneurship and the provision of highly localised innovations.
“Digital money will provide opportunities for new business models and allow companies to engage with customers in new ways, as well as reducing transaction costs. It will also generate massive amounts of data which, using the right analytics, will provide new insights into consumer behaviour which will inform the development of innovative products and services.
“Large companies will be confronted with both the possibility of new entrants with disruptive technologies and business models and significantly cheaper costs, and massive new market opportunities. Small companies, such as those supplying farms, or local cooperatives, have better information, but may face more competition. Ultimately, those that cannot connect digitally will be left behind and eventually driven out of business.”