Some 55 years ago, innovation trends in the banking sector and the use of money fuelled general speculations about the future of money. In a comment on the raging speculations at the time, Jack Lefler in the July 24, 1968 edition of the Las Cruces Sun-News (Las Cruces, NM) noted that: “As a result of the proliferation of credit cards, there has been widespread speculation about the possibilities of a checkless, cashless society in the future”. However, after more than five decades, cash is still king despite an apparent trend toward a cashless society.
It is also evidently true that in the last three (3) years we have witnessed more tremendous changes to our ways of work and life than we experienced some decades ago. This is largely due to the advances in emerging technologies, global responses to global challenges such as the COVID-19 pandemic, and the surge in entrepreneurial pursuits resulting in new Startups leveraging the opportunities of advanced technologies to address existing and new consumer pain points. The result has been the digitalisation of almost all activities, including using money. And as rightly noted by Dan Schulman, CEO of PayPal: “Physical money, whether it’s checks or cash or credit card, is digitising in front of us”.
The trend of emerging technologies, their uses and large-scale adoption through new business models is influencing the current wave of changes and cannot be discounted in any prediction of the future of money. This is as a result of money (cash) demonstrating the tenacity to remain king in spite of the long history of innovations that have underpinned developments in the global financial sector for decades.
It is instructive to note that the global financial sector, and Ghana’s financial sector in particular, is undergoing various structural and operational changes influenced by several factors which this article cannot comprehensively discuss. Therefore, this article only aims to assess how some of the emerging technologies and new business models with significant impact on the global financial sector may influence the future of money.
Money today – the continuing evolution
According to Koenig & Bauer: “Cash works but it could work better. No other payment tool enjoys such a unique range of defining attributes, ease of access and use, simplicity or resilience. As humans, we can, and we do, depend on cash. Today cash, and in particular banknotes, represents the bedrock of economic stability, trade, social inclusion and freedom to exchange value”. This is an apt representation of money (cash) and is most appropriate for this context.
Money in its current form – banknotes and coins – have undergone various forms of transformation over centuries. In tracing its early development, Citi GPS noted that “… around 3,500 BC, money moved from clay tokens to clay tablets. Precious metal-based money followed, with coins circulating in Asia Minor around 550 BC. Paper-money was invented by the Chinese, initially starting as promissory notes during the Tang Dynasty (618-907 AD)”.
Up until the 1970s when the United States abandoned the ‘gold standard’ practice – replacing same with the United States dollar (US$) – gold or similar precious commodities were the basis of valuing money through to the 20th century.
The characteristics – universality of acceptance, the finality of transactions, anonymity and uses – of the early developed forms of money remain uniquely tied to modern forms of money. Today, money continues to essentially serve three (3) historical functions, namely:
- As a unit of account, assisting in measuring the value of a particular good or service;
- As a medium of exchange (payment) in paying for goods and services; and
- As a store of value, which can be saved, retrieved and exchanged at a later time.
Banknotes have been around for centuries, and the way they are used, moved and accessed has evolved in line with public needs and technological advances. Today, money (banknotes) continues to enjoy universal acceptability due to its ability to provide comprehensively for what consumers value in a payment instrument: trusted as legal tender; has near-100 percent availability and reliability; considered free of charge to use; retains anonymity; offers direct settlement; offers a safe haven and fallback; tangible and helps with budgeting; and offers inclusion as a national payment tool for marginalised sectors of society
Banks – first established in 1474 in the Tuscan city of Siena – have developed as part of the institutional arrangement to regulate the use of money. In Ghana, the earliest banking activities started in 1896, when the Bank of British West Africa (which later became Standard Chartered Bank in 1985) opened its first branch in Accra. Today, the modern history of banking operations in Ghana has been facilitated by several financial sector reforms, policy initiatives, guidelines and enactments; key among them being the 1992 Constitution of Ghana and the Bank of Ghana Act, 2002 (Act 612) as amended and its allied legislations.
With constitutional authority, the central bank (the Bank of Ghana) exercises the sole responsibility for issuance of the national currency – the Ghana cedi (₵), a central bank-backed currency also referred to as ‘fiat money’. As relates to its mandate, the Bank of Ghana also regulates, licences and supervises commercial and retail banking activities – facilitating the use of money in Ghana. This regulatory and operational structure, consistent with global practice, has enabled the development and use of money in Ghana.
Over the years, an overarching goal of regulations, policies and initiatives that have underpinned the development of the financial sector and the use of money in Ghana has been the promotion of “financial inclusion for all”. This goal reflects the vision of the current National Financial Inclusion and Development Strategy (NFIDS) (2018 – 2023), which is: “Increasing the availability of a broad range of affordable and quality financial services that meet the needs of all Ghanaians, and are provided by sound, responsible and innovative financial institutions”.
Although the NFIDS is still under implementation till end of the year, a survey by the Ministry of Finance – the Official Ghana Demand Side Survey 2021 – to measure impacts of the various policy interventions and programmes has revealed tremendous progress in bridging the financial services gap for Ghanaians.
According to the survey, financial access has increased from 41 percent in 2010 to 95 percent in 2021 for the formally served (collectively served by banks and other formal financial institutions), surpassing the target of 85 percent by 2023. Equally, financial access for other formal (non-bank) financial institutions increased from 20 percent in 2010 to 94 percent in 2021 – driven largely by Mobile Money (MoMo), which had an 87 percent contribution.
Consequently, the population excluded from financial services reduced from 44 percent to 4b percent within the same period – bridging the unbanked population gap and pushing Ghana to 2nd position as Africa’s “least financially excluded country”.
With the high recorded financial inclusion rates; access to key financial services in terms of savings and investments; borrowing and credits; insurance and risk; and also remittances have been enabled for a growing percentage of Ghanaians who hitherto had no access. Innovations within the financial sector, notably Mobile Money, are accounting for these new opportunities and possibilities of financial sector participation by all.
Mobile Money agents have become the closest financial service providers, within 30 minutes of reach for 92 percent and 76 percent of urban and rural adults respectively; with bank branches, ATMs and Microfinance Institutions (MFIs) remaining the least accessible. Mobile Money agents have grown to become an important part of every mobile network service, by continuously driving industry expansion and being responsible for two-thirds of all cash-in transactions for the year 2022 according to GSM.
Mobile Money has become a mainstream financial service in Ghana, reflecting the dominance of payment solutions in our fintech ecosystem. Despite enactment and implementation of the Electronic Transfer Levy Act 2022 (Act 1075) as amended, introducing a 1 percent tax on any electronic transfer including Mobile Money above the daily threshold amount of GH¢100, Payment System Data published by the Bank of Ghana still show a significant increase in MoMo transactions: from a total transaction volume of 365 million with a total value of GH¢76.8billion in February 2022 to 497 million and GH¢134billion respectively in February 2023.
Globally, digital transaction value grew by 22 percent between 2021 and 2022 from US$1trillion to around US$1.26trillion while the share of cash-based transactions in the overall transaction mix declined – with cash-in and cash-out transactions dropping nearly 2 percent due to the significant rise in digital transactions, particularly interoperable bank transfers and bill payments according to GSM.
Digital payments, as a category of digital transactions according to Capgemini Invent, will grow from approximately US$87billion currently to more than US$200billion by the year 2028 – with Peer-to-Peer lending also growing from an approximate US$80billion to more than US$700billion by the year 2030.
As rightly noted by the CBN, growth in the payment market will be driven by emerging trends such as Request for Payment (RfP); virtual cards; contactless card payments; near field communication (NFC) on mobile devices, wearables and Internet of Things (IoT); USSD payments; quick response (QR) codes; voice-initiated payments through services such as Alexa, Siri and Google Assistant among others.
The switch to electronic payments will further be accelerated by interoperability and the exchange of cash for digital counterparts; the mobile-first generation – preferring instant access to funds rather than long queues in traditional banks; the continued adoption of mobile and digital wallets for end users and merchant accounts; and the emergence of frictionless payments which will remove the need for one-time passwords (OTPs).
With the recent rise in digital forms and uses of money, the use of traditional banknotes and coins is set to decline. While the power of financial innovations – functionality, and relevance – is important in driving change, changes in the use of money can primarily be attributed to regulatory responses and permissions.
The enactment of enabling legislations, setting up a new functional supervisory office at the central bank for new financial technology innovations, and implementation of government policy initiatives have created a coordinated approach to harnessing the benefits of a shift from cash to digital payments by developing a national inclusive digital payments ecosystem wherein every individual can make and receive payments digitally.
Nonetheless, the attitude and response of innovators, government and the regulator are not suggestive of the intention to replace money – in the form of banknotes and coins. At best, the structural shift from cash to digital is to drive a “cash-lite (light)” economy wherein consumers will use less physical cash and transact predominantly using licenced and permitted digital platforms.
To this end, money in the form of banknotes and coins will remain relevant in the disruptive digital financial era and co-exist with alternatives in the growing multi-payment ecosystem, as banknotes in circulation have grown over 400 percent since introduction of the first ATM in 1967.
The future of money: prophesies at best
Fundamentally, the three historical functions of money – use as a unit of account, the medium of exchange and the store of value – will not change going forward. This is likely the only certainty one can predict about the future of money. The goal to displace cash – as noted by the central bank of Nigeria (CBN) “Through a cashless and efficient electronic payment system infrastructure that facilitates financial services in all the sectors of the economy and provides secured, reliable and user-centric financial solutions in compliance with international standards” – is taking centre-stage in regulatory efforts across the world to manage money now and in the future.
To maintain sovereign control over the issuance and use of money, central banks across the world are amplifying efforts to define, regulate or out-rightly ban and/or build stronger oversight over new forms of money being pursued by private players as ways of democratising the central banks’ control over the issuance and use of money.
Competition for the future of money is bound for two ends – one end driven by the continued desire by central banks and/or governments to centralise, issue and control the current form of money (fiat) and its emerging digital versions, Central Bank Digital Currencies (CBDCs); and the other being to permit the decentralised and independent private limited supply of money facilitated by emerging technologies such as blockchain – as in the case of cryptocurrencies. This competition is further reflected in the state of the two regulatory worlds.
First, the adoption of a regulatory regime for the issuance and use of fiat money – with consistent improvements that enhance the security and durability of banknotes as the stable and widespread use of fiat money – has increased over the years. On the other hand, an unregulated regime and/or outright bans dominate the growing interest in digital currencies.
The International Monetary Fund (IMF) describes CBDCs as new forms of money with three particular characteristics:
- They are in a digital/electronic form;
- They are issued by a country’s central bank; and
- They are intended to serve as legal tender
These defining characteristics make central banks the only institutions with authority to issue and regulate CBDCs. And central banks are participating fully in the disruptive digital evolution and taking advantage of emerging technologies to pilot and roll out various forms of CBDCs. According to Citi GPS, to be able to issue and control CBDC as a digital form of fiat money, central banks must either elect to centralise CBDCs through a single proprietary system or through a decentralised system using distributed ledger technology (DLT).
Additionally, central banks must contend with the type of CBDC to issue and regulate. As noted by Henri Arslanian: “There are two types of central bank digital currencies — wholesale CBDCs and retail CBDCs. Wholesale CBDCs are issued by the central bank but operate between the central bank and member banks. The public does not touch wholesale CBDC. By contrast, retail CBDC is a digital currency accessed by the public, like a digital banknote. Retail CBDCs can have a significant impact on the financial services ecosystem. We can segregate wholesale CBDC into two — the first is national wholesale CBDC, which is the use of wholesale CBDC within a country.
Although there are pilots, their impact is likely to be limited as many countries already have well operating national payment systems like Real Time Gross Settlement (RTGS) networks. Although they may not be perfect, they work fine. So, there is not much urgency there. The second category of wholesale CBDCs are cross-border CBDCs, which although more complicated are interesting as the system today has a lot of flaws – with a clunky network of correspondent banks and legacy systems. This is one area a lot of central banks have been trying to explore to see if they can improve with CBDCs. However, CBDCs are likely to have a bigger impact with the second type — retail CBDC.
Within retail CBDCs, we have three main categories. First is a two-tiered retail CBDC. In such a case, the central bank issues a retail CBDC, but it is issued via regulated intermediaries, e.g., banks. As a result, it does not disintermediate banks. It is similar to how things operate today, with the exception that the public has access to a digital form of central bank money (the same way banks distribute physical banknotes via an ATM). China, the Bahamas and some pilots in Sweden are good examples of a two-tier retail CBDC.
The second model is synthetic CBDCs, whereby the central bank allows tech firms and others access to a central bank account. These firms can issue stablecoins backed by central bank reserves. Unlike a bank and a fractional banking model, these stablecoins are backed 100 percent with reserves at the central bank. This idea was advanced by the IMF two years ago, and is not too dissimilar to the debate that took place in the U.S. around narrow banking a couple of years back.
The third form of retail CBDC is when the central bank works to create a tech platform allowing banks and non-bank FinTechs to participate. The Bank of England, and even Sweden’s Riksbank, were leaning toward such a model”.
The complexities surrounding types of CBDC to adopt and the lack of uniformity account for delays in widespread rollout by central banks across the world. As of the end of March 2023, according to a research briefing published by the House of Commons Library, only 4 CBDCs were operational and 114 other countries were exploring the concept; with the Bank of England saying it has no plans yet to introduce a digital pound – and will not be deciding on its introduction for several years to come.
Apart from investments into new technologies, systems, people and processes to support the rollout of CBDCs, most central banks are struggling with how to align implementation to the existing developed financial sectors. As a guide, the Bank of England together with the Bank for International Settlements published a report on the “foundation principles” that must guide the implementation of CBCDs citing three key principles:
- CBDC should coexist with cash and other types of money in a flexible and innovative payment system
- Any introduction should support wider policy objectives and do no harm to monetary and financial stability
- Features should promote innovation and efficiency
Despite the challenges of policy considerations underlying the rollout of CBDCs by central banks, CBDCs have immense advantages which according to the CBN include reduction in the cost of cash management; prevention of counterfeiting due to its cryptographic design; allowing real-time auditing and tracking, facilitating better compliance with Anti-money laundering (AML) and Counter Financing of Terrorism (CFT) frameworks; improving payment efficiency; and fostering competition and control among others.
Additionally, CBDCs have the potential to act as an interoperable payment instrument and a tool for bank reserves, balance sheets and liquidity management for central banks and commercial banks.
The ability of central banks to manage the related risks associated with the rollout of CBDCs will have significant impacts on its adoption and use by private citizens. As noted by Citi GPS, CBDCs have inherent risks relating to the following:
- Central banks competing with private players
- Loss of privacy due to the risk of excess surveillance as transactions will not be anonymous, unlike traditional cash transactions
- Loss of bank deposits
- Limited uptake as demonstrated by the rollout in Nigeria, where less than 0.5 percent of Nigerians are using the eNaira.
The above considerations however will not discourage central banks from the ongoing CBDC framework evaluations for commercial rollouts. The world of money is being turned on its head with CBDCs of major currencies coming our way toward the second half of this decade. We could have US$5trillion of CBDCs circulating in major economies of the world which could be used by 2-4 billion users globally by 2040, and Ghana may not be an exception to the growing phenomenon.
A CBDC is central bank-issued digital money denominated in the national unit of account and represents a liability of the central bank. This essential characteristic is the point of departure for CBDC from other forms of digital payment instruments currently being pursued by private entities.
The issuance, control and supervision of money have historically been the preserve of public institutions led by central banks. However, we are witnessing an ongoing challenge by private institutions to democratise and break the public monopoly over issuance and use of money through leveraging advanced technologies to create other digital formats of money. The result of this competition is the design of hitherto unknown and unused forms of digital ‘currencies’ set by supply and demand known as ‘cryptocurrencies’ – currencies that have no legal par value and public institutional liability backing.
Cryptocurrencies are private digital and decentralised attempts at innovating digital payment instruments. Leading these innovations are Big Tech and other private entities. Big Tech has been focused on securing regulatory approvals for Stablecoins – which are designed as blockchain-based digital currencies collateralised to the value of an underlying asset (usually a claim or a reserve).
In the process, four approaches have been developed in the design of stablecoins: namely fiat collateralisation; commodity collateralisation; crypto collateralisation; and non-collateralisation with fiat currencies such as the US dollar (USD), euro (EURO), or British pound (GBP) being the commonly collateralised stablecoins. Examples of stablecoins include Tether and USDC.
Other cryptocurrency formats have aggressively been pursued up until November 2022, when a collapse of the world’s second-largest cryptocurrency exchange platform, FTX, led to the historic joint warning by three US regulators – US Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency – about the associated cryptocurrency risks including potential fraud, legal uncertainty, and misleading disclosures by digital asset firms. Bitcoin (BTC) and Ethereum which lead this category are designed on a peer-to-peer architecture that allows digital values to be transferred without a central authority such as the central bank.
The reliance on cryptography – the mathematical process of encoding and decoding information helps in ensuring the security of transactions (over a decade of history of not being hacked), operating on an anonymous basis and without assigning control to any single participant. Developed as a decentralised crypto, BTC and others do not use a central repository which could wipe out all the holdings in case of a server crash or if a user misplaces his or her private key – a distinguishing characteristic from stablecoins.
In a long explanation of how Bitcoin works in reality, Citi GPS noted that: “Bitcoin miners are computers running the Bitcoin core software client. Each instance of the software maintains a copy of the Bitcoin ledger or database. The Bitcoin ledger is maintained in the form of a chain of blocks in which each block stores the cryptographic hash of the previous block (hence blockchain).
An owner of a Bitcoin sends it to a receiver by signing a transaction and transmitting to the Bitcoin chain through a node. The transaction signature is created based on the (1) sender’s private key; (2) receiver’s public key; (3) transaction timestamp; and (4) transaction amount. The nodes verify the authenticity of the transaction.
All valid transactions are then put in a queue called ‘Mempool’ from where miners pull out the transactions and start bundling them in a block, the hash of which takes in individual transaction signatures, hash of the previous block and timestamp, and a random nonce to create a hash of the current block.
The hash of the new block must meet some conditions set by the Bitcoin protocol — this is the cryptographic puzzle that miners solve. Each block requires solving a different mathematical puzzle chosen from a very large set of similar puzzles. Each block’s problem is equally hard to solve. In order to solve this mathematical problem, a lot of computational power is used (and thus a lot of electricity).
The ‘proof-of-work’ is the computational power expended to create a hash of the new block that meets the conditions set by the protocol; and it is achieved through brute force by trying out different values of nonce as the input for hash function. Once the cryptographic puzzle is solved (Bitcoin protocol conditions are met), the miner then transmits the block to the network and other miners will verify it by looking for a random number that, once inserted into the hash function, yields the right number of leading zeroes in the output.
Once verified, the block can be added to the blockchain and is distributed to all other nodes on the network. All the nodes in the network will update their copy of the Bitcoin ledger with this new block. The miner that mined the block will then be rewarded with a ‘block reward’ aka ‘mined Bitcoins’. After the block is added to the chain, every block added on top of it counts as ‘confirmation’ for the block. If the current blockchain is 625 blocks long and my transaction is in the 620th block — that means my transaction has ‘five’ confirmations.
It is referred to as a confirmation because every time another block is added on top of it, the blockchain reaches consensus again on the complete transaction history – including your transaction and your block. In other words, your transaction has been confirmed 5 times by the blockchain at that point. The more confirmations your transaction has, the deeper the block is embedded in the chain and harder it is for attackers to alter it”.
The complex chain of computerised operations driving Bitcoin innovations has been extended in decentralised finance (DeFi) by enabling complex P2P, mutualised financial instruments and applications that run on smart contracts on public permission-less blockchains – mostly built on the Ethereum blockchain. The programmability, transparency, permission-less, non-custodial and lack of intermediaries among others make DeFi solutions attractive for consideration despite their risks and challenges.
Bitcoin and others are not developing without criticism. Many – including Agustin Carstens, General Manager of the Bank for International Settlement – continue to highlight 3 main issues; value stability, technical robustness and efficiency as major concerns cryptocurrencies must address. And for sceptics such as Willem Buiter, Bitcoin remains “an asset without intrinsic value, whose market value can be anything or nothing”.
A full-scale analysis of all emerging digital payment instruments cannot be achieved in one article. It relates more to the back-end than the front-end results. Nonetheless, the true measure of outcomes from the ongoing contest between a fully developed form of money – fiat – and its evolving digital version (CBDC) – controlled, issued and supervised by a central authority – and private decentralised efforts to eliminate intermediaries between participants in the use of money will be greatly influenced by regulatory responses and consumer adoptions in the coming years. It is an undeniable fact that the gig economy is upon us, and the digital revolution is amplifying the adaptation of everything digital.
However, dynamics of the current global financial sector do not offer a clearer picture for predicting the future of money with any degree of certainty. What will not turn out to be a fake prophecy is that money (in terms of banknotes and coins) will continue to co-exist with all emerging digital payment instruments – public and private. At worst, private decentralised efforts may fade and give way to the dominance of fiat money and its digital versions – CBDCs – as two kings cannot rule over the same kingdom. And Jeremy Hunt is right to say that “Cash is here to stay”.
The changing landscape – what are the enablers?
Amid the competitive challenge, the uses of traditional money – banknotes and coins – are not changing. People still use ‘money’ either as a unit of account, a store of value or as a medium of exchange. The changes we are experiencing are in the end-user behavioural landscape influencing what money is being used for; advances in technologies permitting convenient, fast and secure ways of payments and/or the use of money; and new business models that are pushing the conventional limits and innovating the forms and uses of payment instruments generally.
Emerging technologies have become key enablers for the current changes and a likely future for the form and uses of money. And in the process, new business models are evolving as challengers to traditional financial service providers – some of which are considered below.
The new norm: the influence of emerging technologies
Improvements in existing payment instruments such as cheques, banknotes, coins etc. were made possible and have been enabled by technology. Moreso, the advances in technology drove the current development of digital payment tools and is enabling new ones such as CBDCs and cryptocurrencies – Bitcoin and Stablecoins among others.
In recent times, Artificial Intelligence (AI) has proven to be the foremost important driver of technology’s influence on financial services. Although the influence of AI is being felt across all industries – resulting in a high global adoption rate which according to McKinsey Digital was 2.5x higher in 2022 than in 2017 – it is the ability of AI to analyse large datasets (big data) and provide deep insights into payments flows offering the opportunity for greater operational controls, risk management, fraud prevention and data-driven decision-making that makes AI uses exciting for the financial sector.
AI has been normalized, and its capabilities are embedded in processes allowing automation, computer vision, natural-language text understanding, virtual agents or conversational interfaces among others; significantly improving the customer relationship management of service organisations. The field of AI has seen the fastest evolution.
Innovations in terms of algorithms and modelling as well as in terms of technologies are accelerating. While the last few years have seen the democratisation of deep learning and cloud computing, the next few years could bring algorithmic and technological disruptions, with the emergence of new paradigms (edge AI, low-code, etc.). Closely linked to AI is Machine Learning (ML).
While AI illustrates the capacity of a computer system to mimic human cognitive functions such as learning and problem-solving, ML aids mathematical models of data to help a computer learn without direct instructions from humans – with the possibility of continually learning and improving on its own based on its experience.
Following the increasing levels of automated processes and digitised transformations in financial services, service providers are leveraging AI and Machine learning in handling ‘Big data’ and predicting market trends. A key enhancement to this technology is the AI-powered chatbot and virtual assistants which have been pre-programmed to provide solutions to customers through data analysis of consumer patterns over a period.
Although these changes will not have any impact on the form of money, their relevance is in the operational advantages they provide to service providers in cutting down operational costs while efficiently serving customers’ needs and making more accurate predictions.
Developing on the back of AI and ML is blockchain technology – a back-end infrastructure technology without a prominent consumer interface, unlike AI. Blockchains are a peer-to-peer network based on cryptography that creates a decentralised, immutable ledger that records information and transaction free from any central authority although it could be private or public. Its utility is underscored by its use in the design of new digital currencies like CBDCs either linked to distributed ledger technology (DLT) or not, enabling the transfer of financial value. All blockchains are DLT – a digital database held and updated by distributed network participants independent of any central authority.
The process of creating tokens (tokenisation), which are codes on a blockchain, has enabled the trading and transfer of ownership and titles of value independently and directly via a digital ledger either as real-world assets or financial assets – the basis of cryptocurrencies, stablecoins and CBDCs. These are some of the real use cases of blockchain technology in the design of new payment instruments – providing open-source platforms that anybody can use and build on; thus spurring innovation and network effects, and giving rise to new, interoperable financial services and vibrant ecosystems.
However, the successful adoption of blockchain into the mainstream requires the help of other technology enablers – including decentralised digital identities, zero-knowledge proofs, oracles and secure bridges. Technology generally holds the key to ensuring these enablers are enhanced in the bid to realise blockchain’s full potential as the bedrock of emerging digital payment instruments.
Also, the following emerging technologies will power new ways of financial services delivery and uses of money – particularly in digital/electronic formats. They will further enhance user experiences and provide real-time insights for managing end-user relationships, as well as offering protection against the potential risks of cyber-security breaches, fraud, identity thefts, etc.:
- Internet of Things (IoT): This is the collective invisible network of connected devices permitting communication between Internet-enabled devices and cloud services. With this innovation, devices connected to the Internet are integrated and powered to allow seamless connectivity and access over multiple smart devices such as computers, cars, mobile devices, wearables and home appliances among others. The opportunity of IoT – which is linked to the real-time collection and exchange of data across multiple smart devices, IoT applications, and graphical user interfaces – is to allow financial service users to participate in emerging financial services on multiple connected devices. With 5G technology on the horizon, the opportunities for connectivity will become unimaginable.
- Voice authentication, augmented reality and virtual reality: Generally, people are preferring to talk than call or type as part of communication with others. And we are beginning to see effects on the purchase journey of consumers, where people are switching to the use of transactional commands through connected devices as part of their digital engagements. Voice authentication technologies are being built and adopted to provide security for transactions, forming part of this wave of engagement. Further, being integrated into the purchasing processes are authentication methods using computer vision such as facial recognition, behaviour biometrics and gesture-based biometrics for a faster and more secure online experience.
- Digital identity and user authentication technologies: Gradually, the use of PIN will give way to new identity forms – normalisation of digital identity and authentication. This will enable biometric-based verification at all end-user touchpoints for financial services, reducing fraud immensely. Two-factor authentication will become the minimum level of user authentication, as more robust security systems which trigger notifications and alerts are emerging.
The big changes: new business models
The banking (financial) sector which provides institutional support for the form and use of money is undergoing a drastic transformation. Quite rapidly, new service models underpinned by new financial services and products are emerging. These trends are contributing to the call for complete digitalisation of money, including CBDCs and cryptocurrencies.
Apart from central banks shaping the future of financial services through regulatory permissions and oversights, two key players – traditional banks and fintech companies – are also driving new banking business models primarily focused on digital products and services with the aim of promoting financial inclusion for all. To ensure a robust design and deployment of banking business models of the future, traditional banks must draw on their legacy capabilities: such as the long history of operation & heritage, people, established business models, customers and systems to attract the benefits of technology and innovation – speed, reduced cost of operation, potential reach and youthful innovators available to fintech companies.
As noted by Capgemini Invent, financial services of the future must be intelligent financial service products characterised by the ability to customise, advise, adjust, connect, personalise, contextualise, respect, adapt and interact. This means that traditional banks and fintech companies must not focus their energies on competing but on collaborating to leverage their complementary advantages. The possibility of any of the following emerging business modes succeeding will be highly dependent on such collaborations:
- Banking as a Service: The concept of Software as a Service – which is a shift from the practice of buying, installing and maintaining software on hardware devices to accessing software through a web-based platform as an on-demand service – is emerging strongly. In banking, Banking as a Service is beginning to take shape as the next-generation business model gives banks the ability to leverage their investments in information technology (IT)) by getting other banks, usually smaller or local banks, to switch from their outdated IT to modern platforms.
The adoption of emerging technologies is not without huge financial costs and regulatory compliance demands. Usually, smaller banks are unable to sustain these investments and BaaS offers the opportunity for them to leverage modern banking platforms at a lesser cost.
Also, BaaS can enable entities without banking licences such as retail stores to offer financial products through white labelling as ways of increasing consumer experience, driving sales, and increasing profitability in the future. Other benefits of easy customisation, access to low setup and infrastructure costs, scalability and security among others for SaaS can accrue to BaaS models.
- Platform Business Models: Over the years, independent non-banking companies such as tech companies and retail giants have mastered and demonstrated the utility of the platform approach to their business growth. They have created excellent user experiences by limiting the need for consumer alternatives.
Aggressively, some of these companies are innovating their own financial products to eliminate the need for banking service providers; and traditional banks and fintech companies must work together to build platforms that integrate relevant industry players across multiple value chains for consumer retention. Financial service providers must elevate existing partnerships with selected service providers to co-create programmes wherein data can be leveraged for monetised initiatives via platform designs.
- Embedded banking: New business opportunities are being created by fintech innovations. Some existing rails, such as the development digital payment ecosystem in Ghana, offer the opportunity for tintegrating financial and non-financial products into a single end-user interface.
Through embedded finance, banking functionality is absorbed into physical products, technology or platforms for creating a seamless customer experience. Financial service providers must explore the integration of growing business verticals such as ride-hailing, food & other deliveries, whereby payments can be integrated with other financial services such as lending, insurance and investing. The opportunities for new lines of business and revenue streams are limitless.
- Invisible finance: This is an entirely futuristic financial business model with no current one comparable. According to Capgemini Invent, “Invisible finance will become the most successful species – effectively becoming the Homo sapiens of Financial Services business models”.
It is described as: “A non-financial product or service that includes an indistinguishable finance capacity. This goes so far that the necessary financial functions are an integral part of the overall product and hence inseparable from each other…connects banking products with non-financial products and services. From a customer experience perspective, they become invisible. The focus is on connecting and integrating Financial Services advisory and products with life-event-driven products and transactions”.
The prospect of non-financial products and services creators integrating full financial capabilities and making them inseparable from their products or services makes invisible finance a contender as the preferred financial business model of the future, given the currently changing shopping and purchasing behaviours of consumers.
The above business models are not an exhaustive list of models shaping the future of money. I anticipate the existing traditional banking system – with relevant adoption of technology and fintech sole service models such as neo banks – will also make significant impacts on the future of money. Technology has widely opened the doors of possibilities, and only time, research and data-driven insights within the boundaries of permitted banking activities can provide some definitive business models which can support the use of money as payment instruments in the future.
Conclusion
Any predictive task is a difficult one. Getting predictions right is almost near-impossible. However, the long history of the current financial sector’s structure, trends and insights, although in a rapidly changing technological era, accounts for some certainty about the future of money. On this note, I am fortified to make the following predictions about the future of money – banknotes, coins and their allied versions, namely:
- Cash will continue to dominate payment instruments, accounting for not less than 50 percent of global payments over the next two decades despite the deployment of new digital payment instruments.
- Fintech innovations will not be the mainstay of the financial service. Traditional banks will continue to enjoy greater patronage of financial services, subject to improvements based on investments in technologies, systems and people.
- Central banks will continue to exercise state control over the issuance and use of money – either as cash or in any digital format (CBDCs or Cryptocurrencies).
- Consumer protection will be enhanced with the deployment of emerging technologies against fraud, cyber breaches, identity thefts, etc.
>>>the writer is a Fintech Consultant and the Managing Partner of Sustineri Attorneys PRUC (www.sustineriattorneys.com), a client-centric law firm specialising in transactions, corporate legal services, dispute resolutions, and tax. He also heads the firm’s Start-ups, Fintech, and Innovations Practice divisions. He welcomes views on this article and is reachable at [email protected]
