The Future of Money, Part Two: with the budget exactly a week away, Guest Contributor Chris Cook reports on radical innovations in digital cash
Chris' report arose from the first post from ResPublica's Civil Society and Social Innovation Unit in its 'Future of Money' series. That post concentrated on peer-to-peer lending and loan sharking, engendered some thought-provoking responses and can be found here
It has been a long time since I attended an event as stimulating as last week's 13th Digital Money Forum in London where my contribution was to briefly outline a future Money 3.0 financial architecture where banks evolve from being credit middlemen to a role as managers of direct 'Peer to Peer' credit creation.
While predictions are difficult, particularly about the future, actual developments on the ground are proceeding at a phenomenal pace in the developing world. Speaker after speaker outlined how different countries are converging in their use of mobile phones for payments.
Where The Money Is
When asked why he robbed banks, Willie Sutton famously replied.....'because that's where the money is'. But in the developing world, banks are typically few and far between, ATMs are even rarer, and including alternative money transmitters like Western Union even rudimentary access to cash and payment services is difficult at best. Other banking services like credit are practically non-existent other than from local money-lenders at usurious rates.
Mobile telephone companies are moving into this financial services vacuum at a phenomenal rate. All of them establish networks of air-time re-sellers, typically local shops and agents, and users make pre-payments for mobile phone use. This in itself has had interesting side effects; one major African operator was obliged by an Central Bank to cease selling high value Phone Cards, because these were routinely being used as currency, and – to add insult to injury – holding their value better than the Central Bank issued notes.
A Ghanaian mobile payment provider outlined how conventional access to cash is available in Ghana from only around 2,000 locations, for a population of 23 million: whereas his network alone (with over 50% of the mobile phone market and over 8 million subscribers) already has, through its network of re-sellers, 300,000 points of presence, accessible to 90% of the population.
Using cheap and cheerful basic mobile phones even the least educated people can simply and easily make micro-payments to each other by text message or Bluetooth, and deposit and withdraw cash, via the network of agents.
While in other countries mobile 'Telcos' either partner with or even buy their own banks to facilitate micro-payments, this Ghanaian operator's shrewd approach is to work with nine banks initially, all of whom were queuing up for the aggregated 'micro' deposits.
In Colombia, a new service provider's business model is simply to bring a bank together with a Telco and the tens of thousands of local 'Mom and Pop' shops which underpin Colombia's economy. Perhaps the best known example is Safaricom's MPESA payment system in Kenya, which had 15 million subscribers by the end of 2009, and is now branching out into areas such as crop insurance.
Credit where it's due
The point I was making in my presentation was that there is no reason why the shop resellers who sell airtime - and who take in cash deposits and provide access to cash as part of the mobile money service - should not dispense with cash and receive and extend interest-free (but not cost free) credit from and to customers instead.
Such credit may be created and settled within a credit clearing union architecture. All that is required for this is a mutual guarantee agreement, similar to a credit union's 'common bond'; a service provider (banking as a profession) to set and manage guarantee limits and defaults; and an accounting system.
Such credit clearing has been routine between tens of thousands of Swiss businesses since 1934 on the WIR credit clearing system. More recently, in Ecuador, the FactoRepo system currently under development will enable VAT-registered businesses to discount their invoices directly with the Central Bank and thereby free up working capital. Neither Swiss Francs nor Dollars, respectively, actually change hands in these systems: instead credit obligations of businesses (trade credit) is simply used in payment of other obligations within a framework of trust, the WIR's being private, and FactoRepo's, public. The Swiss Franc and the Dollar are used only as the pricing reference or value standard.
I believe that within a remarkably short time the developing world will be using mobile payment utilities at a minute fraction of the cost of the baroque and outrageously expensive bank-centric legacy systems in the developed world. It will only be a matter of time before such systems spread virally here, too.
The enabling factor for pervasive spread in the First World will be forms of credit and currency which are based upon a new approach to investment in the use value of land/location, and of energy, both of which are almost universally acceptable in exchange.
But that is another story, and awaits the further decomposition of our terminally dysfunctional financial system of 'Zombie' banks.