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The Cashless Future: Imminent Or Distant?

If you were asked to leave your house today without your wallet and rely solely on your mobile phone and credit cards to carry out all your day-long transactions, you would probably deem the task as impossible, that is, if you are staying in Bangladesh. Given our heavy reliance on cash-based transactions, a day without the use of paper money might seem unimaginable at this point, but elsewhere around the world, a cashless revolution is already underway.
Recent statistics predict that there will be more than 4.8 billion individuals using a mobile phone by the end of 2016. Another report noted that 39% of all mobile users in the U.S. had made a mobile payment in 2015. This is up from 14% in 2014 and by estimations will be in the 70% range by 2017 according to the US Federal Reserve report on Mobile Financial Services. Globally, mobile payment transaction volumes grew by 42% to reach 26.9 million in 2016, up from 18.9 million in 2015, Future Market Insights (FMI) revealed. This volume represents nearly $768 billion worth of transactions, up from $549 billion last year.

“GIVEN OUR HEAVY RELIANCE ON CASH-BASED TRANSACTIONS, A DAY WITHOUT THE USE OF PAPER MONEY MIGHT SEEM UNIMAGINABLE AT THIS POINT, BUT ELSEWHERE AROUND THE WORLD, A CASHLESS REVOLUTION IS ALREADY UNDERWAY.”

DIMINISHING IMPORTANCE OF CASH IN CHINA
While the world is still debating the replacement of cash, there is already an audacious economic phenomenon happening in China. Almost everyone in major Chinese cities is using a smartphone to pay for just about everything. At restaurants, patrons can either use WeChat or Alipay — the two smartphone payment options — before bringing up cash as a third, remote possibility. Equally startling is just how quickly the transition took place. Only three years ago this would be unimaginable, because everyone was still using cash.
Today, it is impossible to maneuver in Chinese cities without a mobile wallet. High end brands to local street vendors, all have QR-codes placed on their counters, which upon being scanned using your cell phone conveniently allows you to flawlessly make your transaction. Such services are rendering traditional bank properties such as ATMs useless.
The secret to such an exponential outburst in the use of mobile payments is two-fold. The mobile payment companies are able to provide their services frugally, partly by allowing smaller vendors to make use of a simple printout of a QR code or their phone, instead of an expensive card reader. Secondly, a back-end system that stores a record of user accounts, removes the need to communicate with the banks which further drives down costs. But not all is merry, as such inbound systems can make life difficult for tourists and business travelers, who might be unwilling to open a separate e-wallet just for transactions in China.

REDUCING ROLES OF FINANCIAL INTERMEDIARIES
Despite introduction of newer mediums, we still rely entirely on large intermediaries, such as banks, to facilitate most of our transactions. Overall, they have done a good job fulfilling their function. However, there are problems that stem from old business models clashing with new technology. Inherent to the old model is centralization, which is buckling under its own weight.
In 2009, Bitcoin was anonymously released in the wake of one of the largest financial shocks in history. It is a digital cryptocurrency that is not regulated or issued by any government or private entity. Although it has very little intrinsic value and was originally worth pennies on the dollar, there is major interest in its underlying blockchain technology due to its decentralized and pseudonymous nature.
Bitcoin can be purchased through an online exchange using traditional currency, either whole or in fractions. A digital wallet is needed in order to safely store the Bitcoin due to the possibility of online exchanges being hacked. Private wallets allow users to store Bitcoin and safely create backups on a smartphone or offline.
Bitcoin was the world’s strongest currency in 2010, 2011, 2012 and 2013, outperforming even gold. The upward trend continued in 2015 and 2016. It is currently priced around $250 per Bitcoin, according to Coindesk.com. Bitcoin’s purpose is to establish trust and allow transactions across a global ledger, specifically with no need for a third party. Trust is established through peer-to-peer collaboration and cryptography rather than a singular authority figure. While Bitcoin’s true potential is yet to be identified on a massive scale, the cryptocurrency just might be the perfect payment medium for borderless digital natives.

WHAT DOES THIS MEAN FOR TRADITIONAL FINANCIAL INSTITUTIONS?
The business model for traditional financial institutions, such as banks have experienced very insignificant changes entering the 21st century, with the adoption of 24/7 online banking being one of the more crucial ones. But in this era, if the banks do not take the initiative of disrupting themselves, someone else is going to enter the space and do this job for them. The insurgence of tech giants such as Google, Apple, PayPal, and so on, into the payment arena is a warning for traditional financial institutions to rethink their slow-paced business models, if they wish to survive through the upcoming decades.
To take complete advantage of the digital revolution, the banks must provide a comprehensive digital platform for all possible financial services. This has to reflect throughout the entire organization, from front-end commercial activities to back-end technology and operations. If banks fail to provide their account holders with a mobile payment gateway, linked back to their accounts, they will slowly start losing customers to new entrants such as Android Pay or Apple Pay. Peer-to-peer lending and Insuretchs have already started gaining popularity in the West and in China, which will further reduce the functionality of traditional financial institutions.

“IF BANKS FAIL TO PROVIDE THEIR ACCOUNT HOLDERS WITH A MOBILE PAYMENT GATEWAY, LINKED BACK TO THEIR ACCOUNTS, THEY WILL SLOWLY START LOSING CUSTOMERS TO NEW ENTRANTS SUCH AS ANDROID PAY OR APPLE PAY.”

PUSHING THE DEVELOPING WORLD INTO THE CASHLESS ERA
Many might argue that claims for a cashless future are fitting for developed nations, but preposterous and unimaginable for countries such as ours. But India’s recent demonetization juggernaut just might have pushed started its own cashless revolution.
India’s demonetization initiative included removing 86% of its currency from circulation without having an adequate supply of new notes ready to take their place. This proves that India is more reliant on cash than almost any other country on earth. Suddenly, hundreds of millions of people were left without the means to engage economically, to buy the things they wanted and needed. A myriad of businesses were left without a readily available mechanism to receive payment for their goods, to buy supplies, or pay their staff.
But this surprise demonetization also did something else: it pushed millions of new users onto the country’s digital economic grid by virtual fiat. Prime Minister Modi’s demonetization initiative has been a boon for India’s e-payment providers. Paytm reported a three-time surge in new users – tacking on over 14 million new accounts in November 2016 alone. While Oxigen Wallet’s daily average users increased by 167% since demonetization began.
However, experts suggest that the sudden invalidation of some denominations of the rupee almost overnight, is responsible for such a sharp boost to digital payments, with the population having no other alternative. But not everyone country make the leap as such structural changes are heavily reliant upon infrastructural developments. Countries such as Bangladesh and India still have poor internet connectivity and not everyone uses a smartphone. Even in Bangladesh, mobile financial services such as bKash and Rocket have failed to popularize its platforms as payment mediums for day-to-day transactions. Thus it can be said that cash is not going obsolete anytime soon in the developing nations of the world.

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