A Brief on Money and Payments in an Increasingly Digital World
One six-inch strip of blended cotton and linen sewn with colored synthetic fibers evenly distributed throughout at various lengths. Its purpose is to represent a liability of the Federal Reserve System, fully redeemable on demand for another cotton strip of the same unit.
Depending upon which natively-recognizable figure(s) or numbers are depicted in its design, the high-quality stationary can be freely and effortlessly exchanged for a range of goods and services throughout a physical jurisdiction.
It’s fungible, durable, portable, and (contentiously) a unit of account. Before acknowledging digital formats, that is the standard of money as it is known today in the USA and in many other countries around the world.
One sturdy three-inch piece of plastic designed to be swiped at cash registers and inserted into designated smart machines. Its primary purpose is to communicate with banking systems and other money networks to authenticate transactions that represent the use of the technology outlined above in a digital format, and therefore without borders.
A smart device can be used in the same way, but with more layers of complexity to accommodate for the more expansive capabilities and complex tasks that allow the device to provide an interface to interact with money.
The primary distinction between these methods to interact with banking systems and money networks is the level of trust required by the counterparties that use them. With physical money, there is no trusted intermediary between counterparties that wish to make a transaction. The trust in the interaction is between a promisor and a promisee.
In the case of a debit/credit card or even a mobile banking or payments application, there are several other layers of trust required to deliver a successful transaction. In the case of a credit card, the credit networks must be solvent, the payments provider needs to be able to communicate with the user’s bank, and the card provider must be able to complete the transaction in a timely manner.
Thanks to the scale of today’s largest payment network providers like Mastercard and Visa and ubiquitous internet connectivity, there are few cases where the level of trust required in this situation deserves much of a second thought. On a smart device, a user may be at the mercy of the device’s operating system, the reliability of a mobile application used on the device, and the application’s ability to communicate with the user’s cloud banking infrastructure in a timely manner.
With increasing global monetary cooperation happening at the speed of light, physical money is fizzling out of the picture and finding its way into history books. Banking cards and traditional mobile applications are a common method of payment, but come with trade-offs when compared to internet-native payment networks that require no trusted third party for validation.
Blockchain technology, or the invention of distributed cryptographic messaging as a method to communicate value globally addresses the risks of relying on trusted systems in an increasingly digital world. For example, blockchain networks like Bitcoin allow two parties to send money to one another in a peer-to-peer fashion and without trusted intermediaries like a bank or other financial institution.
Instead of waiting for Visa to communicate with your bank for whether or not it has sufficient funds and then authorizing the transaction made using a debit card, the card could be a phone running a Bitcoin Network light node that grants the device an inherent “awareness” of the current state of the network and the user’s funds. This will prevent the user of the phone from needing to rely on third party payment networks and allows the payee to ensure payment is authentic and is delivered with finality thanks to blockchain technology.
Now, we can observe the difference between analog, digital, and a digitized system. Walking up to a clerk with a $100 bill to buy your groceries works, but comes at a risk to the vendor due to the inability to check the authenticity of the payment on-demand.
Using a debit card for payment is convenient for the vendor as the vendor can trust that the third party payment systems won’t allow a customer to spend money at its store without having sufficient funds, but the user is subject to having their payment declined by the bank, the payment processor, or even having issues with the physical terminal used to swipe the card. Even when using payment solutions such as Apple Pay, the same issues arise.
If a user has a phone that is solely connected to the Bitcoin network and uses a mobile app that allows the user to send Bitcoin as a payment, the vendor and the customer can settle a transaction between them without the need for any trusted third party. The only intermediaries in the transaction are the physical devices used in the transaction and the bitcoin algorithm itself.
An algorithm as an intermediary for financial transactions may sound intimidating, but when compared to irresponsible money managers and high-level management in a rent-seeking industry such as payments and banking where conflicts of interest are the standard, an unbiased and practically unstoppable algorithm may have a competitive alternative.
Regardless of the merits and benefits of money and payment solutions available today, the landscape continue to shape around the digital economy, for which credit cards are the #1 form of payment in the United States. According to Statista, credit cards had a market share of 38% for payments made at point-of-sale (POS) systems last year. Coming in after that is debit cards at 29%, followed by cash at 12% and digital/mobile wallets at 10%.
In the world of e-commerce, cards are the number one form of payments as well, according to a report released by JP Morgan in 2019. Specifically 47% of payments made online are made using a card, 28% are made with a digital wallet, and 7% are made with cash and bank transfers.
Digital/mobile wallets include apps like Venmo, Paypal, and could even include an app that connects to a blockchain network, so this is the figure to watch moving forward. Considering that cash outperformed digital/mobile wallet usage at POS systems in 2020, there would be less of a need for a shift in consumer behavior at POS if blockchain networks were integrated with debit and credit cards rather than with mobile devices.
The increased relevance of digital wallets used in e-commerce transactions compared to usage at POS systems may reveal that consumers that are using the internet to purchase goods and services regularly are more familiar with the method. Acknowledging the potential for integration of blockchain technology within digital wallets, the payment method forms a great primer for a world where consumers can seamlessly tap into the benefits of distributed payments upon activation.
Will greater awareness, understanding, and adoption of blockchain technology come through the increase of mobile wallet usage or will blockchain projects choose to adapt to the banking card infrastructure that has been developed by payment providers for decades? As payment infrastructure giants like Visa continue to expand and as globalization increases consolidation across industries and regions, the need for more efficient and integrated payment systems is a top priority.
