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From the impact of cryptocurrencies and blockchain technology to the potential decentralization of the power of financial institutions, uncertainty reigns supreme over the future of money and finance. Several experts have tried to clear the air in this regard, and some of the predictions have been spot on, and others misleading.
Experts are adamant that the future of money is cashless and digital currencies may take over. AI and machine learning are expected to minimize financial crimes, while new payment systems may reduce the power of banks. Meanwhile, open banking has been tipped to improve customer experience.
Read on for a detailed discussion of these predictions and what they mean for consumers, banks, governments, and other entities.
Will Money Exist in the Future?
Money will exist in the future, but which form money will take is up for debate. At some point, tangible cash will become obsolete due to technology and other advancements that will help thwart all of the security issues that arise with physical cash.
Everything from counterfeit production of cash to ATM theft of cash will become problems of a past monetary society.
Digital cash is the future but that could take a number of different forms. The timing of cash extinction is up for debate however.
A Cashless Future, but Not As Soon as You Might Expect
The death of cash has long been predicted, with some experts adamant that this form of money will be virtually extinct by 2030. The future of cash has a sealed fate with extinction. Paul Amery, the founding editor of New Money Review, was in 2019 quoted saying: “Cash will have completely disappeared in five years. It’s happening far more quickly than most people expected or central bankers feel comfortable with.”
A Cashless Society fueled by Electronic Payments
Elsewhere, in a 2012 survey by Pew Research, the majority of the technology experts and other relevant stakeholders predicted that by the year 2020, most people would be using electronic forms of payment.
They attributed this to two factors: the rapid growth in the use of mobile devices (especially in advanced countries) and the security and convenience of mobile payment systems. A lot of mobile payments are possible because of technology such as visa provisioning service. But we still see a substantial amount of physical cash payments, even though they’re slowly retreating.
Some experts argue that this phenomenon is generational, with the younger money savvy generation demographic more receptive to electronic forms of payment than their parents and grandparents. Others cite ingrained consumer habits, reservations about the security of electronic payments, the anonymity provided by cash transactions, and the lack of infrastructure for mobile payments. You won’t have to worry about how to void a check in the future.
Whatever the explanation, the truth is that cash is still a major component of the global economy, and it may take some time before we realize fully cashless societies worldwide. Experts have been predicting its disappearance for almost a century, but physical cash still lingers. Even in Sweden, the world’s frontier in terms of going cashless, 20% of the purchasesare still made using cash.
The bottom line? The future is a cashless society, but expecting a cashless world by 2030 would be a bit of a stretch. Alternative payment options are gaining ground, but they seem to be co-existing with cash at the moment (and in the next decade or so) rather than replacing it.
Artificial Intelligence and Machine Learning Will Revolutionize the Fight Against Fraud and Money Laundering
In the past few years, AI and machine learning have become popular in various industries, and the banking sector is no exception. The two technologies are already making an impact on banking, helping customize services and improve products for consumers. Their use, however, is far from widespread at the moment.
AI is the technology the banking industry needs to invest in to facilitate machine learning. It’s the technological “infrastructure” that allows machines to learn how to perform specific tasks without human intervention. We can already see its elements in things like virtual assistants, facial recognition systems, and auto-reply predictions for emails.
With widespread use in the next decade or so, machine learning will (among other benefits) provide the banking sector with an Omni-faceted view of the whole customer footprint.
This means that financial institutions will be able to instantly view the full financial information and activity of a particular individual across multiple accounts. While it will be useful for product and service personalization, such functionality will also improve fraud detection because it will make it easier for financial institutions to identify abnormal behaviors on an individual’s account.
Ismael Wrixen of FE International agrees, holding that AI is simply more efficient than human beings in terms of analyzing large quantities of data and identifying trends. Its expected explosive adoption in the banking sector may prove to be the anti-fraud action regulators have been advocating for in the recent past.
Digital Currencies in Several Countries
Until just over a decade ago, digital currencies like Bitcoin were reserved for the individuals and organizations trading under the shadows of the dark web. But that’s a thing of the past now, with Facebook’s Libra the latest in several digital currency initiatives to be launched by various companies, banks, and consortia.
Many governments have launched their digital currencies, too, a far cry from being skeptical of digital currencies. Examples include China, Tunisia, Senegal, and Singapore. And seemingly, they won’t be the only ones, with countries such as Estonia, Japan, Palestine, Russia, and Sweden among those planning to join the bandwagon.
Indeed, industry leaders (including Bill Gates) who have been touting for digital currencies, have made a positive impact.
The global surge in the popularity of digital currencies comes in the wake of the maturing of the underlying technologies, a feat that’s helped lay the framework for the enactment of this form of money.
Another contributing factor has been the long-standing shortcomings of conventional payment models. For instance, payments and deposits made through such models like instant online check cashing may take days to clear due to complex international and national gross settlement mechanisms. They can also be prohibitive to small businesses because such entities often have to pay higher fees than larger corporations due to a volume-based pricing system.
Digital Currencies Will Take Center Stage
Digital currencies have the potential to eliminate some of these challenges and will become the future of money. Distributed Ledger Technology (DLT), like Blockchain technology, facilitates a trusted transaction network, eliminating the need for a central authority. That means payments can be authenticated in real-time, and the involved parties can view the transaction details without the risk of data being unlawfully altered.
With such capabilities, blockchain-based digital currencies may be the way to go with regard to eliminating transaction verification intermediaries such as notaries, brokers, and settlement agencies. Such currencies may also help reduce the need for price-reporting agencies, benchmark providers, market arbitrageurs, and other service providers that make money off information asymmetry.
The future of money involves digital cash and there are a lot of advantages. Digital cash is an attractive prospect for financial institutions, too, because it’s cheaper to store, move, and dispense than physical currency. The same goes for governments and businesses because digital currencies can help reduce financial crimes and extend economic inclusion to individuals who previously lacked access to banking infrastructure. For governments, such currencies may also improve tax collection as well as traceability.
We could go on and on about the potential benefits of digital currency and why it’s such an attractive prospect for the future of money transactions, but you get the picture.
Let’s take a look at some of the types of digital currencies you can expect to take center stage soon:
In simple terms, these are blockchain-based virtual coins that are used for transactions and a long-term store of monetary value. Bitcoin is perhaps the most popular example, but it’s not the only one.
Other lesser-known types of cryptocurrencies include:
- Lite coin
Generally, cryptocurrencies provide a certain level of anonymity, especially in peer-to-peer transactions. That’s because they’re typically decentralized, using cryptographyas an anti-counterfeiting and security measure.
Since payment processing and law enforcement agencies have no jurisdictions over this form of money, the anonymity it provides comes with a major caveat: increased risk of financial crimes.
While many have speculated that cryptocurrencies and bitcoins are the future of money, given that it’s currently an unregulated currency, bitcoin future currency is not likely in its current operation. Cryptocurrencies are not recognized as legal tender and their value is determined by market conditions.
Conditions in the market also hold true for bitcoin cash price predictions along with other forms of cryptocurrencies.
This is a relatively new class of cryptocurrencies that seeks to provide price stability and is usually pegged to a specific reserve asset, exchange-traded commodities, or fiat money. Fiat-collateralized Stablecoins are the most common, but asset-backed coins (usually pegged to precious commodities like gold) are becoming increasingly popular.
Mostly, Stablecoins are used as a means of exchange for hedging, storage, market-entry, and to provide a transactional link between physical and digital worlds.
Common examples include:
- Gemini dollar
- Trust token
- USD coin
Like asset-backed stablecoins, a consortium stablecoin is usually issued by a group of companies rather than a single organization. The earlier mentioned Libra is a great example of such stablecoins. The future of money for a group of companies would be considered consortium stabecoins. Typical of any stablecoin, consortium stablecoins facilitate instant transactions across international borders and come in handy for individuals and corporations that operate outside the conventional financial system.
These are mainly used for B2B money transfers within a network and usually leverage the transactional efficiency and speed of public blockchain technology to enforce regulations while maintaining control over the network. Usually, access is pre-approved, ensuring the legitimacy of the network to the involved parties.
Some examples of corporate currencies include JPM coin and Signet coin. Some renowned retailers, such as Amazon, Rakuten, and Walmart, are currently developing their own corporate currencies to enable payments within their businesses’ networks. Retail banks could soon enter the arena and issue corporate currencies are replacements for fiat currencies in credit/debit cards.
The only potential problem with corporate currencies is that their proliferation would likely make it for users and other stakeholders to gauge the relative value of the various options.
Central Bank Digital Currencies (CBDCs)
As their name suggests, these currencies are issued by the central bank, meant to serve as a digital form of legal tender. The future of money for a bank’s currency is considered CBDCs. They’re usually backed by existing banknotes, making them a riskless substitute for private bank deposits. The CBDCs were inspired by cryptocurrencies (most notably Bitcoin). However, unlike cryptocurrency, they’re issued by the state and are recognized by the government as legal tender.
While various central banks have issued e-money before (for instance, Finland’s Avant e-money card was issued as early as the 90s), the current concept of CBDCs is different from earlier forms in that it’s blockchain-inspired.
China’s DC/EP digital currency project, which began in 2014, is perhaps the earliest incarnation of modern CBDCs. Other central banks around the world have been contemplating launching digital currencies, including the Bank of England and the Central Bank of Sweden.
However, few governments have gone through with implementation. When it happens, this form of money will likely be enacted and controlled through a government-run database. Alternatively, government-approved private entities may be trusted with governing the database.
As with many cryptocurrencies, this database will likely be protected using cryptography and would keep all the financial records of individuals and corporations using CBDCs. But since a central bank digital currencies will be centralized (which is unlike cryptocurrencies), blockchain and other similar Distributed Ledger Technologies will likely not be used, even though the information may be stored in a distributed database.
Globally, strides have been made towards the launch of CBDCs, too. Recently, the World Bank partnered with the International Monetary Fund (IMF) to launch a private blockchain as well as a cryptocurrency known as Quasi-Cryptocurrency. While the coin has no monetary value (yet), it’s the first step towards developing a global digital currency, which will likely be implemented by the two organizations.
We Won’t Rely on Banks So Much to Make Payments
Financially, banks are currently at the top of the food chain, handling and controlling most financial matters. They control everything from starter checks to lending mortgages for houses. But in the future, this will likely change as the future of money evolves, most notably on the payment aspect of banking.
Sure, banks may keep a firm grip on things like credit issuance. But if you take a look at what has happened in China with the emergence of payment powerhouses like WeChat and Alipay, you’ll notice a trend where payment apps are slowly phasing out traditional high street banks.
Of course, this will take time, but the change is imminent.
Open Banking Will Revolutionize the Customer Experience
There’s a low-key global shift in consumer preference from product-led banking to platform-based banking in the digital age. Europe and the UK are leading the rest of the world in this regard, with most aspects of banking dictated by consumer expectations. This is bound to put a dent in the amount of profit banks make on some of their products, but the customer will benefit more.
With Open Banking increasingly appealing to consumers, banks are being forced to ditch the traditional vertically integrated business model for a platform-based one, and the ones that haven’t will likely join the bandwagon. This change will help financial institutions cater to the fast-evolving consumer needs and expectations in the digital age, and banks that don’t embrace it will likely struggle to stay afloat.
Essentially, open banking is a platform-based model that is characterized by a “flat” structure that allows seamless exchange of data between corporations, consumers, and other relevant third-party entities. By taking advantage of digital platforms, a bank using such a model is better-placed to respond to changing consumer needs without compromising its capabilities.
The future of money is platform-based. That’s because a platform-based model allows a bank to have one platform that transcends multiple business segments, as opposed to a series of siloed business units. This simplifies the way the bank interacts with its customers because it combines all relevant data into a single platform. In doing so, it gives the institution a bird’s-eye view of all customer interactions, which is great for gaining better insight into consumers’ needs.
For the consumer, open banking will be beneficial in several ways that may make borrowing easier and save you some money.
To elaborate, let’s take a look at some of the potential benefits of open banking to consumers:
Doing Away With Screen Scraping
First-generation Personal Financial Management (PFM) apps required consumers to key in the same log-in credentials (password and username) they normally use at the bank to access their account. The app can then “screen scrape” (click here to read more about data and screen scraping), meaning it has to choose any piece of information it requires from all the vast amounts of data at its disposal.
This was unreliable and inconvenient and would often require reworking every time your bank had their website updated.
With Application Programming Interfaces (APIs), PFM apps can directly extract the exact pieces of info they need. This speeds up the process and makes it more convenient to access your bank account information. Better yet, it eliminates the need to share your log-ins with anyone.
More Handy Tools
Since APIs are easier to work with for app developers, you can expect the future of money to include an influx of handy tools to help you take better control of your money. Leveraging AI, they may even be able to foresee your account activity and suggest services and products that’ll save you money ahead of time. You may be able to do away with bank direct deposit times and the wait that comes before receiving your money in your account.
With open banking, borrowing will be more streamlined. Instead of having to manually piece together all the info you need to get a loan, you may be able to simply allow a prospective lender to grab the information they need directly from your bank account so they can give you a better offer.
The same goes for business loans. When your small business needs to borrow, lenders often want to go through your books. Instead of submitting your financial reports, your lenders will be able to pull all the pieces of information they need from your accounting system or business bank account. However, in some cases, it may be misleading by the time a prospective lender sees them.
With open banking, both businesses and individuals may save money on accounting processes. Thanks to integrated systems, you’ll get automatically updated when you receive or send payments. This will not only make banking more convenient but also make tax preparation less labor-intensive.
That brings us to the end of today’s post. As we’ve seen, the future of money will have several implications for consumers, banks, and other stakeholders. Open banking will make banking easier and more convenient, and new payment systems will take away some of the power of banks, forcing them to adjust to consumer needs.
Meanwhile, AI and machine learning will improve the safety of our money, which experts predict will be in the form of digital currency. But while a cashless future is starting to take shape in some parts of the world, it might take longer than most people think. So until then, getting quarters in a roll may still be in the form of physically walking into a bank.