Fintech comes of age

Why the future of payments may lie deep in the past

It’s that time of year when we take stock, review where we are and try to work out where we are going. Of particular interest is what we term ‘payments’ — a simple term which belies its importance.

Every banking transaction is a ‘payment’ — nearly 400 billion of these were made globally in 2014. And if this appears to be a big number, it is estimated that this makes up only 15% of all transactions worldwide, with the rest being cash-based.

While the past decade has been overshadowed by the near-death of global banking, the ways we give and receive money have undergone a quiet revolution, driven by so-called ‘Fintech’ companies which use leading edge technology to deliver lower-cost financial services.

As a consequence for example, we have seen a rapid rise in peer to peer services. P2P lending organisations such as Lending Club are already moving beyond their social networking roots and adding stronger governance, linking high net worth with lower risk individuals.

Meanwhile London-based Transferwise, which enables P2P currency transfers between individuals without using banks as intermediaries, has been valued at a billion dollars.

Payment mechanisms are also becoming more affordable and, therefore accessible. As we have seen, Near Field Communication (NFC) payments via cards and smartphones are giving people confidence to let go of cash and accept mobile payments.

And in many countries, any small business can buy a card reader terminal for tens of dollars or less, from the likes of Paypal or Square, supporting chip card or NFC payments.

A third trend is how cryptocurrencies such as Bitcoin continue to rise in popularity. Due to their system of record, Blockchain, cryptocurrency payments can take place without involving banks, inviting new models for purchasing goods and services — not least music and arts.

So what does any of this mean? Most importantly, as costs reduce and confidence increases, so the lower limit on transaction size drops. We are unlikely to see the death of cash any time soon, but small change may become a thing of the past.

Acceptance of smaller electronic payments also encourages the rise in minimal-cost services (such a, for example, the individual play of a song). And while traditional cash has a minimal measure, cryptocurrencies operate at sub-cent levels, further enabling micro-payments.

As well as seeing a growth in such services, we also need to watch out for the potential for micropayment misuse, for example for currency laundering or fraudulent provision — if a service is offered for a ha’penny then fails to deliver, few would bother to make a complaint.

We will also, inevitably, see the creation of new intermediaries which offer a layer of governance and trust on top of payment mechanisms. Many are vying for this position, from service providers and handset manufacturers to old and new financial institutions.

Indeed, a new ecosystem is already evolving. Santander, JPMorgan, UBS and Barclays are looking into Blockchain, and Transferwise is in talks with traditional banks about adding a P2P currency exchange feature to their mobile banking apps.

The consequence is of improved flow of money. This is both a blessing and a curse as it yields market unpredictability, as various trading disasters in recent years serve to illustrate. Technology also brings its own risks — not least, it can be buggy or insecure.

Overall however, less friction makes for more efficiency, meaning that the payment mechanism reduces in importance compared to the products or services we are selling or buying.

Currency was never meant to become more important than the things that we do with it, but over the last couple of thousand years it has become so. While we may never go back to a system of barter, our experiment with currency may well be moving back to its proper place.