A Case In Point - Sweden
Sweden is particularly interesting in the financial sector because it has leapt ahead of other markets both in the uptake of digital ID and electronic cash. It has done so by delivering collectively-operated utility-like solutions from the private sector: a group of banks acting in concert, rather than through an individual firm or government service.
“How do we expect the financial system to adapt? And what new norms and behaviours will co-evolve during this period of adaptation?”
Global remittances are now the largest source of capital inflow into developing economies. They exceed $500bn annually according to the World Bank, growing around 10% in the last year and from a level of around $300bn a decade ago. The volume of digital remittances has quadrupled in the past five years. Unlike foreign direct investment or international development funding, remittances from migrant workers to families back home are more resilient and responsive than other forms of capital. It also reminds us that people do care about more than rationally maximising their expected utility. They also care about their families and the places they came from.
At the central bankers annual brainstorm at Jackson Hole, Mark Carney, governor of the Bank of England, proposed a ‘synthetic hegemonic currency’ as a potential replacement of the dollar as the stable reserve currency. He alludes to structural solutions mooted by Facebook’s Libra project (further reading). Carney’s whole argument, which gives a glimpse into how central bankers think, is worth reading in full. Key amongst them is that we will soon need an alternative to, or supplement for, the dollar as a reserve currency. That having two reserve currencies (such as the dollar and renminbi) can lead to a liquidity trap which may exacerbate the negative impact of economic shocks. Carney argues that the depression of the 1930s was worsened by just such a liquidity trap as sterling and the greenback transitioned. A synthetic hegemonic currency could ‘dampen the domineering influence of the US dollar on global trade.’ Carney warns as the ‘blithe acceptance of the status quo is misguided.’ (More analysis from Bloomberg here.)
Telegram, the messaging app beloved by the cryptocurrency community, is reportedly on the verge of launching the Gram, its own digital currency, by October 31st (coincidentally an interesting data for the British pound). Telegram has more than 250m users, and a group skewed towards early adopters. It’ll be very interesting to see how this plays out. Integration with an existing audience base can electrify a new financial product. Think of KakaoBank in Korea, a spin-off of KakaoTalk, the dominant social network in Korea. Nearly one in six Koreans has a KakaoBank account less than two years after launch. Or, look at Tianhong Yu’e Bao, a money market fund launched astride Ant Financial’s Alipay in China. Now the world’s largest money market fund, it has nearly 600m customers!
Sweden is such a striking example of how high-trust economies can innovate in finance. Two projects of note are collective endeavours by the Swedish banking system. The first, Bank-ID, is a national digital ID utility which allows Swedish citizens to quickly and securely access services with a proven ID. Around 78% of the population uses it. It proves to be very helpful for the developer ecosystem too, as the verified identity problem is solved for minimal cost. Other Nordic countries have similar programs. Such co-operative approaches to ID haved propelled use of digital ID in Norway and Sweden to the frequency of ‘using a toothbrush’.
The second is Swish; another utility service run by a consortium of banks allows for electronic payments and has all but replaced cash in the Swedish economy. According to the Swedisk Riksbank, the world’s oldest central bank, by 2018 Swish was used by as many people as physical cash, and was substantially more popular than physical notes amongst the users under forty-four. Swish shows how rapidly people are willing to give up physical cash when given the chance. (The trend is likely to continue in other markets.) Anyone dabbling in the odd purchase of recreational weed (or more serious misdemeanours) will needs to find kroner notes as Swish keeps a juicy audit trail available to investigators subject to a judicial warrant. (See this handy English language guide to Swish.)
Chris Skinner, a particularly rigorous analyst of the sector, is transported back to the mid 20th century when an American client sends him a cheque. (This $10k -or-so cheque cost more than £100 and two months to process. He points out that 18 months ago, a transaction of $100m in Litecoin was processed in two minutes at a cost of $0.40!)
Gig working will be a regularised part of our economy, and gig workers will be supported by platforms offering financial or finance-like services. One good example is ‘Kobu’, the platform for Nigerian truckers, which not only finds gigs, but provides cash advances and discounts.
Naturally, changes are being wrought not just by technology but also by demographics, migration patterns, globalisation and trade. The diversity of potential configurations in quite mind-blowing.
Banking behaviour has changed over the past few years.
A case in point - For a typical individual - a ‘go to’ consumer bank is Monzo. Tide and Revolut for business banking. Xero and Receiptbank for billing and expenses. The oldest of these firms, Xero, is only 13-years old. American Express could well be the main credit card.
A useful resource - negative interests rates, what they mean and whether they will spread to the US market, An accessible analysis