Wallets and accounts are two very different things. The leather wallet in my pocket is exclusively accessed by myself, and holds bearer instruments (physical cash) directly. My bank account however, is where I have entrusted my money to a third party- my bank. That trust, is expensive. Not only the insurance of my deposit, but the amount of capital expended to insure the correct state of the ledger raises the costs of financial services, which in turn raise the barriers to entry.
Today’s mobile financial services use antiquated technology providing a simple digital interface with a centrally managed account being held by a bank or mobile network operator. We have seen tremendous success of mobile money in Africa, where users are able to digitize a once risky task; domestic remittance.
Mobile money today is far from financial inclusion. Currently, mobile money allows a user to dip their toes into financial services for the first time through the ability to transact high values digitally within a country, to a friend or family member who is also using the same mobile network.
Mobile money can not yet allow for true financial inclusion because of the antiquated system of central account management it is built on top of. What today is referred to as a ‘Mobile Money Wallet,’ is nothing more than an interface to access a centrally managed account via a mobile phone.
Centrally managed accounts are what we have used exclusively for financial services because, until now, we have always needed a trusted third party to complete transactions not taking place in physical cash. Banks have taken on this role for hundreds of years, and recently mobile networks have entered the scene. These centrally managed accounts are expensive because of the necessary backend support required to insure the correct balance and security of the account. Not everyone today realizes what an account actually is, and they don’t understand the value they see represented in an account represents only a promise.
An account balance is a promise. It’s a promise that the financial institution will return the value that the depositor has lent it. We have seen this promise broken countless times in history, from sovereign crisis in Cyprus and Greece, to the devastation of 50,000 depositors at Chase Bank of Kenya just a few months ago. Deposit insurance, greater controls, and continual audits help to build trust and insure the safety of consumer deposits, but all add cost for the end customer and further raise the barriers to access financial services.
What if you could hold cash in a digital wallet, just like you hold paper cash in your leather wallet today?
One of the greatest advantages users of bitcoin have found, is the sovereignty of control and ability to be the sole party able to hold and transact value. When somebody holds a bitcoin, they hold a financial instrument that is conceptually similar to physical cash. As a bearer instrument, whoever is in physical possession, is the rightful owner. There are no centrally managed accounts, and holders of the cryptocurrency are the only ones able to access it.
Cryptocurrencies aren’t exclusively bitcoin, and new technologies have made it possible for central banks to issue legal tender exactly how they do today, but in a digital medium. Digital legal tender is extremely advantageous for central banks, and dozens have created working groups to investigate digital issuance to help lower the cost of printing, distributing, and securing money. China, Russia, England, and dozens of other central banks have looked at accelerating financial inclusion with digital national currencies.
This digital legal tender, which is equivalent to physical cash in every way except the medium which it is printed on, is able to take on favourable properties of cash without having to occupy the physical world.
A user is able to hold and transact digital cash directly, without the need for a trusted third party. This ability has the potential to change financial services at its core, and change the role financial institutions play today. The financial services paradigm shift brought forth by bitcoin and the blockchain is still not fully known. The ability to hold any digital bearer instrument directly, however, will change finance. A user’s wallet will hold a variety of financial instruments; cash, equity in a company, commodities, or even non-monetary instruments such as identification documents, school records, and driver’s licenses.
Because institutional risk is removed when a user is responsible for their own bearer instruments (just as it is when a person holds paper cash in their leather wallet), cost drops dramatically and the need for physical infrastructure diminishes as digital services are accessible anywhere a data network exists (which is already over 97% of global population coverage).
Mobile based banking will not be revolutionized by Apple Pay, Google Wallet, or even MPesa. No, those services simply offer an increased convenience to access legacy technologies which at their core are prohibitively expensive, complex, and require reconciliation between financial service providers.
Financial services will be revolutionised by the disintermediation of trusted third parties and the ability for value to flow like information is communicated today – digitally.
Disclaimer: Blog posts reflect the views of the respective authors, and do not necessarily represent the official view of Monetas.