Evolving the Digital Money Ecosystem

by Citi

Two key themes shone through in every discussion of the third annual Digital Money Symposium: adaptation, and collaboration. The digital environment is too great and too complex for any one company, or sector, to dominate. Instead, we need to create a digital-money ecosystem – adapting to the new environment, and sharing capabilities and expertise across industries.

The digital revolution is very much underway, and — as the 2015 Digital Money Symposium highlighted — companies, financial institutions, governments and consumers have a choice: adapt, or fall behind. Hosted by Citi and Imperial College London, the Symposium discussed stories of progress, and examined the need for adaptation and collaboration as the key ingredients for the hard work ahead of digitally- converting the remaining — and stubbornly resistant — physical cashflows. Indeed, through bringing together representatives from all sectors — with speeches from those at Citi, Imperial College London, GSM Association, Verifone, Transport for London, mySupermarket, Google Fiber, Zopa, The Financial Times, Financial Conduct Authority and Bitcoin — the symposium invited players to explore how collaboration can build a digital ecosystem that is large and profitable enough to benefit us all. Across the two panel discussions and keynote speeches, the symposium — held at London’s City Hall — focused on five key areas: the benefits of digital money; the Digital Money Index — highlighting a need for adaptation; connecting the unconnected; stories of progress; and industrialisation versus innovation.

1. The benefits of digital money

Increasing the pie: adding to the formal economy

• The benefits of digital money adoption are clear. “The consensus is that digital money is better, cheaper, faster,” described Jamie Forese, Co-President of Citi and Head of the Institutional Clients Group.
• “Just a 10 percent increase in digital-money adoption could generate an additional US$1 trillion for the formal economy — through the financial inclusion of around 220 million people,” explained Forese in the Symposium’s opening remarks.
• “This would have a ripple-effect,” added Sandeep Davé, Director of Global Digital Strategy at Citi. “Governments would see US$100 billion in additional taxes, banks would see new loan and deposit relationships to the tune of US$150 billion, and retailers would see an increase in spending power to US$100 billion.”

Reducing costs

• There is a misconception that cash is a costless means of transacting. In fact, there is a cost for producing, storing and transporting cash, as well as a cost for managing potential fraud. “Our estimates indicate that between government and retail alone, there is a potential for over US$300 billion in savings over the next three-five years from lowering the cost of cash handling,” explained Davé.
• “For corporations, digital money reduces costs,” described Forese. “The Centre for Economics and Business Research estimates the cost of cash handling to be 2.8 percent of total takings by retailers.

Share Shift

• Indeed, the Symposium also highlighted the impact digital money adoption could have on share shift. Businesses that have been able to deploy successful digital money initiatives at the right time have benefited from substantial share gains. Citi explained that digital money could create the potential for US$500 billion in share gains across businesses or industries over the next three-five years.

2. Digital Money Index: a focus on adaptation

Exploring the 2015 Digital Money Index

• This year’s Symposium unveiled Citi and Imperial College London’s 2015 Digital Money Index – an update of 2014’s launch of the Index exploring the “readiness” of 90 countries with respect to adopting digital money initiatives. Factors – ranging from government support, and technology infrastructure, to consumer appetite and the solutions available – not only indicate how ready a country is to adopt digital money, but also how likely.
• Last year the Symposium launched the Index – asking “what must be done” to drive digital money adoption. 2015’s Symposium, however, explored more the “how and when” — with “adaptation” arising as a central theme.

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“One Size Fits All” does not work

• “Cultures are different,” Professor David Gann, Vice President of Development and Innovation at Imperial College London explained when summarising the symposium. “And if you forget that, culture will trump innovation every time, and it won’t take off”. Indeed, the Digital Money Index highlights the impact of culture on digital money adoption. Germany, for instance — despite ranking as “materially ready” on the Index — observes high cash use due to the wide-spread cultural belief that credit cards lead to overspending.
• “Context” also has a significant impact on digital-money adoption. In Argentina, for instance, rebates on card use introduced by the government have resulted in low cash use.
• As such, there is no “one size fits all” solution for digital money. Indeed, any “copy and paste” deployment of an initiative from one market to another will likely fail.

Tailoring products to consumer market, and readiness

• Citi’s Davé stressed the importance of companies tailoring digital money solutions to suit each market. In part, this means tailoring solutions to the proclivities of a particular market — whether in terms of government support, technology infrastructure, or another local concern. Consumers in the emerging markets, for instance — where internet-use can be low — might prefer mobile money initiatives.
• “Markets are constantly evolving,” explained Davé. “And as consumer behaviour changes, old propositions become commoditized.” Adaptation is therefore not just about adjusting what is suited to the market, but also about when a solution should be deployed.

Partnerships are critical

• Perhaps the most crucial stage of adapting to the new — digitally-led — business environment is partnership: a point pressed throughout the Symposium. Naveed Sultan, Global Head of Treasury and Trade Solutions at Citi stressed the need to create a digital money ecosystem in his opening remarks: “We cannot succeed in isolation,” he said. “We need to collaborate as an ecosystem, and evolve together to make digital money a reality.”
• Collaboration was also stressed — not least when building new consumer propositions that are convenient, offer sophisticated and secure financial services, and are supported by regulators. “Not one company has all capabilities,” highlighted Gann. “By working together to ‘increase the pie’, everyone will benefit.
• Indeed, the Symposium highlighted the value of each sector — from telcos to retail, financial services, and the public sector. And by gathering representatives from each sector, the event hoped to highlight what each has to offer, and how collaboration between all parties is the only route to digital money success.

3. You have to be in it, to win it

Connecting the unconnected

• Estimates show there are as many mobile devices on Earth as there are people. This does not mean, however, that everyone is connected. Indeed — as Anne Bouverot, Director General of GSM Association (GSMA) explained — “given many of the connected have more than one device, or more than one SIM card, the reality is that just under half the world’s population is connected.”
• In order to connect the other half — and bring them into the formal economy — we need more coverage, and devices need to become more affordable. Digital literacy can also be low among the poor, old, and — in many countries — women. Improving digital literacy, as well as enabling local content (such as e-government services) would therefore further drive adoption. 

4. Stories of progress

The “Practitioners Playbook” panel discussed stories of progress: where digital money, and digital commerce, has observed success.

Mobile Money

• “We have seen mobile financial services thrive in the emerging markets,” explained Yasmina McCarty, Head of Operations and Development, Mobile for Development at the GSMA. “Almost 300 million individuals have signed up for these services, and there are 100 more mobile money services anticipated to launch.” 
• “There are 251 live mobile money initiatives in 80 markets,” highlighted Bouverot. “And 10 of these have more than 1 million regular users each.” Clearly, mobile money is a phenomenal success story across the emerging markets. Poor technology infrastructure means that many people in the emerging markets are unable to access online or traditional banking. They can, however, access mobile phone outlet shops. As such, the demand for mobile money is high and climbing.

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Digital Wallets

• The demand for mobile money in developed markets is, however, low. Indeed, as Bouverot described during a closing keynote speech of the Symposium, much of the digital money innovation in developed markets — where consumers already have access to traditional banking, as well as to credit cards and contactless payments — is around digital wallets (electronic devices, such as smartphones, that enable electronic commerce).
• Near Field Communication (NFC) is critical for digital wallets on smartphones. The endorsement of NFC through Apple Pay has resurrected discussion on the technology — evident throughout the Symposium’s first panel session: “A Practitioners Playbook”. Innovation around digital wallets has increased momentum — creating initiatives that will not only benefit commerce, but also facilitate public transport payments.
• Of course, digital wallets are not solely an area of interest for telcos. Indeed, as the “A Practitioners Playbook” session demonstrated, success with digital wallets spans sectors. “We were part of the original digital money journey about 30 years ago — when credit cards started using electronic systems, making it easier for people and merchants to do business,” said June Felix, President of Verifone. “The whole area is transforming dramatically, and it is our strategy to work with partners across multiple sectors (whether for cards, or digital wallets).” Certainly, Verifone is a partner of Apple Pay. “70% of the retailers that accepted Apple Pay were using our technology,” said Felix.

Online commerce

• Part of the success of digital money is linked to online shopping. “The online market space is seven percent and forecasted to be 10 percent by 2020,” explained Kim Ludlow, UK Managing Director of mySupermarket. “Digitization allows us to provide pricing transparency, which is great for the shopper.”

Contactless payments

• The panel also stressed the significance of contactless payments — the advent of which has transformed both digital commerce and public transport. “Chip and Pin” payments can sometimes take up to 20 seconds. Through contactless payments, however, store payments are 15 percent faster.
• For London transport, contactless payments enable commuters to pay for travel in around half a second, without ever having to buy a ticket or Oyster card – preventing gridlock and removing the need to queue for tickets. “Contactless payments helps us solve a problem [paying for travel with cash] that we have been grappling with since the tube was established — 152 years ago,” said Shashi Verma, Director of Customer Experience at Transport for London.

5. Industrialisation vs innovation

Evolution of banks

• “Banking benefits from scale, and has traditionally required a high-level of trust, built over long periods of time,” explained Forese. “Consequently, innovation has been seen as less important than safety, soundness, and trust.” The second panel of the event — “In with the new — but are we out with the old?” — asked a key question: does the prioritising of safety over innovation mean banks will struggle to adapt to the new digital environment?
• “While legacy systems mean banks are unable to transform overnight — or as fast as innovators — they are certainly capable of adaptation and adjustment,” explained Bob Ferguson, Lead on Project Innovate, Financial Conduct Authority (FCA) during the panel discussion. “It is evolution, not extinction.”
• Banks have the expertise and trusted platforms to incorporate innovation, concluded the panel, as well as partner with innovators to add the sophistication and security many digital-money initiatives require.
• The event also attempted to define “innovation” – suggesting that true innovation is not simply finding a new way to pass a transaction along the same old rails. Instead, real innovation comes through providing a different consumer experience and behaviour.
• And are innovators – Bitcoin, for instance – competing with incumbents, such as banks? “Innovators are filling a space incumbents are getting out of because of regulatory restrictions,” explained Greg Baxter, Head of Digital Strategy at Citi. “I think this is great – and benefits the consumer. But it should not be competition – they are complementary, and there is space for both.” 

Regulation

• Of course, where there are new players, and new standards, there must also be regulation. “As regulators we always try to be business- model and technology-neutral, because we don’t want to stifle markets and innovation,” said Bob Ferguson, Lead on Project Innovative, Financial Conduct Authority. “But it is also important to be aware of when new solutions alter the risk profile from the point of view of the consumer.”
• It is important when risks are transferred from a company to a consumer to stick to certain values: including respect for the law, and the fair treatment of customers – ensuring the consumer is aware of the risks they are undertaking.

Clearly, the only way to drive the adoption of digital money is through collaboration – not just at the inception of solutions, but throughout deployment to both the regulatory and technology infrastructure. Only this way will the market ensure that once money becomes digital, it stays digital.