There is a movement in many countries into what is known as the digital wallet
. It is replacing the old concept of ‘hard money’ in the form of notes and coins carried around inside a wallet or purse or saved inside the bank to be spent utilizing a debit card. Leading sovereign banks in advanced economies, including the USA, China, Japan and the UK are creating digital currencies tightly tied to the national monetary unit – the term used is ‘fiat currency’.
This has raised questions about what effect it will have on the fintech sector. Much of the growth of fintech has come through its offering of more flexible and light-weight procedures. Already, fintech activity has been rapidly overtaking traditional banking as the leading player in e-commerce activity.
To try and estimate whether launching digital currency platforms will impact on fintech’s appeal, we have tried to look at the balance of effects.
To some degree, there will be a straight swap between the newer digital currency and other payment platforms like PayPal and Alipay. On the other hand, sovereign digital currencies will boost fintech on balance because they are built on internet platforms that are the core fintech activity, so all new features will be an added bonus for fintech service providers. On balance, this should be a plus for fintech companies.
Countries where fintech has caught on have become increasingly cashless societies, where the majority of transactions are purely digital. The use of e-wallets instead of bank accounts will push this trend further and faster. Digital currency will be usable through platforms like PayPal and Alipay, on top of other regular payment methods. Sovereign digital currency is not meant to replace traditional money. Still, digital wallets containing sovereign digital currency will create competition in the electronic payment space. In the main, fintech companies earn little revenue from straightforward money movement, but get most of their bankable profits from subscription fees and third-party services. If the swap to digital currency brings more customers, then clearly the fintechs will win substantially.
A more interesting aspect will be how the shift to digital currency changes lending in the fintech market. Fintech service providers can neither offer interest on sovereign digital currency deposits, nor would they lend in cash with the digital account balances as surety. Customers must actively convert from their regular cash-based interest-bearing accounts to sovereign digital currency to keep their wallets stuffed with ‘cash’. At some point, this manual intervention is going to be changed by innovative fintech banks. For them, it is a way of attracting more and more customers who are looking for the best of both worlds. They will get interest on their retained balance, together with the flexibility and security of the digital currency.
For the ‘unbanked’ – individuals without a bank account – the new trend will enable them to easily access their earnings in a stable and widely accepted digital currency.
This will then prompt them to use the broader range of fintech products – a win for both the customers and the banking as a service providers. In those countries that have been heavily investing in digital payment technologies and central bank digital currency development, fintech players will soon reap the benefits. The firms will see a mainly positive impact on the level of activity by increasing the number of active customers, raising the volume of digital payments, boosting cross-border payment applications, and expanding access to fintech by the unbanked.