The global phenomenon of digital money grows daily more significant. Indeed, Citi research indicates that the digitisation of financial flows is expected to reach a transaction value of around US$1 trillion by 2016.
Money transactions have entered a new era – with the use of mobile phones presenting a platform for solutions that not only allows more sophistication, but is also compatible with the information and communications technology (ICT) infrastructure of the more innovative developing markets.
The benefits to corporates are many. Certainly, the bank’s clients with mobile transactions have observed a volume of business growth three times larger than those without.
Yet in order to reap the rewards of digital money, corporates must fully understand the benefits, enablers and barriers to adoption. Each was analysed in depth by experts at the 2014 Citi and Imperial College Digital Money Symposium, held in London last January.
A New Frontier
So what is meant by digital money? The Digital Money Index created by Citi and Imperial College, and introduced at the Symposium defines it simply as “monetary exchange by electronic means” – essentially, any monetary transaction that does not involve cash.
Of course, this is not a new phenomenon. After all, the developed world has long recognised the advantages of electronic and card payments over cash.
What is new, however, is the use of mobile phones for digital transactions. It is this small change that has revolutionised digital money and propelled countries, companies and consumers around the world towards cashlessness. Citi’s corporate clients alone sent over US$115bn through mobile phones last year.
For developed markets, the use of mobile phones has meant the ability to go further than ever in the journey towards cashlessness, with smart phones enabling access to larger platforms that can perform multiple functions.
“Smartphones have been key as they can perform the traditional function, and also go beyond the barriers that cards present,” said Milan Gauder, European head for emerging payments at MasterCard, who spoke at the Symposium.
Yet the real change triggered by the use of mobile phones is the financial inclusion of developing or emerging markets. Indeed, the progress in developing markets has been most the remarkable feature of the extraordinary technological journey over recent years. As many in such markets lack access to either bank branches or the internet, they have largely been excluded from the digital money journey up until now.
This is because consumers in developing markets do have access to mobile phones. In India for instance, in the mid 1980s there were two million landline telephones for 750m people. Today, there are 900m internet enabled smartphones, making these markets ripe with innovation – even more so than in developed markets where consumers already have access to convenient banking. Given this potential for ‘leap-frogging’, the digital money solutions being generated now can truly benefit countries, companies and people globally.
What’s more, this sudden surge in appetite and innovation for digital money has inspired governments to invest in IT infrastructure and create favourable regulatory environments. Digital money has entered into a new era, and is now more sophisticated, accessible and efficient than ever before.
Adding Transaction Efficiency
The benefits to corporates are clear. Monetary exchange is at the heart of any business and transaction efficiency is, therefore, key to corporate sustainability. It relies largely on three factors: simplicity, cost reduction, and security.
Transferring cash can be an arduous process that requires detailed record-keeping and is exposed to human error and leakages. Through reducing transactions to a single click or tap – both accurately calculating and transferring the money, as well as noting the exact time and participants of the transaction – digital money adds simplicity.
Of course, collecting cash can cost money. It is estimated that companies can spend between 2-5% of the cash they collect on its lifecycle management. With no cash to collect, there is no need to spend money on its lifecycle management, thus reducing costs.
Finally, the transport or physical collection and payment of cash exposes a company to the risks of theft, fraud and incorrect payments. Digital money not only removes the need for physically transporting cash – thereby reducing the risk of theft – but also removes the need for intermediaries. Through digitally transferring money directly, the risk of leakages and fraud are significantly reduced, and the risk of human error eliminated – thus enhancing security.
Corporates also wish to grow and to do so they need to know where and when their money is being moved, as well as how it is being used internally.
Digital money not only tracks transactions in real time, but also presents companies with a detailed overview of payments and collections both internally and with counterparties. It therefore makes it easier to track cashflows and observe patterns, allowing the company to iron out any inefficiencies and prepare for growth.
Furthermore, the benefits gained from access to this data go beyond payments. “Information allows you to see the world in different ways and transform it,” said Rashik Parmar, president of IBM Academy of Technology at the symposium. “There has been some emergence of leveraging data from digital money to create insights. For instance, payment flows can help you understand the carbon footprint of your company.”
Having outlined the many benefits of digital money leads to the obvious question: why do we still use cash? In addition to regulatory and infrastructure barriers, there is one key obstacle to digital money – resistance to change.
“There are cultural, ethical and religious concerns with money,” explained Dr Llewellyn Thomas, a research associate from Imperial College London. “So changing it is extremely difficult.”
For centuries, cash has been the main form of monetary transaction, so countries, companies and consumers alike are reluctant to walk away from it so easily. Germany, for instance – a country estimated to be “materially ready” for cashlessness in the Digital Money Index – still prefers to use cash over digital transactions out of a belief that it prevents overspending.
Additionally many companies, despite recognising the myriad of benefits digital money has to offer, are reluctant to overhaul existing systems and practices to adopt it.
Yet this is a mistake. Despite these barriers, the sophistication and comfort digital money offers will be too hard to resist. Companies that choose not to adopt, will soon be falling behind competitors. Compromising through overhauling current inefficient systems and taking a chance on a new method of monetary exchange is therefore a decision that corporates must make.
Of course, while getting ahead of the competition inspires digital money adoption, competition between companies is itself a barrier to cashlessness, as it prevents collaboration – a challenge that is particularly significant in the west.
“Competition prevents companies from working together for the greater good,” explained Victor Koss, partner, Booz & Company. “In countries such as Japan or South Korea, organisations are increasingly culturally following others – even if it may be of short term detriment to them – because they see the greater good. We don’t do that as much in the west.”
Digital money solutions need to be as advanced, sophisticated and as user-friendly as possible in order to encourage the consumer to adopt. Collaboration, not competition, therefore, is the only way to combine ideas and develop together to advance the use of digital money.
Digital money – and its benefits – has been around for a while. It is only now, however, with the use of mobile phones enabling access to digital money on a larger scale, that the journey towards cashlessness is finally gaining momentum. Corporates, which are at the heart of economic growth and innovation, must work to embrace the change and collaborate towards a digital future.
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