Abacus: How the World Responds to Digital Wallets
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As the pandemic ravaged on in 2020, for the first time ever digital wallet payments became a more popular choice for in-store purchases than cash: which now accounts for just one-fifth of all face-to-face payments globally. Crisis has always served as an accelerant and a cashless future is even closer to becoming a reality. This growth shows no signs of slowing down. In 2021 alone, total m-commerce (mobile) is estimated to reach 3.16 Trillion dollars. Just years ago, many assumed that the transition to a cashless society would be facilitated by credit or debit cards, but suddenly these payment methods are being seen as antiquated vs developing mobile payment systems.
Mobile payment methods emerged in effectively three stages, first, commerce payment options came about to allow consumers to order and receive goods over the internet with a credit card. The creation of PayPal helped facilitate this rise by helping merchants accept online money transfers. Next, mobile payments allowed purchases to be made with smartphones at brick-and-mortar retailers through services like PayPal and later Apple Pay. Lastly, there was the emergence of mobile wallets, in which money is stored and transactions registered, these mobile wallets also serve as peer-to-peer payment options that allow money to be sent directly to other users. These mobile wallets are effectively the combination of the peer-to-peer wiring options that PayPal revolutionized, which tracks seeing as how Venmo is a PayPal’s subsidiary, and the mobile payment options brought about and popularized by Apple and WeChat.
Beyond just making transactions simpler and more efficient, cashless and mobile payments actually stand to grow the economy. Studies show that a switch to digital can boost annual GDP for some countries by as much as 3%. This is due to a two-part effect, one in which mobile payments make moving money easier, speeding up the rate at which transactions can be completed. Secondly, mobile payments are seen to increases the basket sizes of purchases made relative to cash. PayPal themselves have seen as much as a 19% increase in total payment volume since more than 600,000 retailers began accepting Venmo/PayPal. This trend is not just present among 18-35-year-olds, as nearly 40% of Gen-Xers and 17% of Baby Boomers used digital wallets in 2018.
One common concern regarding this shift to a cashless society is the effectiveness of monetary policy. The Central Bank can regulate interest rates through the bonds market. When there is a recession, the central bank buys back US government bonds from other banks for cash. More cash in the bank results in a higher money supply and a lower interest rate. The inverse is also true, where to control inflation the Central Bank sells US government bonds in exchange for cash from banks. This lowers the money supply and increases the interest rate cooling the economy. In a cashless society, these policies would cease to be effective.
This dangerous possibility is being countered by some nations through the implementation of a nation-wide digital currency. Others like India have gone as far as to propose banning crypto entirely. In China, eCNY, or electronic Chinese yuan, has been in development by the nation’s central bank. States see their own digital currency as a vaulter for economic growth, where middlemen in peer-to-peer transactions could be cut out. Beyond this people who do not have bank accounts could more easily manage their money this way. Lastly, the concerns about monetary policy that exist now could be rectified if a digital currency was centrally controlled. Many nations are also beginning to see a nationalized digital currency as a necessity. The ability to regulate digital currency is essential for these governments worried about preserving their control of the economy in the long run. Where blockchain verified coins like Bitcoin or Etherium have taken off in popularity, governments are worried about their ability to regulate what was manufactured to be a decentralized currency. When facing the loss of monetary policy and its regulatory abilities, through the rise of digital payment systems, along with the advent of decentralized digital currency that threatens government control over the money supply entirely, it makes sense that the recourse would be a nationalized digital currency. These effects are also compounding. As nations develop their own digital currencies, others will follow suit as to not be undercut. Although this leap is an important one for governments who want to centrally plan their economies, one lingering risk of adaptation is privacy.
Throughout the history of mobile payment, privacy and anonymity in purchasing have often been pushed aside in the quest for increasing ease of use and convivence. Every swipe of a credit card is recorded, where cash is quite hard to trace. While the Bitcoin dream of decentralized, anonymous transfers might be fleeting, a centrally controlled digital currency does not even try to hide the implications of data collection. “Suddenly now you’re talking about building a monetary system where every transaction could be stored as data and create a robust social graph of the United States,” said Rohan Grey, a digital dollar specialist at Willamette University. Where China has promised its eCNY would feature a form of “controllable anonymity”, the central bank would still have access to all transaction data. While anonymity is a primary concern for opponents of something like bitcoin, where it has allowed rampant fraud and the purchase of black market goods, it is forgotten when discussing the sacrifices made for the convenience of credit cards, having every transaction made with a digital USD stored and tracked is a different, dark reality I want no part of.
As digital wallets and payment systems have taken over how consumers interact with merchants, questions remain about how to balance a cashless world with a centrally planned economy. While digital purchases help growth, without a way to control it, the advantages are nullified. Where some have come to see nationalized digital currencies as the solution, privacy concerns are more than real. Only time will tell who wins out, private online payment platforms, or the central banks who have realized they are losing ground. I want to say the house always wins, but PayPal currently has… 361 million users.
