Our history is littered with disruptive innovation.
A disruptive innovation or technology is any development that replaces existing markets with new ones: Controlled fire, gunpowder, and democracy come to mind.
More current examples of disruptive innovations would be the introduction of Wikipedia, and what that has meant to the encyclopedia salesman; the use of plastics rather than metal, wood or glass; the evolution from chemical photography to digital photography.
Disruptive technologies have changed the way we communicate, the way we work, and the way we entertain ourselves. Remember the video store? Eight tracks and cassettes? When was the last time you saw a film reel break at a movie theatre?
Change is constant, and is part of what makes us humans tick. We constantly strive for more, for better, for faster, and for easier. It is the common thread in the evolution of our species.
It shouldn’t come as a surprise that innovation will soon have an impact on financial services. It wasn’t that many years ago that our only option to make payment at a merchant was to write a cheque, pay with cash, or, for those who accepted it, with a credit card.
As times changed, so did our forms of payment - people once carried large amounts of cash with them to make payments, and those who used credit cards were considered less financially worthy. Today, the opposite is true, a pocketful of cash could be a mark of those without access to credit, or those who prefer to not use regular channels. In fact, there are limits to how much cash one can deposit or pay for most goods and services. Investment dealers no longer deal in cash in any amount, and banks are required to record and report deposits greater than $10,000 cash to regulators.
For most of us, the days of cheques and cash as the dominant medium of transferring value are gone. We use our debit cards, smartphones, PayPal accounts, credit cards, and digital currencies.
At the forefront of the digital currency evolution is Kenya. In a country where the majority of people don’t have access to bank accounts, most have use of mobile phones. The currency of choice for many Kenyans is called the M-Pesa (m for mobile, Pesa, the Swahili word for money). It’s a mobile phone based money transfer, financing, and micro financing service.
The technology was developed in the UK, but has first been put into practice in Kenya. Much like a pay-as-you-go phone system, you’re able to go to kiosks on the street or in stores and fill up your phone with M-Pesa. You don’t need a smart phone, just a regular mobile phone with internet access. You can then make payments or transfer money in any amount with anyone who will accept it: Taxis, stores, businesses, services, and any others who are able to accept this form of payment.
The commercial banks fought this technology, but surprisingly, the Kenyan government allowed it to proceed without intervention. Today they have M-Pesa interest-bearing accounts, loan provisions, and the ability to store value at very little cost.
It is still a currency that derives its value from an underlying fiat currency. All currencies today are a fiat currency, which means that their value is derived from the issuing governments’ ability to pay rather than the physical (gold as an example).
By controlling the money supply, and access to it, governments and commercial banks have been able to limit access to capital, and thus control commerce. The introduction of digital currencies like Bitcoin are causing the foundations of monetary policy and financial banking institutions to sway a little.
As digital currencies become more prevalent, and evolve to the point where people are using them, two things will most likely happen: Central banks’ ability to influence economic directions may become limited, and the cost of banking may drop. Economies will more accurately reflect their true health, and our access to financial transactions will no longer be limited by our ability to accumulate wealth.
One of the truths about change is that once you open the door, rarely can it be closed. The way we pay for things, the way we do business, and the way we manage and invest our money will continue to change as surely as the Model T replaced the horse and buggy, and battery driven cars like Tesla will replace internal combustion powered vehicles. Where we go next is hard to predict, but what I can say for sure is, it will continue to change.
It’s a brave new world. It always has been.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.