Did you hear?
Amazon is getting into financial services.
The online giant recently launched a credit card with no annual fees, 5% cash back on all Amazon and Whole Food purchases, and 1% in other purchases as long as you have an Amazon Prime membership.
A great deal, right?
This follows after The Wall Street Journal reported a few months ago, they are in talks with JP Morgan to offer a checking account for its customers.
Big tech is getting involved in finance
As we wrote yesterday, the Reserve Bank of Australia’s governor Philip Lowe recently spoke about how low cash usage is hitting a turning point.
But, there was something else in his speech that caught our eye, and yes, it involves big tech. Here is what he said, emphasis mine:
‘[N]ew technologies open up the prospect of new payment options developing. Recently, there has been much discussion on the role that so-called ‘Big Tech’ firms might eventually play.
‘These firms have potential advantages over existing providers of payments services. In some cases, their technology and systems are more flexible, they have a greater ability to use and process information, they have well established networks which they can leverage and they are often better at interacting with their users and customers. Given this, one scenario is that these firms become significant players in the payments industry. They might be able to do this through developing new payment applications that provide a commercial return, not through charging for payment services, but by commercialising the value of the information that they obtain as a by-product of offering these services. If this scenario were to play out, it could significantly change the payments landscape, providing both merchants and consumers new payment options at low monetary cost. At the same time though it would raise a number of important issues related to data privacy, ownership and security.’
While much of the global population may not have a bank account, they do have smart phones. And big tech could completely disrupt the banking services as they can provide services in exchange for your information.
Why are central bankers worried?
Privacy and security aside, this has some central banks worried. As the whole financial landscape changes, central banks are not really sure where this will leave them.
This was quite clear in a speech by Sweden’s central bank deputy governor Cecilia Skingsley. As she recently warned:
‘What I would like to communicate today is the insight that, regardless of whether or not the Riksbank decides to issue an e-krona, the old order will change. We need a broad discussion of what it means when central government’s presence on the payment market’s supply side risks disappearing along with cash. Introducing an e-krona would entail taking a new step and the consequences of this must be analysed carefully. But accepting a situation in which the general public no longer has access to any form of central bank money would also be a step into the un-known…
‘As cash usage declines, almost all consumer payments in shops are now made by card. This market is completely dominated by Visa and Mastercard and much of the infrastructure is located outside Sweden’s borders. Unlike Norway and Den-mark, Sweden has no card network of its own.
‘At the same time, new technology is leading to new, convenient ways of paying becoming available, such as the mobile application Swish, for example. In Sweden, 6.5 million of 10 million inhabitants are connected to Swish. As the rest of society becomes digitalised, demand is increasing for digital payments and, above all, for rapid payments that can be made in real time…’
Central bankers look to offer their own digital currency
As cash disappears, central banks are struggling to see what role they will pay in the future. That’s why some central banks are looking at offering their own digital currency.
This is something also Christine Lagarde from the International Monetary Fund also addressed in a speech earlier this month:
‘[T]he fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money.
‘We are at a historic turning point.[…]
‘And this is key: money itself is changing.[..]
‘What role will remain for cash in this digital world? Already signs in store windows read “cash not accepted.” Not just in Scandinavia, the poster child of a cashless world. In various other countries too, demand for cash is decreasing—as shown in recent IMF work. And in ten, twenty, thirty years, who will still be exchanging pieces of paper?
‘Bank deposits too are feeling pressure from new forms of money.
‘Think of the new specialized payment providers that offer e-money—from AliPay and WeChat in China, to PayTM in India, to M-Pesa in Kenya. These forms of money are designed with the digital economy in mind. They respond to what people demand, and what the economy requires.
‘Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.
‘Let me now turn to my second issue: the role of the state—of central banks—in this new monetary landscape.
‘Some suggest the state should back down.
‘Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in custodian accounts, and simply settle payments within their networks.’
But Lagarde has a solution. She argues that central banks should provide regulation, and even go further, become active players and start establishing their own digital currencies. As she continued:
‘Should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm.
‘This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF…
‘I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy. ‘
She envisions a world where financial institutions partner with central banks. Financial institutions would focus on customers and the front end while central banks take care of the back end.
A ‘public-private partnership’ offering semi-anonymous payments…if such a thing actually could exist. That is, payments would be anonymous by default, but ‘if a suspicion arose it would be possible to lift the veil of anonymity and investigate.’
As she continued:
‘The advantage is clear. Your payment would be immediate, safe, cheap, and potentially semi-anonymous. As you wanted. And central banks would retain a sure footing in payments.’
But, as you probably know, there is more to digital currencies like bitcoin that makes them attractive. Like the fact that they are decentralised, that not one entity controls them.
Editor, Markets & Money
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