Free research: Open Banking, Mobile Money and Digital Currency

I just found three interesting management reports. One is a survey from Salt Edge on the lack of success of the use APIs and Open Banking, two years after the introduction of PSD2; the second is from the GSMA on the state of mobile financial services; and the third is a great white paper by Dave Birch on Digital Currencies.

Here’s the management summaries.

Open Banking Ecosystem in Testing Mode Report

… based on testing 2000+ PSD2 account information and payment initiation APIs in 31 countries upon analysing 39 criteria

The level of tech maturity in the financial sector of different EU markets is far from uniform. Based on the API availability, the UK stands out, with the weighted average in the country being 97%. This means that during the first 3 months of 2020, out of 100 API requests we sent - in 97 cases the UK banks’ APIs accepted the request. The countries with highest API availability are: the UK - 97% , Portugal - 91.59%, the Czech Republic - 90.21%, Italy - 83.92%, Germany - 83.92%, and the Netherlands with 82.87%.

These numbers take into account only whether the APIs accepted the request - i.e. the APIs were available. Yet, they do not say if the APIs responded back. The reality drastically changes when actually considering the successful response rate of these API channels throughout Europe. The biggest contrast in results can be seen in the Czech Republic, the number dropping from 90.21% (weighted average) of requests received by Czech banks and where only 31.75% of them were successfully responded to.

It’s 2020 and Europe still registers mostly one-way communication from TPPs to banks. The reality is that on average, banks successfully reply back to only half of TPP requests.

You can download the full 29-page PDF report here.

State of the Industry Report on Mobile Money

2019 marked a major milestone for the mobile money industry: the number of registered mobile money accounts surpassed one billion.

Reaching the one billion mark is a tremendous achievement for an industry that is just over a decade old. The mobile money industry of today has a host of seasoned providers with a broad set of operational capabilities, a full suite of products and a global reach. With 290 live services in 95 countries and 372 million active accounts, mobile money is entering the mainstream and becoming the path to financial inclusion in most low-income countries.

What is not captured in this figure is the empowerment that comes with owning a mobile money account. More women are using financial services, low-income households are accessing essential utility services and smallholder farmers are getting paid more quickly and conveniently. Meanwhile, millions of migrants and their families are experiencing the life-changing benefits of faster, safer and cheaper international remittances and humanitarian cash assistance is being delivered more thoughtfully to those in crisis situations. All of this is unlocking new solutions to some of the world’s most intractable development challenges and highlighting the catalytic role that mobile money is playing in achieving the Sustainable Development Goals (SDGs).

This year’s State of the Industry Report looks at what one billion registered accounts signify for the mobile money industry, mobile money users and the future of the mobile money ecosystem.

You can download the full 72-page PDF report here.

The Digital Currency Revolution

by David Birch for the Centre for the Study of Financial Innovation (CSFI)

It is now a quarter of a century since a pamphlet that I picked up at the CSFI changed my world view. It was entitled The IBM Dollar and it was written by the noted lateral thinker Edward de Bono. His thesis on the future of money was that technological developments in computers, communications and cryptography would mean that the cost of creating money would fall to the point where it would make sense for private organisations to make their own. He suggested, in particular, that it would make economic sense for companies to issue their own currency, rather than use equity (hence the title). He went on to write that he looked forward to a time when “the successors to Bill Gates will have put the successors to Alan Greenspan out of business”.

De Bono was arguing that companies could raise money just as governments do now, by printing it — and put forward the idea of private currency as a claim on products or services produced by the issuer, rather than as bank credit. In his formulation, IBM might issue ‘IBM Dollars’ that would be redeemable for IBM products and services, but also practically tradable for other companies’ monies or for other assets. To make such a scheme work, IBM would have to learn to manage the supply of its money to ensure that (with too many vouchers chasing too few goods) inflation did not destroy the value of its creation. But companies should be able to manage that trick at least as easily as governments do, particularly as they have no voters to cope with.

This money would be rather like a corporate bond — a bearer instrument, with no interest, no clearing and no settlement.

The concept is expandable. A start-up launches, and instead of issuing equity or debt, it issues a security that is redeemable against some future service. So, for example, a wind farm start-up might offer money in the form of kilowatt hours that are redeemable five years from now. In the early days, this “money” would trade at a significant discount to take account of the risks inherent in the venture. But once the wind farm is up and running and producing electricity, then the value of the money will rise. There might even, in this case, be a surge in demand for renewable energy that drives its value higher than its original face value.

With millions of these currencies in circulation and constantly being traded on foreign exchange markets, the situation might appear unbearably complex for anyone trying to pay anyone else. However, as de Bono explained, in an “always-on” networked world, this complexity is no barrier to trade:

‘Pre-agreed algorithms would determine which financial assets were sold by the purchaser of the good or service depending on the value of the transaction. And the supplier of that good or service would know that the incoming funds would be allocated to the appropriate combination of assets as prescribed by another pre-agreed algorithm. Eligible assets will be any financial assets for which there were market clearing prices in real time. The same system could match demands and supplies of financial assets, determine prices and make settlements.’

Remember, de Bono was writing this before there was a Google — or even Netscape. In his vision, you send me an IBM Dollar and I put it in my wallet. Instead of bank accounts in conventional fiat currency, companies would hold a basket of such currencies. It is worth emphasising that de Bono also wrote that the key would be the ability “of computers to communicate in real time to permit instantaneous verification of the creditworthiness of counterparties” - simultaneously imagining both the always-on internet and the “ambient accountability” of the blockchain.

If that seems far-fetched, let me quote from a justreleased white paper produced by the conservative Swiss payment organisation, SIX. In its analysis of “future of money” scenarios, it has one called “moneyless”, in which:

‘…the ‘price’ of any asset can be displayed in realtime in terms of any other asset. Algorithms scout the most liquid pairs of assets to form a chain of bilateral exchange rates linking the to-be-priced assets with the to-be- priced-in asset. Market makers furthermore provide liquid bilateral exchange rates between different pairs of assets.’

This is de Bono’s argument precisely, and it reminded me that the reason his CSFI pamphlet stopped me in my tracks was that I was already working on systems for decentralised and secure transactions. I immediately recognised that his was not idle speculation but a vision of an inevitable future. Now that the combination of mobile phones, social networks and strong authentication makes the necessary calculus cost-effective even for small transactions, the technology needed to deliver the IBM Dollar is in place. The world of digital money, digital cash and digital currency is upon us. In that world, we should no longer assume that currency will be provided by the nation-state through a central bank. The low cost and wide availability of relevant technologies mean that there is a wide range of public and private alternatives.

It seems to me now that the whole topic of digital currency needs to be explored further. In this paper, I will try to set out the economic and technological imperatives, discuss the potential impact on the international monetary and financial system and start to explore the likely repercussions — economic, social, and political.

You can download the full 32-page PDF report here.