16 November 2020
Econ 4.0: How electronic is your wallet?
This article first appeared in The Edge Malaysia Weekly, on November 16, 2020 – November 22, 2020.
Here’s a twisted trading tale: On a cool Covid-19 weekend, two stockbrokers decide to spend a lazy spell at the beach. They find a nice spot near the waves, spread their towels (one metre apart) and take a short nap, lulled by the rhythmic sounds of the gentle waves.
After a while, the waves get more robust, which wakes up one of the traders. “Hey, buddy, the tide’s rising, we should move out from here,” he says, nudging his friend.
“Hmm, okay,” the sleepy guy mumbles. “Do you think it’ll rise more?”
The first guy looks at the waves and replies: “Yes, it certainly looks like the tide’s rising fast.”
The other guy, still half asleep, turns over and mutters: “Ok then, don’t sell yet.”
If that sounds like a corny joke, it probably is. Trading in stocks was probably the first global business to go entirely cashless. Currently, 16 stock exchanges in the world have a market capitalisation of more than US$1 trillion (RM4.1 trillion) each. They are sometimes referred to as the “One Trillion Club”; these exchanges accounted for 87% of global market capitalisation in 2015. The oldest is the London Stock Exchange, which was founded in 1698.
This column is not about stock exchanges, however. It is about cashless trade. The leader of the pack is not the US, but China. Alibaba Group Holding Ltd’s Alipay began offering electronic wallets way back in 2004. Apple Pay was launched in 2014, while Google Pay and Samsung Pay started in 2015. Electronic wallets began because of the lack of physical banking services in developing economies, which chose the digital route to promote inclusion.
A digital wallet — or e-wallet — refers to an electronic device (computer or smartphone) or online service that allows you to make electronic transactions. You can top up money in the digital wallet before making a purchase, or you can link your bank account to the e-wallet. Your personal identifiers or credentials — which are stored in the e-wallet — authenticate the transaction.
China is, by far, the global leader. According to estimates, up to US$27 trillion in e-wallet transactions were done in China in 2019, led by Ant Financial Services and Tencent Holdings Ltd. Early this year, PayPal tied up with state-backed China UnionPay to access each other’s networks. In September 2019, the People’s Bank of China allowed PayPal to buy a 70% stake in a GoPay, making PayPal the first foreign company to operate in China’s payment services market.
The global market for digital payments was valued at US$3.53 trillion in 2018; it is set to reach US$19.89 trillion by 2026 in transaction value, says Fortune Business Insights. That is a compound annual growth rate (CAGR) of 24.4%. “The emergence of e-commerce and tech-led initiatives are key factors fuelling the rise in digital payments,” the firm says. “Samsung Pay, Google, Alipay and Apple have emerged as the top players in the digital payments market.”
Earlier this year, Malaysia began its cashless society push with a target of 15 million users, about half of the country’s population. In early October, Kenanga Investment Bank Bhd, Merchantrade Asia and Visa announced they would launch Kenanga Money, Malaysia’s first stockbroker e-wallet.
“With our shared vision to innovate financial solutions, this strategic collaboration with Merchantrade will enable us to reshape the stockbroking experience that clients have with us,” Kenanga Investment Bank’s group managing director Datuk Chay Wai Leong told the media. The added benefit: The platform’s multi-currency function would enable users to buy, sell and store 20 foreign currencies.
Malaysia’s e-wallet scheme can help cut down the need to handle cash and spur digital awareness. Take Finland, for example. The country leads the European Union in cashless payments with more than 80% of all payments made via debit or online banking, compared with 78% across the EU. The bulk of e-transactions is handled by Finland’s personal ID-based online banking system. That is about €8 billion (RM39.2 billion) a year.
Malaysia has earmarked RM450 million to boost cashless payments and is collaborating with GrabPay, Touch ’n Go eWallet and Boost, which includes RM30 promotional shopping vouchers for users.
GrabPay has recorded 20 million downloads of its app and is accepted at 30,000 shops. It has also been rated the most popular electronic wallet in Singapore over the past two years, according to a report published last November by meta-search website iPrice Group and mobile data and analytics platform App Annie Intelligence. The study analysed 30 digital wallet apps and ranked GrabPay as the leader, followed by DBS PayLah!, FavePay, EZ-Link app and Alipay.
The future of wallets — and banking — is digital. By 2030, up to 80% of heritage financial services firms will either have gone out of business or become commoditised or exist only formally but not competing effectively, warns Gartner. These firms will struggle for relevance as global digital platforms, fintech firms and other non-traditional players gain more significant market share and use tech to change the economics and business models in the industry.
David Furlonger, vice-president and distinguished analyst at Gartner, says banks face a growing risk of failure if they continue to maintain 20th-century business and operating models. “Digital transformation is largely a myth, as institutional mindsets, processes and structures stand firm,” he says. “Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms.”
Emerging technologies, such as blockchain, offer digital transformation opportunities by creating trust between parties that do not know each other, without intermediary relationships that incumbent financial firms cultivate.
“The biggest mistake financial services [chief information officers] make is putting too much focus on tech,” says Pete Redshaw, a Gartner vice-president. “They should push their organisations for a more coherent response to digital business; it’s important to set the digital vision and destination first, then think about how to lead an organisation there.”
Covid-19 has accelerated the move from physical to virtual banking. “Banks in multiple geographies are closing branches (or in some cases, will not reopen branches they closed because of the pandemic) as well as ATMs,” notes a recent McKinsey study. “In Australia, the top four banks have removed 2,150 ATM terminals and closed 175 bank branches since June.”
The future of money is also digital. With the advent of online and virtual banking, there are few reasons to go to a bank branch in person. I was recently forced, however, to visit a physical bank branch because my ATM card was not working, and I needed to withdraw some cash. Never in my wildest dreams did I imagine that I would one day enter a bank, wearing a mask, and ask for money!
Raju Chellam is vice-president of new technologies at Fusionex International, Asia’s leading big data analytics company