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From Paper to Pingit: Retail Transactions in the Digital Age

The horror and fascination of witnessing the global financial system on the brink of collapse is compelling. We all worry but there is little we can do about it. Many have lost their shirts while others have turned to invest in gold. Why gold? Because it can be trusted, it's scarce, and throughout history people have been able to exchange it for other things of value.

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The horror and fascination of witnessing the global financial system on the brink of collapse is compelling. We all worry but there is little we can do about it. Many have lost their shirts while others have turned to invest in gold. Why gold? Because it can be trusted, it's scarce, and throughout history people have been able to exchange it for other things of value.

Gold has its drawbacks, however. It's heavy and there isn't really enough of it to go around. For these and other practical reasons, the concept of 'currency' was born. Paper money and other forms of currency became ubiquitous. Combined with gold and silver or "backed by the full faith and credit" of governments, currency has been the way our society has done business for several hundred years.

This status quo has been under threat in recent decades, however. Personal checks and debit and credit card systems backed by large financial institutions, dominated 20th Century business - consumer transactions. This system is being phased out as first magnetic strips and now near field communication (NFC) do the same thing; ensure that the seller is paid by the buyer.

This credit intermediary system has two fundamental characteristics that make it successful. It works and it can be trusted. However, it too has its limitations. It is expensive to maintain. This cost is passed onto the consumer and skimmed for profits. Retailers don't particularly like it, but in the land where the consumer is king, they accept the preferred cards of the customer. The customer pays as well, but they don't really 'see' the cost.

Not all merchants can afford such systems or find them useful (market traders, convenience stores etc.). Meanwhile, many automated systems -- parking meters, vending machines and toll booths, for example - still involve cash, and transactions between individuals are barely possible outside cash and checks. Remember barter?

Nonetheless the credit intermediary system remains highly effective, in large part because it is trusted and secure. Its limits, such as they are, have been set fundamentally by technology. However, these limitations are being removed. The system is about to change and change profoundly. We are about to enter the era of mass market transaction capability.

Up until very recently only big systems with serious security and large investment could provide the necessary assurance and reliability to process transactions. In the near future any member of the public with a smartphone will be able to securely and reliably perform a transaction with anyone else directly. No paper, no notes, no cards, no signatures (if you don't count iris recognition) and no visible intermediaries.

Call it peer to peer finance, call it digital wallets, call it what you will. It's already here and in no time at all it's going to be everywhere. The tipping point has already been reached and our society is about to undergo a transformation that the like of which we haven't seen for a few hundred years and may not see again in our lifetimes.

The trends are unmistakable. The use of cash in modern economies has reduced dramatically over the last ten years, and the use of non-cash payments and value transfers in developing economies is shrinking just as fast. These trends will continue as the public demand for greater convenience and control over how we spend our money keeps driving businesses to find new ways to provide services.

Traditional financial services corporations such as banks no longer have a monopoly on the customer's wallet. Mobile phone companies such as Vodafone with mPesa in Africa, supermarket chains such as Tesco, and even banks such as Barclays with its SMS based "free to all" money transfer system Pingit in the UK are active in creating financial services offerings. They recognize an opportunity to be part of a revolution in the way retail commerce is transacted. They see that the old systems are no longer the best available.

So why do these and other banking and non-banking enterprises bother investing massive sums of money in creating their own versions of new systems?  They'll each have their own answer, but fundamentally it comes down to grabbing market share of a fast evolving system that is likely to form the basis for how we (Joe Public) conduct transactions for a very long time to come. It's going to be fascinating watching how technology, innovation, revolution, money and cut-throat competition contribute to this evolution. Watch this space.

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