Finance's problem with Big Tech, Erosion of Dollar Dominance, The Fed talks Crypto, SE Asia says no to cards
Risk in a changing world hits big tech, the dollar, crypto and cards.
1. Finance’s problem with Big Tech
2. Erosion of dollar dominance
3. The Fed’s Brainard takes on crypto
4. SE Asia gives up on credit cards and goes digital
1. Finance’s problem with Big Tech
BIS tackles finance’s big tech problem, a problem China is well acquainted with through Ant.
Big tech’s activities overlap with the financial sector to make it both a competitor and service provider all at the same time.
The BIS report “Big tech interdependencies – a key policy blind spot” can be downloaded: here
The BIS with a great report on how big tech through the cloud and other partnerships with banks is now a new risk to be managed.
One need look no further than how Goldman cooperates with Apple on Apple Card and Google for cloud services. The relationship between big tech and banks is tight which is both good and bad.
The problem is that no one really knows what would happen if systems failures on either the credit analytics or network side of Apple Card or to Google's cloud would do to this service. Saying it would stop isn't enough.
And that is the problem, with Amazon Web Services providing some 33% of the cloud business what would happen to interconnected banks if it failed?
Or what would happen to a bank if its products were sold improperly by big tech in some way that created a reputational or financial risk to the bank?
The BIS is rightly concerned that:
The activities of big techs and financial institutions are increasingly intertwined through a variety of partnerships.
Financial institutions heavily rely on technology services provided by big techs, and this is likely to increase going forward. Banks are particularly dependent on cloud computing and data analytics provided by big tech.
Financial institutions’ and regional big techs’ dependence on global big techs’ technology exacerbate systemic vulnerabilities.
The existing regulatory framework was not formulated with closely connected digital platform ecosystems in mind, and hence misses the risks arising from interdependencies.
The BIS's concerns are well-founded, big tech represents a new risk to financial services that frankly no one has thought much about.
While this is new to the BIS and to bankers in the West, it’s something that China has given a lot of thought to.
China and big tech
Alipay and Tencent comprised 93% of mobile payments in China or 83% of all payments. So China understands big tech risk better than most. So much so that it built the e-CNY as backup!
Always enjoying a controversy I went back to re-examine the Ant IPO cancellation after reading the BIS report. I couldn’t help myself!
While I cannot defend the timing of the IPO cancellation, if you look at the actions taken by regulators all were designed to deleverage the regulatory advantage Ant enjoyed as a big tech over banks and end its data monopoly.
Like the BIS report, the regulatory actions against Ant seemed targeted at address similar problems of reducing big tech risk to make markets safer.
While undeniably messy, China was one of the first nations to deal with big tech.
2. Erosion of dollar dominance
Long-form article!
UBS says “We’re seeing a gradual erosion of the dollar,” while the Fed declares “nothing can rival the dollar.” You decide, but my take is don’t be fooled!
54% of central bank reserve managers are increasing RMB allocations. While dollar allocations are split between 61% increasing and 31% decreasing.
For the full article go: Here on Substack
3. The Fed’s Brainard takes on crypto
Fed Vice Chair Brainard talks about crypto’s “serious vulnerabilities,” the “walled gardens” of stablecoins, and the “natural evolution” of CBDC and crypto!
Full speach available: here
Fed Vice Chair Brainard is my hero, and while I’ve never posted a speech by Fed Chair Powell on these pages, this makes the second or third by Brainard.
I like Brainard not just because she supports CBDC but because she is the only one in the Fed with a clear vision for the future.
The entire speech is a must-read, but I want to focus on one specific area and give special credit to Brainard for recognizing the problem of “walled gardens” with stablecoins.
Walled gardens are a problem…
Her choice of the term “walled gardens” clearly signals that she’s aware of the similar problem faced by the Peoples Bank of China with WeChat and Alipay. Stablecoins already exhibit identical "winner take all" market dynamics as seen in China, with the top three coins accounting for 90% of transactions.
There is nothing wrong with stablecoins or China’s payment platforms; they are positive payment innovations. That said, walled gardens cause payment market "fragmentation, " resulting in risk concentration when 2 or 3 players control the market.
In both China and the West, there is an urgent need for risk reduction due to walled gardens. As good as these payment systems may be, they are corporate money and not risk-free to users or society.
CBDCs are the solution.
China's solution to “walled gardens” was to launch a CBDC to de-risk the payment system by providing a backup and alternative.
Unsurprisingly Brainard has the same solution:
“Given the foundational role of fiat currency, there may be an advantage for future financial stability to having a digital native form of safe central bank money—a central bank digital currency. A digital native form of safe central bank money could enhance stability by providing the neutral, trusted settlement layer in the future crypto financial system.”
There it is. A bold vision for a future where CBDCs have a major role in bringing stability to the crypto financial system. Surprised? I'm not.
Given the coming regulatory changes that will hit crypto and the wait for a major CBDC like the digital euro, we'll have to wait another five years. Still, we're getting a peak of what the future will look like, and it has CBDCs in it!
By definition, Brainard’s vision for a CBDC - crypto rapprochement means that CBDCs will also have a home on Web3 and the metaverse regardless of how much crypto maximalists loathe this outcome.
The crypto world will be changing fast, and the “natural evolution of the complementarity between the public and private sectors in payments” is coming!
4. SE Asia gives up on credit cards and goes for digital wallets
Visa should be terrified by these results in SE Asia where two-thirds of consumers prefer a mobile wallet to a card, a sign that the end of cards is near.
South East Asia new cashless users are not going for cards. The largest number of new users were using mobile wallets! Remember many new users were passed over by Visa and banks while mobile wallets welcomed them.
Download the full report “Navigating a New Era in Payments by Visa”: Here
SE Asia is going digital with nearly 3 in 4 SE Asian (SEA) consumers supporting their government’s plans to develop their nations into cashless societies!
No Visa is not doomed, but what is clear is that particularly in SEA’s developing nations, many consumers will skip cards and go straight for wallet-based mobile payment.
Having never been part of card ownership they will likely be lost to Visa and the card system just as many in China will never know what it is to own a “credit” card.
Visa's stats back this up. Mobile wallets gained the highest traction amongst first-time users (33%), followed by online card (30%) and QR code payments (26%). Cards are clearly not the first choice for new users.
QR Codes
QR code payments are coming from behind with 2 in 5 currently using them. The problem is that 74% of consumers want to use them and in some countries like Thailand and Indonesia they have broken the 50% threshold for all payments in the country and are climbing.
Despite card companies' best efforts to divert them to their own systems, people are voting for mobile payment wallets and the platforms they bring with them. Worse, Visa can’t fight practicality. Drivers for QR code payment include 66% convenience of not carrying cash, 61% physical safety, 60% ease of setup and use, 🔥58% convenience of not needing to carry a card! 🔥
When 58% of respondents prefer using QR codes because they don’t want to carry cards, someone at Visa should be very afraid.
The handwriting is on the wall, and I would expect Visa to copy Union Pay in China and put together a QR-based system tied to your card. Visa already has these systems in Africa and Thailand. In Thailand the system is not well received because merchant fees are still high when compared to mobile wallets, but at least it gives Visa the ability to say they’ve got it too!
Unionpay is an “also-ran” with QR codes in China because while it makes a payment there is no platform behind it and I suspect Visa will have the same problem.
The pandemic’s impact was clear in accelerating the region's transition towards a cashless society by between at least two to four years for every country except Vietnam, which was catching up from behind.
Read this survey carefully and it will be clear, new consumers throughout SEA are making a change. Just to be clear Asia is all about these new consumers whom Visa and banks have passed over. Visa will have a tough time convincing new mobile wallet users to carry cards.
I wrote about this in an article on Alipay+ a few weeks back. SEA is going for wallets and aspirational services there is no turning back.
SE Asia's mobile wallets will read this and like sharks smell Visa’s blood in the water.
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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