The future of money: three ways to go cashless
Summary
TLDRThe script discusses the global shift towards a cashless society, highlighting the US's reliance on credit card networks like Visa and MasterCard, driven by high merchant fees and consumer rewards. It contrasts this with India's Unified Payment Interface (UPI), a government-backed system promoting interoperability among banks and fintech wallets, facilitating digital payments even for those without credit history. Lastly, it examines China's closed fintech app model dominated by Alipay and WeChat Pay, which leverages QR codes for easy digital transactions, and the government's concerns over their financial dominance.
Takeaways
- 🌐 The global trend towards a cashless society is accelerating, with digital payments becoming more prevalent.
- 💳 In the US, card networks like Visa and MasterCard dominate due to high merchant fees and consumer rewards programs.
- 🏪 Merchants are compelled to accept these cards due to their ubiquity, despite the fees, because consumers prefer them for the rewards and protections they offer.
- 🇮🇳 India has adopted a unique model with the Unified Payments Interface (UPI), a non-profit system that facilitates direct bank-to-bank transactions through mobile apps.
- 📲 UPI's interoperability allows various banks and fintech wallets to communicate, enabling digital payments even for those without credit histories.
- 📈 The shift to digital payments in India has spurred significant growth in loan provision, as transaction data enhances creditworthiness.
- 🔗 The account aggregator system in India allows individuals to control their financial data, facilitating access to a range of financial services.
- 🇨🇳 China's digital payment landscape is dominated by Alipay and WeChat Pay, which control about 90% of the market through closed networks.
- 👥 The QR code system in China revolutionized payments by allowing cheap and easy digital transactions, even in emerging markets.
- 🏦 The success of Alipay and WeChat Pay has led to the expansion into lending and other financial services, becoming a significant part of China's economy.
- ⚠️ The dominance of a few payment providers in China raised concerns for the government, influencing the design of more decentralized systems like UPI in India.
Q & A
What is the trend towards a cashless society accelerating due to?
-The trend towards a cashless society is accelerating due to the increased use of digital payments, especially during the COVID-19 pandemic when people had to shop from home.
How has the pandemic influenced the shift towards digital payments in the US?
-During the pandemic, the shift towards digital payments in the US has been influenced by people shopping more from home, leading to an increased use of cards and digital transactions.
What is the underlying model that makes Visa and MasterCard's network so entrenched and resilient?
-Visa and MasterCard's network is resilient due to their model where they charge enormous fees to merchants, which are then used to pay consumers with rewards and provide consumer protection.
Why do merchants feel compelled to accept cards from Visa and MasterCard?
-Merchants feel compelled to accept cards from Visa and MasterCard because these cards are ubiquitous, and consumers love to use them, making it almost mandatory for businesses to accept them.
What is the Unified Payment Interface (UPI) and how does it differ from Western models?
-Unified Payment Interface (UPI) is a digital payment system in India that allows interoperability between various banks and fintech wallets. It differs from Western models as it does not require a credit card network and enables direct payments between bank accounts facilitated by a fintech app.
How has UPI impacted the financial system in India?
-UPI has impacted the financial system in India by enabling digital payments for those who previously relied on cash, unlocking a range of other financial services, and allowing people to own and export their transaction data to improve creditworthiness and access to loans and insurance.
What is the account aggregator system in India and how does it work?
-The account aggregator system in India allows users to export their transaction data from one financial service provider and import it into another, enabling them to own their data and access financial services from various providers.
How do Alipay and WeChat Pay differ from traditional bank card systems and UPI?
-Alipay and WeChat Pay differ from traditional bank card systems and UPI by operating as closed networks where payments typically occur within the same app's user base. They also leverage QR codes for easy and low-cost transactions, which has contributed to their widespread adoption.
Why did the Chinese government view the dominance of Alipay and WeChat Pay with concern?
-The Chinese government viewed the dominance of Alipay and WeChat Pay with concern because these platforms controlled a significant portion of the financial system, which could pose risks to financial stability and regulatory oversight.
What was one of the motivations behind the design of UPI in India?
-One of the motivations behind the design of UPI in India was to avoid creating a single dominant player in the financial system that could control a large part of the market, as seen with Alipay and WeChat Pay in China.
How has the shift towards digital payments influenced the lending sector in China?
-The shift towards digital payments has significantly influenced the lending sector in China, with platforms like Alipay's affiliate, Ant Financial, originating a substantial portion of short-term consumer credit before being regulated by the government.
Outlines
🌐 Global Cashless Society Trends
This paragraph discusses the global trend towards a cashless society, with a focus on the United States, India, and China. It highlights how the COVID-19 pandemic accelerated digital payments, particularly in the US where card usage increased. The resilience of the card network is attributed to the high fees charged to merchants, which in turn fund consumer rewards and protections. The paragraph also introduces India's Unified Payments Interface (UPI), a government-led digital payment system that facilitates direct bank-to-bank transactions and has significantly reduced the reliance on cash.
📱 Digital Payment Innovations in India and China
The second paragraph delves into the unique digital payment models in India and China. India's UPI system, which processed a trillion dollars in transactions, is noted for its interoperability and government-backed non-profit structure, allowing for a more inclusive financial system. The paragraph also contrasts this with China's model, dominated by Alipay and WeChat Pay, which control about 90% of digital payments. These platforms use QR codes for payments, which are cost-effective and have contributed to their widespread adoption. The discussion touches on the financial services ecosystem built around these payment platforms, including lending, and the regulatory concerns that have arisen due to their dominance.
Mindmap
Keywords
💡Cashless Society
💡Digital Payment Systems
💡Visa and MasterCard
💡UPI (Unified Payment Interface)
💡Interoperability
💡Credit Card Networks
💡Alipay and WeChat Pay
💡QR Codes
💡Account Aggregator System
💡Financial Inclusion
💡Network Effects
Highlights
The global trend towards a cashless society is accelerating.
Digital payment systems are evolving differently across key markets.
During COVID-19, digital payments in the US increased significantly as people shopped from home.
Visa and MasterCard's network is resilient due to high merchant fees and consumer rewards.
Credit card networks offer extensive consumer protection, adding to their appeal.
India's Unified Payment Interface (UPI) is a non-profit digital payment system facilitating direct bank-to-bank transactions.
UPI's interoperability allows various financial entities in India to communicate seamlessly.
India's digital payment revolution has enabled financial inclusion for those without credit history.
Data from digital transactions in India is transforming creditworthiness and access to financial services.
China's digital payment landscape is dominated by Alipay and WeChat Pay, controlling about 90% of the market.
Alipay's QR code system revolutionized payments by eliminating the need for expensive card readers.
WeChat Pay leveraged its existing user base for rapid growth in digital payments.
The dominance of a few payment platforms in China raised concerns for financial control and regulation.
India's UPI was designed to prevent the creation of overly dominant financial players.
The discussion highlights the impact of digital payments on financial systems and consumer behavior.
Transcripts
around the world the trend towards a
cashless Society is accelerating but
what will that digital future look like
and how will it vary across the globe
the economists correspondents share
their insights on the major digital
payment systems in three key markets
[Music]
there have been sort of a few winners
from this trend
um which sort of really accelerated uh
during covid-19 during the pandemic when
people were sort of having to shop for
everything from home in particular in
places like the US people have been
using those cards more and more as
payments have shifted more digitally the
reason that network is so
um sort of entrenched and so resilient
is because it has an extremely sort of
clever underlying model which is that
the card issuers Visa and MasterCard
charge enormous fees to the merchants uh
the sort of Shoppers so you know your
coffee shop or or even sort of Amazon
and Walmart
and those Merchants feel like they sort
of have to pay those fees they have to
accept these cards because they are so
ubiquitous uh most of that fee is sort
of routed uh to the the issuing bank so
JPMorgan Chase or Citibank or whoever
sort of issued the credit card that
you're using uh but they use that fee to
then pay the consumers who use those
cards sort of really enormous rewards so
this is the sort of air miles or hotel
points or cashback that Americans have
become sort of so accustomed to
receiving uh the cards also come with
sort of huge amounts of sort of consumer
protection uh so you know if something
isn't delivered as uh described or sort
of an airline cancels your ticket you
have recourse through these credit card
companies and they can afford sort of
all of those luxuries because the fees
are so high and so it is very difficult
to see sort of what could
um could disrupt that model because
consumers love to use these cards and uh
and Merchants feel like they have to
accept them
what India is doing is really a
fundamentally different model than you
know what we have in the west or really
even what uh you know China has with
digital payments um so it's called a
unified payment interface or UPI uh it's
now the largest digital payment Network
in the country a processed a trillion
dollars in transactions last year that's
about a third of India's GDP uh and the
way it works the government has set up
uh you know a non-profit that's
partially owned by the central bank and
it basically sits in the middle of every
uh mobile transaction in the country
um so there are a lot of banks a lot of
fintech wallets in India just like other
countries but what they've done is
they've made them all uh talk to each
other uh what's called interoperability
uh where the UPI system sits in the
middle of each one and they have a
common set of standards and apis that a
lot allows for payments between uh my
bank account and your bank account
directly facilitated by a fintech app in
the UPI system uh and so it's different
than uh you know the West because
there's no need for a credit card
Network and so you know people who only
have a mobile phone and may not have a
credit history and might not be able to
get into the financial system otherwise
are now able to do digital payments
um I think that's like a pretty big
change for a country that was previously
mostly uh using cash one of the things
that's so fascinating is how a shift
towards these type of payments can
unlock a whole range of other changes
within the financial system as people
have uh more data generated about their
transactions so it changes their credit
worthiness which in turn might change
their ability to get insurance or loans
how is that playing out in India loan
provision has basically taken off uh you
know as a result of the data produced by
UPI they have a system where you can
basically export your data let's say
you're using one payment app or One Bank
you can export your data it's called the
account aggregator system and then you
can import it into another uh you know
Financial Services environment so
basically allows you to kind of own your
own data and then get you know financial
services from anyone and I think that
that like kind of linkage between
payments and other Financial Services is
what's really taking off around the
world
[Music]
of the newest model I think it's fair to
say or one of the newest models in India
you have this 60 year old model in
America and Europe with the the bank
card system and then in China you have
something different right which is it
which is neither uh you have a statistic
in your report origin about how Ali pain
WeChat control about 90 percent of
digital payments in China and I remember
the last time I was in China this is
pre-pandemic but trying to pay for
something with my credit card and it was
even at a western chain I think it was a
Starbucks and they had to go to the back
and get out a credit card machine and
plug it in because everyone else was
paying with their phones and so tell us
for people who might not be familiar
what that payment system looks like and
what its longevity is you think in China
or how it might be used elsewhere so
it's not it's not an open system uh like
UPI is but it's also not like a card
network uh how the US Works rather it's
you know a fintech app um or two as you
mentioned alipay and WeChat pay and
their clothes networks that means uh you
know you can typically only pay from one
alipay account to another alipay account
or from one WeChat pay account to
another WeChat pay account and the
reason why the the system kind of took
off the way it did is because in 2011 um
you know alipay at Financial they
basically uh you know at the time was
Alibaba they basically launched uh a QR
Code system where you could basically
scan a QR code at a merchant shop and
then you could pay directly and that was
really groundbreaking because previously
you needed expensive card readers as you
mentioned uh which you know a lot of
businesses in an Emerging Market you
know don't really want to spend money on
which is why they would prefer cash but
QR codes are super cheap you just need
to you know slap a sticker on your
storefront and then you can start
accepting digital payments and by then
smartphones were getting you know
becoming more ubiquitous
so that's kind of what allowed alipay to
really take off and then WeChat pay was
able to basically copy it and grow
because you know WeChat was used for
messaging right it's kind of like you
know as ubiquitous as like a Facebook is
in the west uh and so you know everyone
was already onboarded on their platform
so it was very easy for them to kind of
already have the network effects built
in uh and then simply add the payment
business on top of that and so just to
give you a context some context on the
numbers here you mentioned the 90
percent of uh statistics right 90 of
digital payments were happening on these
two platforms it's also a hugely
valuable business because the other
services they put around uh the payment
so you know all you pay got Financial
got really into lending right
um you know right before uh covid uh you
know something around 20 of all
short-term Consumer Credit was
originated by amp Financial which is you
know insane when you think about uh you
know how much money is going uh into
lending in these countries as opposed to
IPO for you know 300 billion dollars but
of course that was blocked by the
government
um and in fact you know the the kind of
presence of this type of dominant
payment provider that controls so much
of the financial system was a bit scary
to the to the Chinese government which
is why they ended up doing what they did
and that was actually you know uh uh one
of the motivations for why UPI was
designed the way it was
um is so the system didn't create such
huge uh individual player that
controlled so much of Finance
this video is part of a longer
discussion between the economist
journalists if you're a subscriber you
can watch the whole thing please click
this link see you next time
foreign
[Applause]
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