The future of money: three ways to go cashless

Summary

The 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

00:00

🌐 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.

05:03

📱 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.

Keywords

💡Cashless Society

A cashless society refers to an economic system where financial transactions are conducted electronically or online, rather than through the exchange of physical currency. In the video, this concept is central as it discusses the acceleration of digital payments worldwide, particularly during the COVID-19 pandemic when people were shopping from home and using cards more frequently.

💡Digital Payment Systems

Digital payment systems are platforms that enable electronic transactions, such as online banking, mobile wallets, and digital currencies. The video highlights major digital payment systems in the US, India, and China, showcasing how they have evolved and the impact on consumer behavior and the economy.

💡Visa and MasterCard

Visa and MasterCard are leading global card networks that facilitate electronic funds transfers. They are mentioned in the script as examples of card issuers that charge fees to merchants, which are then used to provide rewards to consumers, thus creating a resilient and entrenched model in the US market.

💡UPI (Unified Payment Interface)

Unified Payment Interface (UPI) is a real-time payment system developed by the National Payments Corporation of India. It is highlighted in the video as a fundamentally different model from Western systems, allowing interoperability between banks and fintech wallets, facilitating digital payments even for those without a credit history.

💡Interoperability

Interoperability in the context of the video refers to the ability of different banks and financial technology services to communicate and interact with each other. This is a key feature of UPI in India, enabling seamless transactions across various platforms and promoting financial inclusion.

💡Credit Card Networks

Credit card networks, like those operated by Visa and MasterCard, are payment systems that allow for the transfer of funds between consumers and merchants. The video discusses how these networks are deeply ingrained in consumer and merchant behavior, especially in the US, due to the rewards and protections they offer.

💡Alipay and WeChat Pay

Alipay and WeChat Pay are dominant digital payment platforms in China, mentioned in the video as part of a closed system where transactions typically occur within the same app's user base. They have revolutionized payments in China by leveraging QR codes and smartphone ubiquity, leading to a significant shift away from cash.

💡QR Codes

QR codes are two-dimensional barcodes that can be scanned to transfer information, often used for payments. The video explains how Alipay's introduction of QR code payments was groundbreaking, as it allowed for cheap and easy digital transactions, even in emerging markets where card readers were expensive.

💡Account Aggregator System

The account aggregator system in India is a mechanism that allows individuals to share their financial data across different financial service providers. This system is mentioned in the video as a way to empower consumers to control their data and access a variety of financial services based on their transaction history.

💡Financial Inclusion

Financial inclusion refers to the access to and usage of a variety of financial services and products by individuals and businesses. The video discusses how digital payment systems, particularly in India with UPI, are promoting financial inclusion by enabling those without credit history to participate in the digital economy.

💡Network Effects

Network effects occur when the value of a product or service increases with the number of users. In the video, WeChat Pay's rapid growth is attributed to network effects, as its integration into the widely used WeChat messaging platform allowed it to quickly gain users and establish itself as a major payment system in China.

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]