Currency, Currents & Erosion: Future Money 2015

Yesterday I gave the opening keynote at Finextra’s Future Money conference. Below I’ve included my script and a link to the slide deck.

As usual when I post scripts I give the caveat that this was written for me to say, not for you to read, but I hope it remains interesting if you missed the talk or wanted to check on some of my points.

You can view the presentation here — use your arrow keys to navigate on a desktop or simply scroll on a mobile: https://content.tomcheesewright.com/decks/finextra/index.html

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I’m no historian — quite the opposite in fact. But I believe there is some debate about why currencies were created. Did they emerge naturally out of our need to exchange? A desire to formalise previously softer notions of credit and debt?

Were they standardised by states as a way to raise armies and reward soldiers? Or was it simply the state’s need to collect taxes in a more manageable form than livestock and sacks of wheat. I’d love to see HMRC try to handle that.

Whatever the driving force was, there’s little doubting the benefits. Currency, an abstract concept minted into coins, reduced the friction around all sorts of transactions. It enabled simple local trade and increasingly complex global commerce.

For me, it is this ability to minimise the friction in our commercial interactions that is one of the most important characteristics of money. And it is the characteristic that will define the future of both the currencies that we choose to use, and the institutions we choose to help us in doing so.

My name is Tom Cheesewright and I am the founder of the Applied Futurism practice, Book of the Future. We work with organisations to help them to see, share and respond to a vision of the future.

We work with a wide variety of clients across four sectors: future humans, future cities, future communications and most relevant today, future business. As part of that segment, we have developed a strong interest in the future of money.

Our view on the future is based on a particular belief. That over the next twenty years, in developed markets like the UK, technology will be the greatest driver of change.

This comes from a simple bit of analysis. Has everyone in here done a PESTLE or STEEP analysis at some point on a management away day? Looking at Political, Economic, Social, Technological and Legal factors?

Consider the rate of change in each of these factors. In all but one, technology, the rate of change is marginal.

Take politics. We’re approaching an election. Does anyone expect radical change after May 7th? Here’s where all the main parties sit on the political compass. Even if UKIP swept the board, there would not be a revolution tomorrow.

How about the economy? We’ve been through some tough times. But during the depths of the recession in 2008, the UK economy shrank by 4%. Painful but marginal.

Environment? Climate change is going to dramatically increase the flood risk in the UK, but the number of homes affected and the total costs are not expected to double for 70 years.

Meanwhile Moore’s law remains true.

Are you all familiar with Moore’s Law? It’s often misquoted. Fifty years ago the co-founder of Intel, Gordon Moore noted that the number of transistors that could economically be placed on a silicon chip was doubling every two years.

The important word here is ‘economically’. Though Moore’s observation was specifically technical, what it really told us is that the bang for buck we were getting from technology doubled every two years.

Amazingly this remains true and not just for processors: storage, connectivity and other key factors have mapped the same path of progress.

These advances underpin many of the major change trends happening today and that we believe will continue to drive change over the next twenty years.We break these trends down into five key macro themes.

Diversity: We are approaching a future characterised not by one paradigm or even binary choices but by fractured markets, cultures and power systems. In almost every ecosystem we examine, the range of models, channels, suppliers, partners, audiences, and choices is destined to be much greater than before. This presents a new set of challenges — and opportunities — in every market we see it.

Retail is a great example of this: this chart from IGD shows how diverse the UK grocery retail market has become. Just a few years ago it appeared large format stores from the big supermarket chains would dominate. Now, hidden in those numbers, is a £250m organic veg box market.

Agility: Established organisations have always been focused on doing things better, where ‘better’ usually means ‘more efficiently’. Increasingly we find that this approach is failing. A focus on optimisation locks an organisation into legacy decisions rather than allowing it to move with the times. Put simply, it’s better to be functional in the right market than it is to be optimal in the wrong one.

The new challenge is to achieve a ‘good enough’ level of optimisation in any given operation, and to do so rapidly, because the next market shift is never far away.

Just ask Dell: hyper-optimised and unable to transform when the post-PC revolution came.

Performance: We’ve found that great organisations, and particularly those that are most agile, have something in common: good quality data flows quickly through the organisation, from customer, to CEO and back again. In an age of computerisation and ‘big data’ it’s tempting to capture and measure every piece of data, but this is valueless without a schema that defines what is valuable, who needs to know it, and how it should be acted on.

Future-ready organisations are those in which the right data flows quickly to the right people, who act on the data they receive.

Take Google. By capturing data and optimising its induction process, Google squeezed an extra 15% productivity out of staff in the first nine weeks.

Ubiquity: The march of technology continues apace. Everywhere it can add value, eventually it is applied, whatever the initial objections might be.

Digital technologies are now extremely widely distributed, raising issues of personal data and privacy. The next wave of biological technologies approaches, raising new issues of ethics and simple emotion. And materials science is on the verge of bringing us a new revolution that will see us capable of building structures that were once the stuff of science fiction.

Moore’s law was just the beginning.

Are you all familiar with Hon Hai Precision industries, also known as Foxconn? It makes iPhones. FoxConn has an infamous CEO, notorious for referring to his production line workers as ‘animals’. He is in the process of replacing those animals with robots.

Now what was the overwhelming reason behind the shift of manufacturing to China? Low cost labour. What happens when the workers are replaced with robots and Foxconn has solved all the problems of automating iPhone manufacture? There’s nothing to stop that manufacturing moving anywhere in the world. Yet the market forces Foxconn to follow this route, because if they don’t, someone else will.

Scale: As the world shrinks, markets grow and the barriers between them fall. The things that isolated us — languages, currencies, cultures — are being eroded and amalgamated, overlaid and bypassed. Difficult geographies are trivially navigated.

Through both the deliberate efforts of a business and governmental globalisation agenda, and the arguably more powerful effects of a global Internet culture, we now operate in a world where every organisation — and every individual — plays on a world stage, whether they choose to or not.

If we did a survey in the room of the two most popular online shopping apps, I guarantee they would be Amazon and eBay.

The Intersections methodology we use with clients to help them look at the future then maps these trends against pressure points in their own market.

So let’s look at some of the pressure points around money. And you’ll forgive me for my perspective: some of these are pressures from the point of view of the consumer and the small businessman.

Instability: It’s hard not to start with the knife-edge the World and particularly the European economy seems to be walking. Will Greece default? I’ve no idea. But the uncertainty is clearly creating pressure.

Just last week, the IMF published its latest review of the top threats and announce that risks were rising. It highlighted eight key areas: volatility in exchange rates and bond markets, deflation, falling oil prices, and market bubbles amongst them.

Trust: In this post-crash world there’s a distinct lack of trust, in national and international institutions and particularly in banks. It’s cliché now to bash the bankers, but that doesn’t mean it’s stopping.

In a 2013 YouGov study, 83% of over 4500 British adults said that Bankers are greedy and get paid too much. Andrew Tyrie said late last year that we are years away from restoring trust.

Regulation: Partly as a result of this reduced trust there is an increase in regulation. Regulators are not only getting more teeth, they’re starting to bite, motivated no doubt in part by the beneficial impact to the economy of a few million pounds in PPI repayments and similar, sprinkled around.

As KPMG put it in its 2015 report on the subject: “The headwinds of the costs of past misconduct do not make it any easier for banks to secure a viable and sustainable future.”

Banks are being held to account across their retail and investment arms, and being forced to insulate themselves against future shocks under regulations like Basel 3.

Risk: This increase in regulation has a direct impact on the relationship with the customer. Lenders are now extraordinarily risk averse. Just to open a bank account is an exercise in administrative torture. Borrowing, whether it is for a mortgage or a business, is incredibly difficult. All local control has been stripped from the system.

Cost: Finally there is the issue of cost. Moving currency around remains very expensive.

If you’re a small business owner card fees can be 10% of a typical transaction. If you’re selling groceries a 3% charge on a 4% margin is pretty painful. Likewise moving money around — particularly internationally.

These are some of the pressure points that I see. Sources of friction.

Friction between customer and retailer. Friction between business and bank. Friction between user and currency.

This friction is eroding the traditional money infrastructure. Where these pressure points intersect with the macro trends I discussed, we are seeing wave after wave of technology-driven innovation. Slowly eating away at the currency frameworks we all know.

In business lending, new forms are appearing that move us away from the old, centralised models. Models that relied on large, trusted institutions at their core.

Just look at peer to peer platforms like Funding Circle, crowd funding platforms like Kickstarter and alternatives to factoring like Urica.

The same is happening with consumers — albeit not in a universally positive manner, as the recent backlash against payday lenders has made all too apparent.

In my eyes this erosion started with the advent of ecommerce. When companies wanted to start selling online the banks just weren’t ready to support it. The early online retailers had to code their own payment processing engines from scratch.

Unsurprisingly, once they’d done this they found that others wanted to buy this technology from them. Companies like Cybersource, now part of Visa, started as online retailers trying to solve a problem to which the banks didn’t have a solution.

A few years later and many of the same people are now tackling the in-store challenge. Banks had enjoyed a long-standing hold on the ability for companies to take card payments.

Along come the likes of Square and iZettle and that hold is rapidly broken. Up front costs disappear and fees start to fall.

More payments innovation is coming that will further displace the traditional providers. The device that is used to make the payment, the device that receives and the networks that connect them are all changing.

In all of these things: commerce, lending, money transfer, we are seeing a new class of intermediaries emerge. Like PayPal. If the first dotcom boom was a story of dis-intermediation, then more recently we have seen a new series of intermediaries who act like a lubricant, removing friction between layers.

These intermediaries abstract us away from the banks who have traditionally held and moved our money around. And in doing so they abstract us away from the currency itself.

A great example is shopping on eBay.

I regularly buy items from the US and China. The people I am dealing with work in dollars or yuan, but I see their prices in pounds and pence.

What is moving between us is of an agreed, shared value but it isn’t really in one currency or the other. The currencies are just the way we translate that value into our native languages.

It is this abstraction away from the fundamentals of currency that open the door to new means of exchanging value. Like bitcoin and other alternative currencies.

If I and the person I am buying from are both working through an intermediary that translates the value we are exchanging into a language that we both understand, do we care how that value is exchanged?

I would argue that we do not. We care much more about the friction in that exchange: how complicated and how costly it is to make.

Think back to the pressure points that I raised. The instability in the existing systems. The lack of trust. The growing friction brought about by regulation. The cost.

Think about those and consider the risk people might experience in trying alternative approaches. If someone proposes a simpler, cheaper, lower-friction alternative, then I am going to take it.

Which takes us right back to where we started. Currency as a low friction form of exchanging value.

Money is simply a common language of value. I believe that the future of money sees much of the complexity and infrastructure we have built around money start to fall away, eroded by the friction inherent in the system. Washed away by waves of innovation that leave us with something simpler, and ultimately more stable.

A global common language of value that we can exchange.