Digital Money: The Rise of the Entrepreneurial State

Citi Public Digital Money | The Rise of the Entrepreneurial State | March 2022 5 Citi Public Digital Money | The Rise of the Entrepreneurial State | March 2022 4 Emerging Technology Technology availability and maturity, driven by continuous innovation, has accelerated tremendously over the last few years. Technology is transforming the way businesses operate, consumers buy and use products and services, and how governments provide services to their citizens. According to World Economic Forum estimates, digital-led platforms would generate 70% 1 of incremental value this decade, proving that digital is the way forward. Companies across industries are benefiting greatly from digitalization, which is encouraging them to use technology to alter their businesses. Forward-thinking businesses are looking for technology to improve customer experience and engagement, drive operational efficiency and explore newer business models. In fact, industry participants are leveraging application programming interfaces (APIs) to link up with partners and create ecosystems that enable them to better serve clients while providing differentiated experiences. Digital ID is another foundational technology that helps improve efficiency while influencing overall client experience. Banks in India were able to issue around 440 million 2 no-frills bank accounts seamlessly to underprivileged individuals, using Aadhaar (India's digital ID). Digital ID solutions also have the potential to transform economies. According to McKinsey, digital identities might lead up to a 13% 3 rise in GDP by 2030 as they become more generally available. Advancement in analytics and machine learning has now allowed firms to mine large volumes of consumer data to better understand their needs and offer personalized service. Likewise, Blockchain-based solutions are also gaining traction across industries including financial services. It is estimated that the technology will save banks $10 billion 4 in cross-border payments Market developments — providing the necessary impetus to digital money readiness alone. Blockchain technology also improves accountability, transparency, and efficiency across the supply chain — a big focus area for industrial firms. According to Citi, trends like APIs, Blockchain, Digital ID, IoT, and 5G will continue to grow over the next few years, and participants across industries will begin to take these technologies seriously as they evaluate their digitalization strategy. Citi’s Emerging Technologies report 5 provides detailed point of view on technologies impact on various industries. Regulatory trends The rise of eCommerce, which necessitates real-time payments infrastructure, as well as the introduction of 24/7 closed-loop payment networks such as digital wallets, have helped the industry participants recognize the need to upgrade the ageing payments infrastructure. Regulators around the world are leading the charge to accelerate investments in payments infrastructure. Regulators are progressively evaluating their ability to make their infrastructure available 24 hours a day, seven days a week, either by extending the hours of operation of existing systems or by introducing Instant Payments schemes. There are currently around 60 countries 6 with live-instant payments schemes around the world. Another development impacting the industry is open banking, which refers to the practice of allowing third-party providers to utilize clients’ data available with the first party to offer goods and services. The UK took the first step toward open banking with the “Open Banking Initiative”, followed by the EU's PSD2. Since then, a slew of other countries have launched their versions of open banking regulations. Open banking allows conventional banks and fintech companies to collaborate and offer superior products and services to end clients. This open banking approach is expected to improve customer experience while lowering distribution costs for service providers. According to estimates, open banking and APIs can help the underprivileged save about 2.5% 7 of their income in fees due to the availability of better products and services. Finally, the rise of payment instruments such as cryptocurrencies and stablecoins is forcing regulators to reconsider their regulatory framework around digital money. To combat the threat of high-risk alternative currencies to the financial system, 74% 8 of the central banks have already started exploring Central Bank Digital Currencies (CBDC). Policymakers expect CBDCs to preserve financial stability, in addition to streamlining the payment system. Harvard Business Review expects CBDCs to reduce the cost of managing payments, with the US economy alone expected to save $750 billion 9 every year with CBDC adoption. Adoption of CBDCs is expected to further accelerate with the advancement of the underlying DLT technology. Such fundamental changes like instant payments, CBDCs, and open banking will take time to completely emerge on a global scale. However, the potential of these technologies to transform the payments landscape and its impact on consumers and corporates are already being felt. Policymakers across the globe will continue to focus on initiatives that address three main themes — driving innovation while ensuring financial stability, consumer protection & compliance. Externalities The global impact of the COVID-19 pandemic has been enormous. Lockdowns and associated supply chain disruptions led to consumers clearly understanding their needs, differentiating between essential versus luxury products, while also sharpening their focus on sustainable products. Lockdowns also influenced consumer shopping patterns. Even those who had never purchased online before the pandemic, shopped, and paid for their necessities online. Clearly, the pandemic has significantly impacted the scope and reach of the digital transformation. According to a Forbes survey, 58% of the US consumers were spending more money online, with 27% signing up for at least one new digital streaming service. 10 Many experts predict that the habits developed during the pandemic will last long after the crisis has passed, irreversibly altering what people value, how and where they shop and how they live and work. This irreversible change in consumer behavior is predicted to give countries the single major boost in driving overall digital money readiness and adoption.