IN 2006, AROUND THE TIME OF THE LAUNCH OF ORIGINAL M-PESA MOBILE MONEY APP, JUST 14% OF KENYANS HAD A BANK ACCOUNT.
Meanwhile in the developing world, where all too often much of the population does not have a bank account (both due to poverty and a lack of bank branch infrastructure), but do have a mobile phone, mobile payment systems have seen explosive growth in some countries. Kenya stands out as one of the best examples of the transformational effects. Back in 2006, around the time of the launch of original M-Pesa mobile money app, just 14% of Kenyans had a bank account. It was initially purposed to repay microloans, but soon started to be used by consumers and shopkeepers to make deposits (rather than keeping money at home), transfer money to friends and relatives, and eventually to pay for shopping or services, and nowadays a broad array of financial services in conjunction with banks and businesses. As a result, 83% of Kenyans now have access to formal financial services, and 96% of households have a mobile money account, and according to a recent study, this has helped to lift many out of extreme poverty (under $1.25 a day) and poverty (under $2 a day), above all as it has tended to encourage to have some form of savings cushion. That said attempts to replicate the success in Kenya elsewhere have been decidedly patchy, but in relative terms it has proven to be more effective in combatting poverty than the much-touted intervention of microcredit.
Be that as it may, thanks to the restrictions on physical movement, the pandemic has accelerated what were already well-established trends away from ‘bricks and mortar’ to online retailing, as well as the use of electronic / digital payment systems. It has also highlighted the need for more effective and efficient systems to distribute the Covid-19 support payments and grants to consumers and businesses. It has again emphasized the point that the trickledown economic theory which underpins QE indubitably supports the financial economy and market based measures of ‘financial conditions’, but has very limited benefits for the ‘real’ or ‘main street’ economy. But again, this raises the question of how to effect such changes without endangering the fractional-reserve banking system that remains extant throughout most of the world, as the BIS CBDC principles highlight above, and perhaps even more so given the very sharp rise in global debt levels, as a result of the fall-out from and battle against the pandemic.
There are obviously no simple answers, but China offers an interesting lens through which some of the challenges can be illustrated. While Europe and to a lesser extent the U.S.A. continues to see rapid growth in digital and electronic payments, China is much further advanced. It may surprise many to find out that Alibaba’s (AntFinancial) AliPay and Tencent’s WeChatPay account for an astonishing 80% of all consumer payments in China, astonishing both due to the proportion, and the obvious monopoly that this implies. For all that the general perception is that the Chinese authorities, i.e. the CCP, are exercising ever greater control over everyday life in China, the fact is that the authorities continues to be ‘caught offside’ by the explosive growth in its financial sector, and continually find themselves having to take rear-guard actions. The suspension of the AntFinancial IPO a day before its launch was as surprising as it was necessary, above all given capital adequacy considerations, particularly related to AntFinancial’s microfinance lending, an area which has been a long-term problem in China, as it is in many developing and indeed developed economies. To be sure, a provocative speech by Alibaba founder Jack Ma about China’s financial sector not being fit for purpose appeared to be the trigger for the move to block the IPO, though in truth it was obvious that it was heavily undercapitalized without the IPO proceeds. There was doubtless also pressure from China’s commercial banks, both out of fear of losing deposits and payment revenue flows, as well as their disadvantage in terms of regulations.
But then again, this is not the first time that domestic regulators have been ‘caught napping’ with regards to AntFinancial. The explosive growth in assets at Ant Financial’s Yu’e Bao (“leftover treasure”) money market fund from a standing start in 2014 to $268 Bln in assets at its peak in March 2018 (more than $100 Bln more than the largest & oldest money market fund run by JP Morgan), was a similar story, and allegedly prompted one state run TV commentator to call it a “blood-sucking vampire”. But in a country with a very high savings ratio, the inflows were primarily attracted by the much higher interest rates relative to bank deposits, thanks to its ability to invest in much riskier assets, as well as the fact that it could be used as a checking account (thanks to the AliPay link), with many consumers doubtless (still) unaware that it does not offer the same protection as a bank account. Local regulators did become aware, and tightened regulations on asset quality and liquidity on this and other wealth management products (WMP), while the fund’s managers (Tianhong Asset Management) also voluntarily placed caps on daily and total subscriptions, while also increasing the number of money market funds on offer to AliPay users.
14 | ADMISI - The Ghost In The Machine | Q4 Edition
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