U.S. reinforces a backward approach to mobile banking — and we’re poorer for it
Recently I ordered a pair of fancy reading glasses online from a national department store, and within hours someone used my credit card to buy gasoline near the company’s headquarters.
This was not the first time my number was compromised, and the credit card company declined the charge and canceled the number. I was left without my favorite credit card, except inside my iPhone’s digital wallet, which was immediately updated.
I’d used my mobile phone to pay bills in the past, but the lack of a card forced me into a new habit that happens to guarantee hackers cannot steal my digits. Now I’m disappointed when I can’t double-click a button to pay my bill.
Like most Americans, I’m coming late to mobile payments. In Asia, especially China, young people are skipping plastic and going directly to using mobile phones to pay bills. Meanwhile, the U.S. is downright backward when it comes to adopting new technology, and its regulators’ fault.
Kenya’s Safaricom mobile phone network launched the M-Pesa text message payment system more than 11 years ago. Because it targeted poor people, it costs almost nothing. Ten African countries have adopted the system, and the U.S. still has nothing as simple or inexpensive.
In the U.S., we have apps like Venmo. But unlike M-Pesa, where users put money on their phone with cash, companies like Venmo rely on the traditional banking system. Typically, that means higher costs to consumers.
In China, financial technology firms are not piggybacking on traditional banks, they are eliminating them and saving consumers money. The biggest fintech firms, unsurprisingly, are spin-offs of China’s big e-commerce firms.
Alibaba Group created Ant Financial to manage the Alipay system, and the new company raised $14 billion in the world’s largest fintech deal last year. Baidu spun off Du Xiaoman Financial and raised $4.3 billion in 2018. The other big player is Tencent’s WeChatPay, a mobile payment system used by 1 billion people.
These fintech companies are sometimes called neobanks, built from the bottom up to operate on your phone. Customers deposit paychecks into fintech accounts, and then all bills and payments are made using your phone, dramatically reducing the need for cash, tellers or bank lobbies.
These fintech systems are taking over in dozens of developing countries for the same reason mobile phone adoption took off so quickly. When a customer has
never had a home phone or traditional bank account, they leapfrog directly to digital and mobile alternatives.
Global investment in fintech more than doubled to $55.3 billion in 2018 from $26.7 billion in 2017, according to Accenture, the global consulting firm. But most of the expansion is taking place in countries with weak traditional banking infrastructure and low regulatory barriers to entry.
Noticing an important trend, Facebook recently announced plans to launch a new currency called Libra. Chief Executive Mark Zuckerberg said a consortium of at least 100 companies would accept Libra, a blockchain-based currency using technology similar to Bitcoin. Unlike Bitcoin, though, Libra’s value would be based on a basket of currencies and remain relatively stable.
Libra promises a universal currency to “Reinvent money. Transform the global economy.” But global banking regulators pounced on the announcement.
The Securities and Exchange Commission insists it will need to regulate Libra, and the Federal Reserve has expressed some serious reservations. The European Central Bank says Libra needs to answer a lot of questions before it can launch.
Governments and traditional banks have been crushing fintech innovation in wealthy countries for more than a decade. Developed nations have complex regulatory structures to deal with centuries of insider trading, market manipulation and devious fraud. Incumbent banks, which are built around these rules, are lobbying for roadblocks to stifle competition until they can get ahead of it.
Democratic Rep. Maxine Waters, chair of the House Financial Services Committee, told Facebook to stop developing Libra until further notice. The Reuters news agency reported last week that Democratic lawmakers are considering a ban on tech firms offering financial services.
I agree that Facebook, Apple and Google are too big and may need to downsize. Congress should not allow tech companies to run the world’s currencies. But American consumers deserve better, cheaper and more convenient banking services than those currently on offer by traditional banks.
Congress should open regulatory pathways for fintech companies to disrupt the current banking industry while protecting consumers. Unfortunately, incumbent banks have many friends in Congress, and we’ll likely end up with an overly complex and expensive system that will make us the pity of the world.