I’m doing the PR rounds for my book – Bitcoin: the Future of Money? – at the moment. One question that keeps cropping up is: why do we need something like bitcoin? Or any other type of new money? What’s wrong with what we have?
I’ll tell you.
The current financial system is exclusive. It is impeding the progress of some 3.5 billion people – half the world’s population, in fact.
They need a new financial system – and what’s more, they’re getting it…
What landlines and mobiles can tell us about the future of finance
Do you remember landlines? Do you even use yours any more?
I have one at home. But only because that’s how I get the internet. I don’t use it to make calls. A phone isn’t even plugged into it and I have no idea what my number is.
Some people still use theirs out of habit – my mum and dad, for example. Many use one because their mobile reception at home is rubbish. But most of those who have moved house in the last five years or so don’t even bother any more. They just use their mobile.
At the peak – which came, by the way, in 2008 – there were 1.3 billion landlines worldwide. That number is now in decline.
With a global population of close to seven billion, you might expect that number to have been higher. People like to communicate. Telecoms companies like to profit from people communicating. They’d lay cables across the Arctic or the Sahara if they thought there was money to be made. If they haven’t, it’s because they felt they couldn’t make money.
Yet a recent UN study revealed that some 6.3 billion people worldwide now have a mobile phone. In fact, more people have a mobile phone than a toilet. This proves quite categorically – as if it needed proving – that the desire to communicate is there.
So why did the landline fail where the mobile succeeded?
Unbanked
The obvious reason is that the superior technology of mobile telephony has made widespread coverage cheaper.
But there is something else – an elephant in the room. Most poor people in the developing world are ‘unbanked’. They didn’t (and still don’t) have the basic financial services you need to get a landline – you needed credit and/or a bank account. They might have wanted one, but they couldn’t get one.
The telecoms companies concluded the demand wasn’t there, and the infrastructure was never built. So the financial system was a barrier to progress.
With a mobile phone, you don’t need a bank account. You buy the phone and the airtime with cash. Almost anyone can get a mobile – banked or unbanked – and they have.
How our inadequate financial infrastructure holds back the global standard of living
The World Bank estimates that 50% of the global adult population does not have access to basic financial services. “Poverty, the cost, the travel distance and the necessary paperwork to open an account” are the reasons given.
Here’s another stat for you: only two billion people are ‘banked’ and take part in ecommerce, yet 5.5 billion have at least some access to the internet. So there are 3.5 billion people – half the world’s population – who are excluded from ecommerce because they don’t have access to the necessary financial infrastructure – despite the fact that they probably want to trade, exchange, earn money and improve their lot.
But thanks to bitcoin and other forms of mobile money, this barrier is being broken. You don’t need traditional financial services or a bank account any more. A bank account is useful, of course, but it is no longer essential – and, as each day passes, it becomes even less so. To participate in some way in ecommerce, all you need is internet access. Most of the world’s population will have that long before they have proper sanitation, healthcare or education.
I’m suggesting traditional banking is about as redundant as the landline is. Suddenly, the developed world is going to have some 3.5 billion more people to exchange products and services with, to outsource jobs to, and so on. That is a quite mind-boggling amount of potential new trade.
The money the ‘unbanked’ 3.5 billion make might enable them to buy the sanitation, the education and the healthcare that they haven’t had for far too long. Rather as the Industrial Revolution enabled people to escape rural poverty, and within a generation become part of a new, educated middle class – so might the coming ‘financial revolution’ – as I’ve just dubbed it.
The financial revolution begins in Africa
It’s already starting to happen in Africa. In Kenya in the early part of this century, people started transferring their mobile phone credits – their airtime – to friends and family. Mobile phone airtime has, of course, a value. Based on a real thing, it’s like a modern-day commodity currency. (Not unlike gold and silver).
Vodafone and Safaricom – the largest mobile phone companies there – both picked up on the practice and brought in systems to regulate and facilitate it. Gradually, the M-Pesa was born. M stands for mobile and Pesa is Swahili for money. So you have ‘mobile money’. You can now send M-Pesas by text message.
Over 65% of Kenyans now do that. People can pay bills, obtain credit, and transfer, deposit and withdraw money. Three-quarters of the country’s financial transactions are handled by the system, and 43% of Kenyan GDP flows through it. But just 40% of Kenyans have a bank account!
Such was the pace at which the M-Pesa was expanding, that in 2009, Kenyan banks actually lobbied the government to audit M-Pesa in an attempt to slow its growth. But it made little difference. “Financial inclusion is reported to be at 80% in Kenya”, says Sitoyo Lopokoiyit of Safaricom. “When you remove mobile money, it drops to 23%.” You can see what mobile money is doing for financial inclusion.
Growing economy
And Kenya’s economy is doing well: last year it grew by 5.7% last year and became the fourth biggest in sub-Saharan Africa. It is now categorised by economists as a ‘middle-income’ rather than a ‘low-income’ country. Nairobi has become Africa’s Bangalore or Silicon Valley.
The M-Pesa is just the beginning. When you have an international currency like bitcoin – or whatever bitcoin is a precursor to – the possibilities are enormous. There will be a massive boom, and hopefully the old financial dinosaurs will be left behind – rather as the internet put paid to newspapers.
Bitcoin and other forms of mobile money are to banking what the mobile phone was to the landline. I talked about how to get hold of bitcoins in a Money Morning a few weeks ago . And if you’re interested in investing in the theme, Jim Mellon had some interesting ideas on mobile money in last week’s MoneyWeek magazine cover story.
• Dominic Frisby is the author of Bitcoin: the Future of Money?, available at Amazon. The audiobook is available here.
Category: Investing in Bitcoin