The Emperor's New Clothes

Rise of The Invisible Economy

Why should you live in a world without feeling its weight? — Karl Ove Knausgård

This article introduces readers to the co-mingling of two related technologies that will transform life and business as we know it. The rise of the Internet of Things (IoT) & the Internet of Value (IoV) will create an invisible economy (much like the emperor’s new clothes) except you need to peek under the hood to know what’s going on.

Basic Terminology

The term “the Internet of Things” was coined by Kevin Ashton of Procter & Gamble, later MIT’s Auto-ID Center, in 1999. Today, it comprises anything (devices: cell phones, computers, televisions, car keys, thermostats, lights ; living beings: animals, humans with a chip (e.g. pacemakers) that is connected to the internet and can send/receive data over a network and has a unique identifier.

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The term “Internet of Value” can be simply understood as money/assets represented as computer code (eg cryptocurrencies) that can be transmitted over a network. Ripple Labs aims to create an “internet of value” — a world where money is exchanged at the speed in which information moves today. Of course, the true IoV extends to anything of value including fiat currencies, commodities and other assets.

The Internet of Value as it is imagined (a global settlement network) is not in existence today but could be tomorrow.

Flashback: En Route to Kenya

It was 2001 and I had just graduated from college in Mumbai, India. I was on board an airplane destined for Nairobi, Kenya in East Africa. My cousin sister was sitting in the adjoining seat. She joined us from a common connecting airport. She was traveling from USA to Kenya and I was traveling from India to Kenya. Incidentally, Kenya is a pioneer in mcommerce through its M-pesa platform.

There were many differences between USA and India as there are today but our conversation veered towards the use of credit cards in our respective countries. India was well known as it is today (despite demonetization) for a cash based society (only 2% transactions are cashless) alongside many countries such as Germany (33% cashless transactions) and the US(45% cashless transactions) was known for the use of personal debt to finance purchases and the increasing role that credit cards were playing in financing the debt. For all my curious readers, Singapore leads the cashless transactions league table at 61% with Netherlands (60%), France (59%) and Sweden (59%) close behind. Again, these percentages are meant to be directional. They do indicate that a large portion of the transactions in the world are still cashless.

Societies can go cashless for a list of incentives ranging from reducing the cost of ATM’s and hard currency for banks (case in point — Sweden) to mass financial inclusion (case in point — India).

Coming back to my trip — my sister explained that she carries her credit card for convenience but hesitates to use it because she finds it hard to keep track of expenses except when she uses cash or debit cards. For her, the mere action of parting with cash or a card that directly applies the debit to her bank account serves as an occasional reminder that she is overspending.

To me, it sounded like the convenience of swiping introduces an element of opacity i.e. you have to wait for your credit card statement to scan your itemized purchases (apps were not that popular at the time. Remember the first iPhone was launched in 2007 and I am talking about 2001)

As a rookie programmer, I felt this experience was very similar to closed operating systems/software. With open source software like Linux, it is easy to see the code but this ability is useful only if you are a programmer.

However, with MS Windows, you have a great Graphical User Interface but you don’t know the code under the hood. I see a very similar trend with the oncoming invisible economy and that is:

With convenience comes opacity unless you want to expend the time learning what’s under the hood. This is especially true when it comes to the IoT and the IoV

At the time, all my transactions were in cash or via a debit card because I did not have a credit card. I was used to the phrase “keep the change” while my sister was used to just swiping.

Just like Knausgård’s words above, I was used to feeling the weight of a coin or a note in my hand before handing it out. Now, not so much.

Fast Forward To Today

It is 2017 and I work in the United States. I have not gone to a bank branch in 1 year. I carry cash 2% of the time. My wallet is filled with credit cards. I pay my friends using Venmo and absolutely adore the emoticons that come with it. One thing I must say is I use credit wisely and pay off my debts well before time. Now, you can also use the Apple pay icon on your MacBook Pro for payments.

Global Trends in Payments

As per Ayden:

1. The mobile share of global payments (currently 37%) will continue its inexorable rise, exceeding 50% in markets such as the U.K. and Australia. This is mostly driven by the growth of mobile wallets. Apple Pay, with its early adopters and powerful brand, is leading the charge (up by 400% in the past year), while Android, with its greater smartphone market share, could be the one to open the floodgates.
2. According to Worldpay, alternative payments (digital wallets, currency etc.) could account for 59% of settlement activity by 2017, up from 43% in 2012.
3. In the US, you have a bank consortium that has introduced Zellepay that is competing with Venmo. Klarna, a Swedish payments app has morphed into a bank. PayTM in India had an infusion of $1.4 Billion from Softbank. WePay and AliPay are already expanding globally. Here is a snapshot of the landscape:

4. Tech giants Amazon, Facebook and Google are already seeking inroads. With their enormous reach, their clientele would practically be the entire world.

5. As per CB Insights the US market accounted for the most deals to payments startups in the first half of 2016. The United Kingdom ranks second, and is the home to well-funded startups like Transferwise and Azimo, among many others. The third spot is tied by Germany (home to Number26 and Payleven) and India (home to MobiKwik and Juspay) followed by Canada, Singapore, and Denmark.

In short, payments and settlements will continue to be of tremendous focus in the VC and FinTech world. What will change the game? Read on.

The Future: Internet of Everything

There are many payment protocols in place today such as ACH in USA, SWIFT in many other countries and SEPA in Europe. So, how do you transfer value across borders? Enter the Blockchain.

Granted, there is an enormous amount of unfounded excitement around Blockchain and it’s application to cross border payments to eliminate middlemen, transaction fees and transaction times.

A proverbial grandson in the US will be able to send digital money/crypto currency (which will be optionally convertible to fiat currency) to his grandmother in a small village in India using a digital wallet/crypto wallet on his cellphone in a matter of minutes at a fraction of the current transaction costs or zero transaction costs.

In short, it does make economic sense. Whether the world is ready for it is a different matter altogether.

Blockchains require enormous computing power. Efficiency is sacrificed for an immutable record and security.

Consider the recent problems in the Bitcoin community over Segregated Witness (SegWit) method of handling the size of blocks. The Bitcoin Blockchain can only handle a few transactions per second compared to Visa’s network which can handle roughly 2,000 transactions per second.

Luckily, the SegWit matter did not result in a hard fork to the Bitcoin Blockchain. In short, Blockchains have ways to go before becoming globally scalable.

Ripple Labs feels that the IoT and the IoV are the same things and that eventually there will one global network.

The ‘Internet of Everything’, as it is referred to today, will facilitate transfer of value across borders and will also allow inanimate objects to participate.

However, before that happens, there has to be a registry of value i.e. all types of assets (including physical ones such as commodities) will need to be registered to be able to be exchange hands over the Internet of Everything.

Already, Honda and Visa announced a proof of concept of a connected car that makes payment for gasoline seamless:

Smart contracts (computer code — if x happens, then do Y statements to put it crudely) will facilitate online contracts. In the future, an automated car can pay for it’s own gasoline using crypto-currencies and embedded smart contracts. In fact, transactions by things may exceed transactions by humans.

Challenges abound and need to be overcome— role of regulators, governments to protect citizen’s rights, online security that prevents using the Internet of Things to invade privacy and create a reality show out of our lives, creation of digital identities etc.

Financial Inclusion for all is a very difficult mission. Cash is still king.

As the Emperor says in the Emperor’s New Clothes: I don’t want to blind them, I just want them to blink a little.

In the end, a blink of an eye is all the time it will take to do business on the Internet of Everything and yet it will be difficult to see the transaction happen. It will almost be like magic.

Thank you for reading. If you think this article is educational, please share it with your followers on Facebook, Twitter, LinkedIn or other social media. You can follow me on Twitter: @akothari_mba

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