The world is going digital, and so is our money. Weekly trips to banks and ATMs will soon be history. Banks are going completely virtual while offering the same experience to the customer via various technologies such as AR (Augmented Reality), VR (Virtual Reality), digital payments, and smartphone technology due to the reduced footfall. All of this has given rise to a digital economy, or new economy, depending upon the group of economists.

So, what is the digital economy?

“Simply put, the digital payments economy is an economy based on digital technologies.”

The evolution of the internet and the rise of e-commerce have been the biggest drivers fueling the digital economy’s growth. As per Digital Economy Report 2019 by UNCTAD (United Nations Conference on Trade and Development), global internet traffic has risen from 100GBPS in 2002 to 46,600GB by 2017 and is expected to reach 150,700 GBPS by 2022.

Why digital payments?

Digital payments ensure faster and less costly processing of funds, higher transparency due to traceability, and the ability to carry out transactions from anywhere at (almost) any time. The ‘almost’ is because many countries do not offer 24*7 money transfers.
Also, many payment software come equipped with capabilities to comply with regulations specific to the country the software is being used in. This ensures the companies do not get into trouble over compliance with regulations. However, hiccups do occur sometimes. Recently, PayPal was fined Rs 96 lakh by the Indian government over noncompliance with the country’s AML (Anti-Money Laundering) norms.

How it began –

Commerce always evolves. In ancient times, people exchanged goods, the practice known as barter. This is still used in many areas. Later, shells were used as money. From barter and shells to the coins and the current paper or fiat money, every step has been marked by technological advancements. With the internet becoming humanity’s lifeblood, it is but natural that money goes digital.

The first such systems were somewhat primitive. The earliest credit cards were printed pieces of metal, resembling the dog tags worn by American GIs. The current system of bank crediting the merchant the sum spent by the customer was first implemented in 1958. Online payments appeared around 1994, coinciding with the foundation of Amazon.com. However, the first such sites were difficult to use.

Then like so many other sectors, the smartphone drove the sector’s upwards growth. The arrival of mobile payments fueled the rise in the digital economy. The first such platform was PayPal, which arrived in the markets in 1995. In 1997, Coca-Cola and Mobil allowed people to make payments via their mobile phones. The SMS payment system evolved. In 2007, Vodafone introduced payment for bigger sums via SMS. Google introduced Google Wallet, which allowed people to directly send and receive money into their bank accounts using their mobile phones. Apple followed suit with a wallet named Passbook and followed it up with the introduction of Apple Pay in 2014. It was quickly followed by Google Pay and Samsung.

These software offer users an option to pay for their purchases using data from their credit or debit cards stored in the payment application. Other big players from various countries soon entered the fray. Now, financial institutions are increasingly opting for digital transformation, and the comingling of finance and technology named fintech is a booming tech sector.

How it is going…

The UNCTAD report puts the size of the digital economy between 4.5 percent to 15.5 percent of global GDP. Thanks to its dependence on the internet and related technologies, the growth is so far uneven. A good example of this is mobile payments. Mobile network coverage in some emerging economies is still far behind other countries. This hampers access to many internet-related services including mobile payments, despite having access to a mobile device. A World Bank report says that 7 out of 10 poorest households possess a mobile handset. However, the lack of resources means people get left behind, dragging the growth of the digital economy.

However, in other countries, mobile payments have been a successful initiative. Asian countries like India and Nordic countries are already making giant strides in adopting a ‘cashless economy’. This has proven to be a driver for huge growth and has given rise to other more sophisticated services like Insuretech, Non-Banking Financial Companies (NBFC), and even education, known as EdTech. The initiative has also led to a rise in increased use of plastic money in emerging markets, further driving the growth of the digital economy.

E-Commerce is another critical component of the digital economy. The sector is seeing a massive boost due to increasing internet penetration as well as the built-in convenience factor. The UNCTAD digital economy report 2019 pegs the global value of e-commerce at $29 trillion in 2017, which was 36 percent of the global GDP. As the customer base widens, so does the network of vendors. With vendors coming from rural areas and areas with less access to hard cash, the adoption of digital payment is picking up speed. The evolution of mobile payment technology coupled with its integration into E-commerce marketplaces are fueling the growth of the digital economy.

Increasing internet penetration is also fueling the appetite for online money transfers. Various formats like SWIFT, UPI, and wire transfers now allow individuals and businesses to instantly transfer money in the country or even outside a country’s borders.

There is always a but…

The rapid increase in digital payment adoption is not without its fair share of worries. Digital payments are tech-driven. There is a limited number of platforms capable of handling all aspects of a digital economy. But these platforms such as AliPay (China) and BHIM (India) are few and mostly restricted to only one or two countries. Google, Apple, Amazon, and Facebook control most of the global digital landscape. The only place they have not been able to make headway is China, due to its strict gatekeeping. However, China has its monopolies like Alibaba and Alipay, which enjoy hegemony in the market.

The “big” companies continue their domination by acquiring or merging new innovators. And as we all know; monopoly is never good for any sector. It stifles innovation, which results in products of poorer quality. The companies are able to fix their own pricing due to the lack of competition. All these dangers are very real in this sector.