Crypto Investments and Faster Payments Meet the Unbanked and Unequal

Who can easily take advantage of the benefits of digital financial services and who cannot? Taken together, this list of articles and research papers shows that cash is no longer king. They also suggest increasing income inequality.

The ticket to the digital economy and its efficiencies and rewards is a bank account. Bridging the gap between cash and digital has policy implications that go beyond whether someone can use a digital wallet to make a payment or even avoid a fee with a faster payment.

The gap in income will widen as long as the digital divide persists. As one of the research papers listed below concludes, “Policy-makers should recognize that rising income inequality is more than a distributional issue; it is likely a central force shaping broader macro-economic trends.”

Could altcoins surpass bitcoin? “Another week has closed with another crypto price rally, in what has been a banner year for the market. Bitcoin’s been enjoying historic highs – though not without some of its trademark volatility – throughout 2021, and with another climb to $50,000 Friday that trend doesn’t look to be ending anytime soon.

“But Bitcoin’s surge wasn’t the only story in crypto this week – along with the most ubiquitous and oldest of the coins, altcoins also enjoyed historic price jumps — Ethereum climbed to over $4,000, and a whole host of smaller currencies – like Cardano, XRP, Stellar, Uniswap, and Litecoin – surged in the range of 5-10% over a 24 hour span.”

Businesses look to the future with faster payments. “Driven in part by the impact of COVID-19 on commerce, a substantial majority of surveyed businesses consider it important to use faster payments. And despite being relatively satisfied with existing payment arrangements, nearly two-thirds indicated they would factor access to faster payments into future decisions on whether to switch banks.

“Nearly 75% of the micro businesses and 60% or more of all the other businesses cited managing cash flow and working capital as among their top concerns about the business climate they face. Coming out of the pandemic, many are focused on offering additional digital/online payment options, ensuring payment timeliness, and growing sales and revenue.”

Debit cards dethrone credit cards (and why that’s likely to stick). “The number of debit transactions has exceeded credit card transactions for some time, but 2020 was the first year in which the value of debit spending (including prepaid) exceeded credit cards.

the increased use of digital wallets, funds-transfer apps such as Zelle, Square Cash, and Venmo and other contactless and digital transactions will continue as many consumers have embraced the benefits.”

Digital currency, digital payments, and the ‘last mile’ to the unbanked. “Individuals with no bank accounts might not have access to these payment methods or might have to pay high fees to use them. Without access, consumers may be deprived of making online purchases and using some in-person services that do not accept cash, such as cashless stores, parking garages, cashless highway tolls, and cash-free vending machines.

“The problem of funding does not arise for households who have a bank account because they can move money in and out of their bank account to fund other means of payment, such as credit cards, debit cards, and mobile apps (Venmo, PayPal, Cash App, and others). In particular, households with a bank account can convert cash to fund their digital payments via depositing cash and electronic transfers into their bank account.

“Banked and unbanked consumers alike still heavily use cash. According to Kim, Kumar, and O’Brien (2020), in 2019, consumers used cash for 26 percent of all payments and 47 percent of payments under $10. Whereas banked consumers use cash mostly for low-value transactions, unbanked use cash for both small- and large-value transactions.

“Without providing a solution to this problem, unbanked consumers will continue to be shut out of online commerce and even some in-person services that no longer accept cash.”

Is an excess of rich people, not of middle-aged people, what depresses interest rates? The title is from the Financial Times, but it refers to an economic study delivered at the Federal Reserve Bank of Kansas City’s annual economic gathering in Jackson Hole, Wyo. Here are some relevant quotes from the research paper, which provide insights into the reasons for historically low-interest rates and their policy implications.

“The bottom line. . . is that the rise in income inequality combined with high saving rates of high-income households leads to a substantial rise in saving by the top 10% of the within cohort income distribution from 1995 to 2019. The rise in income inequality leads to a large rise in saving and therefore is a likely culprit when assessing forces that push down r∗  (the natural rate of interest).

“The historically low natural rate of interest (r ∗ ) raises concerns about secular stagnation, threatens asset price bubbles, and complicates monetary policy given proximity to the zero lower bound on nominal interest rates.

“Policy-makers should recognize that rising income inequality is more than a distributional issue; it is likely a central force shaping broader macro-economic trends.”

Policy on a precipice. These articles only hint at the long-term economic and policy implications of the pandemic, whether they concern cryptocurrency investments, faster payments, or income inequality. Lyric Hughes Hale, editor-in-chief at Econvue, provides one of the best statements I’ve read on that point:

“COVID has spawned an era of furious policy experimentation by national and local governments. From lockdowns to public-private partnerships in global health, from modern monetary theory to unprecedented income support and dual-edged technological innovations, economic scholars will be analyzing the resulting data for generations. We cannot possibly foresee all the implications of these concentrated actions over the last 18 months. We cannot predict the political and economic fallout, or know how geopolitics will bend to our new reality. However, we can expect the impact will be persistent, certainly outlasting the current uptick in inflation. Half a century from now, we could still be in the midst of changes created by this pandemic.”