From the early days of sea shells (Asia) and monumental stones (Yap), humans have long used a variety of units for exchange and store of value. Coins date back some 3,000 years (Greece) and paper money dates back 1,000 years (China). Promissory notes known as ‘Jiaozi’ were printed by a group of merchants in Sichuan during the reign of Emperor Zhenzong (AD 997–1022). Venetian merchants are famously credited with inventing accounting and bills of exchange, but JiaoZi pre date them by a few hundred years.

We tend to think that money as we know it has been around for ever, but the Bank of England was established in 1694 (three decades after the Riksbank), and the Federal Reserve in 1913.

Money is important for the operation of complex societies with increasing specialisation, but there is no intrinsic reason why money will not continue to evolve.

20th century money

While the underpinnings of money changed during the 20th century from money backed by gold to free floating fiat currencies, the experience of money was reasonably stable (and paper based) until the advent of early computer systems that enabled early ATMs and credit cards and telex which powered the initial SWIFT four corner cross border settlement schemes.

Before the early digital era, money comprised coins and bank notes together with personal cheques and bank drafts. It all had to be done on paper and manually, so it was slow and expensive. The role of banks as creators of credit (effectively money) through the magic of fractional reserve banking was well established, albeit much slower and harder to regulate because of the lack of transparency that comes from manual paper-based processes. (Better regulatory visibility enabled by digitisation has been offset by even faster and more complex banking activity delivered by the same technologies.)

Even though banking was slow and expensive, people and businesses became familiar with considering a bookkeeping entry as part of their wealth, in addition to physical notes and coins. In bank back offices, money was moving from ink on paper to bits and bytes. But from a user perspective, the banking system was only accessible during banking hours which were normally more restrictive than the classic nine to five workday of most employees.

Early digitisation of money

Electronic messaging and rudimentary automation were game changers, and eventually led to the first credit cards which freed us from bulging wallets.

ATMs freed us from bank branches by giving people access to cash 24/7 – though in Japan ATMs were locked inside bank branches well into the 2000s, giving a huge boost to non-bank cash distributors like Seven-Eleven. Likewise, credit cards enabled us to spend money 24/7 regardless of bank working hours.

In the early 1970s, Americans discovered the joys of money market chequing accounts offered by brokers to get around the OCC rules that prevented banks from paying interest on current accounts. Regulatory restrictions drove, and digitisation enabled, innovation in the business banking space as well, with new services such as sweeping (ZBA) and in the early 1980s notional pooling. (Notional pooling is still not allowed under OCC rules, so American banks offer the service in Canada and Bermuda.)

Money in the 21st century

The internet, and later mobile, have radically changed user expectations. Massive service innovation and Moore’s Law in technology have created expectations of instant everything and mostly for free too. Money has generally been slow to adapt. An industry with a government mandated monopoly has little incentive to disturb the status quo. Fintech encroachment on core money has until very recently been held back by regulatory constraints. Internet and mobile wallets remained niche.

Regulators, seeing the internet develop rapidly ahead of what 20th money could service, and spurred by the growth of niche services such as PayPal, Venmo, AliPay, etcetera to material scale, have finally become more proactive. This is reflected in the push for 24/7 instant payments and the creation of regulatory sandboxes for fintech and financial innovation generally.

Invisible banking

It has become commonplace that “we don’t want banking, we want stuff”. After decades of emphasising how nice their branches are, or more recently how great their internet banking is, banks are understanding that the best user experience is invisible (and safe). Users want homes, not mortgages. Users want goods and services, not payments.

Uber is a good case study in proto invisible banking. By interfacing with credit card systems, Uber was able to create an invisible settlement experience for its users. Specify your trip, get into the car that arrives, get out at the end – there is no payment step in the process. It helps that the mobility business executed through mobile devices with GPS provides a strong evidence of service delivery to justify those credit card charges.

Banks, often driven by regulators, are catching up with this reality in terms of service innovation. Instant payments, which are rolling out in most markets, enable verifiable settlement with QR codes and RFID tags, offering a cheaper alternative to card networks. Open banking, which is spreading much more slowly, enables better integration of settlement services into internet platforms that provide ‘stuff’ that users want.

It has been a decade since the internet moved on from ‘mash-ups’ to APIs everywhere. Mash-ups were the first examples of services built on top of other services – an example is Zillow showing homes for sale on top of a Google map. Now APIs allow internet services to integrate multiple specialist offerings in their own products. For example, the tutorials that pop up over web sites and the friendly chat icon at the bottom right of most web sites are all external specialist services that are pulled in (aka ‘consumed’) through APIs.

Banks are finally starting to work on similar capabilities, though clearly consuming bank balances, not to mention payment services, through API requires careful security planning. More critically, APIs redefine who owns the customer experience, which is causing headaches to banks.

Wallets

In response to the clunky and expensive user experience provided by traditional banking in the online world, tech in general has embraced wallets. These obviously have their own problems, including fragmenting user cash, potential credit risk, and increasingly regulation.

Ant Financial’s Yu’e Bao, which means ‘leftover treasure’, became the world’s biggest money market fund within a couple years of launching. It peaked at US$1.7trn in 2018, but has since shrunk in response to regulatory pressure to increase the liquidity of its assets, which resulted in lower yields.

Consumer facing businesses in China increasingly need to accept settlement from wallets. Some have more than half their cash in ‘non-bank accounts’ – primarily wallets. The market is material enough that cash pooling and similar corporate products have become available. Integrating wallets and bank accounts remains a work in progress, and it will be interesting to see which predominates in the future.

Most wallets are tied to fiat currencies, but the success of Bitcoin and other DLT coins, has spurred big tech to move into this area as well. Facebook announced its coin ‘Libra’ in 2019, but strong regulatory and political backlash cancelled the proposed 2020 launch, and it has since been re-branded as ‘Diem’.

Also in 2019, J.P. Morgan announced ‘JPM Coin’ as USD on a private DLT. All this activity has spurred central banks to speed their studies and in some cases roll-outs of their own coins.

Central bank digital currency

In 2020, PBOC rolled out large scale pilots of its CBDC – digital CNY. Uptake has been enough to prompt tech companies to develop capabilities for CBDC settlement. To the extent that CBDC is legal tender – just as notes and coins and bank bits and bytes – commercial adoption is ineluctable.

Although CBDCs are not necessarily implemented as DLTs (cloud databases are totally fit for purpose), it seems clear that the growth of Bitcoin, Ethereum, et al – as well as the ‘Libra’ saga – has pushed governments forward. CBDCs – properly implemented – can eliminate the volatility problems of Bitcoin as a store of value, and with the same technology base that has been proven with instant payments can provide fast and cheap settlement (Bitcoin is expensive and slow).

CBDCs introduce some interesting issues that have the potential to radically transform money and banking. In some implementations, CBDC has the effect of allowing citizens to bank directly with the central bank, thus cutting out banks. This would have many advantages, and would result in big reductions in risk across the monetary system. It would also render ineffective many central bank policy levers that are currently executed through the banking system.

If CBDCs allow citizens and businesses to bank directly with the central bank, this would free banks from onerous regulation and allow them to focus on value added provision of financial services such as investment, loans, risk management, and so forth.

If CBDCs are implemented via banks, they will not be very different from the current status quo such as instant payments, which are messaging around bits and bytes held at banks.

Conclusion

For treasurers, the future course of money might have radical consequences for daily operations and risk management. In any case, the spread of instant 24/7 settlement will require deep and thoughtful automation as long as treasurers need sleep and holidays. Treasurers are likely to have to deal with new service providers for wallets and potentially DLT coins. And depending on how CBDCs roll out, they may start to have a very different relationship with central banks.