Emerging tech and the future of payments with Swift’s Head of Oceania, Suresh Rajalingam
Emerging tech and the future of payments with Swift’s Head of Oceania, Suresh Rajalingam
Emerging tech and the future of payments with Swift’s Head of Oceania, Suresh Rajalingam
In this VISION by Protiviti interview, Protiviti Director Ruby Chen and Protiviti Senior Director Rupesh Mahto sit down with Swift’s Suresh Rajalingam, who heads up the Oceania region and a team covering 20 countries across the region. Rajalingam is a seasoned senior payments professional with over 22 years of business development experience in both the domestic and cross-border payments space. Here, Rajalingam discusses the rapid pace of technology, open banking, the payment ecosystem, the future of payments in 2030 and beyond, and more.
In this interview:
1:13 - Swift’s business model in the context of new technologies
4:20 - Areas of opportunity
6:45 - Removing friction in payments
10:52 – Opportunities and concerns in the international payment space
13:19 – The world of payments 10 years from now: Interoperable, or marked by “digital islands”?
Suresh Rajalingam currently heads up the Oceania Swift team covering 20 countries in the Oceania region. Suresh is a seasoned senior payments professional, with over 22 years of business development experience in the domestic and cross-border payments space. His background includes both payments technology and sales and he enjoy working in environments which blend the two. Having worked throughout Australia and New Zealand, he has a broad, multicultural network of contacts within the banking industry; payments market practitioners, market infrastructures, fintech vendors and regulators.
Rupesh Mahto is a senior director specialising in strategy, technology assessment and enabled execution, digital transformation, cloud migration, and application of emerging technology to business demands. He successfully leads interactions with CXO, focusing on increasing operational efficiencies, growth, and cost reduction.
Ruby Chen is a Protiviti director with over 12 years of experience in the financial services industry, for 10 of which she worked within the Big Four banks before transitioning into consulting. She has a broad range of experience providing advisory services and secondments across all three lines of defense.
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The future is digital but fraud, volatility could cripple crypto, says Allianz Trade executive
The future is digital but fraud, volatility could cripple crypto, says Allianz Trade executive
The future is digital but fraud, volatility could cripple crypto, says Allianz Trade executive
Aaron Lindstrom is the Americas region Head of Transformation and Digital Partnerships for Allianz Trade, and he sits down with Joe Kornik, VISION by Protiviti’s Editor-in-Chief, to discuss the end of cash, digital payments, the danger of crypto currencies, the future of the U.S. dollar and what he thinks will be the world’s most valuable asset in 2050.
Kornik: Everyone seems to be talking about the end of cash and the emergence of cashless societies. So, let’s start there: When do you see cash going away and what are the potential implications—positive and negative—of that development?
Lindstrom: I have heard a great deal of talk on this subject, and I believe that, specifically in the B2B space, we are already there. I’m not aware of any corporation which would hand its employees briefcases of cash to execute purchases. Paper checks are still the most common form of payment in B2B transactions, followed by bank-to-bank (ACH) payments, wire transfers, and credit cards. To many in the trade finance space, “cash” is in reference to payment on or before delivery by one of the above methods.
The pre-payment requirement of many cross-border trades limits supply inputs and creates a cash flow gap downstream. We are seeing a surge in financial institutions and fintechs trying to deploy solutions to provide liquidity and credit at the time of transaction. The rise of embedded finance solutions using technology to provide net payment terms or liquidity at the time of transaction is probably the most positive outcome of these efforts. On the downside, new technology and payment methods come with a degree of risk. Technological dependencies, fraud concerns and market acceptance by both buyers and sellers could all hinder the development and deployment of these programs.
Kornik: The rise of digital currencies will be one of the biggest financial developments over the next decade. Walk me through how you see that playing out—from cryptocurrencies to central bank digital currencies to stablecoins? What could we expect that landscape to look like in 2030 and beyond?
Lindstrom: I think there is a lot of talk about it and most of it is really just marketing. Depending on the data you read, between 50% and 85% of Americans are using some form of “digital payment” today. This could include touchless payment with your debit/credit cards from your mobile device or services like Zelle or Venmo. Again, we are well on our way to a cashless society in both the B2B and B2C spaces. I would argue that the dollar, euro, yuan, and many other currencies are already digital first.
Stablecoins are really just trying to take this to the next level while making money on small changes in the value of the currencies they are tied to. The past few years we have seen several of these algorithmically controlled coins suffer due to improper collateralization and fluctuations of other digital assets. The volatility of these programs shows there is a long way to go before they are going to be considered as a mainstream payment method.
Volatility is also a huge issue for crypto. Looking at Bitcoin as an example, Forbes talks about cryptocurrency’s volatile history. Granted, if you bought and held during the first 10 or so years, you made a ton of money. But since then, there have been as many great days as there have been horrible ones, and it is not uncommon to see the value rise or fall by 10% or more in a day. That type of fluctuation can destroy a company’s profit margin. It would be very difficult to manage a consistent profit margin unless your entire supply chain was operating on Bitcoin, and even then, swings in value could leave manufacturers and distributors in a losing position.
we are well on our way to a cashless society in both the B2B and B2C spaces. I would argue that the dollar, euro, yuan, and many other currencies are already digital first.
Kornik: So, it sounds like you have lots of red flags when it comes to crypto.
Lindstrom: Look, the key to trade currencies is consistency, and crypto just isn’t there yet. While many feel confident that crypto can become a dominant force in trade, I think there are several barriers to its success. In addition to volatility, security remains a concern. Chainalysis estimates that in 2022 alone, $3.8 billion was stolen in crypto hacks. While credit cards and mainstream banking see their share of fraud, there are protections and insurance available for corporates and individuals with mainstream payment methods. Many of these are legislative in nature, and that is the other big challenge to crypto. Crypto is not tied to or protected by the actions of a sovereign government. While many tout that as a selling feature or benefit, it does not provide businesses or consumers the confidence needed to make it a mainstay of commerce.
For the average person, I am hard pressed to find one use case where these cryptocurrencies provide what is not already handled by existing payment methods. While crypto certainly offers fast and cheap transaction rates, the benefits do not outweigh the risks, in my opinion. When you layer on financial regulations around sanctions and KYC processes, I do not see crypto becoming a major force in global finance.
Kornik: Do you see a future where the U.S. dollar is no longer the world’s reserve currency? And what could potentially take its place?
Lindstrom: The U.S. economy is still the largest economy in the world and continues to be a net importer. Our consumption and economic strength make us the world’s reserve currency. Nothing is forever, but it is hard for me to rationalize a world where the U.S. dollar is not central to trade finance. While I am not an expert on geopolitics, I can see a future where the world is operating with multiple reserve currencies tied to political and trade alliances.
Kornik: What worries you most about a digital currency future? And conversely, what excites you about it?
Lindstrom: Fraud and instability are my biggest fears. Moving towards digital currencies, and indeed digital identities, has the potential to make the world a much more insecure place, leaving us increasingly vulnerable to identify theft and fraud. Perhaps the most exciting thing to me is the access to data and speed of transactions that digital currency could provide. Given the time it can take funds to clear with current systems—it often takes days—the amount of money tied into these processes must be huge. Freeing that liquidity through digital currency could be a huge boost to businesses of all sizes.
Kornik: Finally, if I ask you to predict far into the future, say 2035, 2040 or even 2050, what’s different? What does that financial future look like? Any bold predictions?
Lindstrom: It has been 90 years since the U.S. departed from the Gold Standard and 50 since Richard Nixon finally ended the last vestiges of a hard currency backed by gold. As I mentioned earlier, I believe that most major currencies are digital in nature already. Bitcoin and other cryptocurrencies take the concept of fiat money to a whole new level. You asked for a bold prediction so here’s one: If I had to make a prediction of what the future of money looks like in 2050, I would say it will be transacted digitally but likely backed by water. I can see a world in which currency, digital or otherwise, is benchmarked to fresh water as the planet’s most valuable asset.
Crypto is not tied to or protected by the actions of a sovereign government. While many tout that as a selling feature or benefit, it does not provide businesses or consumers the confidence needed to make it a mainstay of commerce.
Cornell professor of trade policy: Digital revolution will transform currencies—and the world
Cornell professor of trade policy: Digital revolution will transform currencies—and the world
Cornell professor of trade policy: Digital revolution will transform currencies—and the world
Eswar Prasad is the Tolani Senior Professor of Trade Policy at Cornell University, as well as a Senior Fellow at the Brookings Institution, where he holds the New Century Chair in International Economics, and a Research Associate at the National Bureau of Economic Research. Prasad sits down with Joe Kornik, Editor-in-Chief, VISION by Protiviti, to discuss his latest book, the digital revolution and the future of money.
Kornik: The subtitle of your outstanding book, “How the digital revolution is transforming currencies and finance,” is provocative, to say the least. Let’s start with the end of physical cash. When, why and how do you see it going away and what are the impacts of the digital currencies that replace it?
Prasad: The era of cash is drawing to an end, with its use declining in virtually every economy, including some economies where it is barely even used. Digital payments have many merits. They are quicker and often cheaper. For businesses, it is a boon not to have to deal with transacting in and managing cash. For a street vendor or a mom-and-pop store, handling cash and making change is a hassle. Storing and managing cash is generally messier, time-consuming, and increases vulnerability to theft and loss.
For all its flaws, cash also has many advantages. It is easily accessible, can be used without any electronic device or connection to wireless networks or the internet, and is available to rich and poor alike. Cash also comes through in a pinch, especially during natural disasters and other emergencies, when communications networks might be down and electricity can get cut off. Most importantly, it provides privacy in commercial transactions, an attribute that is unlikely to be true of any form of money that leaves a digital trail.
Will the disappearance of cash matter? Advocates for cash have made the case that it remains essential for a significant share of the population in any economy—those who might not have easy access to digital technologies, including the poor; residents of remote, rural areas; and the elderly. Digital payments such as ApplePay are easy to use but you need a bank or credit card account before you can sign up. So, the non-acceptance of cash could disenfranchise the poor, who already suffer from various deprivations and lack access to the financial system. Besides, cash is often inextricably tied up with national identity. Countries regularly redesign and modernize their banknotes to reflect their national heritage and values while trying to stay a step ahead of counterfeiters.
Despite all this, the reality is that physical money is slated to become a relic, with digital payment systems becoming the norm around the world. Soon, we will live in a world where our smartphones displace our billfolds and physical wallets, much like they eliminated the need for cameras and GPS devices. Whether that leads to greater economic efficiency, or a dystopian society—or both—remains to be seen.
Advocates for cash have made the case that it remains essential for a significant share of the population in any economy—those who might not have easy access to digital technologies, including the poor; residents of remote, rural areas; and the elderly.
Kornik: How do you see that race for digital currency dominance playing out—from Bitcoin to central banks to private companies like Amazon or Meta developing their own cryptocurrencies?
Prasad: The emergence of the original cryptocurrency, Bitcoin, was aimed at making it easy, in principle, for anyone to have access to a means of payment without having to rely on a commercial bank, credit card company, or even money issued by a central bank. The fact that transactions using Bitcoin could be conducted using just the digital identities of the transacting parties, thereby preserving anonymity, was an added allure. However, Bitcoin’s unstable value and its inability to handle more than a tiny volume of transactions have made it a non-viable medium of exchange. New cryptocurrencies called stablecoins aim to fix the problem of unstable value. Their stable value comes from being backed by stores of existing fiat currencies. There are already stablecoins such as Tether and USD Coin that are backed up one-to-one by U.S. dollar reserves. These stablecoins are being used for payments within and perhaps someday even across countries.
Allowing major corporations such as Meta and Amazon to issue their own stablecoins could pose a threat to governments’ monetary sovereignty. After all, global corporations that have widespread reach and deep pockets could someday conceivably issue currencies that are delinked from and directly compete with existing fiat currencies.
Spurred by these innovations and faced with the declining use of cash, many central banks around the world are experimenting with or already rolling out digital versions of their currencies. Central bank digital currencies (CBDCs) have many advantages. They can provide a free and convenient digital payment system for the masses, even those without a bank account or the means to acquire a credit card. Digital currencies will bring economic activity out of the shadows and raise government revenues by making it difficult to conceal transactions that are subject to taxes. Counterfeiting of currency will become harder, but digital hacks cannot be ruled out. Ironically, offshoots of Bitcoin’s technology might help in improving security. The use of currency for money laundering, terrorism financing, and other nefarious activities will be curtailed.
Kornik: Do you think we’re looking at either a weakened U.S. dollar or even perhaps the end of it being the dominant global currency?
Prasad: New financial technologies, including the advent of cryptocurrencies and CBDCs, have implications for the international monetary system. Take cross-border payments, which are inherently complicated, as they involve multiple currencies, institutions operating on different technological protocols, and varying sets of regulations. As a result, international payments tend to be slow, expensive, and difficult to track in real time. New technologies are reducing these impediments, with nearly instantaneous payment and settlement becoming possible.
The landscape of global reserve currencies may appear to be at the threshold of disruption as cryptocurrencies gain traction as mediums of exchange and stores of value. In reality, despite all the hype, the proliferation of cryptocurrencies will not have a substantial disruptive effect on the major reserve currencies, especially the U.S. dollar. Unbacked cryptocurrencies are much too volatile to be considered stable sources of value or reliable mediums of exchange. On the other hand, stablecoins backed by major corporations such as Amazon are likely to gain traction as means of payment. But insofar as their stable values depend on their being backed by fiat currencies, stablecoins are unlikely to become independent stores of value.
global corporations that have widespread reach and deep pockets could someday conceivably issue currencies that are delinked from and directly compete with existing fiat currencies.
Kornik: So, what does all that mean for the future of the global economy?
Prasad: The landscape is likely to shift a great deal, especially for smaller and less developed economies. National currencies issued by their central banks could lose ground to private stablecoins and perhaps also to CBDCs issued by the major economies. Even among the major reserve currencies, there are some shifts in store. The U.S. dollar could lose some ground as a payment currency, although it will remain dominant both in this dimension and as a store of value. A digital version of the Chinese renminbi could help it gain traction as a payment currency but the digitization of the currency by itself will do little to boost its status as a reserve currency, one that is held as a store of value by domestic and foreign investors. The renminbi’s further rise, even if gradual and modest, and the advent of additional stablecoins, could reduce the importance of the second-tier reserve currencies, including the euro, the British pound sterling, the Japanese yen, and the Swiss franc.
Kornik: What if we get this right? What are the positive outcomes of this finance and currency revolution? And, conversely, what could go wrong? What worries you about the financial future?
Prasad: The blockchain technology pioneered by Bitcoin has the potential to make low-cost digital payments widely accessible. Many low-income households even in the U.S. lack access to digital payments because they do not have a credit card or bank account. International payments, which are beset by even more impediments, could also be made cheaper, quicker, and easier to track. These changes will be a boon to consumers, businesses, as well as exporters and importers.
Blockchain might soon play a bigger role in other areas of finance as well. Variants of the original technology could someday make it easier to connect savers and borrowers directly, sidestepping banks and other conventional lenders. “Decentralized finance” is viewed by proponents as a way to democratize finance, enabling broader and easier access to a wide array of financial products and services. The prospect of easy access to digital payments and basic banking products for savings and credit is one that could be beneficial not just in developing countries but even in a rich country like the U.S., where about 5 percent of the adult population is cut off from the formal financial system.
But technology can’t solve all the problems and will create new ones. Financial regulators face significant challenges with updating regulations to cover cryptocurrencies and related financial products that often fall between the regulatory cracks. Investor protection is a serious concern as naïve, retail investors might end up taking on more risk than they realize when they get dazzled by the promise of a quick pathway to riches from the new technologies.
Kornik: I don’t mean to focus only on the what could go wrong, but I wonder how you think we can combat issues around privacy, data security, fraud and even financial crimes in a digitized future?
Prasad: Some of the advantages of digital currencies discussed earlier come with a price. Electronic transactions leave a digital trail that cannot easily be erased. Even with privacy protections in place, the reality is that transactions using a central bank digital currency will be auditable and traceable. After all, every central bank wants to do all it can to ensure that its currency, physical or virtual, does not facilitate illicit commerce.
The U.S. dollar could lose some ground as a payment currency, although it will remain dominant both in this dimension and as a store of value. A digital version of the Chinese renminbi could help it gain traction as a payment currency but the digitization of the currency by itself will do little to boost its status as a reserve currency.
Electronic money offers possibilities that cash cannot. For instance, in an economic crisis, a government could dole out digital money with expiration dates, ensuring that it is spent rather than saved. This makes economic policy more effective but at the same time takes some key decisions out of the hands of households in favor of government-directed outcomes. Digital “smart money” that replaces cash could become an instrument of government control, with authoritarian governments using it as a surveillance tool and even benevolent governments conceivably using it to promote social objectives (preventing its use to purchase goods and services that are deemed illegal or undesirable).
Bitcoin’s blockchain technology can help in creating better digital payment systems, automating a broad range of transactions, and helping to democratize finance. But, in an ironic twist, the true (and dark) legacy of Bitcoin might be the erosion of confidentiality, the broader prevalence of government-managed payment systems, and greater intrusion of big business and governments in financial systems and in the functioning of society.
Kornik: When you look out to 2030 and beyond, what will be the ultimate impact of this digital disruption on people and the planet?
Prasad: In the coming years, central bank-issued currencies will still retain their importance as stable stores of value, reflecting the perceived trustworthiness of their issuers. But when it comes to money’s function as a medium of exchange, we can expect more competition between private and fiat currencies. In principle, intensified competition between currencies should lead to payments that are cheaper and quicker, benefiting consumers and businesses, and also foster incentives for issuers, whether private or official, to exercise discipline in order to preserve the value of their currencies.
But it is worth keeping in mind that technology can have unpredictable consequences. Rather than leading to a proliferation of private and official currencies that compete on a level playing field, the digitization of currencies might eventually result in an even greater concentration of economic power. If they were easily available worldwide in digital form, major currencies such as the dollar, the euro, and the renminbi might displace the currencies of smaller and less powerful nations.
Digital currencies issued by large corporations that take advantage of their already dominant commercial or social media ecosystems might gain traction too and, unless quashed by governments, could one day perhaps even turn into independent stores of value by giving up their fiat currency backing. This could create even more monetary instability if it resulted in individual countries having multiple issuers of money, with domestic currency values fluctuating relative to one another. All that is certain is that the international monetary system is on the threshold of momentous change, wrought by the digital revolution. It remains to be seen whether this ultimately benefits humanity at large or exacerbates existing domestic and global inequities.
the digitization of currencies might eventually result in an even greater concentration of economic power. If they were easily available worldwide in digital form, major currencies such as the dollar, the euro, and the renminbi might displace the currencies of smaller and less powerful nations.
Three financial executives talk future of money, banking, and the economic promise of Africa
Three financial executives talk future of money, banking, and the economic promise of Africa
Three financial executives talk future of money, banking, and the economic promise of Africa
Joe Kornik, Editor-in-Chief of VISION by Protiviti sits down with a panel of three longtime financial executives with more than 75 years of combined experience in financial services and banking in Africa—Sepo Haihambo, Faith Khanyile and Charity Chanda Lumpa—to discuss the future of the sector, currency and the continent.
In this discussion:
1:25 – A macro perspective on the future of the industry: digitization, inclusivity
5:06 – A more equitable money landscape
10:19 – Implications of digital money
12:40 – Future of banking: consolidation, collaboration, complience
19: 36 – Economic prognosis for Africa
Joe Kornik: Welcome to the VISION by Protiviti podcast. I'm Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource looking to the future to examine big themes that will impact the C-suite and executive boardrooms worldwide. We're discussing the future of money and its implications globally. And today, we're focused on Africa. We have three outstanding financial executives from across the continent joining us today, and I couldn't be happier to welcome in Charity Chanda Lumpa, member of the Supervisory Board of Oikocredit Netherlands, and VP of the Institute of the Directors of Zambia.
Charity Chanda Lumpa: Thank you so much for having me. Thank you so much.
Joe Kornik: Also joining us today is Sepo Haihambo, executive officer of commercial banking, FNB Namibia, and former head of global markets for Rand Merchant Bank.
Sepo Haihambo: Thank you for having me. Excited to be talking about the future of money.
Joe Kornik: And we're joined by Faith Khanyile, director of companies, and former CEO of WDB Investment Holdings, as well as the former head of corporate banking at Standard Bank Group.
Faith Khanyile: Thank you very much for inviting me, looking forward to the discussion.
Joe Kornik: Well, we've got, believe it or not, more than 75 combined years of finance, banking and business experience on this panel today. So, I'm really excited to get started. I wanted to start sort of from the macro perspective and talk about where we are today, with the many disruptors facing the financial sector right now, specifically in the fintech space, with digital payments and cryptocurrencies, and now, even generative AI is into the mix. What do you think it all means for the future of the industry?
Sepo Haihambo: So, look, I think three things come to mind. I think one, as money becomes more digital, you're going to have greater integration in terms of people's everyday lives and how digital payments assimilate into that. Right now, a lot of it is maybe very business-to-consumer, but over time, it will also become business to business. This is going to mean that as banks, we're going to have to look at faster speed of integration as innovation continues into our existing business models, which means continuous investment and capital expenditure to make sure that we're ahead of the curve, maintaining the existing legacy models, but also building into the future with the investment in technology. So, expensive from an investment perspective, but really going to require faster adoption, given the speed of change.
Faith Khanyile: Maybe if I may add to what Sepo is saying, I also think there will be opportunities to promote more inclusive finance, especially in emerging markets, like, for example, in South Africa and African continent, where we still have the big part of our population having challenges accessing financing, accessing credit. But at the same time, we do have a high adoption of, for example, smartphones. And now, also data is becoming more accessible and more affordable. So, I definitely think that AI, and specifically, fintech, can promote more inclusive financing. And also specifically for small businesses, which require credit, and the old traditional way of accessing credit via banks has been quite expensive and also just not that friendly to small businesses.
Charity Chanda Lumpa: The future I have in mind is trending towards what I think Sepo talked about in terms of digitization. It's more about convenience, making it convenient. I don't know what paper money will look like in the future, if at all, but certainly, digitization is going to run out the number of ATMs that we have because of that particular instance. And even payment systems themselves will continue to be more and more cashless as we go, so that we can see that there'll be more focus on convenience, more focus on inclusivity, and that will also require much more security in terms of our banking systems or whatever system we're going to use, to use money on the global platform, even locally, domestically.
Joe Kornik: Right. And I heard you all in some way, shape or form, talk a little bit about equity. I think one of the promises of the future of money is that it perhaps will create a more equitable global environment for the financial sector. Do you see that as a real possibility and one of the opportunities in the future?
Charity Chanda Lumpa: I think it's a yes and no question, because basically, leveling the playing field would be tantamount to people having the same opportunities, equal opportunities, and equal access to finance. Yes, as much as the level playing field will be there in terms of the mode of using this money digitally, there will be some areas where there'll be less equity than others. And especially when you look at the South-South divide, or the first world and second world, definitely in more African countries, we'll see that cash is more of a leveler than it is elsewhere, where you find that you can't even pay using cash, you have to have a card. You have to have a debit card or a credit card. So, it's a yes and no question, depending on where you are.
Faith Khanyile: Yes. And I think to add, I think we do have to also deal with some fundamental issues around the allocation of capital, because I think right now, we do have issues around the diversity, sort of like the profile of the allocators of capital and then the managers of capital as well. And I guess also within this, we've got still, sort of like old ways of really looking at who gets capital. So, I think technology, fintech alone cannot solve some of those fundamental issues around who is allocating capital, and to whom are they allocating capital. Because I think one of the biggest challenges that globally we still have is that we have not really had the kind of transformation that we need at that level of capital allocation, and capital and fund management, which then can trickle down to making sure that we then achieve equity in the access to finance.
So, I think we do need to deal also with that issue, because then, if we can deal with that issue, then we can hopefully see more equity in who is accessing finance, be it women or small businesses. But I think as long as we don't have that, and then also if we don't deal with some risk appetite issues, I think we will have a challenge. But I think obviously, fintech and technology or the digital revolution will definitely open up opportunities, but we do need to deal with some systemic issues as well.
Sepo Haihambo: So, what I would say is I agree with Faith and Charity that at the end of the day, digital money is still money, so it must be earned. And if the earning potential of the individual, the company of the country isn't enhanced, then it doesn't necessarily increase access. However, having said that, I think with the increase in digital solutions, you're going to have more straight-through processing and real-time settlement of transactions. And this being done by people's cell phones, et cetera has led to new credit models that perhaps wouldn't have been used even five years ago. I've read case studies where they look at the behavioral pattern of when a person buys data for their mobile plan. Are they responsible? Do they wait until they finished every last bit of data and voice time before they top up? Are they very prudent, and like when they’re 50% utilization, they go and they top up, and they’re using alternative credit models that weren't available to us before we had AI as an input into credit models. But ultimately, we still need to solve in tandem, for the quicker, better, faster solutions. We need to, in tandem, solve for the income potential of the individuals, the companies, and the countries, et cetera. Otherwise, you build for a very limited market.
Joe Kornik: I think we're all in agreement that money is going digital. Clearly, the future is going to be some sort of digital currency, which opens up all kinds of new issues potentially. I mean, there are opportunities, certainly, but then there are also some challenges.
Sepo Haihambo: A hundred percent cashless society would need—for that to be adopted, you need that to be government led. So, I suppose there are valid concerns around the privacy, and the conversation will probably be based on the analysis of the positives and the negatives on a whole, and on a balance, what society seeks to gain if we go fully digital with no cash, globally. I mean, like, for example, I think enhanced revenue—tax revenue collection, could be one of the possible gains. But with regards to the privacy concerns, what I find interestingly enough, is that this tends to also be linked to generational concerns. You find that the younger generations from your Gen Z's and below are not as concerned about sharing their data. There's more of an interest in understanding why their data is being taken and what it would be used for, but happy to share the data if there's understood benefit for them at an individual level. So, I think as time moves on, the adoption of fully digital money will probably get easier as the younger generations come into the active economic workforce.
Faith Khanyile: Yes, I think one of the other considerations is obviously, on regulation. I think governments really need to get their heads around how do they regulate this new unchartered territory to protect the privacy of the individuals, as well as, obviously, the data that is being shared.
Joe Kornik:You've all touched on banking, and we have so much banking experience here on this call, I just wanted to ask a little bit about the future of that sector and what do you see as the major challenges in banking.
Charity Chanda Lumpa: I think for me, banking especially is a very highly regulated sector, and that always causes problems for banks, especially when it comes to meeting some regulations that actually negatively or adversely impact the ability to provide great service to customers. So, regulation needs to be measured, because keeping up with these regulations can be a challenge. It's a cost, especially for smaller banks. So to overcome this, a bank needs to implement really robust risk management systems, and also invest in technology that supports their regulatory reporting, but that tends to be quite high. And really, having a proactive stance when it comes to compliance; it's quite a cost in terms of a bank to meet all these regulatory requirements. So, yes, for me, that's one area that I see is quite a challenge for the banking sector in years to come.
Sepo Haihambo: I would add that the significant cost of compliance is definitely a key item, and I agree with Charity on that. And then, you also have the cost of guarding, protecting your client's money because of the cyber risk investment that has to happen alongside with a large capital expenditure, that banks will continuously need to plow into their systems to make sure that they've got fast adoption of new technology as it is developed. It's making the cost of doing business relatively high. So, what I expect you'll see in the next 5 to 10 years is a lot of consolidation. I think we're definitely seeing that in the African banking context. So, lots of consolidation, fewer players, but bigger players because of the cost of business in banking continuing to escalate with compliance and investment in technology required.
Charity Chanda Lumpa: We have seen changing customer behavior and expectations in the face of what we just discussed, security and cybersecurity threats. So, with the increasing trend of technology, digitization of financial transactions or banking transactions, the risk of cyber threats, even data breaches, becomes a really significant concern for banks. And to keep their customership, they must now continue to enhance their security stance, their security measures, and implement stringent cybersecurity frameworks that are not cheap, they're quite costly, and ensure that there's also a very robust, what I would like to call “incident reporting systems,” to allow customers feel that, yes, when it does happen, the bank will be there to help them. But all these are actually quite costly investments for the bank.
So, collaboration is going to be very key between the banks, between regulators, law enforcement agencies in terms of combating cybercrime. And then, customer behavior also needs to be factored in because the banks need to transform their experience of their customers by providing seamless, personalized, and omnichannel services, because really, it's not just in the good old days you go to the bank and then you get served. Now you have to get your banking wherever you are, and mostly, it's on your handset. So, banks now need to adopt a more customer-centric digital strategy when it comes to leveraging the data analytics to understand customer preferences, behaviors, whilst ensuring that they're protected.
Faith Khanyile: Yes. And also, I think the other one is that definitely banks are being disrupted by fintechs. I mean, it's that being disrupted left, right and center. Yes. And you can see, banks are now entering the fintech area, and they've got this legacy systems and costs that are just difficult to dissociate from. So, I think that's definitely—I think that trend has been going on now for the past five to 10 years. So, that is a real reality. But you see banks partnering with fintechs or investing in fintechs. It's actually fascinating to see what's happening in South Africa at the moment.
Joe Kornik: So, Faith, play that out for me, over the next three to five to even 10 years, how do you see that sort of—those partnerships and those collaborations, how do you see those impacting the sector, the industry?
Faith Khanyile: I think the industry is definitely going to be totally, totally different, because it's not just the fintechs that are playing in this sector, we also are seeing telecoms companies also. Because they've got the customer, they've got the data, they really have got the cream that you want, to then offer financial services into this huge untapped market on the continent. So, I think it's going to be a totally—I think over the next 10 years, your traditional banks, like your standard bank, your net bank, they are going to be—yes, I think it's going to be very tough for them because I think they're going to be meeting competition from all angles, from their own clients, from their service providers. So, it's going to be quite different, and I guess the regulations must obviously keep up with the changes. I think what we're seeing in South Africa is that the regulations are a bit sluggish, but that is not stopping innovation. I mean, even retailers are offering financial services to their clients. So, it's going to be a totally, totally different industry over the next 10 years.
Joe Kornik: I wanted to talk about Africa a little bit. It wasn't too long ago that some were predicting that Africa could be the next China, but economic growth has slowed post-pandemic. But key demographic changes still signify a lot of economic opportunity, and since we've got three different countries represented here, I did want to ask a little bit about, from a financial standpoint, from an economic standpoint and its positioning on the global stage, where is the continent today, and where do you three see it going in the future?
Sepo Haihambo: Africa is a very diverse continent. I believe at any given time, there's always pockets of growth in the continent. What you do find, though, I think there is still lots of potential untapped opportunity in the continent. I think following COVID-19, with the supply chain delays that were experienced globally, this trend towards reshoring is making a lot of manufacturers and countries reconsider how they acquire raw materials, which I think is creating more direct demand for a lot of the raw materials that are produced in Africa, and also the move towards renewable with these rare minerals that are required for batteries, like lithium, as an example. So, I think from that perspective, there's definitely another growth wave that will come through in the African context.
And then you've got the added complexity of these conversations around the dollarizing trade in Africa, which then could also be very beneficial towards the value of these African currencies. And then, at the same time, you've got African leaders coming together, having a conversation about the Africa free trade continental agreement, which would enhance trade, South to South trade on the continent. So, I think those opportunities do exist, but it would be irresponsible for me not to highlight, though, that the issues and the challenge in adopting new technology is being outpaced by the speed at which we're developing our skills and infrastructure to be able to support that future. So, it's almost like the two things need to happen in tandem for that full potential of the continent to be realized.
Faith Khanyile: Yes. I mean, I think, to say, first one, the opportunities are definitely still there. And I think if we look at the latest AFDB Africa economic outlook for 2023, it's very clear that Africa has definitely been resilient. Again, here, we need to understand that Africa is not one country, but just a macro. The continent has definitely been resilient post-COVID, and the economic growth has recovered completely. I think for 2023, the growth is still projected to be just close to 4%, actually—I have not seen the latest IMF outlook, but that was from the AFDB. And then, for 2024, the continent is projected to grow by 4.3%. And then, we talk about, obviously, the population and the youth dividend, those opportunities definitely have not gone away. But obviously, I think we've had headwinds due to the war in Ukraine, which has led to high food and energy prices. Most of the countries in Africa are battling very high levels of inflation, then we've had the increasing interest rates in the U.S., and the strengthening of the U.S. dollar have definitely impacted those countries that have borrowed heavily from, using U.S. dollars. But I think the key opportunities right now, actually, that we need to leverage as the continent revolves around what now is being termed the “green economy.” And then, I mean, the numbers are just staggering. I mean, apparently, the opportunity ranges anywhere between $2.6 trillion to $2.8 trillion that is required by 2030 to take advantage of this green economy. Anywhere from investing in renewable energy, investing in water infrastructure, obviously, health and education, are still big opportunities on the continent.
Charity Chanda Lumpa: Africa is the happening place. I think all major developments will take place in Africa, if I can say so. Why? Because we have a very youthful population in Africa, a growing middle class, and we have abundant natural resources, increasing urbanization, which may be good or bad, depending on how you handle it. All these actually are significant opportunities for economic growth in the next five to 10 years. We need to make progress as Africa at both country and continental level in terms of infrastructure development, because as we have seen across Africa, many countries are investing heavily in infrastructure development, which will include energy transportation, the green economy that I think Faith was just referring to, and telecommunications.
But we also need to improve connectivity to facilitate trade and ensure that we attract direct foreign investment. When you look at Africa right now, just across from Zambia to Malawi, I had to go to Johannesburg. Okay? So, that interconnectivity is not dead. For me, I cannot jump on a flight to then go straight to Nigeria, for example. I have to hop onto another flight, get to another airport, and sometimes even go to Europe to come back down to Africa. So, interconnectivity needs to be sorted out, especially when it comes to regional integration. In order to boost our inter-African trade and increasing investment flows, that will foster economic cooperation.
If we can also ensure regarding renewable energy investments, that this focus in Africa should be driven by the need for sustainable development in terms of wanting to mitigate adverse climate change developments. As you know, we have vast renewable energy potential, especially in solar, wind, and even hydroelectric power.
So, I think Africa is the happening place. Really, our economic trajectory is going to be influenced by a lot of combinations, such as domestic and global factors, and with the right leadership. I can't overemphasize that. We really need bold leadership that will look inside Africa for African solutions that will be provided by Africans within Africa, with as much help as they can get. But really, we can't keep running to the first world for help when we have significant resources, both human capital and otherwise, on the continent, that can come up with African solutions.
Joe Kornik: Faith, Charity, and Sepo, thank you so much for your time today. I really appreciate the conversation.
Charity Chanda Lumpa: Thank you, Joe. It was really good talking to you.
Sepo Haihambo: Thank you so much for the opportunity.
Faith Khanyile: Thank you very much for the opportunity. Thank you.
Joe Kornik: And thank you for listening to the VISION by Protiviti podcast. Please rate and subscribe wherever you listen to your podcasts, and be sure to check us out on vision.protiviti.com for all of our content around the future of money. Thanks for listening. On behalf of Faith, Sepo, and Charity, I'm Joe Kornik. We'll see you next time.
Lumpa is the founder & CEO of the Charity Chanda Lumpa Foundation, a nonprofit seeking to support community projects. She was a three-time CEO of the Zambia National Tourism Board, Ecobank Zambia Limited and Airtel Networks Zambia Plc and has extensive experience in insurance, banking, tourism and telecommunications. Previously, she had held executive roles in Citibank Zambia, Barclays Bank and Stanbic Zambia Ltd. Lumpa is a member of the Supervisory Board of Oikocredit Netherlands and VP of The Institute of Directors of Zambia.
Faith Khanyile is a financial executive and futurists with 25 years of financial services industry experience in corporate and investment banking, private equity and balance sheet equity investing. She is passionate about growing businesses, empowering people and providing opportunities for women and young people. Previously, she was the Chief Executive Officer of WDB Investment Holdings and Head of Corporate Banking at Standard Bank Group, both in Johannesburg.
Sepo Haihambo is Executive Officer, Commercial Banking, of First National Bank Namibia where she is responsible for the alignment of bank global strategy with full accountability for segment operations, regulatory, risk management, income statement and balance sheet management. Previously, Haihambo was Head of Global Markets for Rand Merchant Bank in Namibia. She is a seasoned senior executive with deep business knowledge, good business acumen, and a proven leadership record of accomplishments leading strategic turnarounds and high-growth strategies.
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Cash out: Why execs need to stay vested in digital currency developments around the globe
Cash out: Why execs need to stay vested in digital currency developments around the globe
Cash out: Why execs need to stay vested in digital currency developments around the globe
In a recent seven-day stretch that concluded with the incarceration of a crypto exchange founder CEO, the following milestones garnered limited mention beyond CoinDesk:
- The first large U.S. financial company unveiled its own US$-pegged stablecoin;
- The largest publicly traded U.S. crypto exchange went live with its open blockchain-based development platform; and
- The SEC reviewed applications for spot bitcoin ETFs from several large investment companies.
These important digital-currency advancements did not receive the attention of the media, which preferred to focus on the opaque platforms, protocols and business practices behind the bankruptcies, collapses and alleged frauds that sparked a “crypto winter.” The underreported developments have less to do with tumbling, rug-pulling, slashing, cold wallets, gas or meme coins and instead are doing more for mainstreaming crypto innovation and rewiring the payments circuitry.
These regulatory, business and technological developments will have substantial implications on decentralized finance (DeFi) and Web3 opportunities across a broad swath of sectors, companies and internal business and functional groups. But beyond the headlines, a wealth of business-relevant digital currency developments and Web3 opportunities demand the C-suite’s attention.
Yes, the outcomes of crypto-related federal criminal investigations and charges as well as enforcement actions will shape future legislation, regulations and enforcement stances. And as Lata Varghese, Managing Director and Protiviti’s Digital Assets and Blockchain practice leader, says in Protiviti’s Powerful Insights podcast, Future of Crypto Innovation and Regulation: “I think the industry should expect much tighter regulations and rules, and if you're an intermediary enabling the trading of crypto assets or safekeeping customer assets, you should expect to comply with all of the rules that would apply if you were managing any other asset.”
Business leaders with Web3 ambitions and strategies would be wiser to familiarize themselves with the EU’s groundbreaking Regulation on Markets in Crypto-Assets (MiCA) than they would be to follow click-bait accounts of crypto failures (which largely stem from old-school governance and risk-management breakdowns). Thoughtful consideration of select cryptocurrency, stablecoin and central bank digital currency (CBDC)issues will help business leaders put enablers in place to optimize investments in blockchains, smart contracts, digital assets and other Web3 opportunities.
Digital Currency Definitions
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Central Bank Digital Currency (CBDC): A form of digital currency issued by a country's central bank. They are similar to cryptocurrencies, except that their value is fixed by the central bank and equivalent to the country's fiat currency.
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Cryptocurrency: A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Most cryptocurrencies exist on decentralized networks using blockchain technology—a distributed ledger enforced by a disparate network of computers.
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Stablecoin: Cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for common transactions.
Crypto and stablecoin: What would Howey do?
Consumer and business cryptocurrency adoption continues to increase despite the industry’s well-publicized struggles in the past 18 months.
Market research conducted by crypto payment gateway Triple-A estimates there were more than 420 million global crypto users at the start of 2023, representing about 4.2% of the global population. One graph in Triple-A’s report overlays global internet adoption from 1991 to 1998 with global crypto adoption from 2014 to 2022: The trajectories are nearly identical. The countries with the largest portion of crypto-owning citizens include the United Arab Emirates, Vietnam, the U.S., Iran, the Philippines, Ukraine, South Africa and El Salvador. In the U.S., 44% of U.S. cryptocurrency owners have annual incomes of US$100,000 or more, 66% hold at least a bachelor’s degree, and 82% are between the ages of 18 and 44. The report also notes that more companies—in retail, financial services, technology, media and entertainment, automotive and telecommunications—are accepting cryptocurrency payments.
A failure of governance and risk management, not a failure of crypto
Crypto adoption remained steady during a 15-month period marred by crypto company liquidity crunches, bankruptcies, bitcoin-laundering lawsuits, enforcement actions and indictments. This resilience shows that the DeFi and Web3 ecosystem is larger and broader than certain crypto exchanges, lenders and stablecoin issuers. Besides, closer scrutiny of most of these misdeeds (alleged or otherwise) points to fundamental corporate governance and risk management failures as root causes of many crypto company collapses. The OCC’s 2016 report on responsible innovation ought to be required reading among crypto-company leadership teams. The OCC’s Responsible Innovation Guiding principle #5 calls for furthering safe and sound operations through effective risk management.
Since that didn’t occur in many cases, upcoming legal, regulatory and legislative outcomes could have significant impacts on crypto markets. One of the biggest crypto-related questions in the U.S. is whether crypto qualifies as a digital commodity (and is therefore subject to CFTC oversight) or a digital security (subject to SEC oversight and registration). An answer likely pivots on the so-called Howey Test, a four-pronged determination of whether a transaction or contract qualifies as a security, based on a 1946 Supreme Court decision.
Regulatory attention
U.S. executive and legislative branch attention on cryptocurrency is also increasing. On September 16, 2022, President Biden issued an executive order detailing a framework for the responsible development of digital assets. Congress has proposed dozens of crypto and blockchain-related bills, including the Clarity for Payment Stablecoins Act, which cleared the House Financial Services Committee in August but lacks support from the President, the Treasury Department and the Fed. At the markup session Representative Patrick McHenry, the Republican chair of the Financial Services Committee, warned, “As other jurisdictions like the UK, the EU, Singapore, and Australia move forward with clear regulatory frameworks for digital assets, the United States is at risk of falling behind.”
The EU’s enactment of MiCA earlier this year confirms that the U.S. has regulatory ground to make up. The sweeping regulation establishes a comprehensive framework for issuers and service providers including compliance with the anti-money laundering rules while covering issuers of utility tokens, asset-referenced tokens and stablecoins, along with service providers (e.g., exchanges and wallet providers).
“As other jurisdictions like the UK, the EU, Singapore, and Australia move forward with clear regulatory frameworks for digital assets, the United States is at risk of falling behind.”
- U.S. Rep. Patrick McHenry, Financial Services Committee
Central bank digital currency (CBDC): What’s happening?
As of July, 11 countries—Nigeria, Jamaica, The Bahamas and eight other Caribbean countries—had launched CBDCs, according to The Atlantic Council, which maintains a nifty tracker of CBDC initiatives in 130 countries.
Another 25 countries are now running CBDC pilots, including India, China (whose government has officially banned cryptocurrencies while embracing the digital yuan), Russia, Australia and Sweden. The U.S., along with Canada, Mexico, the UK and most EU countries have CBDC programs in development; and 45 more nations are in the research phase. President Biden’s September 2022 Executive Order calls for the exploration of a CBDC, which the New York and Boston Federal Reserve Banks are exploring by developing prototypes for both retail and wholesale CBDC.
Last year, El Salvador and the Central African Republic made bitcoin their national currencies. Making a decentralized digital coin the national currency represents a markedly different monetary policy than creating a CBDC, which is highly regulated and controlled by a central bank, and, in most cases, operated on a private blockchain.
Types and approaches
CBDCs can be retail (focusing on consumers and small businesses) or wholesale (larger businesses, governments) in nature. A retail CBDC differs from existing forms of cashless payment instruments because “it represents a direct claim on a central bank rather than the liability of a private financial institution,” according to the Bank for International Settlements (BIS), which also tracks global CBDC trends. “In contrast to a retail CBDC, a wholesale CBDC targets a different group of end users. Wholesale CBDCs are meant for use for transactions between banks, central banks and other financial institutions. So, wholesale CBDCs would serve a similar role as today’s reserves or settlement balances held at central banks.” The majority of current CBDC pilots are retail-focused.
The primary motivations for creating a CBDC, according to the BIS, include financial stability, monetary policy implementation, financial inclusion (i.e., reducing the number of unbanked and underbanked citizens), payments efficiency (especially for cross-border payments) and payments security/robustness.
CBDC designs and approaches vary widely. Some are token-based, others are account-based; distribution, access, privacy and security mechanisms differ as well. CBDCs also help address changing consumer preferences, including a growing embrace of digital transactions and the declining use of cash. In 2016, 31% of consumer payments were conducted in cash and 45% were made via credit and debit cards, according to the Federal Reserve Bank of San Francisco; by 2022, cash comprised only 18% of consumer payments while 60% of payments were made with credit and debit cards.
Upsides and downsides
Economist and Cornell professor Eswar Prasad’s book The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, provides a comprehensive analysis of CBDC pros and cons. The disintermediation of banks is a potential CBDC downside. If a central bank paid interest on its retail CBDC accounts, it could directly compete with commercial banks. While that makes interest-bearing retail CBDCs less likely, there are also upsides for traditional financial services companies: “Wholesale CBDCs could allow financial institutions to access new functionalities enabled by tokenization, such as composability and programmability,” according to the BIS. Large financial institutions are already leveraging DeFi innovations: Last fall, JPMorgan executed its first cross-border transaction on a public blockchain, and the company continues to explore, and invest in, digital identity capabilities and other Web3 innovations.
In his analysis, Prasad also discusses numerous monetary policy benefits of CBDCs: “A CBDC, if properly designed, makes monetary policy more potent in general,” he writes, “particularly under difficult circumstances when an economy faces collapsing growth and spiraling inflation.”
“Wholesale CBDCs could allow financial institutions to access new functionalities enabled by tokenization, such as composability and programmability,” according to the BIS.
Laying the groundwork for Web3 capabilities
The blockchain and digital asset building blocks used in cryptocurrencies, stablecoins and CBDC also undergird a broader range of business uses across industries. DeFi is often used to describe public blockchain technology used to create digital financial services, products and applications related to payment processes, borrowing and lending, and more. Widening the focus beyond financial services and this decentralized infrastructure generates Web3 opportunities related to smart contracts, NFTs and other digital assets, and decentralized autonomous organization (DAO) models.
“Web3 introduces concepts of decentralized accountability and self-sovereign identity, which creates a digital world that centers the control of data around its use,” notes Protiviti Global Leader of Technology Consulting Kim Bozzella. “That, in turn, empowers individuals to have increased control and ownership of privacy and security while interacting in digital realms.”
Again, the nature of these digital applications and opportunities is varied and broad. Stablecoin payments can help small businesses, small vendors and gig workers, accounts receivable functions, and working capital management capabilities.
Areas of opportunity
As more companies integrate crypto and stablecoin into their investment activities, new forms of insurance are needed. Less than 5% of crypto assets are thought to be insured, according to Reuters: “The question for insurers today is no longer whether there should be coverage for cryptocurrency, given the market entrants already in the field. Rather, the question is what forms such coverage will or should take.” But still, finding reliable insurance for crypto is no easy task.
Digital cross-border remittances, e-commerce, the gaming market and the luxury goods market mark the most lucrative short-term opportunities for digital currency and Web3-related adoption and advancements, according to Triple-A’s research.
Protiviti’s annual survey of global CFOs suggests that finance leaders across all industries recognize these opportunities. Although they were never low-ranked finance priorities in previous surveys, blockchain and smart contracts jumped well into the top 10 in the 2022 survey results.
That recognition is important from a CFO perspective because Web3 opportunities related to payments, investments and digital assets require robust governance, risk management and compliance capabilities; new treasury, tax and internal audit considerations; and adjustments to related back office processes (e.g., order-to-cash and procure-to-pay).
Nathan Hilt, a Protiviti managing director who leads the firm’s payments and fintech solutions practice, tells Treasury & Risk that he views different modes of accelerated payments not as a single, absolute treasury solution, but as options that can meet different needs. “The goal is to fit the use case to the processing capability and the ecosystem that would support the various payment methods,” Hilt says. “I don’t think there will be, or ever is, a ‘one size fits all,’ so there is a continued need and business case for various accelerated-payment methods.”
Watching for risks
As financial institutions and companies in other industries increase their use of digital currencies and onboard new customers in more global regions, sanctions evasion risks will intensify. Strengthening anti-money laundering (AML) and “know your customer” (KYC) capabilities along with adherence to a raft of other financial crime-related regulations could help. Customer assessments must be continually updated, transactions should be screened against updated sanctions lists, and blockchain analytics will improve the ability to sniff out transactions linked to higher-risk wallet addresses. Related compliance considerations are also crucial.
The bottom line
While Web3 encompasses much more than cryptocurrencies and the exchanges they trade on, growing adoption of digital currencies has ripple effects on business innovations. So, too, will legal, regulatory and enforcement clarity. As new governance and oversight guardrails emerge, more C-suites will have additional opportunities to thoughtfully pursue DeFi and Web3 experimentations and innovations.
Web3 opportunities related to payments, investments and digital assets require robust governance, risk management and compliance capabilities; new treasury, tax and internal audit considerations; and adjustments to related back office processes.
From cash to credit to crypto, exploring how we think about money
From cash to credit to crypto, exploring how we think about money
From cash to credit to crypto, exploring how we think about money
For baseball fans in America, one of the biggest moments in baseball history is Hank Aaron’s iconic 715th home run that broke Babe Ruth’s long-standing home run record. That moment, of course, was captured on video, and is, by now, a well-established part of baseball’s historical archive. When I watch the video, however, I find myself oddly engaged not by the home run itself, but by where the ball lands—right in front of an oversized advertisement for First National Bank’s new BankAmeriCard.
The year was 1974 and the card ad urged baseball fans and spectators to “think of it as money.” It’s hard to imagine a world where consumers had to be convinced that credit cards were, indeed, money. Or that they should want to purchase now and pay later. But this was almost 50 years ago, when only 16% of all U.S. households had a credit card, so this was still a tough sell. In fact, the BankAmeriCard was first issued by Bank of America back in 1958, but adoption was, in a word, slow.
I’ve been reflecting on First National’s advertising message a lot lately. It’s a reminder that our relationship with money—and how we earn it, save it, spend it, and indeed, “think of it”—is an evolving and fluid one. How do we think about money? What does the word “money” mean today compared to 1974? What will it mean in 2034 or even 2054? It’s a compelling and complicated question. So, of course, VISION by Protiviti set out to find the answers.
Credit where it’s due
The concept of credit dates back at least 5,000 years. Archaeologists unearthed clay tablets that show agreements to buy something but pay later between Mesopotamians and merchants from nearby Harappa—layaway in the cradle of civilization. Cash, in the form of coins, was already around by that point and has remained king pretty much since then.
In the 1950s, the Diner’s Club card served as a successful proof of concept. Banks took note, and once the magnetic strip that could store user data on cards was introduced in 1969, there was no turning back. Today, 83% of U.S. adults own a credit card and we sure do love them. Statista estimates there will be more than 30 billion credit and debit cards in circulation globally by 2025—four for every person on the planet. Although credit usage and penetration vary greatly by country, there is no doubt that much of the planet prefers plastic to paper.
Globally, there are no “cashless countries” just yet but ForexBonuses says several are getting close. Canada tops the list, with Sweden, the UK, France and the United States rounding out the top five. Going cashless has its advantages and disadvantages and opens a Pandora’s box of new methods of payments and new digital currencies—regulated and unregulated—to emerge.
A financial transformation
All of this is to say the world is in the process of a major financial transformation, which will undoubtedly have global economic consequences. What role will central banks play in digital currencies? What about developing countries—where do they fit into this new, and more virtual, reality? What about the 1.7 billion adults worldwide who are unbanked—some 21% of the world’s population. What does that mean for countries like Morocco, Vietnam and Egypt, where two-thirds of people have no bank account?
And what impact could a new monetary system have on the U.S. dollar as the world’s reserve currency? Could the U.S. dollar be replaced? If so, by what? And when? This question is top of mind for business executives and central to VISION by Protiviti’s exploration of the future of money. We asked economists and experts to weigh in on what’s next for the U.S dollar. We asked the same question of executives in our Protiviti-Oxford global survey on the future of money. And we did a deeper dive into that data in our "Exploring an Uncertain Future of Money" webinar, which is available on demand.
what impact could a new monetary system have on the U.S. dollar as the world’s reserve currency? Could the U.S. dollar be replaced? If so, by what? And when? This question is top of mind for business executives and central to VISION by Protiviti’s exploration of the future of money.
On the money
These are some of the big issues and questions VISION by Protiviti will explore over the next several months in our Future of Money theme. We’ll tackle the questions above and much more, including payments, banks, financial services, asset and wealth management. And we’ll consider the implications of privacy, cyber, emerging tech, fintech, financial crime, and regulation and compliance.
We kick off the topic by interviewing two of Protiviti’s Advisory Board members. Economist Dr. Peter Henry is a Senior Fellow at Stanford University’s Hoover Institution and Freeman Spogli Institute for International Studies, and Dean Emeritus of New York University’s Leonard N. Stern School of Business. He lays out a global roadmap for a more prosperous and equitable future. And financial executive Evelyn Dilsaver, former President and CEO of Charles Schwab Investment Management, draws a line between the past and the future of financial services, which she says will be dominated by AI and crypto.
We speak with The Economist’s Swarup Gupta, the lead industry analyst for financial services for The Economist Intelligence Unit, about cash, data and how a digital financial future will impact privacy and anonymity. We also talk to Cornell professor of trade policy, economist and author Eswar Prasad about how the pending digital revolution will transform global currencies and the people who use them. Meanwhile, Protiviti Managing Director Adam Johnston sits down with Darren Furnarello, Chief Compliance Officer of HSBC Asia Pacific, to discuss the regulatory environment and banking over the next several years.
The world of sports and the world of money have both come a long way since 1974 but remain intertwined. FIFA had a crypto sponsor for the Qatar World Cup, and the English Premier League and The National Basketball Association currently have crypto sponsorships, as well. Major League Baseball also had one: It signed what turned out to be a disastrous deal with now defunct FTX in 2021 that had umpires wearing the FTX logo on their sleeves.
I wonder what old Hank and the Babe would have said about that?
We’ll tackle the questions above and much more, including payments, banks, financial services, asset and wealth management. And we’ll consider the implications of privacy, cyber, emerging tech, fintech, financial crime, and regulation and compliance.
Regulation, risk and reward with HSBC’s Chief Compliance Officer, Asia Pacific
Regulation, risk and reward with HSBC’s Chief Compliance Officer, Asia Pacific
Regulation, risk and reward with HSBC’s Chief Compliance Officer, Asia Pacific
Darren Furnarello, Chief Compliance Officer at HSBC Asia Pacific, talks regulation, risk and reward with Protiviti Managing Director Adam Johnston. What does the future of the regulatory environment look like, how do we navigate it, and what keeps compliance officers up at night?
In this interview:
1:30 – Compliance priorities right now: Sanctions, resilience, privacy, sustainability
6:12 – Meeting the challenges of the future: Open banking, AI, regtech
10:36 – Balancing digital transformation with data and other risks
13:23 – Future of banking regulation
19:10 – The next 10 years through a compliance lens
Regulation, risk and reward with HSBC’s Chief Compliance Officer, Asia Pacific
Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today we're exploring the future of money and I'm excited to welcome in Darren Furnarello, Chief Compliance Officer for HSBC Asia Pacific. Darren has held several senior level positions within HSBC including roles in global transaction banking and trade finance. Darren, thank you so much for joining me today.
Darren Furnarello: Thanks, Joe. I'm really happy to see you today.
Joe Kornik: I'm pleased to welcome in my colleague, who will be interviewing Darren, Protiviti Managing Director Adam Johnston, who serves as the Country Market Leader for Hong Kong. Adam, I'll turn it over to you to begin.
Adam Johnston: Thanks, Joe. Welcome again, Darren. It's always a pleasure speaking with you and I'm very excited to dive into our topic today, the future of money through the lens of compliance.
As the Chief Compliance Officer for the Asia Pacific region, you lead a large team of compliance professionals across some 20 businesses and 18 jurisdictions overseeing the compliance function for HSBC in Asia Pacific, ensuring compliance with laws, regulatory requirements, policies and procedures. Frankly, you have a lot on your plate. How do you prioritize all those various responsibilities and which ones require the most attention right now?
Darren Furnarello: Thanks, Adam. Thanks for having me. I'm also looking forward to the session today. Thanks for the intro. You certainly make the role sound huge and important, so thank you for that.
Let me just perhaps frame and give some context just around sort of the responsibility and then I'll try and tackle that question in order. One of the key things to help me do my job and to execute those responsibilities is obviously having a robust compliance framework, which really consists of globally applicable principles, but also making sure that there's enough adaptability in those principles to allow for local regulatory requirements and nuances. Another key aspect of that is also making sure that we have global policies which are clearly comprehensive and detailed and provide clear direction and guidance to each of our business’ unique risks.
Of course we also have horizon-scanning tools which help us identify emerging risks. This really helps us to stay informed about what risks are emerging. It gives us great insights to regulatory trends and changes. We also look at macroeconomic and geopolitical issues and events. This also gives us great insights in terms of what we think the potential impact could be to our business as well as our compliance controls and our framework.
Just to maybe bring that alive a bit, I'll use a good example of all the risks that we've seen that have stemmed from the Russia-Ukraine War. This has been unprecedented for the financial services industry where we've seen an unprecedented level of sanctions as well as activities-based sanctions which has been very challenging for financial institutions to manage and to comply with. This is predominantly because some of those activities-based sanctions and restrictions—banks have never designed specific controls or measures to be able to comply with those. To some extent, we have to have agility to be able to implement new controls and frameworks to ensure that we are managing those specific risks as an example.
But if I were to also kind of just put the Russia–Ukraine war aside, some of the other risks that we continue to monitor and do require additional attention is things around asset quality. This is obviously given the backdrop of the macroeconomic environments as well as challenges that we see across the credit landscape. This means that we're conducting regular health checks on our counterparty exposures, which also include non-bank financial institutions as part of the portfolio review.
We clearly also focus quite heavily on operational resilience. This always requires ongoing reviews, testing and enhancements, particularly in the spaces around cybercrime and cyber security, data privacy, even third-party risk management, including things like cloud service providers etc. Of course, financial crime is always up there in terms of the key focus. This always requires constant tuning and enhancements given we've seen pretty advanced technical advances around the digital and crypto space, introduction of global wallets and digital payment platforms. These all bring new risks for a bank like ours to manage and to mitigate, and we also need to look at what enhancements we need to make to the overall AML framework as well as our monitoring capabilities around this.
Lastly, I'll just mention obviously green and sustainable banking has clearly come into sharp focus in the last year or two. We are working very closely with our businesses and regulators around climate risks, around climate risk management processes and governance, including thematic reviews on green products and greenwashing related risks. Many of these still require ongoing work, particularly from a regulatory perspective and the supervision that regulators want to put around climate-related risks as well as clearly defining some of those risk taxonomies.
Adam Johnston: So as you look out over the next three to five years, do you see that changing? What do you think will be the biggest issues facing compliance officers in the banking sector in the future and how do you prepare to meet those challenges?
Darren Furnarello: Yeah, that's a great question and to some extent I would say the future is almost already on us and we're already seeing a number of changes which are happening now and will continue to happen in the future. So undoubtedly, we will see significant transformation in the banking sector, which will be undoubtedly again driven by advances in technology, evolving customer expectations, the changing dynamics of geopolitics, the global economy and all of these will require some level of regulatory change or enhancements.
Some of the key things that I see will be around obviously digitalization, open banking, artificial intelligence and robotics, workforce transformation, cyber security, and as mentioned, sustainable banking as well as regulatory technology. Just to cover a couple of those off, digitization—as I've already mentioned, we’re already seeing a big acceleration around this through a number of banking services and this is already started from simple account onboardings through digital platforms, the use of Zoom and other identification platforms, right the way through to mobile banking and to online banking platforms. Advances in this space will definitely, definitely continue and we will see this take and become more prevalent as more and more customers are getting more comfortable and turning to digital channels for their banking needs.
I think open banking will further transform banking services, really enabling those third-party developers to access customer data. Of course, this will need to be with customer consent, and we’re definitely seeing acceleration around the build out of innovative apps and services in this space. This will obviously create more competition within the industry and will certainly force, as I see it, more traditional banks to innovate faster or they will simply be left behind in terms of keeping up with the changing demands of customers as they move to more mobile and online banking solutions.
The adoption of AI and robotics in banking operations I think will see a significant increase in the coming years. Banks will generally use these technologies to improve the way we do risk assessments, fraud detection, even customer service. We can see this perhaps for instance through the use of sort of AI chat box which we’re seeing significant advances with especially technology like ChatGPT and others, which still have question marks in terms of the ethics around it, but we’re seeing these big technological moves.
So I also think these technologies will be used for various operational tasks simply to help the banks become more effective and efficient, but also hopefully improve the overall customer experience when dealing with banks.
Lastly, I would just mention that we're also already seeing an increase in regulatory complexity, and banks will need to invest significantly more, in my opinion, around regtech solutions. These solutions will certainly help banks to manage regulatory requirements more effectively and efficiently and help drive some of those efficiencies to reduce the overall cost of being compliant with regulations. And hopefully with the use of these technologies it’ll also reduce the risks and the cost of non-compliance. We've seen significantly over the last few years that regulators have stepped up quite spectacularly their enforcement actions over the last few years for financial non-compliance and these have resulted in very hefty fines and penalties in the industry.
I'm also seeing a trend where technical compliance has to be a must for banks and other institutions. As regulators become more sophisticated themselves with the adoption of vetted data, analytical tools and AI, they will be holding banks to technical compliance, which means banks need to get the basics right, let alone start thinking about how to manage some of the risks of the future.
Adam Johnston: With all that being said, how do you balance digital transformation—all the emerging technologies from AI to cloud as you mentioned and the potential efficiencies that it brings—how do you balance them with data protection, security, risks, and regulation?
Darren Furnarello: Look, most banks already are embarking some form of digital transformation in one shape, form or another. From my perspective, strategic planning is absolutely critical here. Management needs to have a very clear strategy, in my opinion, around sort of the digital transformation programs. This really needs to be driven by a clear understanding of what technology exists, how that can be integrated, and what are the benefits that will bring to the bank.
For example, what are the benefits of using AI machine learning to improve operational efficiencies or enhance business priorities to help with risk mitigation strategies etc.? When we embark on digital transformation and the application of bringing in a new technology, we look at this through a number of lenses. One of the key lenses we do look at this through is through our customer lens. So regardless of the technology that we're going to deploy, we need to make sure that we understand, how does this actually improve the customers’ interaction with the bank? Are we improving the way we're servicing them? Are we making their touch points with the bank more seamless? Are we improving the overall experience of the customer as they interface with different parts of the bank or different products and services? How are we actually enhancing the overall customer protection around their data and personal information?
So directly correlated to that is, obviously, as you start to deploy some of these things, data management and privacy become critically important. So even when you think about the adoption of artificial intelligence or cloud technologies, these both demand very robust data management strategies, which means that we need to adhere to data privacy regulations, which we know continue to change. We're already seeing how tricky and how more costly this has been done, especially for global and foreign banks, as we see more data localization laws which we need to manage and that does create a bit of a challenge for us.
Lastly, I would also say a key aspect to which we look at this through is the lens of business alignment. Does the adoption of these new technologies, are they providing business value? Does it align to our strategic business objectives? I'm always keen to ensure that as we deploy and use new technology, it does serve a practical purpose beyond just keeping up with the times.
Adam Johnston: As somebody who spends a lot of time thinking about standards and procedures to ensure compliance programs detect, prevent and correct non-compliance with laws and regulations, I'm curious to hear your thoughts about where you see the regulatory environment evolving over the next several years. Are there changes that you expect on the horizon?
Darren Furnarello: I'm going to answer that in maybe a strange way. To some extent the future is already here and some of the things that I covered off earlier —we are really seeing how this and the advances in technology are shaping the future of regulation. So some of it we anticipate and certainly I’ll give you a few thoughts of where I see it going. Again, I would say, given the advances on digital and cyber security, we will absolutely see that this will become key in terms of deploying digital platforms and key around enhancing operations. So we'll definitely see more regulation from regulators and I think particularly there'll be definitely an emphasis around cyber security and how we're managing those.
We will definitely see more regulation around data privacy. As I've mentioned, we're already seeing some of this taking hold and more and more governments and countries implementing these local data privacy laws, which really demand for data to be managed onshore and not to be held into these global data lakes and global databases. So there will definitely—I think we'll see evolving regulation around this and I think it will be more sort of defining of the standards and the protocols that we would need to enhance and implement to protect customers, to protect customer data, and to some extent, from an operational resilience, to protect the banking system from cyber attacks, ransomware attacks through the uses of new and more advanced technologies which can be hacked and may not have same security protocols as some of the more traditional banking platforms.
I think we're also seeing quite significant advances just in terms of central bank digital currencies. I think these again are new and will be complex developments. This will definitely necessitate new banking regulations, from our perspective. I think as these central bank digital countries also gain traction and adoption, regulatory bodies will need to think about what is the legal framework around that? What is this technical framework around to manage the associated risks with that, but not just around managing associated risks, but also how they enhance the potential benefit of the introduction of these sorts of products.
I think what I'm also seeing is there's definitely a lot more of non-traditional players are entering the financial services market and these are things like fintechs or big tech firms. I think we'll see quite a lot of regulation coming out to make sure that they are equally regulated. Maybe not to the same extent of traditional banks, but there will be regulations extended to them to make sure that they're adhering to AML-related requirements, data requirements, cross-border type requirements. So in this space I think there will be increased regulation; also predominantly just to level the playing fields against traditional banks. Otherwise, you do put a huge emphasis on traditional banks trying to cover both these big tech firms and fintechs through the provision of their banking services where you could see regulators kind of saying, “Well, we rely on the infrastructure of big banks to do that for us.” We've been strongly advocating that we think more regulation is required in this space, in particular where we are giving out virtual banking licenses as well.
I did mention sort of mobile banking before. I think we're really seeing with the introduction of mobile banking and online banking services, this is already, I guess, through digital finance blurring geographical boundaries. So I think we'll see more regulation certainly from around the world where regulators will need to pretty much collaborate more frequently to manage some of the associated risks with cross border transactions.
Lastly I'll mention and maybe to finish this question a bit more controversially, is I think there will be regulation on AI/machine learning. I think these technologies will definitely in the future transform the way banks operate, how they manage customers, customer data, services and operations. I think these technologies, as they progress and become more mainstream, regulators will be looking to design and to address some of the pretty big open questions out there around the ethical implications of some of the algorithms and all the potential biases in these algorithms. What does that do? Are we susceptible to legal and potential [privacy] violations? Is machine learning and AI making decisions and where do we rest the accountability for some of these?
Adam Johnston: Thanks, Darren. That's very comprehensive. We've covered a lot of ground today. I do have just one final question to close on, and that is if you do think about the future of money from a compliance lens in the distant future, say beyond five years, five to 10 years, what's the one thing that concerns you the most?
Darren Furnarello: Again, a great question. I think the risk of future money will definitely be we're moving to virtual currencies, crypto, crypto assets, tokenization. I think this is the one thing that generally will keep me awake at night and that's predominantly because it's unregulated at the moment. We've already seen some issues with Ponzi schemes in the digital and crypto space and I think it’s not very clearly understood by customers and I think there's a lot of vulnerabilities there where people could be caught into this, trapped into this where customers could be taken advantage of. I think this also opens up tremendous risks for banks in terms of, really around the financial crime risk space, because a lot of these digital platforms, digital assets, tokenization, or whatever it may be in the future will definitely make it more difficult for regulators, banks and law enforcement to really enforce some of the AML rules and regulations that the bank holds themselves accountable to today.
So I think there needs to be significant advancement just around how that is regulated but also significant upskilling which we need to do from staff, from our own internal operations, to be able to kind of —how do we effectively manage these new potential risks that will come through all of these digital platforms, because people are moving away from more traditional banking.
Even if you think about the mobile phone, 10 years ago what it could do versus what it could do today, the technical advances that you can pretty much run your whole life on your iPhone or your smartphone. I think the future generations will want to do all of their banking, all of their finance, all of their transactions via these mobile devices and platforms and that does create a plethora of risks and issues that we need to think about, to manage, to safeguard customers, make sure that they're not being taken advantage of, make sure that banks and systems are not being held to ransomware, which we've seen in recent months and years.
It’s a very big question, Adam. There's a lot of components there and a lot of things. I think as these things evolve, hopefully they evolve quickly but hopefully they don't evolve so quickly that we don't have time to manage and mitigate the risks.
Adam Johnston: Yeah. Absolutely. Darren, thanks again for your time today. We covered a lot of ground. Very, very insightful and we really appreciate you spending the time.
Darren Furnarello: It's my absolute pleasure and again, thanks for having me.
Adam Johnston: Back to you, Joe.
Joe Kornik: Thanks, Adam and thanks, Darren. Thank you for watching The VISION by Protiviti interview. On behalf of Darren Furnarello and Adam Johnston, I'm Joe Kornik. We'll see you next time.
Darren Furnarello is the Chief Compliance Officer for HSBC Asia Pacific where he oversees all compliance professionals across 20 businesses in 18 jurisdictions. In this role, he is the responsible risk steward for regulatory compliance and financial crime risks. Darren has held a number of senior positions at HSBC over the last 23 years, including Head of the Financial Institutions Group (FIG) Hong Kong, Regional COO, FIG Asia-Pacific, and Regional Head of Traded Credit Risk Management, Asia-Pacific. He has also been the Head of Global Markets Transactional Client Group and European Head of Hedge Funds, both within Global Banking and Markets, EMEA.
Adam Johnston is a Managing Director with Protiviti and the country market lead for Hong Kong. With over 15 years of experience, he has spent much of his career consulting to Fortune 500 organisations, helping them solve complex transformation and resourcing programmes and projects. Adam’s specialisation is in Executive Leadership Development and Strategy; Employee and Resource Engagement; and Programme, Project and Change Management.
What could C-level executives and directors be doing to prepare for the regulatory future? Darren Furnarello offered this advice:
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Pressure-test current compliance programs and the effectiveness of controls. This is usually done through specific regulatory inspections, internal assurance reviews and through internal audits. This is vitally important to ensure there is a clear understanding of gaps, weakness or ineffective controls and to determine the necessary resources and strategies to meet new regulatory requirements. Organizations should also consider conducting scenario planning exercises to anticipate and prepare for different regulatory scenarios.
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Develop a strong compliance culture. This includes creating and enforcing policies and procedures that align with regulations, providing effective compliance training, and fostering a culture of transparency, accountability and ethical behavior. Employees should be encouraged to report potential compliance issues, and there should be a robust system for addressing and resolving concerns.
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Build regulatory relationships. Business leaders must stay in touch with current regulations and proactively seek information about potential changes. Building and maintaining relationships with regulatory agencies and industry bodies can help anticipate changes and provide opportunity for input on proposed regulations. This could involve participating in public consultations and partnering with industry associations to collectively address regulatory concerns. Executives should also work with government relations teams to articulate the potential impact of regulations on their organization and present alternative solutions.
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Embrace regulatory technology. Executives should leverage technology solutions to streamline and automate compliance processes. Regulatory technology tools can help monitor for regulatory changes, track compliance activities and improve reporting capabilities. By adopting regtech solutions, executives can proactively manage regulatory risks and ensure timely compliance.
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Recognize that regulatory change is inevitable and should be viewed as an opportunity to adapt, innovate and ensure long-term success. By staying informed, building relationships, conducting impact assessments, fostering a compliance culture, engaging in advocacy, adopting technology and collaborating, executives can navigate regulatory change more effectively, minimize disruptions and improve compliance. I strongly advocate that executives view regulatory change as an opportunity to strengthen their businesses practices/strategies and maintain trust with the customers and industry they serve.
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Ensure there is a robust regulatory change management framework. This means having a dedicated teams and functions for assessing, implementing and monitoring regulatory change.
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Former Schwab CEO Evelyn Dilsaver talks AI, crypto and future of financial services
Former Schwab CEO Evelyn Dilsaver talks AI, crypto and future of financial services
Former Schwab CEO Evelyn Dilsaver talks AI, crypto and future of financial services
Evelyn Dilsaver, financial executive and former Charles Schwab President and CEO, discusses the future of money with Joe Kornik, Editor-in-Chief of VISION by Protiviti. In this interview, Dilsaver reflects on financial services of the past and looks ahead at a less predictable future with AI and crypto, and what their impact could mean for financial services and investment management over the next decade and beyond.
In this interview:
1:10 - The evolution of financial services
4:36 - Disruptors in the investment space
6:42 - The future of crypto
8:47 - The next decade of financial services
10:35 - Bold predictions: Crypto, data and AI
Former Schwab CEO Evelyn Dilsaver talks AI, crypto and future of financial services
Joe Kornik: Welcome to the VISION by Protiviti Interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of money, and I couldn’t be more excited to welcome in financial executive Evelyn Dilsaver. Evelyn is the former president and CEO of Charles Schwab Investment Management, where she led all facets of the business, growing its assets from 137 billion US$ to more than 200 billion in just four years, all while generating more than a billion dollars in revenue. Prior, she served as the chief financial officer and chief administrative officer for U.S. Trust. She currently sits on several public and private boards, including Protiviti’s advisory board. Evelyn, thank you so much for joining me today.
Evelyn Dilsaver: Joe, thank you so much for having me.
Joe Kornik: Evelyn, I mentioned in your introduction that you spent more than 16 years as an executive VP at Charles Schwab. Talk to me a little bit, if you will, about the evolution of the industry over that time, and even what’s happened in the space in the 15 years since. It strikes me that it’s a radically different industry today than it was way back in the 1990’s when you joined.
Evelyn Dilsaver: Right. It has changed so much. If you think about the evolution of the industry when I joined Schwab in 1991, I could break it into two parts. The first part is around the brokerage side of the business, and the second part is around the investment management. On the brokerage side of the business, I would term it with the rise of the individual investor, that can do their own trades instead of having to go through a broker, and it was also at rise of choice and one platform.
If you remember back then when you wanted to buy a mutual fund, for example, you would have to go to the mutual fund company, whether it was Vanguard or Fidelity or any of those mutual funds. So, you ended up having to deal with many statements at the end of the month. And then Schwab invented OneSource, which allowed all of those mutual fund companies to be on one platform so you, as a customer, were able to buy multiple different company funds and get one statement at the end of the month. That was an evolution for the industry. Having said that, from the mutual fund side, you lost the sight of the customer, because Schwab owned the customer, not you, and that made for a different kind of marketing.
The other thing that really rose up during that time in the mid-90s was online trades. All of a sudden, your computer could do your trades for you, and for a while, we started separating out trades in the branch versus trades online and pricing it differently. But we found our customers were arbitraging us and trying to do both at the same time. And that leads me to investment management and how much it has changed. Again, I mentioned before, the customer used to be owned by the mutual fund company, and now this platform where you get to sell all of your funds, that platform owned the customer, so you had to sell differently. At the same time, we were moving away from active investing into passive investing, and the rise of the index funds were showing up a lot.
And then as I mentioned sales. You used to be able to go sell to the branches and to the brokers, and now, because of the construct of portfolios for individuals, you now had to sell to a centralized team that dictated to the brokers and the portfolio managers what kind of investments to invest in. So, it changed the whole sales process.
And then for portfolio management, again, the rise of technology allowed you to optimize your portfolio and do risk optimization better than you ever did before, because now you had all this data at your fingertips. That’s what’s changed.
Joe Kornik: Right. And I would imagine that technology piece is what’s going to—really, what’s supercharging the evolution of the industry now. So, when you look out over the investment management landscape right now, what disruptors do you see in this space, and how should investment managers navigate them? What would be your advice?
Evelyn Dilsaver: Well, I would agree with your last comment, Joe. Technology is going to still be a huge factor. There’s the robo-advisors. So, now, you use technology to be able to give advice, and you don’t need an individual there. And of course, that really depends on the size of the portfolio and the trust of the customer. There’s also auto investment advice, and there’s even more advanced data analytics to be able to do your investment research.
I was talking to a friend of mine who is in the investment management business, and because of the data analytics, he indicated that some portfolio managers are actually moving to very concentrated portfolios versus the very diversified portfolios because they can, because of data analytics and the ability to research and dive deeper into the stocks that they choose.
Alternative investments will continue to rise. Over the last 15 years, at least when I was still at Schwab, and of course, it’s gone on, the rise of exchange-traded funds where it’s very tax advantaged vehicles, but I’m even seeing exchange-traded funds for crypto. Imagine that. So, they’re taking digital assets, if you will, and creating ETFs out of them.
We’ll continue to see regulatory reform. That’s still big because of the focus on enhanced transparency and improving risk management. Big focus on ESG. Of course, there’s some debate about whether it really does perform better than those without the ESG metrics. And then, more global. Emerging markets is continuing to make a big dent in where people spend their time.
Joe Kornik: Yes, interesting. Thanks, Evelyn. You mentioned the word crypto, which is on the tip of everyone’s tongue, it seems, when we talk about the future of this space. So, I’d be curious to hear your thoughts on crypto and its future.
Evelyn Dilsaver: Well, thanks, Joe. Crypto is fascinating to me. Have I invested in it? No, not yet, but having said that, if you think about crypto or even Bitcoin when they first started, the reason they started was to try to make transactions easier, faster, and decentralize the power that banks had to charge fees. So, for example, if you wanted to wire funds to your friend in Europe, you had to pay a pretty hefty fee, and it would take several days to do that. The belief of Bitcoin and crypto is that fees would be less because it's digital. You don't have to worry about the time. You can actually see your transaction in your account within seconds and minutes, and it was a very decentralized approach.
Having said that, some of the big issues—so for example, if you’re using Bitcoin—Bitcoin uses huge computer systems to verify the transactions, but they’re expensive. So, you build more and more systems, and eventually, it becomes centralized, and it has to be governed just like banks do.
Interesting thing is that many of the banks now are moving towards digital assets, which again, is to make life more easy and efficient for the consumer. In May of 2020, there were only 35 central banks using digital currencies. Today, there’s 114. So, the banks are really moving into this, pretty big time, again, to make life easier for them and more efficient, because think about it, you don’t have to print anything. If you do a transaction, for example, in a brokerage, it takes two days to settle your trade. Now, it can take minutes to settle your trade instead of two days.
So, to me, it’s fascinating, but I think where you’re going to invest are the underlying platforms that make it happen versus the very edge of the crypto.
Joe Kornik: If you could take me out, let’s say, even to 2030, and look almost a decade into the future, what do you see? I mean, there’s lots of challenges or lots of opportunities. What do you think the next decade holds?
Evelyn Dilsaver: Joe, I think the next decade will still be one of “Can I trust you?” and security and privacy. Think about what we just mentioned on digital assets. I mean, you’re okay if you go to the store and buy something with your Visa card. For example, in China, everything is tied back to the government so that they can see your information, and in the U.S., I know we’re not really good about letting the government have our information. So, I think privacy and the regulation of that will continue to be big for us going forward.
Trust is going to be another big one. If you can get back into where people will trust you as a company and you as an individual, because we’ve lost a lot of that today. And if I look at the macro environment, I think employment is going to be tough. There’s declining population. I see it in the schools and the universities where schools are shutting down because there aren’t enough students to come through, and that trickles all the way up through college, and of course, employment.
So, there will be, over the next several years, a fight for talent, especially as the baby boomers retire and the younger ones come up, and the declining birth rate would lead up to that. Then, I think, again, digital assets will take off. Once they start to become favored by everybody and accepted by everybody, it’s going to be a huge change for our country moving forward.
Joe Kornik: Right. And specifically, in the investment management space or in the financial industry, any bold predictions for 2030 and beyond?
Evelyn Dilsaver: We’re all going to have to learn how to accept crypto. So, even my companies today, I’ll ask them, “What is our policy about accepting crypto if somebody wants to buy something?” Or “Have we even been asked for that?” and the answer today is no. Now, it depends on which industry you’re in, but the answer today for my companies is, “Oh, no. No, we’re not taking crypto. We’re not accepting it.” But over the next several years, whether it’s crypto or some sort of digital asset, we’re going to have to figure out how to accept it. And it also means what do we do for our employees in terms of using AI.
We didn't talk about that, but AI and chat. Can our employees use them, and what regulations or guidelines do we have around that that we want to employ, because you don’t know where that data is coming from, right? So, again, in the future, I think data analytics is going to be big because you’re going to have to be able to discern truth from fiction, and companies are going to have to be able to use that data in a way that makes sense for them moving forward.
Joe Kornik: Evelyn, I have to ask this question. Could AI replace financial advisors some day?
Evelyn Dilsaver: That’s a great question, because when I was going to do this with you, I went on to ChatGPT and I asked about what is the future for investment management, and actually came back with a lot of the same answers that I have just given you, but I also asked for investment advice. Now, I won’t tell you what the investment advice was, but it was really credible. So, yes, I think that can happen. To a certain degree, we’re already doing it, right? The robo-advisors that many of the firms are using, those are all built off of data analytics that give you the optimized portfolio for where you are in your life, and when you want to retire and all of that, and what your assets are. So, I think it’s already happening.
Joe Kornik: We all have to up our game, it sounds like.
Evelyn Dilsaver: It does.
Joe Kornik: Well, thank you so much, Evelyn. I appreciate you joining us today.
Evelyn Dilsaver: Thank you, Joe. This was fun.
Joe Kornik: And thank you for watching the VISION by Protiviti interview. On behalf of Evelyn Dilsaver, I’m Joe Kornik. We’ll see you next time.
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The Economist’s Swarup Gupta on cash, privacy and data in a digital future
The Economist’s Swarup Gupta on cash, privacy and data in a digital future
The Economist’s Swarup Gupta on cash, privacy and data in a digital future
Swarup Gupta, financial services industry lead for The Economist Intelligence Unit, talks digital currencies and the future of cash with Joe Kornik, Editor-in-Chief of VISION by Protiviti. In the interview, Gupta discusses the future of the U.S. dollar, what currency could eventually replace it and when cash will no longer be king. He also addresses the promise of privacy and anonymity in a world where no transaction goes unrecorded.
In this interview:
0:58 - The rise of digital payments
2:52 - CBDCs around the world
7:50 - The US dollar vs. other rising currencies
9:40 - Privacy and anonymity in transactions
13:25 - Digital currency and financial crime
15:15 - Looking to 2035: A financial world driven by AI
The Economist’s Swarup Gupta on cash, privacy and data in a digital future
Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, a global content resource examining big themes that will impact the C-suite and executive boardrooms worldwide. Today, we’re exploring the future of money, and who better than Swarup Gupta, lead industry analyst for financial services at The Economist Intelligence Unit, the research arm of The Economist, to help us explore that topic. Gupta is an expert on digital finance, including central bank, digital currencies, and cryptocurrencies, as well as issues of privacy and data protection. It certainly sounds like we have a lot to talk about, so Swarup, I appreciate you joining us today.
Swarup Gupta: My pleasure, Joe. Thank you for having me.
Joe Kornik: So, let’s talk about the future of money, and specifically, the rise of digital currencies and cryptocurrencies, whether that’d be Bitcoin or other currencies from the private sector or the central banks. What’s your view of where digital currencies go over the next three to five or even 10 years, and what are the potential impacts of that evolution?
Swarup Gupta: Right. So, even now, across the greatest part of the planet, cash is definitely—it remains king, and it continues to be the major mode of payment, but there are various estimates that show that as a mode of payment, cash would decline to as low as 5% by 2030 to 2031. So, digitalization is something that is definitely picking up, and that is likely to continue over the rest of this decade and then even farther, and it’s quite likely that some form of digital payments will emerge in different parts of the world. It could take up different forms across the planet.
For example, real-time payments, very fast digital payments, are a reality across several countries in Southeast Asia, many of whom have also simultaneously all, prior to this, rolled digital identity services; whereas the private sector might actually take up a major role in the developed countries as we can see. First, for example, in the U.S. with Venmo, and now with the progress and the unceasing march of Apple Pay. Digital payments are definitely going to take center stage. The use of cash is going to fall, and that’s going to take several forms. That’s going to be the real-time payment systems; instant payment systems, both private and public; a small amount of cryptocurrencies; and ultimately, central bank digital currencies, which I’m sure, will come to innovate.
Joe Kornik: Right. That’s kind of where I was going next. As digital currencies become more mainstream, and as you pointed out, I think we’re all in agreement that it’s heading that way. What do you view as the role of governments or international bodies in regulating those currencies, and who takes the lead on such an effort, and what does that potentially mean for the U.S. dollar, and assuming it has a diminished role in the future, what could potentially replace the U.S. dollar?
Swarup Gupta: Well, let me start with the faith of the U.S. dollar. I’m afraid for the next years of the U.S. dollar, that isn’t happening any time soon. Lots of statistics show that almost 90% of cross-border transactions in Southeast Asia, definitely one of the fastest growing parts of the planet, is conducted using the U.S. dollar. Whether as an initial form of conversion or as a last-mile channel in which you convert different currencies across the region. So, yes, the U.S. dollar’s share of foreign trade is likely to decline over time, perhaps over the next decade, but that’s not happening any time soon.
At the same time, the U.S. government itself has shown, especially through the action of the SEC, that it wants to take back the use of money as a sovereign tool of governance and policy making. The way it’s gone after crypto exchanges in particular, those which have refused to register, shows that the U.S. government, and in fact, governments across the world, are keen to reassert their sovereignty over money as a form of exchange of value. So definitely governments will take an increasingly important role, whether it’s through government-backed real-time payment systems like the U.S.’ FedNow, or multi-CBDCs, or CBDCs themselves.
Coming to CBDCs, there are various benefits to the promotion and introduction of a CBDC. It encourages innovation in many spheres, enhances efficiency and reduces cost for internal as well as external economies in terms of foreign exchange transactions, and also promotes greater financial inclusion, not just in the developing world, but surprise, surprise, also in developed countries where large amounts of cash dominate population. So here, by financial inclusion, I’m not referring only to a poverty element, but also access to financial services of multiple kinds, for example, debit and credit services and insurance.
So, it’s going to be a very gated development of central bank digital countries across the world. Several initiatives have actually taken off. For example, China, Hongkong, Japan, Malaysia, Saudi Arabia and the UAE have experimented not just with retail CBDCs, but also with wholesale CBDCs. CBDC development is proceeding along two forks. One is retail, and the other is wholesale. While a lot of attention of both policy makers and analysts and the press is devoted to retail CBDCs, what is likely to take off initially is wholesale CBDCs, and that is related to another issue we’ll probably come to later in the conversation, which I would try and end with this particular section.
So, wholesale CBDCs are concerned more with interbank payments, and essentially, are trying to replace or reset the financial infrastructure of a country as it exists in pre-digitalization format. Basically, if countries can digitalize a large part of their financial transactions within a country, it improves transactions, it improves efficiencies, reduces transaction cost, and essentially shortens the chain which is required when a currency is converted into another currency. This itself has taken several forms. The most common form is using a single token, which is issued jointly by multiple commercial banks across countries. The UAE and Saudi Arabia have been working on a similar project where the same token is issued by multiple banks. The other form that it has taken is known as a multi-CBDC format, where CBDCs of different countries, different CBDCs are interoperable and operate with the similar financial infrastructure and rules governing them.
The retail CBDC, which has seen the most research, has only taken off in China, and even there, it hasn’t been as popular and it hasn’t gotten as much traction as was expected, and that’s not surprising because you already have the likes of Alipay and WeChat filling in for that role in that particular country. And in the developed world and even in developing countries, the introduction of retail CBDCs leads to important and difficult questions about privacy and anonymity.
Joe Kornik: Yes, absolutely. We’re going to get to privacy in just a minute. I know that’s a topic that’s near and dear to your heart, but before we do that, I just wanted to talk a little bit about some of the countries you mentioned. China, we’ve heard a lot about the yuan perhaps taking a leadership role. I’ve read a lot about the BRIC countries and a currency coming out of the BRIC countries. I’m just wondering if you had any thoughts on that, or what’s your take on those currencies potentially taking a leading role.
Swarup Gupta: Well, I have discussed this and commented on this publicly, and let me tell you that a BRIC currency at this point is a bit of a non-starter. Let me start with the status of the BRIC itself. More and more countries want to jump onto the BRIC bandwagon for reasons of their own. It might have to find a new name for itself. I’m not running it down, it’s an important agglomeration of countries. But at the same time, the BRIC itself is terribly lopsided. Any currency born out of a basket of currencies which make up the currencies of BRIC countries will be dominated overwhelmingly by the digital yuan, and definitely will satisfy China’s ambitions of internationalizing its currency, but at the same time, will other countries agree? India and China, for example, have fairly prickly relations, whereas China’s relation with other countries are perhaps better. So, that’s a bit of a non-starter even though the Brazilian president has gone on record discussing the need for a BRIC currency.
So, what is likely to happen is a diversification away from the U.S. dollar to a basket of currencies, and what is that basket going to look like? It’s going to be the euro, the yuan, and several other allied currencies. So essentially, the gap between the U.S. dollar and other currencies sort of declines to a certain extent, but the U.S. dollar overwhelmingly dominates as a share of foreign trade over the foreseeable future, which is the next five years, for instance.
Joe Kornik: Got you. Thank you for those views. It’s very interesting. I do want to dig a little deeper now into the potential impacts of digital currencies, specifically how privacy and anonymity will be affected. What’s the potential fallout from where you sit, and how does that vary by various parts of the planet, geopolitical realities, et cetera?
Swarup Gupta: Before we start this very important bit of this discussion, I’d like to try and define those terms, privacy and anonymity. Privacy is something that even the UN has guaranteed as a right. Essentially, it means that you keep your data safe and secure, and you ensure that only those whom you provide specific rights to, have the right to view that data. For example, iMessage, for long and still now has encrypted messaging, and when you send an iMessage to another person, say me, for instance, you would expect that only I would read that particular message and not any other person in your address book. So, that’s privacy.
Anonymity is a slightly more controversial concept. Anonymity means that you have a fake handle or you use an anonymous handle—let me be clear, not a fake handle but an anonymous handle—on a specific social media service. So, in this case, your identity remains secret, but your activities may or may not remain secret. So anonymity, in fact, is a more extreme form of privacy, and it’s absolutely impossible to guarantee in a digitalized world. The reason for that is any form of digital payment, whether it’s a real-time payment service run by an institution backed by the government, or it’s Venmo, or it's Apple Pay, inherently leaves a trail, an auditable trail of transactions. Not just a trail of transactions, but it also discloses interesting nuggets about your spending behavior and your life in general. That is something—complete anonymity in digital transactions is something that only cash can guarantee. But cash, as you know, is on its way out, and because of the capability of digital payments to generate this auditable trail, there are significant privacy concerns.
So, that is one aspect of it. You might argue that “Look, this is exactly why the proponents of cryptocurrency came up with Bitcoin,” right? Because in this case, not only are you, as a user, anonymous, your transactions are also perhaps anonymous. Yes, you can track that in the case of malfeasance, some protocols have now evolved, but the sender and receiver of those transactions remain inherently anonymous. Well, I would argue actually that that’s not anonymity but pseudo-anonymity because the entire distributed ledger can be viewed, especially by the concerned authorities. They reveal several identifiers which are about us. For example, our age, our gender, our race, and our location even can be tracked, and you can tie that together and then get a fair idea whether Joe or Swarup was using a particular distributed ledger chain to engage in transactions.
So, to round up what I’m trying to say here, the demise of cash has finally ended a completely anonymous form of transacting value, so money or hard cash was the only completely anonymous way of storing value over time in exchange. Digital payments have ended that, which has led to multiple concerns around privacy, who owns the data, who shares the data, who has rights to the data, and which authorities can gain access to which part of the data.
Joe Kornik: Yes, interesting. You touched on a lot there, and I think one of the things that worries people a lot about a new world or digital currency is the potential for fraud, crime, money laundering, and probably some other things that I’m not even aware of in this new, potentially unregulated future. So, how concerned should we be about that, and what can companies or countries do to protect people and data?
Swarup Gupta: I think those concerns that you raised, Joe, are extremely pertinent, and as monetary payment schemes become increasingly digitalized, digital financial crimes, the occurrence of those activities just go up, which leads also to strict anti-money laundering regulations, many of whom are now internationally prescribed to for various agencies. They need to follow them. This is exactly why the proponents of CBDCs or authorities who wish to issue CBDCs argue that if you back the issuance of CBDCs, you would enable us to crack down on money laundering activities, on financial crime of various kinds, and illegal transactions.
However, again, we circle back to those privacy concerns, especially in countries where there is greater awareness of one’s digital rights. So, it’s a bit of a chicken and egg situation. How do you guarantee at least a minimum or a maximum modicum of privacy rights? I would argue that the U.S., for example, or any other developed country could actually take the lead on this by saying, “Look, my CBDC is more private than yours.” Because it offers a greater level of privacy, to the extent of offering a level of pseudo-anonymity, you could just continue to flock into the U.S. dollar.
Joe Kornik: Swarup, thank you so much for your time today. You’ve been very generous of your time. I have just one more question. If I ask you to look out to 2030 or even 2035, how do you see all this playing out? I mean, ultimately, what do you see is the financial future, and will it be a good place, will we like it, or would we long for the good old days of the 2020s?
Swarup Gupta: Well, you definitely will long for the good old days of the 2010s and ’20s because as I’ve said, cash will probably decline to 5% of all transactions globally. But let me just bring in something which has become a bit of a watchword recently, which is AI. You will definitely see AI figure more on both the supply and demand side of money, you will have more and more people using AI as a marketing tool, including the market financial services. At the same time, you will have AI-enabled tools, both generative and predictive, managing a lot of your monetary activities. So, some of the things that we are now trying to achieve or striving to achieve in various parts of the globe, people will just take as given: automation, instant, seamless, crossborder payments, very efficient, very low transaction cost, and of course, assisted by AI, which means that it takes out a lot of the drudgery related to both financial planning and transations.
Joe Kornik: Swarup, thank you so much for your time today. I really appreciate the conversation. Fascinating.
Swarup Gupta: Thanks, Joe.
Joe Kornik: And thank you for watching the VISION by Protiviti interview. For Swarup Gupta, I’m Joe Kornik. We’ll see you next time.
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