Speaker 1: The Coin Bureau Podcast is a production of My Heart Radio.
Speaker 1: Hello everyone, and welcome to the coin euro podcast. This
Speaker 1: is Mad Mike Mooch and I am guy. Welcome everyone,
Speaker 1: Um Mike, where are we recording from today? We are
Speaker 1: like we are in Sweden? Sweden? Yeah, lovely, I'm enjoying it.
Speaker 1: They're very hospitable here. They're very chilled, aren't they very
Speaker 1: They're very chilled, great food, very affordable furniture. Yeah yeah yeah.
Speaker 1: I mean you have to you have to make it yourself,
Speaker 1: which which is a bit like everything in life if
Speaker 1: you think about it. Very profound, very profound. So we've
Speaker 1: shipped are We've shipped our portable studio here to Sweden.
Speaker 1: And because we just felt like it, Sweden sounded cool.
Speaker 1: Get it before it gets really really cold, I guess.
Speaker 1: And obviously Sweden's in the news a lot at the
Speaker 1: moment because abber reforming, aren't they or they've reformed and
Speaker 1: now I didn't know they split? They split split? This
Speaker 1: is a night there. Are they all alive? They're all
Speaker 1: alive that they've reformed, um and are now going to
Speaker 1: be performing as holograms. Let's just give a quick recap
Speaker 1: of what we talked about last time before we launched
Speaker 1: into today's episodes, So good. Last time we talked about
Speaker 1: the history of money, didn't we. We talked about money
Speaker 1: as a technology that's evolved over time to become more usable,
Speaker 1: more useful, and it's it's driven human innovation, it's driven
Speaker 1: our achievements. UM. And we also looked at the different
Speaker 1: types of money. I found that really good fun UM
Speaker 1: looking at the way in which certain things we used
Speaker 1: as money. UM. We talked about commodity money, didn't we
Speaker 1: And you could pay you could pay in salt. That
Speaker 1: was one of my favorite. And we got the Latin work.
Speaker 1: We got the words salary from that a particular high
Speaker 1: point UM. And we also looked at things like the
Speaker 1: gold standard and the pros and cons of that UM
Speaker 1: and how we moved from a commodity money system to
Speaker 1: the current system money that we have today, which is
Speaker 1: obviously the Fiat system. And do you remember what FEAT meant?
Speaker 1: I don't. This is a This was was full of
Speaker 1: meat balls and snaps. So I'm yeah, my brain is
Speaker 1: not working. I'm gonna give you a pass. You're in
Speaker 1: You're you're a new dad, obviously not sleeping, You're obviously
Speaker 1: semi semi conscious. Yeah, I was on the bottle last night,
Speaker 1: hartially crazed. Um. Yeah, fiat, which is how, which is
Speaker 1: how the Latin wasn't it. That's right, that's right. It's Latin,
Speaker 1: and it means let it be done, let it be,
Speaker 1: let it done. So basically, fiat money is money. I
Speaker 1: decree it has valued because the government issuing it says
Speaker 1: it has value, and the government backs up those claims
Speaker 1: with all. It's not what people say that. Oh yeah,
Speaker 1: with with with its gold standard, which isn't gold standard,
Speaker 1: but which is now more just like a lead standard. Yeah,
Speaker 1: as in the currencies backed by lead. Yeah, as in
Speaker 1: by power I think firepower, Yeah, exactly, yeah, by hot lead. Um. Yeah,
Speaker 1: the currency is backed by by the power of government,
Speaker 1: by the power that government has a monopoly on violence.
Speaker 1: Some people would say, um. And in the past, we
Speaker 1: obviously talked about the fact that money was backed by
Speaker 1: gold in a vaults somewhere and how you could you could,
Speaker 1: in theory for a long time, take a bank note
Speaker 1: to the bank and exchange it for that particular amount
Speaker 1: of gold, which was pretty crazy. But that's that ceased,
Speaker 1: and we've eventually worked our way to this system where
Speaker 1: you could not possibly do that, you'd get laughed out
Speaker 1: of the bank. Um. But do you want to hear
Speaker 1: a couple of fun facts about God? Yeah? Good, because
Speaker 1: you're going to anyway. Um. So, when I was searching
Speaker 1: this the other day, I came across the Bank of
Speaker 1: England's website and I was having a look on that
Speaker 1: the Bank of England holds forty four hundred thousand bars
Speaker 1: of gold in its vaults that is worth around two
Speaker 1: hundred billion pounds really. Yeah, and this, unfortunately, this is
Speaker 1: only the second largest hall of gold in the world.
Speaker 1: Do you know who has the largest It's not Jay
Speaker 1: z has more golden the Bank aving That wouldn't surprise me.
Speaker 1: It's it's the Federal Reserve the Americans. Yeah, basically Uncle Sam,
Speaker 1: Uncle's Uncle Sam. But interestingly, the Bank of England's gold
Speaker 1: reserves that that two hundred billion pounds worth, it corresponds
Speaker 1: to between four and five percent of the actual pounds
Speaker 1: in circulation. Really, so that is the extent to which
Speaker 1: the British currency is act today. And I think it's
Speaker 1: probably a similar story. In fact, I would I would
Speaker 1: hazard a guest and say it's a lot less for all.
Speaker 1: This is why governments around the world have been able
Speaker 1: to print so much money, especially over the last eighteen months,
Speaker 1: because of the pandemic and because of the economic slowdown
Speaker 1: that we've had. And this obviously leads to inflation, which
Speaker 1: we're experiencing now. So the supply of money has increased,
Speaker 1: there's more money sloshing around in the system, which means
Speaker 1: that the money, all that money is kind of worth
Speaker 1: less because there's so much of it. It's less of
Speaker 1: a commodity. Um and this is what we're seeing with
Speaker 1: prices going up and I mean yeah again, estimates various
Speaker 1: to the rate inflation. Some people think that the government,
Speaker 1: the US government is is deliberately under representing, under under
Speaker 1: estimating the true level of inflation. But it's definitely climbing.
Speaker 1: It's kind of complicated by the fact that prices are
Speaker 1: going up because of supply chain issues and things like that. Obviously,
Speaker 1: the global shutdown has has made life pretty difficult for
Speaker 1: exporters and trade and all this sort of thing. But
Speaker 1: hyper but inflation is happening, and there's also the danger
Speaker 1: of course, and some people think this could happen about
Speaker 1: possible hyperinflation UM and hyperinflation is basically, I guess the
Speaker 1: boat way to sum up hyper inflation is money in wheelbarrows.
Speaker 1: So this is where they print so much money it
Speaker 1: becomes completely worthless. People lose confidence in the currency. Prices rocket.
Speaker 1: So we saw this, We saw this in Venezuela. Yeah, Venezuela,
Speaker 1: sort of perhaps most recently Zimbabwe as well Germany before
Speaker 1: exactly yet before before everything kicked off again. Yes, so
Speaker 1: in yeah, in in Bimar, Germany, after the First World
Speaker 1: War and before the second. Yeah, they had massive runaway
Speaker 1: hyperinflation um. And yeah. And you hear stories from Venezuela
Speaker 1: and also Argentina, like Argentina hyperinflation um. And you hear
Speaker 1: stories about people being getting there sort of weekly or
Speaker 1: monthly salary and basically being given it in carrier bags
Speaker 1: full of money, and then having to run to the
Speaker 1: shop in order to buy what provisions they could because
Speaker 1: the prices were going up all the time. So by
Speaker 1: the time you got to the checkout, what you're what
Speaker 1: you were trying to buy would often have gone up.
Speaker 1: The price would have gone up even more so what
Speaker 1: you save as space at the checkout. Yeah, and then
Speaker 1: just I've left my yeah, run it through our crap.
Speaker 1: I've left my card. Wait here once, just wait one second.
Speaker 1: I mean I find going to the supermarket, especially when
Speaker 1: it's busiest or stressful enough things it is. So life
Speaker 1: is hard. Yes, so hyperinflation is obviously is pretty catastrophic.
Speaker 1: And yeah, this happens. This happens all the time. Let's
Speaker 1: start by talking about cash, and we're gonna we're gonna
Speaker 1: use the exam throughout this next bit of me paying
Speaker 1: you ten pounds. You're going to be pretty wealthy by
Speaker 1: the end of this wonderful something to look I can
Speaker 1: get my shopping delivered. Yeah, exactly, exactly all you're asking nymphs.
Speaker 1: That's a good business idea like that. Um, so yeah,
Speaker 1: we'll we'll talk about cash now and the other ways
Speaker 1: in which we move money around on a daily basis.
Speaker 1: Because now some of what some of what we're going
Speaker 1: to talk about, it might seem on the face of
Speaker 1: it kind of a little a little basic, a little
Speaker 1: elementary to you. I'm learning to you. It's going to
Speaker 1: leave calcul you are going to have your mind blown.
Speaker 1: But it is easy to lose sight of how just
Speaker 1: how we transact with each other all the time. So
Speaker 1: let's imagine we're making a cash transaction. I am paying
Speaker 1: you ten pounds, and so what are the benefits do
Speaker 1: you think of that of transacting in cash? Is there
Speaker 1: anything that kind of leaps to mind? Um, traceless? Do
Speaker 1: you know what I mean? It's kind of it. It's anonymous, really,
Speaker 1: isn't it. So you could be paying me for something
Speaker 1: that might be a little bit shameful, Yes, legal, but shameful,
Speaker 1: like an adult magazine or something, or you know, or
Speaker 1: something else or something else something, Yeah, something that I
Speaker 1: don't want other people to know about, something maybe illicit,
Speaker 1: or something that you know, I just I would rather Yeah,
Speaker 1: it's personal. Yeah, it's personal. It's just between me a
Speaker 1: Brazilian butt lift for ten pounds for the best jump.
Speaker 1: It's not the best example, a portion of a Brazilian uplift. Yeah.
Speaker 1: So yeah, it's anonymous. There is no one else involved
Speaker 1: in that transaction. It's purely peer to peer, as you
Speaker 1: is a term you're hear in crypto a lot um.
Speaker 1: It's me and you and yeah, so it's it's anonymous.
Speaker 1: There's no one else involved, no one else knows anything
Speaker 1: about the transaction. It's also instant, so I hand you
Speaker 1: the ten pounds, you hand me the voucher for the
Speaker 1: butt lift or design buying, and we both go on
Speaker 1: our way. There's no nothing else needs to happen. It's finished.
Speaker 1: It's it's done. Um and yeah, we're it's it's it's quick.
Speaker 1: There's no sort there's there's no kind of chargebacks, there's
Speaker 1: no having to wait for the money to clear in
Speaker 1: your account or anything like that. We're done and we
Speaker 1: can move on. And also what's great about being instant
Speaker 1: is say we're doing a business transaction and you know,
Speaker 1: you're a supplier of Brazilian butt lifts or whatever it is.
Speaker 1: You The good thing for you about it being instant
Speaker 1: is then you can take that money and perhaps pay
Speaker 1: your employees or the suppliers, you know, because you have liabilities,
Speaker 1: you have obligations, And the great benefit of the transaction
Speaker 1: being quick is that you then have that money straight
Speaker 1: away and you can yeah, and you can spend it. Okay,
Speaker 1: So on the face of it, then a cash transaction
Speaker 1: is pretty good. But what are the are the drawbacks?
Speaker 1: Is there anything that is anything that strikes you? I
Speaker 1: mean you physically have to be there, Yeah, exactly, you
Speaker 1: can't you can't sort of post cash, or you can,
Speaker 1: but it's not I mean, yeah, a ten pound note
Speaker 1: inside a inside a birthday card from your aren't get
Speaker 1: is borrowed by the Yeah, you have to rely on
Speaker 1: a third party. You have to rely on the post um.
Speaker 1: So yeah, I mean you can, you can move cash around,
Speaker 1: but essentially you're absolutely right, you have to be in
Speaker 1: the same place. And this is the big this is
Speaker 1: cash's major problem. This is the big drawback of using cash.
Speaker 1: You have to be face to face because no one
Speaker 1: is going to be comfortable sending large amounts of money.
Speaker 1: And it's also to send large amounts of money, you know,
Speaker 1: using the post would cost you you constantly having to
Speaker 1: buy stamps and envelopes and all that sort of stuff,
Speaker 1: and you'd be worried that it's not not instantaneous. Yeah,
Speaker 1: you're you're you're reliant on on the postal service. Um.
Speaker 1: So yeah, that's that's the major problem with cash. You
Speaker 1: have to be in the same place. And there's also
Speaker 1: a kind of there's also you're you're quite vulnerable if
Speaker 1: you're carrying cash, you can lose it easily. Yeah, And
Speaker 1: I was either from from from lacking in the ops
Speaker 1: getting you or if if you just you drop it. Yeah,
Speaker 1: I mean yeah, I'm quite good like this. I generally
Speaker 1: tend touch with never to sort of lose or drop
Speaker 1: my wallet, but I mean terrible awful yeah, yeah. Yeah.
Speaker 1: In fact, I've seen you. I've seen you many years ago.
Speaker 1: I think you were sort of putting you. I think
Speaker 1: you had a couple of drinks and you were trying
Speaker 1: to put your wallet in your back pocket and it
Speaker 1: was just missing and you were just dropping it on
Speaker 1: the floor. And then you did the same with your
Speaker 1: phone and you dropped it on the floor. And I
Speaker 1: was like, that sounds about right. Yeah. I was like, Mike,
Speaker 1: come on, you know so yeah, and certain people are hopeless.
Speaker 1: But I was thinking about this on the way over
Speaker 1: here today. I was thinking, you know, I've got my
Speaker 1: bank card in my wallet, and that gives me access
Speaker 1: to not actually that much money, but you know, there's
Speaker 1: about there's about a thousand pounds in my account at
Speaker 1: the moment. Now, I'm perfectly happy to carry that bank
Speaker 1: card around because there's inbuilt security on that. I would
Speaker 1: feel really uncomfortable carrying a thousand pounds in cash around.
Speaker 1: I mean it would take up a lot of space,
Speaker 1: wouldn't it, But I'd be I'd be really paranoid about
Speaker 1: dropping my wallet or or you know, or someone seeing
Speaker 1: that I had a huge ward of notes in there.
Speaker 1: It's not ideal. So that's another drawback of cash. Um
Speaker 1: And again I think the other drawback would be it's
Speaker 1: not much use if we're trying to do a large transaction,
Speaker 1: like say we're trying to buy a house. No one
Speaker 1: is going to appreciate you turning up with a car
Speaker 1: load of cash to buy a house. So how do
Speaker 1: we solve the problem of transacting at a distance? Then
Speaker 1: how do we get cutter puls I set up a catapory.
Speaker 1: That's a that's an innovative solution. But I would say
Speaker 1: that the ability to transact at a distance without having
Speaker 1: to be in the same room as someone is is
Speaker 1: a massive innovation, one of the great innovation of our time,
Speaker 1: because without it the world economy would fall apart pretty quickly.
Speaker 1: Um So, And to do this, obviously we use digital money. Now,
Speaker 1: this is this is a this is a broad term
Speaker 1: digital money. Um So I'm going to break it down
Speaker 1: a little bit um and consider the ways that we
Speaker 1: that the things that fall under the umbrella of digital money. Um.
Speaker 1: But it's basically you can think of it as any
Speaker 1: form of money transfer that doesn't involve cold, hard cash,
Speaker 1: So that would be things like card payments, credit card,
Speaker 1: debit card, bank transfers. Um. And you've also now increasingly
Speaker 1: got payment providers, things like papal yeah or Venimore Look
Speaker 1: cash up cash app. We were right, we were really
Speaker 1: in sync there. Yeah, yeah, I didn't think of cash app.
Speaker 1: But obviously the benefits of these digital forms of money
Speaker 1: are obvious. We don't need to be in the same place,
Speaker 1: we don't have to carry large amounts of cash around,
Speaker 1: we can transfer large amounts of money between each other
Speaker 1: if needs be, and we don't have to use wheelbarers. Yeah.
Speaker 1: This is I mean, this is great. But there are
Speaker 1: of course drawbacks to digital payments. What are they? Okay? Well,
Speaker 1: and I alluded to this earlier when I was talking
Speaker 1: about cash transactions. But one of the drawbacks is that
Speaker 1: any digital transaction, any digital money transaction, has to have
Speaker 1: someone else involved. So if I'm going to send you
Speaker 1: money digitally, if I'm going to send you this ten
Speaker 1: pounds UM that I that I apparently owe you, um,
Speaker 1: someone is going to have to facilitate that transaction because
Speaker 1: I because you know, it's it's either going to be
Speaker 1: a bank, there's going to be a card company involved,
Speaker 1: or I might be paying you via PayPal, any any
Speaker 1: of those ways. But there's someone in the middle of that.
Speaker 1: And so that means oversight, you know, that means that
Speaker 1: that transaction is no longer anonymous, so it's logged and
Speaker 1: people can see. So if I'm trying to buy something
Speaker 1: that I don't want people to know about, you know,
Speaker 1: I don't want people to know that I'm having a
Speaker 1: Brazilian butt lift. Or if you're donate thing to say
Speaker 1: wiki leaks exactly. Yeah, yeah, I perhaps I'm donating to
Speaker 1: an organization that the government isn't comfortable with, and wiki
Speaker 1: leaks is a great example. Isis Or on the other hand,
Speaker 1: maybe I want to give money to ISIS. Um. Yeah,
Speaker 1: so there's someone, because someone is in the middle to
Speaker 1: facilitate this transaction, they can also see this transaction happening.
Speaker 1: They can and they can stop it. Um. And if
Speaker 1: you talk to if you talk to anyone who especially
Speaker 1: works in retail, and they and they do they do
Speaker 1: online bank on online sales or anything like that, they'll
Speaker 1: tell you that things like chargebacks are a real problem.
Speaker 1: So if you send if you send a product out
Speaker 1: to someone and they're not happy with it for any reason,
Speaker 1: or you know, they claim it doesn't arrive or anything,
Speaker 1: it's you know, something goes wrong, then they can initiate
Speaker 1: a charge back, and so the transaction is kind of
Speaker 1: frozen or reversed. UM. And I think PayPal, especially if
Speaker 1: you have as a merchant, if you have too many chargebacks,
Speaker 1: if things go wrong, like say you say you send
Speaker 1: things out via the post, if the post lets you down,
Speaker 1: if the postal service lets you down, then you get
Speaker 1: these you get these chargebacks coming towards you. There's nothing
Speaker 1: you can do about it. Um. And then all of
Speaker 1: a sudden, papal will freeze your account, which obviously puts yeah, exactly,
Speaker 1: which puts a real spanner in the works. So having
Speaker 1: someone else involved isn't ideal because it means oversight, because
Speaker 1: it means that the transaction can be stopped, it can
Speaker 1: be reversed, it can be interfered with UM. And also
Speaker 1: we have to we have to trust these people, we
Speaker 1: have to put our faith in them UM. And in
Speaker 1: order to I mean here in the here in the West.
Speaker 1: I'm going to talk about the developed world quite a
Speaker 1: lot because we are so used to using all of
Speaker 1: these things, but we don't often consider that we have
Speaker 1: to put our faith. We're putting a lot of faith
Speaker 1: in these people. If we make a large transaction, say
Speaker 1: we're putting a lot of faith in in the banks
Speaker 1: involved making that transaction. Um, we have to trust them.
Speaker 1: Now in order that we can trust them, there's another
Speaker 1: layer added in and that's obviously government, So they government
Speaker 1: and regulators. Because we have to trust these people, because
Speaker 1: we have to trust these third parties, the likes of
Speaker 1: PayPal or banks or whatever, there has to be another
Speaker 1: layer of oversight involved, and this is where government and
Speaker 1: regulators come in, so they maintain the trust that we
Speaker 1: have in in these in these companies, so they make
Speaker 1: sure that they're behaving properly. So that's a kind of
Speaker 1: another layer in involved in a digital payment. Not only
Speaker 1: have you got the middleman, but you've also got yeah,
Speaker 1: you've also got to the entity overseeing the middlemen. So
Speaker 1: there's a lot of scrutiny. And this is the price
Speaker 1: that this is one of the prices that we pay
Speaker 1: for the convenience of digital payments we have we have
Speaker 1: to we have to live with the fact that there
Speaker 1: are people involved and there are people watching. And so
Speaker 1: the payments we make in this way, they're traceable, they're
Speaker 1: linked to our identities. The third parties can see what
Speaker 1: we're spending our money on. And if governments or law
Speaker 1: enforcement or anyone like that requests or asked asked to
Speaker 1: see those transactions, um, those third parties are often legally
Speaker 1: obliged to pass them on. So if you're a fan
Speaker 1: of privacy, if you don't want if you don't want
Speaker 1: everyone to know, if you don't want the government to
Speaker 1: know what you're spending, um and that and again, like
Speaker 1: wiki leaks is a great example here, you might not
Speaker 1: want the US government to know that you're donating to
Speaker 1: wiki leaks. Um. So if you like privacy, this is
Speaker 1: a problem. Also, the US government was able to stop
Speaker 1: you donating to WikiLeaks. Yeah yeah, so, um, not only
Speaker 1: is there oversight, not not that I donated, but well
Speaker 1: you wouldn't say, well, this is why wiki leaks started
Speaker 1: being paid in bitcoin. But we're we're getting slightly ahead
Speaker 1: of us. Yes, there, because I we will come back
Speaker 1: to that. Um. So before we look at how digital
Speaker 1: payment are made, because I want to kind of break
Speaker 1: this down into how this money moves around because there
Speaker 1: are so many misconceptions around it. But first we need
Speaker 1: to talk about the big problem that digital payments need
Speaker 1: to overcome. And this is called the double spend problem.
Speaker 1: And this is really important to understand. This is a
Speaker 1: key uh, this is a key foundation of sort of
Speaker 1: everything that's involved with digital payments, with modern money and
Speaker 1: also with cryptocurrency, this idea of double spends. So the
Speaker 1: big problem with any asset that's digital is that can
Speaker 1: easily be copied. I mean, it can be a case
Speaker 1: of just you know, just copy and paste. So, um,
Speaker 1: think back the last time sent someone sent you a
Speaker 1: funny image over WhatsApp or something like that. There's no
Speaker 1: you have no way of of of ensuring that that
Speaker 1: image is unique. It's it's easy to copy and redistribute.
Speaker 1: And you could say that, I mean meme culture, it
Speaker 1: would work without it. Um. So you know, these these
Speaker 1: files can easily be copied and sent to anyone else
Speaker 1: and you have no way of preventing that. Um. And
Speaker 1: if if that wasn't if if it wasn't for that,
Speaker 1: if digital files couldn't be easily copied and redistributed. I mean,
Speaker 1: the lives of anyone under about forty five would just
Speaker 1: instantly fall apont just people would just be they wouldn't
Speaker 1: know what to do with themselves. UM. So, any form
Speaker 1: of digital money exists basically in the form of files,
Speaker 1: and digital files are easy to copy. So if I
Speaker 1: sent you such a file as a payment, you can't
Speaker 1: be sure that I haven't copied it and sent it
Speaker 1: to someone else. Now, obviously, this this uncertainty makes the
Speaker 1: asset worthless. So the system collapses because you have no
Speaker 1: confidence in the money. If I can send you these
Speaker 1: digital pounds and then send the same digital back, copy
Speaker 1: and paste and send the same digital pounds to someone else,
Speaker 1: that's that's no good to anyone, UM and people. You
Speaker 1: couldn't rely on people to stay honest like that. So
Speaker 1: this is why the third parties. This is another reason
Speaker 1: that the third parties we talked about earlier exists. They
Speaker 1: are overseeing. They're the ones that make sure this doesn't happen.
Speaker 1: They act as bookkeepers. They keep records up to date,
Speaker 1: so they track the fact that I've sent that ten
Speaker 1: pounds to you. Um and they update the books which
Speaker 1: means I can't then send that ten pounds again, you see,
Speaker 1: so um and they're able to do this because someone
Speaker 1: again is regulating them so so that you know, the
Speaker 1: croupiers are being watched by the pit operator. Every there's
Speaker 1: there's all this oversight. So essentially, what it comes down
Speaker 1: to is that two layers of security are needed when
Speaker 1: it comes to digital payments. So firstly, you need third
Speaker 1: parties to process and oversee those payments, and you need
Speaker 1: a regulatory body in place in order to keep the
Speaker 1: third parties themselves on this and make sure that they're
Speaker 1: not cooking the books and awarding themselves, you know, extra
Speaker 1: extra pounds that they've magiced out of thin air. So
Speaker 1: there's a lot of there's a lot more people involved
Speaker 1: when you make a digital payment, when I pay, when
Speaker 1: I send you ten ten pounds, it's a lot more
Speaker 1: people involved than just the two of us. UM. And
Speaker 1: again this is this is a big this is a
Speaker 1: big issue when it comes to digital payments. Now we'll
Speaker 1: come back to this whole problem of double spending when
Speaker 1: we talk about bitcoin, because actually the inventor of bitcoins,
Speaker 1: Toshi Nakamoto, the big problem that he had to overcome
Speaker 1: with creating this digital currency, this digital cash. The big
Speaker 1: problem he had to overcome was the double spend. How
Speaker 1: do you prevent it? But that is a topic for
Speaker 1: another episode. Shall we take a break, Let's have a break.
Speaker 1: Let's have a break. Welcome back to Part two, Part two,
Speaker 1: How Digital Money works Magic. We're going to get technical here,
Speaker 1: so let's look at how banks transfer money between themselves.
Speaker 1: The real rock and roll stuff, the stuff that goes
Speaker 1: on behind the scenes when we make payments to one another. Yeah,
Speaker 1: the nuts and bolts. UM. I want at this point
Speaker 1: to give credit to a book called The Basics of
Speaker 1: Bitcoins and Blockchains by a chap called Anthony Lewis here
Speaker 1: because big Anthony, big up, Anthony, Good work, Anthony. Yeah,
Speaker 1: his book is excellent at explaining this. There's loads of
Speaker 1: useful diagrams and illustrations and things like this. But yeah,
Speaker 1: I've I've I've used I've used that book a lot
Speaker 1: researching this, UM. And I urge you to read it everyone,
Speaker 1: because it's it's great. UM. And yeah, obviously it does
Speaker 1: what it says on the tin, but it goes into
Speaker 1: a lot of a lot of detail like this that
Speaker 1: is really important to know. So big up, Anthony, thank you, so, Mike.
Speaker 1: If people think about it at all, they tend to
Speaker 1: imagine that when we make a bank transfer, money kind
Speaker 1: of gets sent from one account to another. So back
Speaker 1: to our example, I'm transferring you ten pounds. Um. Yeah,
Speaker 1: the assumption would be that somehow that ten pounds makes
Speaker 1: its way from my bank account to your bank account,
Speaker 1: and everyone's happy. But this isn't the case. This is
Speaker 1: this is not true at all. So we want to
Speaker 1: get this. We want to get rid of this idea, Yeah, exactly,
Speaker 1: to spell that rumor get rid of this idea that
Speaker 1: somehow kind of money itself, physical money, if you like,
Speaker 1: is moving behind the scenes. What is moving, Well, it's
Speaker 1: mostly numbers on spreadsheets. But let me explain. So let's
Speaker 1: start off with the simplest, the simplest type of transaction.
Speaker 1: Let's quickly before we talk about bank transfers about how
Speaker 1: they do this, let's quickly talk about assets and liabilities.
Speaker 1: So the money that's in your bank account, Mike, is
Speaker 1: an asset that belongs to you, Okay, But for the bank,
Speaker 1: that money is a liability. So the bank actually owes
Speaker 1: you that money. So all the money in your bank
Speaker 1: account is currently the liability of whoever you're banking with.
Speaker 1: So if you ask for that money, let's say you
Speaker 1: go to a cash machine or you you make a
Speaker 1: card payment, you know, you instruct the bank basically to
Speaker 1: make a payment, then the bank is duty bound to
Speaker 1: fulfill that obligation, to fulfill that liability to give you
Speaker 1: that money when you ask for it. Um. So this
Speaker 1: is important to remember. So it's our asset and it's
Speaker 1: the bank's liability. UM. So we'll be talking kind of
Speaker 1: in terms of assets and liabilities a bit from this
Speaker 1: point on, so just to let you know, you know,
Speaker 1: to clear up any any confusion around that. So there
Speaker 1: are four different types of bank transfer, um, and we're
Speaker 1: going to see how they actually work. Now, I don't
Speaker 1: want to get too technical on this. There are loads
Speaker 1: of different terms and things, and again, um, Anthony Lewis
Speaker 1: in his great book, he takes you through all these terms.
Speaker 1: I'm going to kind of go lightly on those because
Speaker 1: I think it might kind of clog things up a
Speaker 1: little bit. Sure, So let's start off with the simplest
Speaker 1: type of bank payment. And that's the same bank payment.
Speaker 1: So I'm paying you ten pounds, but we both bank
Speaker 1: with the same person exactly, bank with the same bank exactly.
Speaker 1: So this is this is straightforward. I instruct the bank
Speaker 1: to pay you ten pounds, so the bank then updates
Speaker 1: its records, so it takes ten pounds out of my account,
Speaker 1: out of the out of the assets I have, and
Speaker 1: it updates its records to move to to add ten
Speaker 1: pounds to your account. Okay. So this type of transaction
Speaker 1: we say it clears, so it clears internally. The bank's
Speaker 1: records are updated, and it will show my assets to
Speaker 1: be ten pounds fewer and your assets to be ten
Speaker 1: pounds more. It's it's fairly simple and basically, um it's uh,
Speaker 1: this is numbers being updated on on a huge database
Speaker 1: from the bank's point of view. Therefore, it will be
Speaker 1: liable for ten pounds fewer to me, but it will
Speaker 1: owe you ten pounds more. Okay, sure, pretty straightforward. Nothing
Speaker 1: too complicated has had to happen here. It's basically a
Speaker 1: case of a spreadsheet being updated. But things start to
Speaker 1: get a little more complicated when we have different banks.
Speaker 1: So you bank with one bank, Bank A, and I
Speaker 1: bank with another bank, Bank B. So the same thing
Speaker 1: kind of happens when I send you this ten pounds
Speaker 1: in that our balances at each of our banks they
Speaker 1: are adjusted on the on the records that the banks hold.
Speaker 1: But your banks the problem comes in the fact that
Speaker 1: your bank's liabilities are the amount that it owes you.
Speaker 1: They have increased by ten pounds, whereas my bank's liabilities
Speaker 1: have decreased. Okay, So from the point of view of
Speaker 1: your bank, this isn't great because suddenly they're liable to
Speaker 1: more money for you. Does that make sense? So obviously
Speaker 1: this needs to be this needs to be settled up
Speaker 1: because that if that isn't then your bank is not
Speaker 1: going to be too happy about it. So now once
Speaker 1: back in the past, this would have kind of this
Speaker 1: would have been done physically, and what would have happened
Speaker 1: was that cash was basically transferred between banks um. So
Speaker 1: we're talking loading up cash into into a into a
Speaker 1: land car, into a van um and transporting it between
Speaker 1: the two. So my bank would owe your bank a
Speaker 1: certain amount of money and at some point that that
Speaker 1: money would have to be transported over. Now, obviously you
Speaker 1: can see the problems with that. UM. If you've seen
Speaker 1: the movie Heat instance, I mean, if you've seen any
Speaker 1: number of Hollywood movies. But yeah, security vans, armored cars, whatever,
Speaker 1: they get robbed, they get held up. So that's and
Speaker 1: then the liability changes, I think, goes to someone else.
Speaker 1: Then things get really complicated. Um. So obviously if they
Speaker 1: were to operate like that, they have to spend a
Speaker 1: lot of money obviously on on vehicles, personnel, security, all
Speaker 1: this sort of stuff, insurance, etcetera, etcetera, etcetera. So this
Speaker 1: is obviously not ideal. So the banks have evolved two
Speaker 1: ways of doing this digitally. Now. The first way is
Speaker 1: called correspondent bank accounts. So basically, correspondent bank account is
Speaker 1: a bank account held by a bank at another bank. Okay,
Speaker 1: so let's go back to our example. My bank has
Speaker 1: an account at your bank, and then when we make
Speaker 1: our ten pound transaction, my bank instructs your bank to
Speaker 1: deduct ten pounds from my bank's bank account that it
Speaker 1: holds with your bank. Does that make sense? Yeah, kind
Speaker 1: of inception banking, but I like it. And then that
Speaker 1: ten pounds is obviously credited to to your account, to
Speaker 1: your list of assets if you like. Um, And this
Speaker 1: allows the liabilities of both banks to be squared off
Speaker 1: and neither ends up out of pocket. Okay, and the
Speaker 1: clearing of the transaction. The transaction is basically approved and
Speaker 1: finalized by the bank that receives the money. Okay. Um. Now,
Speaker 1: the problem with correspondent banking is that it means every
Speaker 1: bank needs to have a funded account with every other bank.
Speaker 1: You can't just have an account. You actually need to
Speaker 1: have money in that account in order to meet the
Speaker 1: liabilities that that payments would that payments from your customers
Speaker 1: would would create. Okay, so um. You know, there are
Speaker 1: thousands of banks all around the world, and this becomes
Speaker 1: pretty impractical when you have it when you have a
Speaker 1: large and well developed banking system, because just managing all
Speaker 1: of the accounts that these are the banks that would
Speaker 1: be a huge amount of work. It would tie up
Speaker 1: a lot of funds because each bank would need to
Speaker 1: keep a certain amount of money, and you'd imagine it
Speaker 1: would be a fairly large amount of money in order
Speaker 1: to cover you know, most possible liabilities. So keeping all
Speaker 1: the correspondent accounts funded would be expensive. It would take
Speaker 1: a lot of time and a lot of work. So
Speaker 1: they don't do that much. It still happens, but I
Speaker 1: think not at the level it kind of used to. Um.
Speaker 1: So that's an antiquated way of dealing with this problem.
Speaker 1: But they've got something new. Now I assume exactly what
Speaker 1: would that be. Well, i'll tell you. It leads me
Speaker 1: nicely on to what are called central bank accounts, and
Speaker 1: this is a more practical solution. The correspondent bank accounts
Speaker 1: do exist. They are still used, and you know, I
Speaker 1: think probably the bigger banks in this country they may
Speaker 1: well still use them, because you know, there's only a
Speaker 1: handful of a handful of banks. But what is what
Speaker 1: is becoming more popular as a central bank account, a
Speaker 1: more practical solution where a bank holds Every bank holds
Speaker 1: an account with the central bank in its territory. So
Speaker 1: for our purposes, the Bank of England, if you're in America,
Speaker 1: the Fed, etcetera, etcetera. Now, the central bank does the
Speaker 1: job of keeping these accounts updated as transactions are made
Speaker 1: between banks. Okay, so all this the big spreadsheet, if
Speaker 1: you like, the big account book, the big Excel sheet
Speaker 1: is done, is kept up to date by the central bank.
Speaker 1: So there are two ways that the central bank does this.
Speaker 1: And I'm going to keep this as simple as possible,
Speaker 1: because otherwise we kind of weak stray into the realms
Speaker 1: of banking jargon and boredom and boredom. Yeah, they go
Speaker 1: hand in hand, and we don't want to inflict that
Speaker 1: on our listeners. So I'll keep it, I'll keep it simple,
Speaker 1: and I'll try and keep it brief. So the two
Speaker 1: ways that the central banking, the Central Bank keeps track
Speaker 1: and updates the updates the records are these. So first
Speaker 1: you have a deferred net settlement d n S now.
Speaker 1: This is when the central bank keeps a record of
Speaker 1: all transactions made over the course of the day, and
Speaker 1: then at the end of the day it calculates which
Speaker 1: bank owes money to the others. So obviously you know
Speaker 1: your bank will be making transactions, my bank, we'll be
Speaker 1: making transactions. All the other banks will be transacting. Some
Speaker 1: banks will be up, some banks will be down, etcetera, etcetera.
Speaker 1: So at the end of the day this is all calculated,
Speaker 1: and then any banks that owe money to other banks
Speaker 1: settle up with a single payment. Now, if if the
Speaker 1: if the only transaction that had happened between our two
Speaker 1: banks had been ten pounds from my bank to your bank, um,
Speaker 1: then your bank would be would be awarded ten pounds
Speaker 1: At the end of the day. Does that make sense? Yeah.
Speaker 1: The key thing here is that it happens at the
Speaker 1: end of the day. So is this like when you
Speaker 1: used to spend on your bank hard and it would
Speaker 1: see in your bank account. You'd look at it. Ah,
Speaker 1: but loads of cash exactly. I was. I was out
Speaker 1: on the rats last night. Don't remember what I spent,
Speaker 1: may have dropped my wallet, may have may have brought
Speaker 1: a couple of lucky ladies, a couple of lemon Sherbet's
Speaker 1: wake up in the morning. Didn't seem that bad. Yeah,
Speaker 1: a day later, I I have I'm eating gruel for
Speaker 1: the rest of the of the month, exactly. And this,
Speaker 1: I mean, this takes me back to when we were
Speaker 1: at university together. I mean this used to happen all
Speaker 1: the time. So this is this is about twenty years
Speaker 1: ago now, isn't it? But maybe not quite? God? Really
Speaker 1: is That's depressing? Okay? So this is the Yeah, I
Speaker 1: remember that exactly as you say. You'd go out and
Speaker 1: you'd spend a whole lot of money you wouldn't really remember,
Speaker 1: and then you check your balance the next day. You know,
Speaker 1: you die though, I guess you could go used to
Speaker 1: go to a cash machine, didn't you You You get a
Speaker 1: little prettier if your balance and you'd be like, oh, okay,
Speaker 1: I've still got right, I've got more money than I thought,
Speaker 1: and sure enough for the next time you spend it.
Speaker 1: And this and this is what happens. Basically, these these
Speaker 1: transactions weren't being cleared and settled in a timely manner.
Speaker 1: They were being batched batched up at the end of
Speaker 1: the working day. And I think sometimes the weekend could
Speaker 1: be with that. That was a real sting, wasn't it,
Speaker 1: Because you'd have two days of yeah, you go out
Speaker 1: on a Friday and Saturday night, and the banks wouldn't
Speaker 1: work Sundays and nothing would happen on Sundays, and then
Speaker 1: Monday was just bleak, and then suicide Tuesday. Suicide Tuesday exactly.
Speaker 1: And that's where it came from. It's the banking system.
Speaker 1: Um so yeah, so this is this is kind of antiquated.
Speaker 1: Deferred net settlement d n s IS is fallen out
Speaker 1: of fashion, and I don't think anyone really mourns the
Speaker 1: passing of it, because I mean, I, for one, find
Speaker 1: it's so useful to know to be able to check
Speaker 1: my balance. I mean, nowadays obviously we check it. We
Speaker 1: all check it on our phones, don't we. But to
Speaker 1: actually know that I'm up to date, if it says
Speaker 1: I've got a hundred pounds in my account, then I've
Speaker 1: got a hundred pounds in my account. And this is
Speaker 1: thanks to something called real Time Gross Settlement RTGs, the
Speaker 1: acronym you never thought you owed so much too. So
Speaker 1: when under RTGs, the central bank updates the records of
Speaker 1: each bank in real time. So this means account balances
Speaker 1: are obviously updated in real time and as we've noticed, um,
Speaker 1: and that I think is a great improvement. So yeah,
Speaker 1: obviously RTGs is the system that's preferred nowadays. Um. It
Speaker 1: does mean that banks have to have more in their
Speaker 1: accounts with central banks to make sure that the payments
Speaker 1: are constantly going through, but the convenience of it is obvious,
Speaker 1: and so both d n S and RTGs. The clearing
Speaker 1: is done by the central bank, so the central bank
Speaker 1: kind of handles everything. But to complicate things still further,
Speaker 1: not every bank can have a central bank account, so
Speaker 1: the ones that do are known as clearing banks, and
Speaker 1: they themselves clear the transactions of smaller banks who can't
Speaker 1: get a central bank account. This is going to be
Speaker 1: important when we come to talk about the unbanked later on.
Speaker 1: But yeah, it's like your classics, like your HSBC, your Lloyd's,
Speaker 1: your not West. I don't know if they're big ones,
Speaker 1: that West a big one, that West is a big
Speaker 1: one yet so they will all have accounts with the
Speaker 1: bank in England. But but you're tied. Yeah, say there's
Speaker 1: if such a thing exists, say there's a tiny little
Speaker 1: high street bank in Yeah, so smaller banks you can't
Speaker 1: you couldn't just start up your own bank and get
Speaker 1: a an account with the central Bank. So you know,
Speaker 1: what you end up with is a kind of pecking
Speaker 1: order with central banks at the top. Then you have
Speaker 1: clearing banks you're kind of big, well known household name
Speaker 1: high street banks, and then smaller banks below that who
Speaker 1: have their transactions cleared by the sort of bigger banks
Speaker 1: slightly slightly higher up, who in turn have their transactions
Speaker 1: cleared by the Central Bank. So let's just take a
Speaker 1: quick time out here to say, to have a think
Speaker 1: about all this that we've discussed so far. It should
Speaker 1: be pretty clear by this point that there's a lot
Speaker 1: more going on behind the scenes than I think most
Speaker 1: people would imagine to transfer move this money around. You
Speaker 1: just think it's a computer. Yeah, and it's like one
Speaker 1: big computer that does it all. Perhaps, yeah, but it's
Speaker 1: not exactly. And the more you kind of red about this,
Speaker 1: the more you realize, actually a lot of people who
Speaker 1: work in finance who work it, maybe not in bank.
Speaker 1: You'd hope that bankers would know about it, but you know,
Speaker 1: financial professionals and stuff unpicking this system of transferring money,
Speaker 1: of moving money around, A lot of them can't even
Speaker 1: do it because they couldn't give you. They couldn't give
Speaker 1: you a detailed explanation of how it works because they
Speaker 1: don't subscribe to the iHeart Coin Bureau podcast exactly what
Speaker 1: happens when we start talking about cross border payments. So
Speaker 1: now we've moved beyond the realms of different banks dealing
Speaker 1: with those goddamn foreigners exactly their funny money than their
Speaker 1: their funny money in their funny ways. The problems we
Speaker 1: had when we'd go away on holiday and you'd just
Speaker 1: be dealing with a brand new currency and you're going,
Speaker 1: am I rich? Am I poor? And I how much
Speaker 1: is this beer costing me? Am I getting fleeced for this?
Speaker 1: Henna tattoo. Yes, is the answer to that? Yes, you
Speaker 1: are wasting your money? Um yeah, absolutely. You go abroad
Speaker 1: and you think, okay, this this is a funny looking
Speaker 1: bank note, it's got a big number on it. Is
Speaker 1: that good? Or should I wipe my ass with this? Yeah? Yeah?
Speaker 1: That that question that that came up a lot. Yes,
Speaker 1: So let's talk about cross border payments. But we're going
Speaker 1: to stick with the same currency because things get way
Speaker 1: more complicated when you start chopping currencies around. Um. So again,
Speaker 1: let's use an example. I'm paying you ten pounds from
Speaker 1: my UK bank account, but you've you've gone over to Ireland,
Speaker 1: say maybe just to sort of get away whilst the
Speaker 1: heat dies down and you know, just make yourself scarce.
Speaker 1: But I need to send you this ten pounds to
Speaker 1: your bank that's in that's in another country. So what
Speaker 1: we're where we're at is now we're back at correspondent
Speaker 1: bank accounts. So your Irish bank will maintain an account
Speaker 1: at my UK bank. When I make the payment, the
Speaker 1: ten pounds is simply being moved from my bank to
Speaker 1: your bank's UK account. That makes sense, so it stays
Speaker 1: within the current zone that it originates from. In this case.
Speaker 1: In this case, the UK bigger banks may have subsidiaries
Speaker 1: in other countries, in which case those subsidies would handle
Speaker 1: this type of transaction. So say I, I say I
Speaker 1: banked with HSBC. There's a good chance that there would
Speaker 1: be an HSBC subsidiary in Ireland. I mean it's probably
Speaker 1: there any way, I don't know. I haven't been to
Speaker 1: Ireland for a long time. Um So in that case, yeah,
Speaker 1: it would be it would be fairly simple. But what
Speaker 1: if we don't want to transact purely in pounds? What
Speaker 1: if I want to send you ten dollars? Okay, so
Speaker 1: if my bank in your bank don't have US banking licenses,
Speaker 1: we're talking to US dollars here obviously, then each must
Speaker 1: have a correspondent bank account back to those again with
Speaker 1: a U S bank you followed, Yeah, yeah, So if
Speaker 1: it's with the same US bank, then that clears the
Speaker 1: transaction and updates the records. But if it's with different banks,
Speaker 1: then the transaction is cleared by the central bank, in
Speaker 1: which case the FED. So again, in order to facilitate
Speaker 1: all this loads of different banks in loads of different countries,
Speaker 1: they need loads of different correspondent accounts and open with
Speaker 1: each with each other's banks in order to in order
Speaker 1: to move some some dollars around. So again, really really unwieldy. Um.
Speaker 1: And that brings us on to the last type of
Speaker 1: bank transaction, and that is a foreign exchange of forex transaction.
Speaker 1: So here's the scenario. I want to pay you ten pounds,
Speaker 1: but you want to receive it in euros in your
Speaker 1: Irish bank account. Okay, So in this case, what we
Speaker 1: need is a middleman who is basically willing to exchange
Speaker 1: the two currencies, in this case pounds and euros, because
Speaker 1: there's no way that the pounds that I'm sending can
Speaker 1: somehow get turned into euros by the computer or or
Speaker 1: anything else. You know, someone needs to actually exchange these exactly.
Speaker 1: But broken, yeah, broke of the deals. So sometimes the
Speaker 1: banks fulfill this role. So if my bank had an
Speaker 1: account at your bank, one of these correspondent banks bank
Speaker 1: accounts again, then they can transact and they've got a
Speaker 1: few euros in the back of the sofa. Oh, we
Speaker 1: could probably handle that ourselves, fill that, yeah, yeah, we
Speaker 1: can clear that. Um. So if our banks don't have
Speaker 1: this relationship, then we could use what's known as a
Speaker 1: money transfer operator and m t O. There's another little
Speaker 1: acronym for you and Shelley and m t O. Um.
Speaker 1: So these are third parties like Western Union, which we
Speaker 1: talked about earlier, MoneyGram scrill or wise wise used to
Speaker 1: be called transfer wise. Yeah. Um, they handle foreign currency
Speaker 1: transactions and they're used by hundreds of millions of people
Speaker 1: across the world to send money in the form of remistances. Again,
Speaker 1: this is something that we're going to talk about in
Speaker 1: a minute. Um. But yeah, these sort of transactions are
Speaker 1: obviously in credibly common people in other countries wanting to
Speaker 1: basically send money home, but it's no use. Cash catapults,
Speaker 1: the cash catapult. Why when will this idea be made flesh? Um, Yes,
Speaker 1: so it's no good. Someone let's say someone from Kenya
Speaker 1: is working in the UK. They want to send money back,
Speaker 1: but they want their dependents, say their family in Kenya
Speaker 1: to receive it as Kenyan shillings because they're not going
Speaker 1: to once they're not going to want is the actual
Speaker 1: Kenyan schillings. Yeah, obviously a relictive, relictive imperialism. Now, these
Speaker 1: money transfer operators, these m t o s, they do
Speaker 1: of course charge fees for their services, and these can
Speaker 1: be as high as ten percent using Yeah. And so
Speaker 1: imagine if you're sending a hundred pounds from from the
Speaker 1: UK to Kenya. Is that because of the variants and
Speaker 1: different likes so exchange rates and they need to cover
Speaker 1: that or is it just take these people are desperate. Well,
Speaker 1: I think it's I think it's probably a bit of both.
Speaker 1: Someone someone I was listening to recently on another podcast
Speaker 1: did point out that one of the reasons why these
Speaker 1: these fees are so high, that you know, West Western
Speaker 1: Union for example, charges high fees is that they have
Speaker 1: to use the banking infrastructure, and which, as we've seen,
Speaker 1: is really complicated, and so they need to kind of
Speaker 1: you know, they need to take time. It takes time money. Yeah,
Speaker 1: And as we're going to see in a moment when
Speaker 1: we talk about unbanked people, banking infrastructure is is pretty involved.
Speaker 1: Um So Western Union kind of I'm sure would probably
Speaker 1: like to charge lower fees, but in order to cover
Speaker 1: their costs because of the clunky nature of of international banking,
Speaker 1: they kind of have to charge these fees because it's
Speaker 1: not a it's not an easy thing to do. Um
Speaker 1: And as we've seen even even moving money between different
Speaker 1: banks in the same come treat is is clunky, It
Speaker 1: is complicated and involves a lot of involves a lot
Speaker 1: of work. So yeah, and then moving between different banks
Speaker 1: in different countries, in different currencies, the system just gets
Speaker 1: more and more complicated. And when it gets complicated, it
Speaker 1: gets expensive. And unfortunately, these costs are covered by customers.
Speaker 1: They're covered by us, they're covered by anyone using these services,
Speaker 1: and in the former in the turn, in the case
Speaker 1: of remittances, it's being covered by and large by very
Speaker 1: poor people, which which is not ideal. Um. And yes,
Speaker 1: so these these m t o s, they are and
Speaker 1: yet another centralized entity that people have to use in
Speaker 1: order to exchange money with each other. So it's clear
Speaker 1: that however we choose to move this money around, there
Speaker 1: are loads of just I guess you'd say, moving parts,
Speaker 1: a lot of a lot of cogs exactly that you've
Speaker 1: got to spray with w defaulty and all this sort
Speaker 1: of stuff. So yeah, these moving parts, these third parties,
Speaker 1: they have to be paid for their services, and so
Speaker 1: their profits come from us. On that note, should we
Speaker 1: take another break to digest all that? Okay, So parts
Speaker 1: three card payments and e money. Most of us in
Speaker 1: developed country we use credit or debit cards to pay
Speaker 1: for things on a daily basis, don't we. I mean,
Speaker 1: lots of lots of people now use their phones to
Speaker 1: pay for things. This system is now, it's so fast
Speaker 1: and supposedly seamless that we hardly think about what happens
Speaker 1: behind the scenes. Now we've already seen what happens with
Speaker 1: trying to transfer money between banks, but making payments on
Speaker 1: card is equally, if not even more complicated. Now I
Speaker 1: found a really useful diagram on the Bank of England's
Speaker 1: website that explains card payments, and I'll try and even
Speaker 1: in the show notes if I possibly can. But it's
Speaker 1: a ten step process that illustrates. So let's just let's
Speaker 1: just talk everyone through this. So Step one is the
Speaker 1: person paying using a card. Step two, the shop sends
Speaker 1: data to the provider of the card reader. Okay, okay,
Speaker 1: so that's an individual. There's a few different providers of
Speaker 1: the card reader exactly. So here's already. So already we've
Speaker 1: got three people involved in this transaction, the person doing
Speaker 1: the paying, the shop, the merchant, and the provider of
Speaker 1: the card reader. Okay, So step three provider of card
Speaker 1: reader sends request to Visa. Okay, so this is a
Speaker 1: this is a Visa card obviously, so there's a fourth
Speaker 1: person involved in the transaction. Step four, Visa sends authorization
Speaker 1: request to person's bank. This is the person obviously paying
Speaker 1: with the card. There's another person involved Step five, number five,
Speaker 1: so step five. By this point we've got five people involved.
Speaker 1: Person's bank authorizes the transaction. Okay, fairly straightforward. Visa sends
Speaker 1: authorization to shop to the merchant. Shop receives authorization at
Speaker 1: step seven. Step eight, provider of card reader sends list
Speaker 1: of transactions to Visa. Step nine, Visa and banks settle
Speaker 1: net transactions at Bank of England. Again, this this idea
Speaker 1: of the central bank handling clearing clearing, yeah, exactly, acting
Speaker 1: as the clearing bank. There's another person involved, the Bank
Speaker 1: of England, with the central banks, and that's now six
Speaker 1: people involved. And step ten, the final step, person's bank
Speaker 1: statement shows the money has gone out. Now it's worth
Speaker 1: bearing in mind that this whole ten step process takes seconds,
Speaker 1: which is incredible given everything that's happening, or what often
Speaker 1: happens is Visa at step four, this counts got no
Speaker 1: money this guy's got no money, decline that ship. So
Speaker 1: in that case, it's a fourth step process. Step one
Speaker 1: person pays using cards. Step two shop sends data, providers
Speaker 1: a card reader. Step three, provider of card reader sends data.
Speaker 1: Chris sends request to Visa. Hilarity, laughter, laughter, laughter. Step
Speaker 1: four Visa refuses to authorize the transaction. Step five person
Speaker 1: exit shop sheepishly. Um yeah, I mean this is a
Speaker 1: ten step process, assuming everything goes to plan and you
Speaker 1: haven't maxed out your card, and as you say, Mike, yeah,
Speaker 1: it happens in seconds, which is incredible. But um so,
Speaker 1: this is obviously a well developed system that we've got.
Speaker 1: But as we've seen, I mean, I think the final
Speaker 1: total there were six people involved in the transaction. That's
Speaker 1: all people who've got to get get the little they
Speaker 1: get their palms greased, exactly exactly, And that really leads us,
Speaker 1: really nicely on to the next point that I wanted
Speaker 1: to make. Because this system is so streamlined, it's so
Speaker 1: convenient on the face of it, that we often assume
Speaker 1: that card payments are free because we don't get a
Speaker 1: we never get a statement, we never get a bill
Speaker 1: for these card payments. You've used your card three times
Speaker 1: this month? Is here's a three pound bill or whatever
Speaker 1: it is for that convenient we never get that is
Speaker 1: that the MERCHENDI gets. Yeah. So basically, payment networks like
Speaker 1: Visa and master Card and others, they levy charges on
Speaker 1: merchants who accept card payments. Okay, so in this case
Speaker 1: it's the shop whoever's you know, whoever selling the goods
Speaker 1: to us. They are having to eat up the charge. Now,
Speaker 1: these charges they there's arranged. It depends on quite a
Speaker 1: few factors, but they range from about one point three
Speaker 1: percent to three point five percent of every single transaction.
Speaker 1: So and in actual fact, the merchants pay, they pay
Speaker 1: three types of fees to accept credit cards in order
Speaker 1: to provide us with that convenience. Because let's face it,
Speaker 1: especially somewhere here like London, Um, if if a shop
Speaker 1: didn't take card, they would they would struggle. There's I
Speaker 1: was out and about and I was a place called
Speaker 1: Vaulty Towers, Vaulty Tower, Vaulty Towers, which is a pub
Speaker 1: linked to the to the vaults of in Waterloo and
Speaker 1: their card only. Yeah, the places don't take cash anymore. Yeah,
Speaker 1: it's becoming more and more common and I think you're
Speaker 1: I think it's I think it's a bit of a
Speaker 1: gray area, it seems. But I think you're supposed to
Speaker 1: You're supposed to still accept cash. But then bus shop
Speaker 1: bus is done, do they not? You can't pay for
Speaker 1: bus fare. I mean it's all right for you, Mr,
Speaker 1: Mr Guy com Bureau. I have my shopping delivered. Mr.
Speaker 1: I take ubers everywhere. Mr. I don't get on with
Speaker 1: the riff raff, but mad Mike moves as a man
Speaker 1: of the people. You're you're on the buzz every day. Yeah,
Speaker 1: I can. I can well appreciate that. That makes me
Speaker 1: look horribly out of touch among But no, I mean, yeah,
Speaker 1: I guess are not like that. They're to be avoided. Well,
Speaker 1: I don't. I don't mind it. I prefer walking. Yeah,
Speaker 1: that's true. That's true. It is good to walk, but
Speaker 1: yeah to a taxi. It is good to walk to
Speaker 1: the helipad at any rate rather than get the gold.
Speaker 1: Let's get back to so merchants, as I say, they
Speaker 1: have to charge, they have to pay three types of
Speaker 1: fees in order for this convenience, which, as we've seen,
Speaker 1: you know, it's just becoming more and more common. So
Speaker 1: the first is called an interchange fee. This is paid
Speaker 1: to the bank that issues the card. Okay. The second
Speaker 1: is called an assessment fee, and this is paid to
Speaker 1: the payment network and that is your Visa or your
Speaker 1: master Card or the other payment. Other payment networks are
Speaker 1: available and they also have to pay processing fees. Now
Speaker 1: these are paid to the payment processor. Now, the payment process,
Speaker 1: this is where it gets so complicated, and I got
Speaker 1: I got really kind of tied up and confused when
Speaker 1: I was when I was looking into all this, because
Speaker 1: it just it's very difficult to tell who all these
Speaker 1: entities are sometimes. But to my understanding, the payment processor
Speaker 1: is the company that acts as a middleman between the shop,
Speaker 1: the merchant, and the banks. Um, so when I swiped
Speaker 1: my card, say, the payment processor communicates with both my
Speaker 1: bank and the merchants bank in order to rise the
Speaker 1: transaction or World pay or square like these you see
Speaker 1: all these like is that the card as I understand it,
Speaker 1: as I understand it, yeah, um so yeah, it's it's
Speaker 1: it's another another layer of person. And so this is
Speaker 1: three different fees that shops that merchants are having to
Speaker 1: and does this all come out of that one point
Speaker 1: three to three I think that, yeah, I think that's
Speaker 1: I think that's covered within that. But there are also
Speaker 1: sometimes monthly subscription fees the merchants have to pay UM
Speaker 1: and I think you know these can I think these
Speaker 1: are generally quite low that you know, they're not too narniers.
Speaker 1: It might be maybe twenty pounds twenty dollars a month
Speaker 1: or something. But then they also have to get the equipment.
Speaker 1: They also have to get card readers and all these
Speaker 1: sorts of things, so that the cost for the merchants
Speaker 1: is significant. They are having to they having having to
Speaker 1: pay a lot of convenience so that your I can
Speaker 1: walk in and just go boo and go away again
Speaker 1: and be out of their be out of their hair.
Speaker 1: But you know, you know what's coming. These costs that
Speaker 1: the merchants have to pay, they are passed quite naturally
Speaker 1: onto us UM and this is seen in the form
Speaker 1: of higher prices across the board. So you know, we're
Speaker 1: paying we're paying more to buy, for instance, a bottle
Speaker 1: of water in a shop than we might otherwise pay.
Speaker 1: But we're paying for that convenience. We're paying to be
Speaker 1: able to tap and go UM. So this is meant,
Speaker 1: this is meant that prices have gone up. Now, if
Speaker 1: you ask me, there should perhaps be a discount for
Speaker 1: paying with cash. I mean you could you could reasonably
Speaker 1: argue that, I mean, you look like an absolute nutter
Speaker 1: um and you'd get you get told where to go
Speaker 1: pretty quickly. But you could argue that we don't accept cash.
Speaker 1: I want a discount, we can't take it. I want
Speaker 1: to pay with cash, and I want to do I
Speaker 1: will give you twenty Kenyan shillings to get to Hybrid
Speaker 1: in Islington's um. Yeah, so obviously we're paying for this. Um.
Speaker 1: You might say that it's a price worth paying. I
Speaker 1: for one, am not in any rush to go back.
Speaker 1: This is again, let's go back to our time at
Speaker 1: university together. I am in no rush to go back
Speaker 1: to those days, to the days of having to go
Speaker 1: into a bank and pay in a check like you know,
Speaker 1: can I just say here and now that checks can
Speaker 1: fuck off exactly. Checks are one of the worst things ever.
Speaker 1: And I'm sure when you're when you're a little boy
Speaker 1: grows up, when you're a little boy starts to use
Speaker 1: money and understand what it's all about, um, and spend
Speaker 1: it on stupid things like his old man did. I
Speaker 1: am sure that you will. At some point he will
Speaker 1: hear about checks. He will hear about the fact that
Speaker 1: sometimes we used to pay each other. And yeah, by
Speaker 1: basically writing an iou by basically writing down on a
Speaker 1: piece of paper and signing it the amount of money,
Speaker 1: and then you would take that piece of paper along
Speaker 1: to a bank. You'd stand in line for someone to
Speaker 1: then process it. Then he doesn't have the money. And
Speaker 1: and even if the money went through, even if you
Speaker 1: didn't get fined because the person has given you a
Speaker 1: check was a total crook, you'd still have to wait,
Speaker 1: sometimes for five days for it to clear. I mean
Speaker 1: that is yeah, and I, for one in no rush
Speaker 1: to go back to those days at Fortune. I think
Speaker 1: you can't imagine what sort of societal collapse we'd have
Speaker 1: to go through in order to get back to that.
Speaker 1: I suppose if the Internet went down, Yeah, I'd rather
Speaker 1: go back to battering Yeah, just with salt lumps of metal. Yeah,
Speaker 1: And I'd quite happily I'd sacrifice a lot not to
Speaker 1: have to go back to checks. But also this whole
Speaker 1: idea of of of having to walk into a bank
Speaker 1: branch and having to get cash out. Now, let's just
Speaker 1: quickly have a look before we move on to the
Speaker 1: sort of people who can't can't use any of these services,
Speaker 1: before we show ourselves up exactly well, yes, before we
Speaker 1: show ourselves up for the coseted, pathetic Westerners that we
Speaker 1: are we are. Let's just quickly talk about the recent
Speaker 1: rise in the last few years that we've seen of
Speaker 1: what I call the money wallets. Um. So these include
Speaker 1: things like papal so again sort of third party the
Speaker 1: payment providers. Um, do you know how many active users
Speaker 1: PayPal has ballpark figure a sort of late just thirty five.
Speaker 1: I don't know what, just thirty five people? You're talking millions. Sure,
Speaker 1: I've got one, and I've got that's too. Joe's got one. Yeah,
Speaker 1: I don't know. Papal has four hundred million active users.
Speaker 1: I was closed with no. No, you wouldn't know. You're
Speaker 1: not close by. Even if you were going to tach
Speaker 1: million on it's like you were still of the all
Speaker 1: four million active PayPal users. Again, that numbers only only growing.
Speaker 1: I got paper had an eBay addiction. Yeah you did,
Speaker 1: didn't you? Yeah? Yeah? What what were you buying anything? Anything?
Speaker 1: Because with the excitement was the rush, Yeah, snipe bid
Speaker 1: now I'm I'm the owner of this record, which I
Speaker 1: already have, which I don't need to I need doubles
Speaker 1: of it, Yeah, Bill DJ mad Mike, I, Um, yeah,
Speaker 1: I remember discovering internet shopping in this, you know, in
Speaker 1: kind of early two thousand's. That's that's one. That's one
Speaker 1: of the few places I consider myself something of an
Speaker 1: earlier adopter. I kind of got internet shopping quite quickly. Um.
Speaker 1: But yeah, I remember having to sign up to PayPal.
Speaker 1: I said, what's this? But actually imagine imagine trying to
Speaker 1: use eBay or any of these other sites now paper. Yeah,
Speaker 1: if there's a PayPal symbol there, I click on that,
Speaker 1: although I probably shouldn't because even if you're paying with
Speaker 1: your credit card, if you pay with your credit card
Speaker 1: via papal, it doesn't have the same guarantees that the
Speaker 1: credit card companies have. Is that right? I didn't know that. Okay,
Speaker 1: So you know, if you if you buy something and
Speaker 1: it's it's shoddy or they go under, you can charge
Speaker 1: back from your credit card. Yeah, it doesn't happen if
Speaker 1: it goes through PayPal. It's got different set of terms
Speaker 1: and stuff. Right, that's interesting. I'm sure you can get
Speaker 1: chargebacks on paper. But yeah, no, but it's but you know,
Speaker 1: if you buy something on a credit so if you
Speaker 1: I bought festival tickets and this festival went under and
Speaker 1: I was able to get the money back, so okay,
Speaker 1: so it's it's it's like a kind of built in insurance. Yeah. Yeah,
Speaker 1: but it wouldn't have happened. I don't think it wouldn't
Speaker 1: have been as easy, or it might be a different
Speaker 1: process via paper, Okay. So yeah, I mean papal papal
Speaker 1: works really well, and I didn't. E Commerce, I think,
Speaker 1: especially things like eBay, which actually bought PayPal, was one
Speaker 1: of the things that made Elon musk as rich, as
Speaker 1: very very rich rich of the world he is, yeah,
Speaker 1: which is saying something considering how rich Jeff Bezos is. Um.
Speaker 1: So yeah. So PayPal has four million active users as
Speaker 1: of late one. We chat pay, on the other hand,
Speaker 1: has one point to five billion. Now, we chat pay
Speaker 1: is the sort of big rival of alie pay. So
Speaker 1: there are two, and they they operate mostly in mainland China,
Speaker 1: And from what I've heard, I've never actually been to China,
Speaker 1: but from what I've heard, pretty much everyone, certainly the
Speaker 1: urban population of China, pretty much everyone uses either or
Speaker 1: both we Chat pay and Allie pay, so they're paying
Speaker 1: with their phones um. And yeah, we Chat pay one
Speaker 1: and a quarter billion users, Alie pay six d and
Speaker 1: seventy six million UM. And there's also the likes of
Speaker 1: Paytm or Patom I'm not quite sure how you pronounce it,
Speaker 1: which is popular in India and that has three hundred
Speaker 1: and thirty million users UM. Now, although these services in
Speaker 1: many cases have made payments even more convenient, um, you know,
Speaker 1: and again think about using PayPal on eBay and all that.
Speaker 1: But what they do is they make use of the
Speaker 1: existing payment rails that are in place. So obviously PayPal
Speaker 1: is linked to your bank account. So although you know,
Speaker 1: on the face of it, they seem to be kind
Speaker 1: of game changing, and they do. They do make things
Speaker 1: a lot more convenient, they're still using that clunky, very
Speaker 1: centralized systems, those clunky centralized systems behind the scenes, so
Speaker 1: they're using the Even though the process of paying by
Speaker 1: card may be ultra convenient for us, it does it
Speaker 1: was still requires whether we're using a card or whether
Speaker 1: we're using PayPal or we chat pay or whatever. That
Speaker 1: loads of infrastructure and middlemen to make sure the system
Speaker 1: run smoothly. Um. It's a huge, huge machine. Um. And
Speaker 1: this in turn pushes up prices, and the person who
Speaker 1: pays those prices is always public exactly, is always us
Speaker 1: the consumer. Okay. So having talked about all that, and
Speaker 1: having pointed out that, okay, this this system may be
Speaker 1: huge and have all these moving parts, it is pretty convenient.
Speaker 1: We'd be we'd be kind of stuffed without it. But
Speaker 1: there are people out there who have none of these things,
Speaker 1: who don't have access to these sorts of services. And
Speaker 1: these people were going to call the unbanked. Now, in
Speaker 1: when you get when we get deeper into crypto, you're
Speaker 1: going to hear the phrase the unbanked a lot and
Speaker 1: a lot of crypto projects do things like talking about
Speaker 1: banking the unbanked. M to the extent that it can
Speaker 1: sometimes be almost a kind of buzzword that just kind
Speaker 1: of trotted out, Oh yeah, and bank the unbanked, etcetera, etcetera. Um.
Speaker 1: But again for us, for us in in places like
Speaker 1: the UK, it's it's hard to imagine not having access
Speaker 1: to to banking services, um, because we take them for granted.
Speaker 1: We're so we're so caustive We're so lucky, really, um,
Speaker 1: but they're again, like, estimates vary about this, but it's
Speaker 1: thought that around thirty one percent of the world's population,
Speaker 1: which is roughly two billion people, are unbanked. And let
Speaker 1: that sink in. That's crazy. That is I find that
Speaker 1: absolutely mind boggling. Now, Um, I did a bit of
Speaker 1: digging and I found a list of the world's most
Speaker 1: unbanked countries, um and it's it makes for pretty fascinating reading.
Speaker 1: So at the top of the list, um, and this
Speaker 1: I believe is pretty up to date. I think this
Speaker 1: is a dated one, this list. At the top of
Speaker 1: this list you have Morocco seventy. Yeah. I was surprised
Speaker 1: about that of Moroccans are unbanked. They don't have access
Speaker 1: to bank accounts, to PayPal, to anything like that. It
Speaker 1: might in a way be a cultural thing. Um. It
Speaker 1: may be that people are particularly mistrustful of banks. We're
Speaker 1: going to look in a minute at some of the
Speaker 1: reasons why why banking, why so many people are unbanked,
Speaker 1: because there are there are a few, but it is
Speaker 1: worth pointing out that, yeah, a lot of people don't
Speaker 1: trust banks, um and have always have always dealt with
Speaker 1: cash are used to dealing with cash, are used to
Speaker 1: perhaps keeping cash under the mattress quite literally, um, and
Speaker 1: don't want to do it another way. So we shouldn't
Speaker 1: rule that out. I think that's I think that's a
Speaker 1: good point that you make. We shouldn't rule out the
Speaker 1: fact that, you know, some people may may not want
Speaker 1: to participate in the system. UM. But I think it's
Speaker 1: it's safe to say that the majority of the unbanked
Speaker 1: are unbanked through no choice or fauld of their own. Um.
Speaker 1: And it's interesting to look at that list and the
Speaker 1: next on the list after Morocco is Vietnam, with six
Speaker 1: of its population unbanked, and coincidentally or well, no coincidence
Speaker 1: at all, I think Vietnam is was recently, i think,
Speaker 1: named top of the list of countries that are adopting
Speaker 1: crypto UM. And you see this a lot countries that
Speaker 1: have where there isn't great banking access for most people
Speaker 1: are the ones that are really picking up exactly. Yeah um.
Speaker 1: And yeah, just looking down that list, you've got the
Speaker 1: likes of Egypt, the Philippines, Mexico, Nigeria, Peru, Colombia, Indonesia, Argentina,
Speaker 1: so fairly spread out Kenya. Kenya. Kenya is there and
Speaker 1: we're gonna, as I said, we're going to talk about
Speaker 1: Kenya a little later on. But yeah, so there are
Speaker 1: right across the world there are people unbanked. And actually
Speaker 1: I looked up and these are big percentages here. I mean,
Speaker 1: we started off with Morocco at seventy one, but if
Speaker 1: you go down to Argentina, one half the country, half
Speaker 1: the people a little bit overt. Yeah, Argentina is an
Speaker 1: interesting case because we mentioned that it suffered hyper inflation,
Speaker 1: would explain I think, I think for a lot of
Speaker 1: for a lot of there's a hyperinflation not just affect
Speaker 1: you even if you've got cash, Yeah, yeah, I mean
Speaker 1: not being not being banked would have a similar you know,
Speaker 1: you wouldn't be safe. You wouldn't be safe from hyper inflation,
Speaker 1: just as you because you didn't use a bank. But
Speaker 1: I think the point about Argentina is that it's it's
Speaker 1: lurched from economic crisis to economic crist this over the years. UM.
Speaker 1: It's a real economically, it's a bit of a basket case. UM.
Speaker 1: And I think it's fair to say that a lot
Speaker 1: of Argentine's basically lost any faith in UM. In the
Speaker 1: in the current financial system a long time ago. Um.
Speaker 1: And again crypto is is taking off in Argentina as
Speaker 1: it is across lots of Latin America. But yeah, historically
Speaker 1: Argentine's I think, have a pretty strained relationship with with
Speaker 1: banks and economists in general. So yeah, it's it's pretty
Speaker 1: sobering to look at this list because I mean that
Speaker 1: that's those percentages are in the millions of people who
Speaker 1: don't have who don't have access to banking. And so
Speaker 1: what does it mean to be unbanked? Well, um, it
Speaker 1: sucks really because it means that you're unable to fully
Speaker 1: participate in the economy. So it's harder. It's harder to
Speaker 1: save because you know, you have to keep cash under
Speaker 1: the mattress or or hidden somewhere. Um. And there's obviously
Speaker 1: there's obviously a whole load of risks associated with that.
Speaker 1: So it's hard to save. You have to use cash,
Speaker 1: and there's plenty of risks with just using cash in general.
Speaker 1: You can't get credit, Um, you can't get loans, you know,
Speaker 1: all these sorts of things. If you want to start
Speaker 1: up a business, you can't get a loan to start
Speaker 1: that business up. If you don't have a bank account. Um,
Speaker 1: no one's going to give you a loan, you know. Um,
Speaker 1: So again, we take these sort of things for granted,
Speaker 1: we're so used to having these, and here we are
Speaker 1: moaning about the difficulty of paying a check in twenty
Speaker 1: years ago. Um and yeah, when you consider that, I
Speaker 1: just think how much crappier our lives would be if
Speaker 1: we had to go back to always using cash, um,
Speaker 1: not most of us having bank accounts. And you know,
Speaker 1: actually it's I looked this up before we started. You know,
Speaker 1: do you know how many people in the UK are
Speaker 1: unbanked forty You look like you're un safer ground with
Speaker 1: that that it's actually a from what I could find out,
Speaker 1: one point three million that I mean, that is staggering.
Speaker 1: So we are I think the Yeah, so I mean
Speaker 1: that's that's a significant amount of people. Um and again, um,
Speaker 1: this is something I think a lot of this is
Speaker 1: perhaps a lot of those unbanked people are perhaps unbanked
Speaker 1: by choice because they don't trust the banks. But does
Speaker 1: that count like children? No? No, So so what we're
Speaker 1: we're these these percentages are all based these figures are
Speaker 1: all based on I don't think Yeah, people who are
Speaker 1: eligible for Yeah, but if you if you kind of
Speaker 1: extrapolated out, Let's say there are two parents who who
Speaker 1: don't have who don't have banking, who are unbanked. M
Speaker 1: that means by extension, their children are unbanked. Let's say
Speaker 1: they have three or four children. Those those children can't
Speaker 1: enjoy the benefits of their parents being banked. So in
Speaker 1: a way, that's kind of yet more people. Um. So
Speaker 1: I mean that, Yeah, these these millions of unbanked, billions
Speaker 1: of unbanked people across the world, and over a million
Speaker 1: here in the UK, which I think is crazy. But again, um,
Speaker 1: a lot of people don't trust banks, and after two
Speaker 1: thousand and eight, I think you can earn the financial
Speaker 1: crash you you can't. You can't blame them, um. And
Speaker 1: I think a lot of people, a lot of ex offenders,
Speaker 1: people coming out of prison and things like that, find
Speaker 1: it very difficult to get banking services. Um. There were
Speaker 1: kind of older and vulnerable people. I mean, I remember
Speaker 1: my my grandmother, who I mean, my grandmother died over
Speaker 1: twenty years ago, twenty five years ago, I think, But
Speaker 1: I mean she was very mistrustful. She she would never
Speaker 1: use a credit card. Um, she would only spend money
Speaker 1: that she actually had. My great aunt who's a hundred
Speaker 1: and two when she died, I mean she was the same. Yes,
Speaker 1: So they would never use they they they they were
Speaker 1: happy using cash. They stuck with what they knew. So
Speaker 1: I imagined there are plenty of people in the UK
Speaker 1: who are still that cash is what they know. They
Speaker 1: understand it, they can hold it in their hands. Um.
Speaker 1: You know, they may live from they may live from
Speaker 1: paycheck to paycheck. They don't want to spend more than
Speaker 1: they have, and and good for them, but you know,
Speaker 1: by by not having access to banking services, they're really
Speaker 1: losing out. Um. So the problem is that banking services
Speaker 1: require a lot of infrastructure, as we've seen. Um, you
Speaker 1: can't just say, well, why not get these people a
Speaker 1: bank account? Um. And this goes back to what you
Speaker 1: were saying, like why are so many people in say
Speaker 1: Morocco or Egypt, say why are so many people are banked? Well,
Speaker 1: it can be a number of factors. In order to
Speaker 1: bring banking to people, especially in rural areas, you need
Speaker 1: to set up that infrastructure. You need to build bank branches,
Speaker 1: you need to staff them, you need to have ways
Speaker 1: of getting cash to these bank branches. These bank branches
Speaker 1: need to be you know, I would say today, they
Speaker 1: need to be Internet ready. You know, they need to
Speaker 1: be linked up to the Internet, and you need to
Speaker 1: be linked into the whole system as it were. So
Speaker 1: if you're if you're living in the middle of nowhere,
Speaker 1: if you're if you're a cattle herder in Kenya, say um,
Speaker 1: in the middle of the Serengetti, it's not it's not
Speaker 1: easy to bring banking services to you. You've got a
Speaker 1: lot of the world's poorest countries have the highest levels
Speaker 1: of our bank people. They often have large, often rural populations,
Speaker 1: remote areas, so banks either don't have the resources or sometimes,
Speaker 1: let's face it, the banks just can't be bothered to
Speaker 1: spend the money to try and to bring banking services
Speaker 1: to these people because poor people don't don't have money. Yeah,
Speaker 1: and what's the point of giving them a service if
Speaker 1: they don't have any money to put in. I just
Speaker 1: I was just on my phone there because because you
Speaker 1: were drifting. No, no, no, I wanted to find out
Speaker 1: what what percentage of the world doesn't have access to
Speaker 1: the internet, Okay, and it's the world has access to
Speaker 1: the internet. It's amazing, isn't it. The country doesn't have
Speaker 1: a bank. Yeah, crazy, it's yeah, it's a crazy thing,
Speaker 1: but it's it's it's interesting that you draw that comparison, because,
Speaker 1: um yeah, access to the internet is still i mean
Speaker 1: six of the world is is great in a way,
Speaker 1: but it's still still yeah. Still who again don't have
Speaker 1: access to something that we utterly take for granted. I mean, yeah,
Speaker 1: we have our Central London office, Our internet keeps is
Speaker 1: very touch and go and we completely lose our marbles
Speaker 1: over it all the time. Eight percent of the world
Speaker 1: has a smartphone. Well, yeah, we're going to talk about
Speaker 1: this in just a moment because that is that is
Speaker 1: a very relevant statistic. But actually the um yeah, the
Speaker 1: business of internet connectivity across the world. It's much much
Speaker 1: easier to connect people to the Internet than it is
Speaker 1: to build banking and um and this is going to
Speaker 1: be crucial when we come to talk about cryptos, and
Speaker 1: this is one of the reasons another reason why crypto
Speaker 1: is becoming so popular, because it's much much easier to
Speaker 1: get someone online and again through their smartphone, which more
Speaker 1: and more people have of the world as a smartphone.
Speaker 1: That's crazy, yeah, yeah, it's it's it's amazing. So so
Speaker 1: those payment rails that that infrastructure is advancing much quicker
Speaker 1: than perhaps regular banking infrastructure ever can. Um. But yeah,
Speaker 1: as you say, poorer people they have they have less money,
Speaker 1: so banks can't make such big profits off them. There's
Speaker 1: no return of the investment of open up a branch there.
Speaker 1: Good point. Yeah, you know they yeah, they might, they
Speaker 1: won't make much of a profit. And so the banks,
Speaker 1: the bank's view as as big bad capitalist entities is
Speaker 1: if there's no profit, then why bother. I mean, you've
Speaker 1: got to see their side of it. Um, But it
Speaker 1: does you know, it sucks for all these people. Um.
Speaker 1: And let's let's touch on something again that we that
Speaker 1: we mentioned earlier. But this is this idea of remissance
Speaker 1: is because many of the unbanked around the world are
Speaker 1: at the same time those people who also rely on
Speaker 1: remistance payments, so obviously that they might have we discussed
Speaker 1: it in detail a few minutes ago. But yeah, relatives
Speaker 1: working abroad sending money home to their families. Now, according
Speaker 1: to the World Bank, and this is a direct quote here,
Speaker 1: officially recorded remittance flows to low and middle income countries
Speaker 1: reached five hundred and forty billion dollars in Now, that
Speaker 1: was down slightly from but that was as a result
Speaker 1: of yeah, of COVID, of people perhaps you know, returning
Speaker 1: to their countries of origin not working abroad so much. Um. Yeah,
Speaker 1: that's a huge amount of money. Every single year. Billions,
Speaker 1: hundreds of billions of dollars every single year are sent
Speaker 1: back to to poorer and middle income countries in the
Speaker 1: form of remittances. And for many of these countries, actually
Speaker 1: remittance payments make up more of g d P gross
Speaker 1: domestic product than actual exports do, so they quite literally survive. Yeah. Yeah,
Speaker 1: so again, and here's the World Bank again another quote
Speaker 1: globally sending remittance remittances. Globally sending remittances costs an average
Speaker 1: of six point three eight percent of the amount sent. Yeah. Now,
Speaker 1: I got my calculators out here, I've got my brain
Speaker 1: whirring away, and that is around five billion, four point
Speaker 1: five billion. Yeah, that's that's impressive. Yeah, that's good tip
Speaker 1: of the capital user. Yeah, thirty four point five billion
Speaker 1: every year going into the pockets of remittance providers. And
Speaker 1: again that's your Western unions, your moneygrams, etcetera, which could
Speaker 1: otherwise be going into the pockets of the world's poorest people.
Speaker 1: Both the unbanked and the remittance market. They are both
Speaker 1: set to be massively disrupted by crypto, as we'll see episodes.
Speaker 1: But let's not get ahead of ourselves now to wrap
Speaker 1: Just before we wrap things up, I want to quickly
Speaker 1: take a look at an interesting kind of middle way
Speaker 1: solution to the problem of the unbanked. And and for
Speaker 1: this we're going back to Kenya, Um, the Kenyans and
Speaker 1: their shillings, and this is something called m Pessa. Have
Speaker 1: you heard of em PSA No? Okay, So this was
Speaker 1: a scheme that was launched in Kenya in two thousand
Speaker 1: and seven by Safari Colm. Now, Safari Com is Kenya's
Speaker 1: biggest telecom company and I think they've they've now been
Speaker 1: brought by Voda Phone. I think they're a subsidiary of Vodaphone. Now.
Speaker 1: The M is for mobile and Pezza is money in Swahili,
Speaker 1: quite literally mobile money. And it works like this. So
Speaker 1: MPSA customers they open an account and they get an
Speaker 1: e wallet on their phone. Now we talked about how
Speaker 1: many people have access to phones. They then use cash,
Speaker 1: so they get this cash that they've maybe been stashing
Speaker 1: away or that they've earned working however, you know, however
Speaker 1: they come across it, they then buy credits from an
Speaker 1: Empessa agent and these credits are then stored on their
Speaker 1: phone's wallet, so they hand over cash and their wallet
Speaker 1: balance on their phone gets updated as a result. And
Speaker 1: they can then send these credits others. Yeah kind of yeah, exactly.
Speaker 1: Um they can send these credits to others in order
Speaker 1: to transact, and all they do is they'd send it
Speaker 1: via their phones. Um. So, and this makes use of
Speaker 1: Safari Comms existing infrastructure so that you know, the mobile
Speaker 1: network that's obviously that the Safari Comms built up across Kenya.
Speaker 1: Um and it also obviously had agents Safari Colm agents
Speaker 1: working across the country. So these were all kind of
Speaker 1: co opted for the MPs and network. UM and EMPA
Speaker 1: now has fifty million customers, mostly across Africa. They did
Speaker 1: trial it I think in India, UM but I gather
Speaker 1: it wasn't such a success there, but it has been.
Speaker 1: It's the trial that they did in Kenya was apparently
Speaker 1: enormously successful. Um And they did it I think for
Speaker 1: about three months and way before the trial was due
Speaker 1: to expire they had, They had people coming back to
Speaker 1: them saying, this is amazing. You've got to keep this
Speaker 1: going you. I'm telling all my friends about it and
Speaker 1: all this sort of stuff. Um. And it's made life
Speaker 1: a lot easier for a lot of people in Africa.
Speaker 1: But the problem is it's still relies on people depositing
Speaker 1: cash with agents. And then imagine you're an agent in
Speaker 1: a very remote part of Kenya somewhere, loads of people
Speaker 1: have been giving you cash, maybe over the month or
Speaker 1: something like that, in order to get their their ewalle
Speaker 1: it's topped up. You then have a pile of cash.
Speaker 1: If you're in the middle of nowhere, you've got to
Speaker 1: get that to a bank. Um. Again, transporting large amounts
Speaker 1: of cash is you know, it's going to make anyone nervous.
Speaker 1: And obviously you know if you're a sole trader, if
Speaker 1: you're the only agent, you can't trade whilst you're hiking
Speaker 1: all that cash to the bank. So, I mean, fifty
Speaker 1: millions limitations on. It's great, Yeah, but it's great, but
Speaker 1: it's still it's still has the same pitfalls that traditional
Speaker 1: banking does. It just it offloads them onto sol traders
Speaker 1: exactly exactly, So I think of it. I mean, fifty
Speaker 1: million customers is a lot, but actually in the grand
Speaker 1: scheme of things, I mean it's not one point six
Speaker 1: three billion. Yeah, it's certainly not. And I mean even
Speaker 1: you know, the likes of Papal and stuff as we've
Speaker 1: seen dwarf it. Yeah, one point to five billion for
Speaker 1: for we Chat pay, and I mean the African market
Speaker 1: is huge. Um So, Yeah, I think kind of fifty million,
Speaker 1: although it's on the face of it an impressive number,
Speaker 1: I think it shows that, you know, there is kind
Speaker 1: of limited scope for it, isn't it. Um So? But
Speaker 1: I like to see MPa as a kind of halfway
Speaker 1: house between the traditional banking system and an entirely new
Speaker 1: way of doing things. Like you know, it's it's made
Speaker 1: use of the fact that people are more mobile and
Speaker 1: you know, they have smartphones or whatever, so you know,
Speaker 1: that's great and they don't have to carry cash around,
Speaker 1: but still it's still kind of having to interact with
Speaker 1: the regular banking system outside. I remember when there were
Speaker 1: crypto cash machines where you'd feed cash in there still
Speaker 1: are yeah, yeah, still yeah, still Bitcoin a t m
Speaker 1: s I think you can get. I mean, it's mostly
Speaker 1: Bitcoin at MS, but you can also get you can
Speaker 1: get some other cryptos. Most of them, you know, I
Speaker 1: think a lot of them, you know, have to hand
Speaker 1: over k y C. You actually have to put in
Speaker 1: identity details, which it's not ideal, but yeah, the idea
Speaker 1: of exchange know your customer. Yeah, this is this is
Speaker 1: a big thing at the moment because crypto exchanges and
Speaker 1: banks and all this sort of stuff are you know,
Speaker 1: you're having to submit this this information basically identify yourself
Speaker 1: and prove who you are, proof of address, you know,
Speaker 1: photographs of I D documents and all this sort of stuff. Um.
Speaker 1: And it's all done in the name of anti money laundering, um,
Speaker 1: you know, anti crime, which is which is fair enough.
Speaker 1: But you know, again it comes back to this thing
Speaker 1: of privacy that we were talking about earlier. And yeah,
Speaker 1: there are there are tons of reasons why we might
Speaker 1: quite legitimately not want people to see what we're spending
Speaker 1: our money on. And I don't think you have to
Speaker 1: be a huge kind of privacy hawk to feel like that.
Speaker 1: I think I think everyone is should be guaranteed some
Speaker 1: degree of privacy. Everyone has a right. Privacy is a
Speaker 1: right and not a privilege or at least it should be. Um,
Speaker 1: I think that's a good a good point to kind
Speaker 1: of wrap things up a little bit. So let's go
Speaker 1: through the points I think that we've we've talked about today.
Speaker 1: So a lot more happens than we think when we
Speaker 1: make a payment, A lot of people involved, Yeah, a
Speaker 1: lot of moving parts. Cash is useful in some circumstances,
Speaker 1: but it's becoming less and lesser part of our lives,
Speaker 1: certainly in the developed world. I I haven't used cash
Speaker 1: in weeks, not getting a bush or buses. Um. Yeah,
Speaker 1: banking requires significant infrastructure and oversight. Way more people are
Speaker 1: on bank than you might think, and this locks them
Speaker 1: out of the world economy and it keeps them poor.
Speaker 1: So what this makes what this leads me to believe
Speaker 1: is if only there was away transfer, if only there
Speaker 1: was a way of transferring money between ourselves that didn't
Speaker 1: involve banks, third parties, costs, extensive infrastructure, and that was
Speaker 1: available to more people across the world. Not just what
Speaker 1: could it be? Mm hmm. Thanks for listening everyone, I
Speaker 1: hope that was useful. I will put some materials in
Speaker 1: the show notes so you can see where I got
Speaker 1: a lot of this information from. And stay tuned for
Speaker 1: our next episode. It's been a pleasure, Mike. Anything you'd
Speaker 1: like to say, no, just just keep keep getting busses,
Speaker 1: keep getting busses. There's a manage to live by. Goodbye everyone.
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Speaker 1: of My heart Breaking