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347: China is Cashless…Are We Next?

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Catch the full episode: https://www.wealthformula.com/podcast/347-china-is-cashlessare-we-next/

Buck: Welcome back to the show, everyone, today. My guest on Wealth Formula Podcast is Martin Chorzempa. Martin is an author. He’s an international market expert and senior fellow at the Peterson Institute for International Economics. He gained expertise in financial innovation while in Germany as a Fulbright scholar and researcher at the Association of German Banks. He’s also the author of The Cashless Revolution: China’s Reinvention of Money and the End of America’s Domination of Finance and Technology. Martin, welcome to the show.

Martin: Thank you for having me.

Buck: You know, I should start out just by I mean, you know, the title of your book is obviously pretty shocking in a way, because the cash well, Cashless Revolution, obviously. But, you know, the end of American domination, all that maybe the best place to start for our listeners is to try to understand what exactly China’s got going on right now. That debt. You know, I know that, you know, China has largely it’s a cashless society and all that, but I don’t think our listeners know the extent of that. Do you want to talk a little bit about that?

Martin: Sure. So I actually moved to Beijing in mid 2013 and at that point going to China felt like going back in time from the United States. You know, here we have our great credit cards abroad points. You can just type in your information and order something online. Everything’s pretty convenient. And then in China, nobody would even accept my debit card that was Chinese issued. So everybody paid for just about anything in cash. And the only thing that you could do and for investments and all that were generally controlled by the government with low interest rates. So it really didn’t look like the future of finance. But in an extremely short period of time, everything became digital. So your average Chinese person doesn’t need to bring their wallet around with them anymore.

The average Chinese beggar has a little QR code printed out, strung over their neck so that people can scan a code to give them money because cash just disappeared. What happened is two of its most successful Internet companies added payments and all sorts of financial services to their, you know, social media, gaming and e-commerce apps to create what’s what we call a super app, which can do something that you would probably take, you know, a dozen or so United States applications to be able to approximate what you can do. I mean, you can get a loan, you can make investments, you can pay for things online and offline. You can hail a taxi travel, show your government ID, just about anything, and this and this one, which makes it incredibly powerful.

Buck: So just to just to be clear. So that’s it was that app you said it was sort of a a team effort of multiple Chinese companies, tech companies, or was it just Alibaba or.

Martin: There are two super apps and then a few contender is for becoming part of the exclusive club. One of them is WeChat, that it was created by China’s most successful social media and gaming company, Tencent. And then there’s another one called Alipay, which is centered around e-commerce. So although each of them have kind of a separate main base, it’s like, you know, imagine if Amazon launched one and Facebook launched a super app that does a lot of the same thing but comes from a different type of company.

Why did this catch on the way it did? I mean, obviously, China still has a fairly significant poor population as well. I mean, I’m just wondering about their access to technology and all that. But but why did this catch on the way it did? Was it really encouraged by the government as well?

Martin: Yeah. So that government role is super interesting. People have this view of China that, you know, everything that’s successful in China is due to big subsidies and the state, you know, pushing it. But actually this is really fundamentally about a state attempt to do that, leaving everything backward. You know, you can go there and everything’s in cash. It’s pretty inconvenient. So if you think about fintech in the U.S. versus FinTech in China, it’s much better for fintech to be competing with a really weak, state owned banks that are not very innovative with cash and all that. Whereas if you’re a fintech company in the U.S., you’ve got to try to get people out there rewards cards. So in China, that’s kind of backwardness of the existing system was actually an advantage to have them leap ahead in ways that we don’t really have as much of an incentive to do because things generally work pretty well and that causes us not to make the improvements that China can when it’s kind of creating a new system from scratch.

Buck: So I’m thinking about, you know, the the role of digital currencies. And one of the, you know, movements of the U.S. towards that and people of of concern considered the possibility of, you know, the government having visibility to everything and the end of privacy in any sort of way. But in China, if these companies are, you know, they’re private companies, does the government have visibility in those transactions?

Martin: Yeah, This is actually one of the most interesting things that I discovered in the book is that you you have all these government officials griping about how these private companies are not willing to share the data with them. Very ask over and over. And the company says we’re still working on it. We’re still cleaning the data. So you have this authoritarian one party state that is unable to get data that it wants, in many cases from from companies.

Now, the interesting question is, is that still true today? Because, you know, eventually the government gets fed up and kind of asserts itself over these companies. But I think it’s still this really interesting battle where the government wants access to more of this financial data. But, you know, the companies know that it’s their main asset. And if they share it with the state, they don’t know if it’s going to be protected. They don’t know if it’ll be, you know, shared with their state owned competitors. So you have a really interesting tug tug of war here that people might not expect is happening in China because of the nature of its system.

Buck: You talk about the end of America’s domination of finance and technology. Talk a little bit about that because, I mean, obviously, we’ve you know, we’ve heard now about, you know, just the issue of a cashless society in China. But, I mean, how does that equate to domination of finance in technology? Can you expand on some of the other things that you might be referring to there?

Martin: Sure. So we’re just really used to, in the United States, being at the forefront of innovation in just about every area. Right. Silicon Valley companies create the future in the U.S. and then eventually that gets copycat it into China. You know, the flow of ideas is kind of from the avant garde in the U.S. to China. And what we’ve seen is actually a flow of ideas has shifted and gone the other direction. Now, people like Mark Zuckerberg and Elon Musk look at China and say, we want to create a super app in the United States. We think what they’ve created there is better and something that we should bring here. So if you want to understand what the implications of the future of finance are, you don’t look in the United States.

You look to China for a preview of the future. And I think that’s pretty, pretty jarring. The other element is that once these companies are really strong in China, they’re not just going to be content with the Chinese market. They’re going to try and expand there to expand their prowess abroad, where they’re going to go head to head with American companies in the tech and finance space. What’s really interesting is that so far, the U.S. companies have really held their own in places like India. WhatsApp, owned by Facebook, has completely outcompeted WeChat, owned by Tencent in China to get Indian people when they’re texting each other, they’re usually using WhatsApp. And on top of that, now we’re building a payment system. But we really can’t be complacent.

We can’t have this idea that these Chinese companies, just because their first attempt to go abroad hasn’t been successful, that that’s not going to last. And China is also creating a central bank, digital currency, where it’s experimental with other central banks around the world to try and eliminate dollars from their cross-border payments. And that’s something that could erode if it really successful, could erode the role of the US dollar and the power of the US to kind of dominate the global financial system.

Buck: I’m kind of interested in understanding the role of future potential super apps in the U.S. and and how that would interplay with the government, the U.S. government, which obviously there is a there will be a strong desire to, you know, maintain the integrity of the dollar and not go to some token system. The ability to track things for tax purposes and all that. How far along are we in that journey and if at all, in how and what are some of the issues that are coming up?

Martin: Yeah, So I actually think that there’s going to be increasing pressure for for big tech companies in the United States to enter finance. If you look at Apple, for example, you see introduction of buy now, pay later. Big expansion of Apple, pay their own card, you know, trying to work around and create their own payment system. There’s a sense for the big tech companies want to do things like in China, and that could bring some useful innovation. But the Chinese experience tells us that there are some real risks there, that you have this concentration of power, conflicts of interest, and also potential temptation for the government to use that as a way to control people that is that is very concerning and we might not necessarily want in the US when it comes to a digital dollar issued by the US government.

I mean, I think one reason that we, you know, a lot of people say the US is behind China is that in China there are privacy concerns but the government can largely steamroll over them or at least say that they’re going to keep it anonymous even if they don’t. Whereas in the US there’s so much more concern about the civil liberties implications of the government having a ledger that records exactly who owns what and who’s paying whom for what. So I think we’re going to be much behind on something that we might not necessarily want right now.

Buck: So you talk a little bit about you just sort of briefly talk about digital currencies. But you know what what Americans need to know about centralized digital currency because, you know, you keep kind of hearing the buzz about that every time there’s a cryptocurrency bull run and what does it all mean, though? I mean, is it just really an advancement in technology more than anything, because most dollars are already digital. So like, what’s the point of a cbdc? Right.

Martin: Yes. I think you make a really important point there that I’ve also made in a testimony to a congressional commission, which is that dollars are generally already digital. So what we’re talking about is really some new kind of payment system, probably looking like some form of digital cash and whether that really matters. I’m not so sure at the retail level in terms of an average American consumer, you might be able to transact in digital cash, but you’re probably not going to get reward points. It might benefit some people who who don’t have bank accounts and thus struggle to do something like pay an Amazon bill without buying a prepaid debit card, which costs tons of money. You just lose you hemorrhage money on fees when you buy these cards and use ATMs and banks. So it could benefit financial inclusion a little bit, but it’s very risky at the global level is really where it gets interesting, where there’s kind of a sense that you can directly link these currencies together and it might make it easier to send money internationally and think about how much money it costs if you want to buy something abroad, not with your credit card and you go to wire and they’re going to charge you up the wazoo with fees and transfer conversions and all that. That kind of process might actually get easier for central bank digital currencies, but it’s really, really hard to pull off.

Buck: Right. You know, what’s the I guess, in terms of where we are in the U.S., in terms of these technologies, where are we now in I mean, I know you said that there’s some interest in the big tech companies, but is there any movement there? Actually.

Martin: There’s some movement. So, you know, Apple is probably the biggest mover at the moment. Google is also talking about creating this more built out payment system. And I think what they’re recognizing is that they don’t have to compete and go head to head with the banks. One of the lessons from China is that really the tech companies benefit is like building APIs, handling data, managing the consumer relationship, building really solid apps in ways that they can kind of be a base layer for tech in the financial system while still having the banks be the ones who determine whether they’re going to lend you money and, you know, actually investing the money. But the tech companies can play a really important role in making finance a lot more user friendly and potentially a lot more competitive.

Buck: But if you if you look at like Apple Pay, that’s kind of what you’re you’re referring to with Apple, it’s really just I mean, it is just simplifying things, right? I mean, it’s not creating a new system in me. You know, whenever I use Apple Pay, it goes through my regular credit card. It’s just I like it because I can just click on it on the Internet And, you know, I don’t have to put in all my address and all that information. But is it just that or are we talking about a a different kind of, you know, currency system altogether?

Martin: I think the interesting thing is a new system altogether. So in the book, I talk about how it’s surprising how little ambition the big tech companies in the US have had in finance compared to their counterparts in China, where they’ve completely remade the financial system in the U.S., as you say, Apple Pay is just kind of a technical layer on top of the existing credit card system. Your same card and all of its rules still apply. But where the potential is in the future is something different, something that might be a lot cheaper. You know, when you go to buy something, say, for a hundred bucks, the store is probably going to get 97 at the end of it. Many coffee shops spend more money on credit card fees than they do on coffee beans just to give you an idea of how expensive our existing system is.

So if the tech companies can build something new and that’s really where Apple is moving now, it seems it’s trying to escape the shackles of this existing bank based credit card system. That’s where we could see a real reinvention. And this is where China shows us that that kind of reinvention can be super powerful and actually really beneficial for for consumers and businesses by lowering costs overall.

Buck: So let’s talk about the the implications of that in the U.S. is that starts to develop again. To me, it seems like really the competition there is not necessarily with cash, but rather with credit cards and other digital forms of payment. Is do you think that’s fair? Because I don’t I don’t see how this is necessarily direct competition to to our, you know, the cash with whatever limited cash is in the system.

Martin: Yes, I think that’s right. One of the main points of advocacy for Central Bank digital currency, they talk a lot about financial inclusion, but I’m always a bit suspicious that the people who currently use cash are going to move to something digital. I tend to think that it is going to compete with the existing system. The hard part of doing that is that people like you and me who have really good rewards cards are really hard to get to sign up for something, even if it’s cheaper. So one of the things that might have to change is that the merchants might be able to give us a discount if we pay using one of these super low cost new payment systems. They say, Hey, we’re going to save a couple of bucks on fees. We’ll pass on half of that to you, and we’re both better off.

But right now, for a wide, complex variety of legal reasons, it’s hard for merchants to offer that kind of discount. So they don’t tend to do that. And that means that we’re kind of stuck with the existing system. And the main beneficiaries of that system are the banks that issue the cards. They’re the ones who are making the fat fees.

Buck: The low, the lowest socioeconomic groups in the U.S. are the ones who use cash the most. And again, I’m you know, whenever the this kind of discussion happens or there’s talk about central bank distributed tokens and that kind of thing, there’s always this, you know question does that mean that cash is doomed in the U.S.? What’s your answer to that? And I guess the answer might be more complicated because it’s like, all right, maybe cash is not doomed, but over time, over a decade, over two decades, it could be do. Is that more kind of what you’re thinking or.

Martin: Yes. So I think from a civil liberties perspective and a privacy perspective, it’s really important for our society to still have cash for someone to be able to make a payment that has no digital record of it whatsoever. And I’m also supportive of things like all the rules that say you can’t pay for a house with a trunk load of cash that might have come from God knows what. So you want to have some some ability to preserve privacy at limited limited volumes. The challenge for the future is that as everything goes digital, as more and more of what we buy is digital, will places still accept cash? And there I think there there will be a smaller and smaller group of people, but there will always be people who want cash. And as long as some people want cash, it’s going to still remain in circulation and it’s probably going to need some role for the government to say that stores have to accept it even if they don’t want to.

Buck: I think that’s already happened in some hyper local situations. I heard something about that in the Bay Area where there was I don’t know if you’re you know what I’m talking about here, but there was some situation where, you know, merchants were not accepting cash and they actually called it, quote unquote, racist because, you know, the people who were using cash were, again, lower socioeconomic, often minorities.

Martin: Yeah. In D.C., we had the same same issue with a fancy salad shop that decided to stop accepting cash. And I think they actually got in trouble and had to start accepting it because, you know, it’s full, it is legal tender, it should be accepted. And and I think it’s important that we retain that option, because one of the other lessons from the book is that when you have a digital revolution, some people are left behind, some people are not going to be able to deal with the complicated smartphone app and really are only able to transact in cash. And you don’t want a system that excludes those people and doesn’t give them any non-digital option. Yeah.

Buck: Yeah, absolutely. Well, this is this is really interesting stuff. The book is called The Cashless Revolution China’s Reinvention of Money and the End of America’s Domination of Finance and Technology. Presume you can get that anywhere, right? Usual?

Martin: Absolutely.

Buck: Is there anything I think that I’ve not really covered that you think would be useful for people to know before they or thought provoking is the you know, as we end the show?

Martin: Sure. I think one of the the main takeaways that’s maybe most surprising to people is that we actually have something interesting to learn from China here. Yeah, there’s a sense that, you know, China is this place where, you know, we can’t learn anything from them because our system is so foreign and we actually find that, you know, a lot of what they’re doing is worth reflecting on.

And some of it we we might want to keep a lot of it. We might say it’s not consistent with our values, but we shouldn’t wholesale reject where they’re actually doing things that are super innovative. And we should make sure we’re not complacent about it, just thinking that we dominate the world and we’ll always do so. So we don’t really need to learn from somebody who might be in second place. And overall, interesting stuff.

Buck: Martin Chorzempa, thank you again for being well, Formula podcast would love to have you back again sometime.

Martin: That’d be great. Thank you for having me.

Buck: We’ll be right back.