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Virtual Currency By The Bit

08:34AM Jan 07, 2015

Expect radical banking shifts for farm business in next decade

Getting a bank account once served as a rite of passage. That will change by 2025 as technology for the exchange of money online gets faster and safer.

For top producers, opportunities in the new banking schema include greater access to agricultural trade with developing markets overseas, better record-keeping and more.

“The smartphone revolution and the global financial crisis have loosened up some of the hold that the legacy players have held over payments,” explains Bill Maurer, director of the Institute for Money, Technology and Financial Inclusion at the University of California, Irvine. One example of the shift is the introduction of Apple Pay, a virtual wallet that enables consumers to make secure and private purchases with a smartphone app. Maurer points out that a wealth of major companies and startups are attempting to make inroads in the area of remittance, the transfer of money from one person to another, a sector traditionally dominated by businesses such as Western Union—as well as in electronic payments at the point of sale, where Visa, MasterCard and cash still reign supreme. 

Such advances raise questions familiar to farmers: Who owns this data? What will producers do when trading with countries that don’t have public infrastructure for payment transactions? The answers might lie in cutting-edge research underway across the globe and in a pop financial tool, the Bitcoin.

Enter the Bitcoin. Cash flow is important in farm country, particularly with the downturn in corn and soybean prices. Yet cash can also pose risks for business owners that might be mitigated by increasingly digitized financial records.

“If you lose it, it’s just gone,” Maurer points out. “It’s easy to steal; it’s easy to have destroyed.”

An alternative is virtual money called cryptocurrency. It includes the Bitcoin, which has attracted interest in popular culture. The Bitcoin is used in a closed-loop electronic payment system in which a person can only sell or buy with those who accept it. The Bitcoin system is different from traditional bank accounts in that at anytime, anywhere in the world, a person may log onto the Internet and review a public ledger of Bitcoin accounts and transactions. Account owners and access codes remain confidential. 

Advocates view this as a way to limit transaction fees charged by traditional banks and credit card companies. Observers, meanwhile, suggest Bitcoin still poses risks. For one thing, its actual value is subject to extreme volatility.

“Bitcoin changes value much more frequently than regular currencies,” explains David Yermack, Albert Fingerhut Professor of Finance and Business Transformation at New York University’s Leonard N. Stern School of Business. “Its day-to-day price risk is comparable to the volatility of small capitalization stocks, even greater. That tends to make Bitcoin unappealing as a store of value.” 

The system also is prone to hacking, he adds, and it is limited to just seven transactions per second worldwide, compared to Visa’s 47,000 per second.

Lasting Architecture. Yet the way in which Bitcoins are cataloged and reported publicly using block-chain technology represents a new generation of financial record-keeping that will likely shape how businesses make sales and purchases in the future. 

For example, the publicly distributed ledger system like that of Bitcoin could have prevented confusion during the 2008 home mortgage crisis regarding title ownership of foreclosed homes, Maurer says. A record dating back to the very beginning of an asset’s lifetime would make access to such provenance easy and accessible. 

The same type of system might be applied to farm buildings, equipment and other investments. 

“I would expect this technology to be adapted to many different uses in the future, such as the registration of automobiles and real estate and the enforcement of financial contracts,” Yermack says. “I am not sure that issuing electronic currency is the best use for it in the long run. ... More likely, you will see growth in mobile payments technology like Apple Pay, which makes it easier for you to use traditional payment systems like credit cards.”


Trade Implications. The virtualization of finance will also open new doors of opportunity for farm owners and managers seeking trade avenues in developing countries. Much of the research underway at Maurer’s institute, funded by the Bill and Melinda Gates Foundation, explores how communities in developing countries respond to the introduction of electronic payment systems. 

In the U.S., producers might be more likely to engage in trade of agricultural commodities with these countries because a block-chain type system adds regularity, records and certainty of payment where little existed previously. 

At the same time, entrepreneurs will need to tread carefully because of differing political and regulatory climates. Most developing countries do not have the type of public financial backbone found in the U.S. In Brazil, for example, it is common to find three or four point-of-sale ATM machines, one for each type of plastic card being used. Meanwhile in Kenya, the mobile-phone payment system M-PESA stood as the exclusive provider for electronic money transfers in that country until recently. 

Thus, limited options in the developing world raise the possibility of monopoly and corruption while opening new doors to the private sector to provide new financial opportunities. 

Whatever the financial system looks like in 2025, chances are it will  provide new opportunities for farm businesses through existing technologies such as credit cards and wire transfers along with new systems that are prepaid and accessible electronically to a much wider audience. 

“Anyone who can break into the remittance market with new and intuitive technology will revolutionize how money moves around the world,” Maurer concludes. 

Future Banking Trends to Follow

In a recent report, experts at PricewaterhouseCoopers, a firm providing assurance, tax and advisory services, share their outlook for megatrends that will affect global banking in the future.

Regulatory Pressure Abroad: “Traditionally restricted markets such as China, India and Korea will be joined by others that limit market share for foreign institutions through local regulation and subtle preferences favoring domestic institutions.”

Bank Branch Structure Will Shift: “Branches will remain but take many forms, from flagship information, advisory and engagement hubs (offering education, financial advice, full-service capabilities and community offerings) to smart kiosks.”

Smart Devices Will Carry Greater Weight: “The customer will be able to select between account providers (e.g. credit providers, deposit accounts) or locally stored value. Acceptance will be universal (with common cross-network payment protocols) and value-transfer instant.”

Biometrics Make Inroads: “Biometrics (e.g. fingerprints, voice recognition) will become commonplace in transaction authorization but will remain tied to a replaceable physical device (e.g. smartphone).”