My earliest memory of a financial transaction was taking a coin out of my savings, walking into the newspaper and exchanging a copy of Smash Hits magazine. How times have changed.
In the decade since I stopped receiving pocket money, we have moved from cash to cards to mobile payments; swiping, tapping and double-clicking to pay – or just waving your smartwatch.
The speed of the electronic payment revolution raises the question of why the “digital pound” is needed. But this has not stopped the Bank of England and the British Treasury launching a consultation to explore the potential.
If they go ahead, the earliest we will be able to use the digital pound is 2030, but we need some answers before then. Technology offers potential profits for non-bank companies to access even more of our spending data – but in return, can take some of the faff out of finance?
Concerns about privacy and security are legitimate, but digital currencies issued by the Bank of England strike me as stronger and more reliable than, for example, those issued by social media platforms. Central banks are right to try and get ahead of the curve. They can only look in horror as investors pile into crypto; we don’t want to repeat this failure.
Some have dubbed it “Britcoin” but the digital pound will be more like a stablecoin, pegged to sterling at the same value as the printed coin. We will hold digital pounds in virtual wallets operated by regulated third parties with access to central bank infrastructure. This may include not only banks but also tech companies and crypto players who are fueling these pre-emptive attacks – ensuring adequate consumer protection will be essential.
Spending digital pounds on phones isn’t necessarily different, but it’s fun to speculate on what features different wallet providers might develop as they compete to attract consumers and see our spending habits.
In a speech this week, BoE deputy governor Sir Jon Cunliffe coined the term “programmable money” to describe how payments could be configured in the future to interact with digital processes.
He talks about “smart contracts” where linked transactions can be automated, providing certain preconditions, such as rapid exchange of foreign currencies. This may be easier if other central banks around the world adopt their own digital currencies. Assuming digital efficiency continues, rip-off rates for spending or sending money abroad could be a thing of the past.
“Similarly, if the digital pound can align the payment infrastructure behind card payments, the fees charged by merchants can decrease, making it easier and cheaper to process small payments,” said Laith Khalaf, head of investment analysis at AJ Bell.
If you’ve ever struggled to find a corner shop that allows your child to buy 50p worth of sweets using a gohenry pre-paid pocket money card, this might appeal. But smaller processing fees pave the way for micropayments, which could challenge the industry’s subscription-based business models from streaming to publishing.
Khalaf predicts widespread disruption for traditional banks. Will they invest in digital wallets, or lose custom for those who do? It can spell the end of free banking if the loss of profits means they have to charge for basic services.
But the ability to program our money can also nudge us into better financial habits. Freelancers who are paid in digital pounds can automatically siphon some into their savings account to meet their final tax bill, or seamlessly receive tax refunds due to pension contributions. If a retailer links a loyalty scheme to a digital wallet, shoppers can relate to cashback instead of rude vouchers.
The real question, accordingly Neil Saundersveteran retail analyst at GlobalData, as a consumer trust: “Will you get your full salary and financial transactions through a digital wallet?”
This is an area where UK digital banking apps still struggle. But millions are warming to the benefits of Open Banking, allowing FCA-authorized applications to check their spending habits. Take Snoop, which scans your account and might suggest you cancel a forgotten subscription, switch broadband providers or get car insurance quotes in time to lock in lower premiums. This saves money; app makes it by showing accumulated spending trends.
If the digital wallet lives on our phone, says Saunders, it raises the possibility of combining spending insights with location, making our data even more valuable – assuming we feel comfortable and rewarded enough to share.
Consumers should live by the value of what they are given. Don’t be short-changed as digital currency transforms transactions in the future.
Claer Barrett is the FT’s consumer editor and author of ‘What Money Doesn’t Teach You‘. claire.barrett@ft.com