Our world as we experience it is continually evolving and nowadays cutting edge technologies are disrupting the way we live, learn, work, and play. More specifically, research has shown that the pace of digital transformation is accelerating on account of meeting the new demands of our new Covid-19 normal.  More specifically, McKinsey & Company argue that in response to the pandemic, “many consumers have drastically moved toward online channels” and in response to their consumers, many companies and industries have digitally transformed their business models. Thus, accelerating the rise of the digital economy.

In this episode of ExpertsConnect, Global Economist, at HSBC Bank, Mr James Pomeroy, explains the notion of the digital economy. He dives deeper into its implications on job creation and loss as well as its effects on how we do business. Later, Mr Pomeroy shares his projections for the banking industry post-covid-19. Finally, Mr Pomeroy provides his views on financial inclusion in the digital economy and subsequently, shares his perspective on its challenges and opportunities. 

SHOW NOTES:

What exactly is the digital economy? [1:25] | James explains as follows. So the digital economy can be, I guess, we can explain it in a number of ways you can think about it in the simplest sense, which is people shopping online, people consuming digital products, be it your Netflix, or your Spotify, or whatever product you choose to use. There's also a digital economy on the supply side on the services side. So thinking about supply chains, thinking about automation, and robotics, there's all of those things together. But for myself, as an economist, the bit that would the most relevant is that sort of consumption angle, because that's where we're seeing the impacts, most clearly in terms of what all of this means for the global economy.

What exactly are the implications of the digital economy on job creation and loss? [2:38] | James states the following. It's really hard to say. So quite simply, in the first side of things, you can say there's a clear negative here because a lot of jobs are going to disappear as more people shop online, and therefore we don't go into physical stores. And online retail is considerably less labour intensive than physical retail. So naturally, we should see fewer jobs out there on the sort of retail side of things. But then you've also got the big risk of automation and I think in a lot of jobs in a lot of industries, a lot of processes are automated. And some of that is in those supply chains, where businesses have realised, well, actually, we don't need people doing these jobs, we can find automated ways of doing it. The best example for most of us in the world is thinking about self-checkouts. Actually, if you go in and use the self-checkout, that's a job that is basically just disappearing. But what's important, though, is there's a lot of jobs that don't get automated. In using the supermarket example, we haven't yet automated shelf stackers, I used to do that job when I was a teenager. And it is actually considerably harder to automate than you might necessarily think because you've got to think about the rotation of stock, you've got to put things in the right order, right place, actually designing that robot is quite difficult. So you're not seeing all types of jobs being lost. But it's also important to stress that the digital economy creates a lot of jobs in itself. Think about all of those people who work in podcasts or in on YouTube, or Netflix, or any of these sorts of companies that have grown out of nothing, there's we've got a much more digital economy, as well as all the people who build the infrastructure. So even going back to like manufacturing, you've got a huge demand for semiconductors, you've got a demand for producing digital technology. All of these things themselves help to grow jobs in a slightly different way. So it's not so simple. There's a lot of places where jobs will be lost. But there's also a lot of places where jobs will be created. And over time, I'm more of an optimist than most people, I think we'll create enough jobs and there'll be a lot of new jobs that we don't even know, or can't even comprehend today. They’ll be pretty commonplace in 10 years time.

How does the digital economy affect the way we do business? [7:00] | James mentions the following. it affects things in a lot of ways and I think one of the most interesting examples is this shift from physical to virtual or physical to digital in it in a lot of different ways. and the pandemic has accelerated a lot of that clearly in terms of face-to-face meetings. And we're starting to think about when actually do we need to get on planes, do we need to go and visit people as much? When we can actually do video calls and it seems not the same, but it's a step in the right direction.  In terms of, we can be much more efficient with the way we're doing a lot of things and I think that's a really important part of it.  Also, I think what we're going to see across the world is a big drop-off in the sort of physical shipments of items. I think this is something that a lot of people don't necessarily think about. You know we're moving to a world where instead of me buying a cd that is physically produced and sent somewhere on a boat,  I just stream something on Spotify, it's a completely different business model and people say okay that's just music but what happens if we start to see similar things where our consumption of certain goods and services changes in a way that is much more virtual and digital rather being physical? What does that mean for the demand for manufactured products, for commodities? For all of these things,  I think could have a quite substantial impact. It's very easy for me to sit here and say well more things are going to be digital in 10 years time but I don't know what they're going to be if I did know I’d certainly be investing in them. But if you went back 10 years and you said to someone well instead of me buying a cd I’m going to have unlimited access to music on my phone you would have just thought that was crazy. I remember going to the shops with my dad when I was a teenager and we'd buy one cd a week or we'd rent one cd a week from the library and that was seen as like this amazing progress that we had in terms of access to music. Little did we think you know 5-6-7 years later, that for £10 or €10 or $10 a month you have unlimited access to music and that sort of transformational change has massive implications for the economy but also those industries involved.

What are James Pomeroy’s projections for the banking industry post-Covid-19?  [9:03] | James estimates as of such. It's very tricky because there are clearly two things at play here: one is that digital payments are booming and the pandemic has really accelerated that and I’ve been for a long time, a sort of anti-cash crusader to an extent with the argument that digital payments are really good for the world. They streamline things, they're a more effective way of doing business, of paying, they save costs, they say wastage in the economy, they're fantastic. And the pandemic has really accelerated digital payment usage because people for one reason or another have opted not to want to receive digital payments or they've chosen not to want to receive cash or they've not wanted to use cash and those two things together partly because of fears of the virus spreading on notes or coins or whatever has really turned the tide in terms of digital payments. Therefore you're going to move towards a world that is much more focused on digital payments going forward. And I think that's going to be a really interesting story, not just what's happening now, but what happens going forward. We've always thought of digital payments as needing a tipping point and for me, that tipping point is when businesses start saying, we're not going to take cash, because suddenly, if a few businesses start saying, we're not going to take cash, then you don't take cash in your wallet, which means next time you only pay with your card, and it really, really intensifies quite quickly. And we saw in Sweden, in the course of the last decade, the share of payments in cash went from about 40-50-60%, depending on what year you use as your starting point, down to about 10% really quickly in less than a decade. And you've got countries all over the world where digital payments still account for a tiny, tiny share of payments, cash payments are about 50 or 60%. Well, what happens if those countries go through the same process that Sweden had? And it's one of those sorts of things where if I say to someone, it may sound crazy, but somewhere like India, imagine if in India, in 10 years time, only 10, or 15 or 20% of payments were cash, you’d think I was crazy. But that's exactly what's how has happened in Sweden in the past decade. And why can't it happen elsewhere? Because the technology is available, more people have mobile phones across the world than ever before, and the improvements in these technologies are what’s making this happen. And I think what we're going into in the course of the next decade is this massive, multi-year boom, in global digital payments as cash usage slowly fades out.

What are the implications of the digital economy on financial inclusion on a global scale? [16:35] |James refers to his earlier comment on mobile money and further explains as follows. What I was just saying about this ability for mobile money to get people sort of active in the banking sector, giving people a bank account, I think is absolutely amazing. And if you do see central banks engaging in central bank digital currency projects, to try and increase financial inclusion. If you read reports from the BI s, they're saying that one of the top reasons for emerging markets central banks to think about their own digital currencies is for financial inclusion reasons, I think it's a huge lever. And if that can happen, and if we can see more people get banked, then as I said, the impact that could have on the world is enormous, not just in terms of economic growth, the way that we would traditionally think about as an economist, but also socially, giving people access to secure savings, giving people access to credit, is massive. And I'm very sort of optimistic about what this could mean for the world. And I am definitely more of an optimistic person. But I think it's fascinating that these things could have.

What are the challenges and opportunities of the digital economy? [17:49] | James explicates the following. There are a few things, one of them is going to be taxes. Now, we don't know how digital taxes get worked out. But when things can move across borders incredibly easily, trying to work out where the taxes are due is a huge problem. We're seeing this in a lot of disputes across countries at the moment. And it's something that's not going to go away until there is some sort of global universal sort of agreement on digital taxes. It is a big issue, and it's going to hang around. Yeah, the challenges I think, are going to be around sort of policy from governments. And I think the biggest risk is that governments don't do their part, which is essentially providing digital networks, it's going to be putting in fast internet, making internet available for everyone at a reliable fast speed. And that is going to be an investment in 4g networks, 5g networks, fibre broadband networks, those sorts of things, that's really, really key. And the countries who don't do that are going to fall behind. Now, it's all fair. And well by saying mobile payments are going to be fantastic boosts to emerging market growth. But if the emerging market, governments don't put in 4g and 5g networks, then then it's much much harder for that to happen. And that that's a key part of it. And it's not just about the payment side of this, if you think about someone in some of the poorest parts of the world, getting a smartphone for the first time, what that access gives you is unbelievable, then when it gives you in terms of news the returns is simple. But what that means in terms of your availability of information, how to do your job better, how to do best practice. And there's a great example in India, of an app that the Indian government released for farmers that gave them essentially simple information such as how much crops were going for the local markets, they knew when to take their crops to the market, and giving them information such as the weather forecast. It’s things like that, which are genuinely transformational. In the very simplest terms, you also think about what this can do in terms of lifting education rates. Now having access to elite-level education online can genuinely transform the prospects of people in some of the poorest parts of the world, and on the healthcare front as well, then you've seen this a lot in the last year just that information spread is so valuable, and what it can do in terms of lifting up potential growth. I'm extremely optimistic about the role that the smartphone will essentially play in lifting the global economy in the next 10 years. The challenges I say there is you've got to put those networks in, if you don't put the networks in, that can't happen. The handset prices are collapsing. They're affordable for pretty much everyone on the planet right now. The problem is, can you get those networks in place? And the progress has been good? It's been very good. But it just needs to continue on for this to happen. If it doesn't, then some of that optimism has to be tainted a little bit.

Notable Quotes from James Pomeroy - Global Economist

"[…] So it's not so simple. There's a lot of places where jobs will be lost. But there's also a lot of places where jobs will be created. And over time, I'm more of an optimist than most people, I think we'll create enough jobs and there'll be a lot of new jobs that we don't even know, or can't even comprehend today. They’ll be pretty commonplace in 10 years time." [4:24]

“[…] And it's one of the big challenges I think policymakers across the world are going to have in the next 10 years and beyond is can you train people to have the skills that you need? And some of that is going to be the simple thing such as being digitally savvy. Do you have people who know how to use a computer well? Can people use the basics such as excel, word, know how to communicate on email, and know how to use social media effectively? All of these things are going to be genuinely important skills that I think for so long I’ve been taken for granted and on top of that a bit more sort of knowledge of coding and those sorts of skills are going to be much more relevant in the next decade than they ever have been before. Learning how to code is going to be a commonplace skill I think in a lot of industries whereas, historically that's been something that has been a very niche skillset for certain parts of organisations.” [4:51]

“[...] the pandemic has really accelerated digital payment usage because people for one reason or another have opted not to want to receive digital payments or they've chosen not to want to receive cash or they've not wanted to use cash and those two things together partly because of fears of the virus spreading on notes or coins or whatever has really turned the tide in terms of digital payments. Therefore you're going to move towards a world that is much more focused on digital payments going forward..” [9:35]

“[…]  Now you've got a lot of people in the emerging world who don't have access to a bank account today. And actually, what I think we're going to see in the course of the next decade is that change quite dramatically because of the advent of mobile money. And for a long time, we thought about how, you know, a bank account has to be a physical branch, and you have to go there, and you have to set up an account, that whole sort of process and that digital adoption, that payments adoption story is a fundamentally different one when you start thinking about mobile money. And what you're seeing in large parts of Southeast Asia and Sub Saharan Africa and a little bit in Latin America, is people getting access to digital payments through their mobile phone.” [11:42]

“[...] I think we could see this really sharp drop in cash usage in much of the emerging world in the course of the next decade. And I think it's gonna be a fascinating thing that happens because, in the emerging world that has an enormous multiplier effect on economic growth because you're streamlining the economy, you're taking out wastage, and you're providing people with an opportunity then to get credit or to have savings or investments, and all of those things that are genuinely transformational for economic growth, and it there's not many good things that have come out of the last 12 months. But if one of them is that we accelerate the move towards digital payments, particularly in the emerging world, that I think is genuinely good news for the global economy.” [12:47]

“[...] I think actually what the pandemic could act as is a real accelerant for governments across the world in the emerging and the developed world, because it's not just in the emerging world where you've got this problem, it's in the poorest parts of the developed world as well. But you've got this huge inequality problem where low-income households don't have access to the devices for their kids to learn at home, whereas high-income households do. And though that inequality problem is being really wiped out by the pandemic, but it’s created an incentive for governments to fix it. And what I'd love to see is much more investment in digital technology, both in terms of the top end of it, no can we get sort of fast internet into our countries, but also making sure it's a universal right, that everyone in the world has access to a digital device and is connected to the internet at a price that's very affordable to them.” [22:08]

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