Exploring the Future of Money: A Brief Study of Financial Technology

Fundamental Terms

Money and Its Functions:

• Medium of Exchange: Money serves as a universally accepted medium that simplifies transactions by replacing the cumbersome barter systems where goods were exchanged directly.
• Unit of Account: It provides a common measure of value that enables easy comparison of goods and services, aiding in informed decision-making.
• Store of Value: Money retains its value over time, allowing individuals to save their wealth and make purchases in the future.

Currency and Its Types:

• Forms: Currency exists in both physical forms, such as coins and notes, as well as digital forms that enable electronic transactions via various platforms.
• National Currencies: These are the official forms of money issued by central banks of respective countries, like the Indian Rupee in India.

Transactions and Economic Activity:

• Foundation of Economics: Transactions are the fundamental building blocks of economic activity, driving trade, commerce, and the circulation of goods and services.
• Economic Health: The volume and nature of transactions provide insights into the economic health of a country, reflecting its growth and vitality.
• Role of Intermediaries: Banks and payment systems play a crucial role in facilitating secure transactions, ensuring the safe transfer of funds between parties.

Money Supply Measures (M1, M2, M3, M4):

• M1 Money Supply: This includes the most liquid forms of money, such as physical currency and demand deposits (checking accounts), which can be quickly accessed.
• M2 Money Supply: M1 plus savings accounts and time deposits, providing a broader view of accessible money.
• M3 Money Supply: Encompassing M2 along with larger time deposits and institutional money market funds, this measure reflects a wider financial perspective.
• M4 Money Supply: The broadest measure includes all the components of M3 as well as marketable securities.

Fintech Terminology

As we traverse the digital financial landscape, understanding key Fintech terminology becomes pivotal. Let's delve into some core concepts:

Blockchain Technology:

Blockchain is a decentralized, distributed ledger system that ensures transparent and secure record-keeping by utilizing cryptographic techniques. It forms the foundation for digital currencies and supports the execution of smart contracts, enabling trustless and automated agreements.

Cryptocurrencies:

Cryptocurrencies are digital or virtual currencies secured by cryptography, operating on decentralized networks. They streamline transactions, eliminating the need for intermediaries like banks, offering speed, cost-efficiency, and enhanced security.

Digital Wallets:

A digital wallet is an electronic service enabling electronic transactions where digital currency units are exchanged for goods and services. It facilitates online or in-store purchases, allowing users to deposit money beforehand or link their bank accounts. Additionally, digital wallets may store users' ID documents, with credentials transmitted wirelessly to a merchant's terminal via NFC.

Central Bank Digital Currencies (CBDCs):

A central bank digital currency (CBDC; also called digital fiat currency or digital base money) is a digital currency issued by a central bank, rather than by a commercial bank. It is also a liability of the central bank and denominated in the sovereign currency, as is the case with physical banknotes and coins.

Case study on UPI

The Unified Payments Interface (UPI) stands as a game-changer in India's digital payment landscape, developed by the National Payments Corporation of India (NPCI). Introduced in 2016, UPI has swiftly become a global benchmark for its efficiency and impact. Functioning as an instant payment system, UPI facilitates seamless inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. Operating on mobile devices, users can instantly transfer funds between bank accounts, making it a widely adopted and accessible platform. As of November 2022, UPI boasts a massive user base of over 300 million monthly active users in India, marking its success in transforming the way people transact digitally. The proportion of UPI transactions in the total volume of digital transactions has surged from 23% in 2018–19 to an impressive 55% in 2020–21.

In August 2023, UPI reached a significant milestone with over 10.5 billion transactions, amounting to ₹15.7 lakh crore. The platform's annual transaction value for fiscal year 2023 reached a staggering $1.7 trillion, with merchant payments contributing $380 billion. India's generosity in sharing UPI technology globally underscores its position as a model for digital transactions. With expectations to surpass major card networks by 2023, UPI continues to redefine the future of digital payments. In terms of volume and value, UPI consistently outperforms traditional payment systems, representing 62% of digital payment transactions in FY 2022–2023. UPI's exponential growth, indicated by a compound annual growth rate (CAGR) of 147% in volume and 168% in value, solidifies its status as a key driver of India's digital payment evolution. From its inception to becoming a global digital transactions model, UPI remains a cornerstone of India's financial technology success, shaping the future of digital transactions both nationally and globally.

Conclusion

In concluding my exploration of FinTech, I've unveiled a promising path towards a more integrated and inclusive financial future. From understanding fundamental FinTech principles to exploring practical implementations like the E-Rupee and transformative case studies like UPI, it's clear that FinTech goes beyond technology—it serves as a catalyst for economic change. As I embrace this journey, I anticipate contributing to a future where financial processes seamlessly align with the diverse needs of individuals and societies alike.