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  • Writer's pictureJaime González Gasque

Multimillion-dollar deals and how they changed your world


Deep in a secret vault in London there is something that very few people in the world get to see: a billion pounds sterling in cash. To that place, at the end of each day, comes money from businesses around the world. country. The next morning, it goes out to be deposited in ATMs. There are those who believe that in just 10 years that place will not exist. In 2015, in the United Kingdom, card payments surpassed cash for the first time.


Other countries go further.


South Korea no longer has coins. Denmark and Sweden are pioneers in reducing payment with tangible currency; In fact, Stockholm is considering turning the country into a cashless society by 2030; Already in 2016, barely 1% of the value of all payments was with coins or bills. If that is the coming reality, who will benefit? And who will ultimately control the money in the future? You and me... and them


If you sell me something and I pay you with bills, we will make a direct transaction in which no one but you and I benefit. If it were not with bills, others would benefit. But if that transaction were digital, someone would have to manage it. There is a space between you and me, and in that space money is generated.


That's why there is great interest in you to stop buying with metal and paper. The new cashless world is slowly becoming a reality. There was a fundamental change in the way we think about money, and it didn't happen by accident. In 1998, Peter Thiel, a technology entrepreneur, gave a talk at Stanford University in California. One of the people listening to him was only there to make a proposal. When the talk ended, Max Levchin, a 23-year-old computer programmer, came up. to the podium, spoke for less than 10 minutes and reached an agreement that changed the nature of money and how we spend it.



The old times


At that time, sending money from person to person was a clunky process.


Old van loaded with coins. Not long ago, moving money took time and effort. You could make a wire transfer, but it was expensive and slow. You could send a check, even slower. Or sending cash by mail: too risky. Thiel and Levchin's plan was to allow people to transfer money instantly through electronic devices.


"If we created something that replaced cash, not only people in Silicon Valley, but people in industrialized and poor countries could take advantage of the system," Eric Jackson, who was the vice president of marketing of the new company, PayPal, told the BBC. .


Today is so familiar...


"One reason we were successful was that, no offense to the banks, we were competing with huge, bureaucratic, monolithic tanks that take forever to change," said Jack Selby, PayPal's vice president of corporate development at the time. .


"We grew at an outrageous rate...it was terrifying in some ways."


A year after its launch, PayPal had one million users.


They started charging a 3% transaction fee. And two years later, they struck a lucrative deal with online auction site eBay, which accelerated their global growth.


"It caught on like wildfire. I remember the first time it hit a million in a week, it was very exciting. And before you got it, it was a million every day, and then a million every hour," Jackson said. And it just kept growing at that exponential rate. eBay tried many times to buy PayPal and, in 2002, it succeeded.


In the end, eBay achieved its goal. Thousands of miles from Silicon Valley


PayPal had made the digital nanosecond transaction a reality. The idea that you could sign up online and move money was a game changer. But there was a much bigger game changer in the money transfer business hatched by a mobile phone provider. And it happened 10,000 miles away from Silicon Valley, in Nairobi, Kenya, a city on the verge of becoming a cashless society. Far from Palo Alto and Silicon Valley.


In 2003, the Department for International Development (DDI), the foreign aid arm of the British government, noticed that few Kenyans had bank accounts. The banks were too bureaucratic and did not have branches in rural areas.


DDI made a deal with Safaricom, a subsidiary of Vodafone, to find a solution.

The result was M-Pesa. With just a mobile number and a code you can send M-Pesa credit to anyone. The telephone is one of the most basic and the transactions are encrypted, very simple but secure.


Kenya was ahead of the world. But that bright and positive vision of empowering those excluded from financial sector services in Africa is only half the story.

Today, a third of that country's economy passes through M-Pesa, which in Kenya alone has 19 million subscribers.


The success of M-Pesa is enormous. Its reach and influence is largely due to the monopoly of a telephone company.


"What happened in Kenya is a very good example of how a monopoly can emerge under the radar of the regulatory system," emphasizes Izabella Kaminska, analyst for the Financial Times newspaper.


"Essentially, the real unit of the economy is the Vodafone unit," says Kaminska.


"A firm that is not a bank suddenly became the largest money issuer in Kenya," she stresses.


Furthermore, it was the result of a British government department giving a million pounds sterling to Vodafone, a private firm, to develop a product from which it was going to make a fortune.


"These are reasonable arguments at first glance," says Nick Hughes, who developed the technology, "but in reality, the problems that M-Pesa solves in Africa are deep problems and the need is very acute."


The landscape was changing rapidly and a deal made by a bank would make it possible to more clearly imagine life without cash completely. In 2007, the Royal Bank of Scotland (RBS), which was the richest bank in the world, hired the company Gemalto that had the technology to make a new type of payment possible, without contact. The final objective was clear. If small cash transactions are made by card, the number of transactions increases, which benefits the banks. They conducted a test in the RBS staff canteen. The volume of cash purchases was drastically reduced. Additionally, they noticed that when paying contactless, instead of just buying a cup of coffee, people bought the coffee and a cake. The RBS experiment showed that people spent more by making contactless payments, regardless of what it costs in coins or calories.


Unknowingly, the technology was taking advantage of the work of a scientist at the Massachusetts Institute of Technology, which subjects the way we think to intense scrutiny. Drazen Prelec has spent nearly 20 years researching what happens in the brain when we make the decision to pay in cash or by card.


"The MRI detects spikes of activity in the region of the brain known as the insular, associated with unpleasant feelings such as pain, rejection, disgust," he explains to the BBC.


"It tells us that there is pain associated with spending money. It's not physical, it's anxiety and aversion, and it may not be conscious, but it's there. Cards anesthetize people and take the pain out of paying. People buy more."


The birth of an economy


In the same year that the financial crisis plunged the global economy into recession, a nascent digital economy was opening its virtual doors. It would become worth more than US$140 billion, and began with the launch of the iPhone in 2007. Steve Jobs was the herald of a new chapter in history. At first, the device only allowed installing applications created by Apple, but in a few months everything changed and a multi-billion dollar app economy was born.


The iPhone became an extraordinary selling device and the App Store sparked a gold rush among developers attracted by the easy access it gave them to the hundreds of millions of credit cards linked to iTunes accounts. Apple gains about 30 % of each app downloaded from your App Store. But it made it a policy not to see what you bought or keep the transaction data. Their ultimate goal is to sell smartphones and hardware, and tie every aspect of your life to their brand.


When rival Google launched a similar service a year later, Android Pay, it was interested in something else.


Terms and Conditions... do you ever read them?


"We may collect information about this transaction," including the date, time, "the location of the merchant, a description provided by the seller," any photos you choose to associate with the transaction, "the names and emails of the seller and the buyer" , the type of payment method, "your description of the reason for the transaction and the offer associated with the transaction, if applicable."


Remember that space between you and me in the transaction, where companies make money? Now that space is full of data.


You have become the new currency.


"What technology companies can do with data is endless. Let's not forget that data finances the internet. Most of all those applications, of everything you see, is paid for by advertisers," said Izabella Kaminska.


In the midst of the data bonanza there is one type of information that is the most precious.


"Tech firms really see data as the new oil. And payments data is the best oil in the business. It's a complete record of how you spend and live your life."


This is the era of Big Data, with algorithms that analyze every aspect of your behavior. That is our reality.


Technology companies are the central nervous system.


And one tech giant spotted an opportunity that goes beyond leveraging a particular company's customer data... how about capturing data from the economy of an entire country and, eventually, two-thirds of it? The world population?


The gold standard


In January 2017, a private jet landed in the dead of night at Kenyatta Airport in Kenya. One of the world's most influential tech billionaires came to Africa with the intention of learning about mobile money: Mark Zuckerberg.


His visit was timely. At the time of his trip to Kenya, Facebook subsidiary WhatsApp was about to test person-to-person payments in India with the aim of rolling out money transfers to its 200 million users there. M-Pesa is the gold standard to follow.


One of the great challenges for companies is to conquer the informal economy. In Nairobi, more than 90% of people shop at typical street vendors, not supermarkets. And they do it using M-Pesa. The fortune is at the bottom of the pyramid.


In Nairobi people still buy in galleries, but not with cash like in the past. Someone like Zuckerberg has the ability to scale the M-Pesa model, offer a global service and achieve what is encouraged in the technological world: a monopoly.


The goal is to be an octopus. M-Pesa is an example of a very successful octopus, which effectively took over Kenya's money supply in a covert coup. No one noticed until it was too late. However, the goal may be bigger: not just to provide another mobile money service, but to become "the" mobile money service.


By BBC Series "Million-dollar deals and how they changed your world"


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