02 September 2014

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Hyperinflation: An Upcoming Black Swan in Payments?

02 June 2010  |  2249 views  |  0

With no inflation in sight, why am I writing about hyperinflation? Remember, in October 2008, the deer in the headlights look on the faces of economics experts? Nobody in charge knew what was going on. None of the experts in textbook economics, none of the Nobel Prize winning old men. They were all dumbfounded. Every one of them. And they are still playing with dangerous things like derivatives and money printing, turning the Western economic world into a gambling den, and forcing all of us to bet on possible outcomes when some of us would rather be focusing on building great companies.

When strategizing my business activities and planning the safety of my family, I now take a serious look at the impact of these people being wrong again, and of their gambling losses causing more damage. I’m certainly not placing all my bets on the continued blind faith in the dollar and other fiat currencies.

Hyperinflation doesn’t need to be the cartoonish version that happened in Zimbabwe. It is actually much more common than that. We’ve seen it in the last decade in places like Turkey, Thailand, Brazil, and other places. It still leaves vivid memories in Italy, Greece and even France if we go back just a few decades.

Around ten years ago, in Turkey, two banks grew their credit card businesses much faster than their competitors. Garanti Bank and Akbank both credited their success to the real-time loyalty programs that they offered. My prior company, Welcome Real-time, provided the software for Akbank’s program. Several years later, I came to understand that it was in fact high levels of inflation that actually drove the success of those loyalty programs.

Inflation causes people to spend money quickly, to convert cash into goods before prices go up further. High inflation will boost credit and debit card payments, since that is an easier and quicker way to spend cash than paper money. All credit card issuers can benefit, especially those that can quickly increase their points program ratios to take into account higher interest rates, like Garanti and Akbank did in Turkey.

But there is another area where inflation will have an even bigger impact and create much larger opportunities for a few nimble payment providers. I see a once in a lifetime opportunity for new prepaid services.

Putting $50 on your Starbucks prepaid account is not very useful in a high inflation environment. But tweaking the system to let customers prepay 10 coffees is a completely different thing. Dollars are converted to goods and services immediately, locking the value of those goods in for the future. Want to lock more in? Prepay 20 coffees. Want to spend your money on more than just coffee? Purchase Starbucks Sterling or Carrefour Bucks. The exchange rate for each retailer’s currency can be displayed on a daily basis.

Customers are already familiar with loyalty currencies and exchange rates for points. Why not retailer currencies for payment?

Closed loop prepaid providers will be the big winners. Open loop prepaid cards are useless in a high inflation environment. Closed loop gift cards that are based only on dollars are also useless.

The real disruption this time, compared to ten years ago in Turkey, is the ability to use mobile phones for transacting. Now, with my new startup venture, Taggo, and with prepaid technology offered by CRM, membership and POS providers that have integrated Taggo into their solutions, any retailer can quickly create their own currency, without needing to issue new pieces of plastic that customers don’t want to carry around.

I have been talking and writing for many years about ways to make payment acceptance more attractive to merchants. This has been a big focus for me in creating Taggo. Developing strategic ways to benefit from potential currency devaluations is an added plus that doesn’t cost much today, but could prove to be very profitable.

Still, I wish all of those gambling addicts in London and New York and Washington would just go cold turkey and let the rest of us get on with our lives.

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