By Steve Kelman

Blog archive

When the U.S. is a tech laggard

App-level approach to mobile management

In Sweden this last week for a friend’s funeral, I got to be present in Stockholm for the listing of Spotify, the Swedish company that is the world’s biggest music streaming platform, on the New York Stock Exchange. (The amount of stock put up for sale was too much for Stockholm’s exchange to handle.)

Spotify’s unique position as the only major public-facing tech platform that comes from Europe highlights American dominance. Facebook, Twitter and Instagram all have an enormous presence in Sweden; there are no Swedish (or other European) competitors. Indeed, Facebook’s recent problems have been a big story in Sweden just as in America.

Most Americans would probably not be surprised to hear this. We tend to think that, with our startups, our entrepreneurial culture and our venture capital, we “of course” dominate tech.

But look right next door, so to speak -- from consumer platforms based around communication of words, pictures, ideas and music to those for financial transactions between individuals and businesses or other individuals. Come to Sweden, and you will see a different picture of the new tech world -- one that the U.S. does not dominate.

Start off with the role of cash in everyday life. Cash has basically disappeared from everyday life in Sweden. While I was there, I asked all the friends I saw whether they use cash to buy anything. The answer was no – none of them even carried cash in their wallets.

What do they do? Well, many do what a lot of us also do in the U.S. -- they pay by credit card. There are two differences, however.

One is that while many Americans pay for a lot by credit card, far more Swedes do so. Some stores have signs saying they don’t accept cash, which helps keep robbers away. In what might sound like a joke if it weren’t true, many banks carry no cash on their premises.

Second, people use credit cards for very small purchases, such as a candy bar or a banana bought at one of Sweden’s ubiquitous small stores that began as newsstands and have expanded outward.

The stampede from cash was accelerated by two changes. One is that credit card companies eliminated earlier requirements for the minimum payment that could be charged to a card, which they earlier had applied because of the high costs of processing small amounts. That opened the way for buying a banana with a credit card. The second was a new government policy that allowed people a large tax deduction for payments made for housecleaning and other household services. That new deduction made it less expensive for people to make such payments on the books rather than in cash, as many previously had done. A significant use of cash thereby disappeared.

Additionally, Sweden has now introduced a new “contactless payment” technology using RFID. Originally developed in the United Kingdom, this technology makes credit card payments easier, especially for small transactions. For payments under 200 crowns (about $20), you just wave your card over the terminal at the point of sale, and the technology takes the transaction from there. There is no need to place the card manually in a chip reader and wait, as has now become common in the U.S. as we move to card chips for security reasons. (For larger transactions, you still need to enter a PIN code in Sweden, but you don’t need to put the card into a machine.)

This is now available at most, though not all, stores, with a symbol in the checkout area signaling its availability. The U.S. is behind -- this technology is still uncommon, though it seems to be slowly spreading. Interestingly, one of the first large-scale uses, scheduled for late 2018, will be in the public sector, as the New York City subway system starts to accept contactless cards to buy tickets.

Sweden is also ahead of the U.S. on mobile payments -- financial transactions done directly using a smartphone. Several years ago a group of Swedish banks rolled out a platform called Swish. Using Swish, one enters on a smartphone screen the account number for the person one wishes to pay, and the amount to send. The system automatically transfers the money from your linked bank account to the recipient’s.

Swish is mostly used for payments between individuals -- the most-common use cited to me was as a convenient way to split restaurant bills so that one person pays on a credit card and everyone else has their share transferred via Swish. More recently, Swish has spread to transactions between sellers and customers, especially in small outdoor markets (e.g. selling produce) where merchants don’t have credit card readers; it is generally expected that such a use for Swish will be expanding rapidly.

When I was in Sweden and asked people whether they used Swish, almost everybody said they did, including friends in their seventies. In the U.S., there is a similar system called Venmo, but it is used mostly by young people.

Next month I will go to China to teach for a few weeks, and get to observe a payments system that not only leaves the U.S. but also Sweden in the dust. Many of us still imagine that China is great at making inexpensive umbrellas and swag handed out at conferences, but little that is advanced or innovative. We have thought that the state-dominated Chinese economy, unlike the US world with its many startups, and the overall lack of freedom in China, would inhibit the Chinese from getting much further. But over the past year or two, that picture has begun to change significantly, as we see Chinese tech innovation and startups, mostly privately owned, that have grown to giants.

A dramatic example of this is that over the space of just a few years, high-tech smartphone-enabled mobile payments have become the dominant form for financial transactions among individuals and businesses in China. The system actually bypasses credit cards, which never really took off among Chinese; it is sometimes noted that China went directly from cash to smartphone payments.

The Chinese approach to mobile payments, developed inside China, is based on QR codes -- a two-dimensional barcode system invented in 1993 in Japan to aid in tracking vehicles and parts in auto manufacturing (“QR” stands for “quick response”). For Chinese mobile payments, the customer waves his or her smartphone, where a unique QR code appears on the screen, at the recipient’s QR code, and money is then immediately transferred from the payer to the recipient. Mobile payments dominate restaurant transactions, retail sales, taxi rides and take-out/home delivery ordering. Many beggars have a QR code and accept this form of payment as well.

The Chinese mobile payments market is dominated by two firms, WeChat (part of Tencent) and Alipay (part of Alibaba). Both started small not so long ago.

WeChat started as a social media platform that had some capabilities that went beyond U.S. platforms, especially the ability to dictate messages to friends who heard your voice. (So the system is not the same as voice recognition software, which produces text rather than a verbal message, and is of course prone to errors.) Alibaba started as an online market connecting businesses and consumers, and businesses and businesses, where distribution was decentralized to third-party vendors rather than being mostly centrally managed as Amazon is.

Both are now huge companies with market caps that actually rival the biggest U.S. tech firms, and they have branched into many new areas, including mobile payments. For WeChat, the first transition from social media to mobile payment use came in connection with a widespread Chinese custom of distributing what are called “red envelopes” -- red-colored envelopes (red is a lucky color in China) given as wedding or Chinese New Year gifts. WeChat came up with the idea of using the platform to give electronic red envelopes. This became wildly successful, and was the entryway to the system that then developed.

Where is the U.S. on mobile payments? Not too far along. Apple introduced Apple Pay in 2014. It has users, but use is limited by the fact that you need a contactless credit card to use it (which most people don’t have) and that by no means all merchants have signed up for it. Google Pay and Samsung Pay are also on the market now. Eventually we will get there, but again we are a laggard.

What conclusions do I draw from all this? First, other countries’ edge over us is sometimes due to technology developed first outside the U.S., sometimes to quicker user adoption (something that would probably surprise most Americans), and sometimes to a greater ability to make non-tech organizational adjustments, such as eliminating minimum transaction values on credit cars, to get the tech to work better. Second, there are clearly efficiency benefits to the new technologies -- think only of the decline in hold ups in stores and bank robberies thanks to the disappearance of cash. But there are also benefits in terms of the general social climate for innovation.

Finally, we need to understand we’re not always as good as we imagine ourselves to be. That in fact may be the hardest message to accept.

Posted by Steve Kelman on Apr 10, 2018 at 6:10 AM


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