Joseph Schumpeter's famous slogan "Destructive Innovation" fails to mention an important feature: sometimes, the cost of destruction can be greater than the profits from the innovation. The destructive effect makes its appearance early, when the innovator is likely to have insufficient startup capital to overcome a stagnant but politically powerful existing alternative. A suspicion arises that undeveloped markets, lacking "national champions", might actually have an advantaged location to perfect and exploit an innovation.
Kenya seems to present examples of several of the issues. Regardless of whose idea it was, the British but Los Angeles Headquartered Qualcomm Corporation seems to have recognized the potential of electronic banking, and hired IBM to develop the technology. Ignoring the British and American markets, they started the M-Pesa Corporation in Kenya and Tanzania, where they quickly assembled 15 million customers producing a 27% profit margin, in spite of a 10% rate of attrition by fraud. Competitors are experiencing similar mixtures of success and failure in India. After the kinks are worked out in Africa, Qualcomm presumably might then be in a position to exploit its experience toward defeating conventional banking competitors in the developed world. Its recent stock market decline may suggest fierce competition even in darkest Africa, or it may suggest an investment bargain. But it illustrates the changing issues within technology innovation.
According to reports, M-Pesa eliminates the cost of branch banks by combining the ideas underlying Bill-Pay and Pay-Pal. Others can do the same. Africa may have few strong banks, but has millions of wireless telephones. The customers deposit money by phone by increasing the phone charges, and then direct its payment by phone. Leverage is developed by outsiders depositing extra money to lend, and thus the basics of banking are assembled inexpensively. A charge to use the system is added, with a surcharge for paying the bills of non-members. The system attracts fraud, but apparently there are enough honest people starved for banking services, that profits absorb the cost. Bitcoin employs different technology but many of the same concepts, so conventional branch banks are not the only competition. Unless they change ancient ways, somebody is eventually likely to upend conventional banks in developed nations, although it may not necessarily be Qualcomm.
So, many of the objections to substituting new currencies for higher-cost branch banking are surely going to be tested by some system, anyway. Branch banking has been successful for a long time, so it is not likely to collapse because of internal contradictions alone. Innovative competitors are going to have a rough time overturning a useful system, need not be addressed here, so we confine this overview to the peculiarities and specific advantages of a currency replacement by index funds. Are they here to stay?