By Michael Lee, Founder of Southern African Chapter of the World Future Society; CEO of the ATM Industry Association; Author of Knowing our Future - the startling case for futurology.
What will happen to money, and especially cash, in this new electronic age? Will all money eventually be digitized? Will PayPal become the big bank of the future? Will virtual currencies like Facebook credits one day rival the British Pound and other currencies?
Computers, which are digital machines, have enabled the exponential digitization of information, which, in turn, has led to the development of new forms of money like online payments and virtual money. The digital format (bits and bytes) converts an analog original, located in one place and time, into a global replica that can be processed and sent at high-speed around the world. The amount of data used globally on internet in 2011 accounted for 1.8 zettabytes (or trillion gigabytes) of digital storage space. By 2013 it is estimated that 5 billion gigabytes of data will be created every 10 minutes.
Not only is there an explosion of digital content but, more importantly, more and more people are getting connected to internet, through PCs, mobile phones, smart phones and tablets. Between 2000-2011, internet use increased by more than 500%, including growing at the astronomical rate of 2,988.4 % in Africa. By the end of last year, there were over 2,2 billion users, at least a billion of whom live in Asia. There could easily be 3 billion internet users by 2016. And internet has already become indispensable to the world economy: if it were a stand-alone national economy it would be a top five performer.
The spread of mobile phone networks in a global net of connectivity is going to be just as influential as growth in computer power and access to internet. The International Telecommunication Union estimates there were 6 billion mobile subscriptions by the end of 2011, roughly 87 percent of the world population.
These three technological developments together have produced a 21st century information and communications revolution. It is shaping our times like the mass media of radio, television and print changed the face of society in the previous century. We will soon live in a mobi-digital world in which all essential information is digital, stored online and accessed primarily by hand-held, internet-enabled mobile devices. Mobile internet is the next big global information platform.
Considering this scenario, I am faced with a big question as CEO of the global trade body for the 2,3 million strong ATM industry. If information is being continuously digitized, and made instantly available on internet, will all money be digitized, too? ATMs are the world’s principal distribution channel for cash so the question touches the lifeblood of our industry. And it goes to the heart of what money is.
Money started becoming less tangible when President Nixon abolished the gold standard for the US dollar on August 15, 1971 , disconnecting the world’s major currencies from physical commodities of value like gold. And we have now reached a point where the technology exists to make it theoretically possible to remove money from the physical world altogether by making it electronic.
Today’s fiat money is in itself useless. It is simply an agreed-upon medium of exchange. And the value of money is determined purely by the supply and demand of market forces. By the time computers and internet came along, money had already become a kind of token, not linked to gold or other precious metals. So why not turn it altogether into the binary digits of computer language?
That is exactly what is happening with the growing number of internet-based virtual currencies such as BitCoin. BitCoin describes itself proudly as a P2P digital currency or electronic cash system which “does not need authorities to manage”. It works by creating a digital wallet, stored online, for each client. Payments can be made to other registered users on the BitCoin network. BitCoin sets up its network of users and issues encrypted credits to their online wallets which can be accessed anywhere, anytime by an internet-enabled device. Virtual money is just a digital currency for any internet-based community.
We can gain insight into what virtualized money is by looking at BitCoin’s definition of money. They see it as an entity accepted as payment for goods and services, or repayment of debts, in any socio-economic context whether real or virtual. The US virtual goods market could reach over $2 billion this year so these online economic communities are not to be sneezed at. In addition, the growth of online retail is sure to increase the popularity of virtual currencies. We can expect to see a proliferation of integrations between the virtual economy and the real economy such as loyalty credits for retail purchases earned in digital wallets. It is but a short step from fiat money, where money is a “useless” medium of exchange, to virtual currencies like BitCoin.
Facebook, which has one billion users, has been described as a virtual country on its own. It even has its own in-system currency, called Facebook credits. Launched in January 2011, (but recently discontinued) the credits could be used to buy in-app virtual goods for its games. These credits, such as Farmville Cash, could be bought from within an app using a credit card, PayPal, mobile phone and many other payment methods. 1 Facebook Credit was valued at $.10 USD. According to Facebook, in 2011 15 million users were conducting transactions with its credits. Incidentally, Facebook took a 30 percent cut for administrating the purchase and use of developer goods and services on its platform.(Note: Facebook credits were discontinued when Facebook decided the credits competed with other virtual currencies in common use on the site.)
The Google Wallet, described as “your wallet in the cloud” in that it is located on Google servers, like Gmail, is not an in-system currency like Facebook credits. Released in September last year, it is a web-based, mobile-payment system which can be used to make in-store purchases or online payments. So, unlike Facebook credits, it links the virtual world with the real economy. Each customer signs up and registers for the wallet just like opening a Gmail account. Payments can be made both online or in-store because the client’s debit card and credit credit numbers are stored in the account. Payment and password information is encrypted and stored in a chip. The activation of the service requires a PIN to provide additional security.
The problem with this Wallet is that it uses NFC (near field communication, i.e. short-range wireless) technology which is becoming a bit clunky in the mobile world since fewer than 1 percent of the phones sold today have NFC chips embedded. PayPal has effectively dumped NFC, describing it as a technology in search of a problem. It sounds great to “tap-to-pay” at point of sale devices in stores of NFC-enabled merchants, when the mobile phone sends the payment to the terminal, but, in practice, the service is only available in certain stores and for certain phones. In addition, the business model for Google Wallet relies heavily on advertising revenue through sponsored promotions to users who are already maxed out on adverts in a saturated space of non-stop promotions. Do we really want to be bombarded by Google Offers from their participating merchants?
It is not just virtual currency which is changing the face of money. There is also e-commerce, or online payments for real goods and services. In this space, PayPal is the world-leader. It has more than 100 million active users in 190 markets and operates in 24 currencies. One difference between e-commerce and virtual currencies like BitCoin and Facebook credits is that the former is an online payment mostly using financial instruments, like credit cards, provided independently by financial institutions. Also, real goods and services are exchanged in e-commerce, linking this system more directly to the world economy.
Expect a dramatic increase in ways of integrating e-commerce and mobile phones. PayPal Mobile, for example, seems to me to be more future-friendly than Google Wallet. PayPal Mobile has the virtue of simplicity whilst also leaning on the trusted online payment brand of PayPal. What they have done is just extend the PayPal account to the mobile phone. PayPal users can request or send money and pay bills via their mobile phones, with each transaction confirmed by a PIN or password. In mobile money transfers, the sender simply informs PayPal of the recipient’s phone number or email address. PayPal Mobile’s service includes text messaging for balance enquiries and money transfers. There is also an eBay shopping app for PayPal Mobile users.
PayPal has recently noted a month-on-month increase of 25% in mobile payments. Traditionally, its online transactions have been from PCs. This non-bank payments provider is piloting other innovations like mobile ticket purchase. Aite Group consultancy forecasts global mobile bill payments will rise from US$16 billion in 2010 to US$214 billion in 2015.
The marriage of internet and mobile telephony to produce the Mobile Web is a game-changing convergence with potential to, once again, transform the way we live and work. The two technologies are busy forming a self-reinforcing virtuous cycle. It is thought there will be more people accessing internet via mobile devices than PCs by about 2015. It must be remembered, though, that 91% of mobile internet use is to socialize, not to buy online.
In our payments and cash industry, there has been a surge of online payments through mobile devices, mostly using a PIN or password for authentication. In this “mobi-digital” world one would expect physical cash to be replaced by plastic money, electronic money and virtual money, right? Here is where the surprise element kicks in. The answer is: wrong, dead wrong. Just as plastic money failed to replace cash from the mid 1950s following the invention of the credit card in New York, so electronic money has not even remotely overtaken cash as the preferred payment method across the globe. Today, cash still accounts for at least 8 of every 10 payment transactions. Pause right there. Did you say 8 out of 10? This means cash is still the undisputed champion of payments fifty years after the invention of plastic money and deep into our info-communication revolution. In 2011, Euromonitor International found that $14.413 trillion in consumer payments was made with cash worldwide in 2010, compared to consumer payment card transaction value at $9.582 trillion. How is that possible? And where is the cashless society which was supposed to arrive shortly after the credit card made its appearance?
Figure 1: Still from the 1963 movie “The Man from the Diners' Club” starring Danny Kaye
Why is hard cash, in the hand or pocket, still so popular five decades after money first took the form of plastic? We have seen that neither plastic money nor electronic money have undermined the popularity of cash. No wonder a recent reputable history of money stated: “Despite the rise of plastic cards and electronic money transfers, cash is still the most important kind of money in the world.”
The secret of cash’s longevity is that it is a simple, human-friendly technology. Otherwise it would not have survived for 27 centuries. This lifespan alone places cash as one of the top social technologies of all time. While the history of a technology is not going to save its future, it seems there is something universal and alluring about cash that a futurist must take into account in looking ahead to the future of money.
At the back of cash’s popularity lies what physicist and futurist, Dr. Michio Kaku (http://mkaku.org), calls the Cave Man Principle. He reckons our wants, dreams, personalities and desires have not changed much in 100,000 years and that when modern technology clashes with this primitive human self we carry around inside us, the primitive desires win every time. There is a constant competition, he argues, between High Tech (e.g. watching a sporting event on television) and High Touch (e.g. attending the live event in person). All other factors being equal, Dr. Kaku believes we will always choose High Touch. Cash is High Touch, digital money is High Tech. And I, for one, love to have some “moolah” in my house and on my person when I go out.
The KISS principle works for me in life and business. I regularly refer to myself as stupid, so I like the rule of Keep It Simple, Stupid. Cash is simple, quick to use and offers instant gratification. And for members of the public it’s free to use. Founder of BitCoin, Satoshi Nakamoto, highlights a strength of cash when he explains that the costs and payment uncertainties of ensuring trust in electronic payments can be avoided in person by using physical currency. They key phrase here is “in person”. Cash, after all, is analog and so is human experience! Money is “a matter of belief, even faith”, it is “trust inscribed”. And cash represents instant trust because it seldom relies on any third-party to mediate the exchange. Trust is so important to payments that PayPal reckons the maintenance of trust in online systems requires a whole-of-sector approach, no less. What Nakamoto meant is that a cash transaction does not require the mediation of a system provided by some trusted third-party. The cash payment occurs directly and instantly between buyer and seller. Simple. Effective. Sure, the central bank is in the background guaranteeing the worth of the cash but that is all part of the broad social contract that already exists for life between a citizen and his/her government.
By contrast, all forms of non-cash transactions, including uses of plastic money, electronic money or virtual money, are based on the mediation of a system with all its costs and risks. With cash, a coin is a coin and a banknote is a banknote, a buyer is a buyer and a seller is a seller. But e-cash is “a chain of digital signatures”. Oh dear, what happened to the KISS principle here? Nakamoto describes the technical complexities of running the virtual BitCoin currency in his paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. The man-in-the-street will not understand all the jargon used in his analysis. Nor do I.
Unless we know why cash is both popular and effective, we will never be able to predict the future of money over the next few decades. That is why anti-cash crusader, David Wolman, who admits he has a personal distaste for cash, has got it all wrong in his recent book The End of Money in which he argues, in somewhat anecdotal style, that cash’s disadvantages, such as its germs, its costs, its footprint and its abuse by criminals, far outweigh its benefits to society. When it comes to health, cash may contain some germs but we need to remember the jury is still out about whether or not radiofrequency energy (RF) emitted by mobile phones is tumourigenic. I would rather deal with a few germs on my hands than heighten my risk of developing a brain tumor. Wolman believes when it comes to money that High Tech will conquer High Touch. I really don’t think so.
With payments, as in everything, people vote with their feet. And their trust of cash is driving up demand for cash at a rate faster than general economic growth rates. For example, between 2002-2011, the value of banknotes in circulation grew in the eurozone, USA, Brazil and South Africa at the following Compound Annual Growth Rates (CAGR) respectively:10.6%, 5.5%,14% and 9.5%. These are growth rates for cash most countries would die for at a GDP level.
I have seen over the last few years that humanity seems resistant to the idea of letting all our money be digitized as if it were just so much information. In electronic and virtual forms of payment, no physical money passes from sender to recipient during transactions made up of digital signals. And here lies an important point about the meaning of money. Money is not just information. Money is a personal symbol. It possesses a value measuring the fruits of our work and productivity. The money in our wallets and bank accounts comes from what we do for a living. It is part of our social standing. It is a symbol of our labor and aspirations. It is this meaning of money which cannot be digitized. In the end Dr. Kaku is right because High Touch trumps High Tech when there is a straight either/or choice between them. You cannot digitize human experience. The analog original comes first.
The fact is, an uncomfortable sense of depersonalization would seep into society if all our money was reduced to bits and bytes. Converting all money into digital characters stored somewhere in computer files inside the vaporous vastness of cyber space would hand control of money from the public to the owners of the digital economy, the so-called digerati or digital elites. In so doing, money would lose some of its real social character. Money would be stripped of its human-friendly qualities. In my view, money should remain primarily a personal and social symbol of value, and not be turned into a cipher others can manipulate on our behalf. No wonder one popular slang word for money is bread. Like bread, cash remains a basic part of daily life. The tangibility of cash is important not just as a symbol of the reality of money but as part of its role as a household budgeting tool. The 2012 4th edition of the “Future of Cash” study shows that the Great Recession which began in 2008 has increased global cash demand and use as consumers attempted to shore up their savings and regain control over their budgets in times of economic uncertainty. With cash you can only spend what you have on you. Cash is real money you can feel, whereas the Chinese, for example, do not consider credit to be real money. And cash personalizes money. It is a physical symbol of the value we represent as producers in society. Cash is the social, public face of money.
The physicality of cash is the reason why it plays a vital contingency role in society. When disasters take place, or when there are power or network outages, cash can be the only payment system still working. Some countries are regularly hit by tropical storms or earthquakes, while during changes in the solar cycle, solar flares can disrupt electronic and communication systems. Money should never be reduced entirely to electronic numbers in some digital file owned by a private organization. Electronic, mobile and virtual money are rendered inoperable during downtime.
The High Touch nature of cash must be one of the reasons why there is no evidence as yet that electronic payments work as a form of cash substitution. Our friendly anti-cash crusader quotes M-Pesa, for example, as a great cash replacement system. M-Pesa (M is for mobile, pesa is Swahili for money) is a celebrated world leader in mobile payments. It is a Kenyan mobile-phone based money transfer service introduced in April 2007. By 2012, just under million 15 million M‐Pesa accounts had been registered in Kenya.
M-Pesa allows users to deposit, withdraw, and transfer money easily with a mobile device, move money to a bank account, pay bills, redeem deposits and purchase airtime. There is even a bulk payment service for corporate payrolls to be paid to employees without bank accounts. M-Pesa customers can deposit and withdraw money from a nation-wide network of agents that includes airtime resellers and retail outlets acting as banking agents. Users are charged a small fee for sending and withdrawing money using the service.
The success of M-Pesa is one reason why Wolman is betting on cell phone payments to replace cash. But the evidence is not with him. Cash in circulation in Kenya has continued to increase steadily despite the exponential growth of M-Pesa, as stats from the Central Bank of Kenya show. While M-Pesa has facilitated e-cash transfers it has not replaced cash. The high growth of mobile payments in Kenya from 2007-2012 was matched by a steady increase of currency in circulation during the same period. The number of M-Pesa customers increased from 6.18 million in 2009 to 14.91 in 2012 according to Safaricom's 2012 annual report. Currency in circulation in Kenya rose from 89.94 billion (KShs - Kenyan shilling) in 2007 to 147.76 billion in 2011.
Whereas Wolman sees the rise of M-Pesa as indicating the emergence of a cash-substitute, the increase in cash demand while this revolutionary technology was taking off in Kenya speaks rather to the possibility of a long-term co-existence of cash, m-cash and e-cash in the future mobi-digital world.
ATMs and mobile phones are starting to converge in a positive way. Today money can be taken from ATMs using mobile phones in cardless transactions in countries from Japan to Greece, from Turkey to Spain. This kind of contactless technology at ATMs and Point of Sale terminals will probably mean the end of plastic cards in a decade or two. I cannot see the next generation using plastic at all for banking purposes. So the biggest loser in the mobile money revolution is likely to be plastic money, not physical money.
Neither plastic money nor electronic money have become cash substitutes. The indications are that mobile money will likewise co-exist with cash, as the M-Pesa case study shows. The same is almost certain to apply to virtual money. Cash is analog, non-cash payments are digital. The digital world exists on top of the analog world, not vice versa. We experience the world analogically: is that fact, ultimately, why cash has remained the foundation of all payments? For how could digitized cash survive without real-world cash?
One can readily foresee a mobi-digital world in which cash, e-cash, virtual cash and mobile cash will be complementary money technologies helping to link the electronic world to the physical world and the digital economy to the real economy. I also see PayPal emerging as the dominant force in the global payments space ahead of the card giants, with Google Wallet and Facebook Credits left behind in the swirling dust kicked up by the self-reinforcing relationship between PayPal online and PayPal mobile. As the Mobile Web grows, PayPal could become the largest “bank” the world has ever seen.
I do, however, forecast the disappearance of plastic banking cards within twenty years. Progress is good, especially when it is only obsolete technologies which have overstayed their welcome that are destroyed by innovations.
As for cash, I cannot see this physical, public form of money disappearing from society in this century. Consequently, I am relaxed about predicting another hundred years of cash to add to the other twenty-seven centuries of its lifespan.
About Michael Lee
Michael Lee is a futurist who founded the World Future Society’s Southern African Chapter and the Institute of Futurology. He is CEO of the ATM Industry Association (www.atmia.com), a non-profit trade association with more than 3,500 members in 60 countries. Lee is a member of the World Future Society (www.wfs.org), the International Society for the Study of Time (www.studyoftime.org), the Royal Institute of Philosophy (www.royalinstitutephilosophy.org) and the Institute of Physics (www.iop.org). He serves on the Board of Directors of the global ATM Industry Association and the US-based Benefit Corporation Standards Institute (http://www.bcorpinstitute.org/). His book Knowing our Future – the startling case for futurology will be published in November 2012 - http://www.infideas.com/pages/store/products/ec_view.asp?PID=1804. The book is also available on Amazon at http://www.amazon.com/gp/product/1906821984
References & useful websites
1. AGIS Consulting & ASI Management Consultancy. September 2012. The Future of Cash 2012.
2. BitCoin - http://bitcoin.org/about.html
3. British Museum Press. 2007. Money: A History (2nd edition).
4. Dean, D, et al. 2012. The Internet Economy in the G-20 - The $4.2 Trillion Growth Opportunity. BCG perspectives by the Boston Consulting Group. https://www.bcgperspectives.com/content/articles/media_entertainment_str...
5. Ferguson, N. 2008. The Ascent of Money. London: Penguin Books.
6. Fortune Magazine, Europe Edition, Number 14, September 24, 2012, p.69.
7. Internet World Stats http://www.internetworldstats.com/stats.htm Miniwatts Marketing Group.
8. Kaku,M. 2011. Physics of the Future. New York: Doubleday.
9. Moffat, M. About.com Guide http://economics.about.com/cs/money/a/gold_standard.htm
10. Nakamoto, S . Bitcoin: A Peer-to-Peer Electronic Cash System. - www.bitcoin.org
11. Wikipedia - http://en.wikipedia.org/wiki/Glioma
12. Wolman, D. The End of Money – counterfeiters, preachers, techies, dreamers and the coming cashless society. Da Capo Press.
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