Over the last few months there have been a spate of articles on the evolution to a cashless society as the use of mobile devices continues to grow around the world. The Death of Cash, Time for Cash to Cash Out?, Visions of a Cashless Society, and Why Cash is Losing its Currency? are some of the titles. The articles are generally focused on two key aspects of mobile digital money: innovative technologies and apps, which are primarily being introduced in the more advanced economies; and the financial inclusiveness of the poorer segments of society in developing economies. Let me briefly explore an article in each of these two categories.
The Death of Cash, published by Miguel Helft in Fortune, is a good article of the first category. He writes about his experiences buying a cappuccino at a coffee house in New York City. He payed for it by simply telling the cashier “Charge it to Miguel,” and was done. That’s because the coffee house uses Square Register, an iPad-based digital cash register application, and Helft has Pay with Square, a digital wallet app in his smartphone.
Both products were announced last year by the San Francisco-based startup Square. Square Register is an iPad app that enables merchants to accept payments, generate digital receipts and manage their menu items and prices. Pay with Square is the companion smartphone app that let’s customers open a tab at any business that uses Register, and pay for their purchases by simply giving their name.
The smartphone app is linked to a credit card and your personal photo. The iPad Register app detects when you are in the store with Pay with Square open in your smartphone and displays your name and photo. After ringing up your purchases, the cashier makes sure your photo matches your face and then taps on it to charge the purchases to your linked credit card.
Just before posting this blog, it was announced that Square’s mobile payment offerings will be available at Starbucks’ 7,000 US stores. Somewhat similar capabilities are being pursued by a number of other vendors, including PayPal, Verifone and Google.
“Changing the way Americans pay for stuff is going to be really hard work. For starters, retailers and their partners will have to offer mainstream shoppers some pretty sweet perks to get them to replace a swipe of a plastic card with a tap of a phone. Then there's the chicken-and-egg problem: Merchants don't want to upgrade pricey point-of-sale terminals so that they can work wirelessly with smartphones unless e-wallets become mainstream, and e-wallets won't become mainstream until consumers can use them just about everywhere. . .”
“Yet once these issues are sorted out - and with so many billions at stake, they will be - cash will find itself on the endangered-species list. Paying by phone will be as transformative as the advent of the credit card in the 1950s. It will change the way we shop and bank. With powerful smartphones and tablets taking center stage on both sides of the checkout counter, it will reshape the relationship between buyer and seller. Not only will the phone or the tablet become a wallet for consumers, but it will also turn into a credit card reader and a register for merchants. Shoppers will use their mobile device as a coupon book, a comparison-shopping tool, and a repository of those unwieldy loyalty cards they carry from everyone from giant retail chains to the corner bakery. And your smartphones will serve as beacons that will alert a retailer when you walk into its store so that it can recommend products, show you reviews, or direct you to aisle five, where that beanbag chair you didn't buy last week still beckons - and you can now have it for 10% off.”
In advanced economies, these are the kind of once-near-magical digital technology innovations that we now take for granted. But for billions around the world, mobile digital money is their ticket to financial inclusiveness and membership in the digital economy.
“The poorer you are, the higher the costs and risks of cash become,” wrote David Wolman last February in a Wall Street Journal article, Time for Cash to Cash Out? “Anyone you know can beg you for a few bucks or steal the hard-earned money that you're trying to save to pay your children's school fees. A fire or natural disaster can obliterate your meager savings. And you may have to spend days riding buses and walking to the countryside to deliver cash to, or retrieve it from, a relative. Even if a wire service is accessible, that means paying steep service fees.”
He later adds: “Having money in electronic form is our ticket to both streamlined commerce and services that help us to achieve stability beyond the next meal or visit to the doctor: mortgages, small-business loans, interest-bearing accounts, health insurance, home insurance, college savings, e-commerce and more. Yet while we can essentially toggle between paper and electronic money as we see fit, the poor are stuck using cash. A primary barrier is the conventional model for banking based on bricks-and-mortar branches. It has never been profitable to put bank branches in the slums and rural villages where poor people live, while balance minimums and the time required to get to and from a branch make old-school banking unrealistic and unattractive.”
“But phones are everywhere. Mobile technology is now being touted as a solution for getting financial services to the roughly one billion people who already have a phone but who don't have a bank account. The models vary, but the gist of mobile money is electronically storing or transferring value by way of the phone. For mobile banking, the idea is to make it possible for almost anyone to open and use a no-frills savings account and, through a network of associated merchants, make transactions. Major players like the World Bank and the Gates Foundation are already investing heavily in these new technologies for providing the poor with financial services.”
As Wolman says, the Gates Foundation is among the institutions helping to bring mobile digital money and related financial services to the poor around the world. In Digital Currency Improves Financial Access, Roger Voorhies of the Gates Foundation writes:
“The digitization of publishing, music, and communications has created new business models and channels that increase access and reduce delivery costs. Shifting the bulk of the poor’s financial transactions into digital form is the catalytic change that can strip the majority of cash processing costs out of the system and make ongoing costs predictable. This means that the shift to digital can pave the way for affordable and far-reaching services that directly address poor people’s needs.”
Similarly, this past June, the US Agency for International Development (USAID) and Citi announced a partnership aimed at accelerating mobile money adoption in developing countries. Their joint press release said:
“Of the five billion mobile phone users worldwide, nearly two billion lack access to banking services, instead relying on cash transactions that expose them to potential theft, fraud or loss, and high-cost lending and remittance providers that leave them vulnerable to endless debt and high fees. . . . [E]xpanding the adoption of mobile financial solutions is a critical economic development strategy with the potential to drive growth and increase financial access and security for the developing world’s poor population. The effort seeks to strengthen alternatives to a cash-based system that is inefficient, costly, and prone to corruption.”
The cashless society should be interpreted as a metaphor for the major changes taking place across just about all segments of the world of payments. It does not really matter if we ever truly become a cashless society as long as we achieve the intended benefits along the way and continue doing so year-in, year-out. As the growing interest on the subject demonstrates, we are well underway in what promises to be a long and exciting journey.