Censored Lecture: The Death of Money is Inevitable

This summer a major point happened in the history of money. The first concrete sign was seen, that the end is coming to actual coins and cash. It won't happen quickly, but we need to be aware of the facts. Two weeks ago, Canadian Mint Director Ian Bennett thought he can silence the story about mobile money at the Mint Directors Conference in Australia. With censorship or without, we are witnessing signs of an absolute inevitable future, where at one point in time there is no more cash. The question is not if, it is only of when.

This is first in a multi-part analysis why the mobile money revolution is starting. Also, as this is raw thinking on my part, this analysis is also detailed and fact-filled, so hopefully it brings some value.

CASH HAS NO VALUE
To start with - lets be very clear - a coin or a banknote has no value in itself sans in theory - the metals in a coin can have some value but not the same value as old coins that had real gold and silver. Modern coins are not worth the metal they are minted in.

The only value in coins and banknotes, is that they exist as symbols of value. We trust the government that mints and prints them, and the money tends to hold its value reasonably well. So if someone gives me one coin worth an Euro or a Dollar, I can trust that when I give that same coin to someone else tomorrow, it will still be worth the same one Euro or Dollar. [This symbolism breaks down obviously when hyper-inflation hits in like recently in Zimbabwe for example, or in pre-war Germany in the last century, etc.]

A SHORT HISTORY OF MONEY
Cash was a great invention. Before cash the way to conduct commerce was by trading. And then the issue of trying to trade one good for another was clumsy and had all sorts of problems. If I have potatoes and you have chicken, and I'd like some eggs, what is the 'exchange rate' of potatoes to eggs? Then what of potatoes vs. eggs a week later - if I bought four eggs from you and have two more at the end of the week, what is the value of an 'old egg' - the potatoes will last for many months and can still be eaten. The egg goes bad quickly.

What is the exchange rate of potatoes to chicken - if I'd like some meat to eat? If I have many potatoes, it's easy to split the group into smaller sets, but if you have one chicken and you want to use 'half of a chicken' to pay for something - it means you have to kill the chicken to split it in half. The barter era economy was extremely inefficient.

Cash replaced all that. You could have a monetary value for anything, and it could always be exchanged into cash and that cash could be saved - no loss in value - and used later to buy anything else. Cash could easily be split into smaller units without losing its values, one dollar is 100 cents, and if you have 100 cents, you can change it for one dollar, and the math always holds.

A clever commercial innovation was the bank - which first just allowed us to deposit money to be saved for us and withdrawn at a later date, paying us an interest rate on the money. For 'rich people' who had lots of money, it made sense not to hold it in their home, but to deposit the money in the bank and withdraw it only when money was needed. And the bank in turn, could then take its total deposits, and do some mathematics, and calculate how much of it they had to keep in the bank 'just in case' but then to lend out the rest of the money to anyone who wanted to borrow some money [and who had good banking credentials, i.e. good credit rating or good collateral etc.]. The bank would charge a larger interest rate from those who wanted to borrow money, and made a profit on the differences in the interest rates paid.

The more interesting bit was that banks would then open up branch offices in other towns, and now if you travelled to another town, you did not have to carry your money on the journey - and risk being robbed - you could go to the bank office in the other town, and withdraw money from your account in that other town. This was a very big improvement in global commerce. Eventually the banks spread to become national and even international, and eventually banks arranged payment methods across banks so you could move money from one bank in one country, to another bank in another country, etc.

PROMISE TO PAY
Then came banknotes. And we had now a piece of paper that promised it is worth 100 dollars etc. A fragile payment method, that is subject to tearing and doesn't like getting wet, etc. But it allowed the handling of large payments - imagine paying for your car with 30,000 dollars worth of coins…

This was all good for a time before digital connectivity. Today every person has a mobile phone. Every mobile phone can be used to make payments. Every mobile phone can be used to receive payments. Every mobile phone is permanently carried and every mobile phone is always connected. That means a new prospective digital financial system that connects 5 billion people on the planet [vs. the Internet which connects 1.7 billion people or the approx 2.2 billion people who have a bank account or credit card or both].

The money in cash was an illusion, but we believed in the illusion, that there is one dollar worth of value in a coin that said 'One Dollar' and we believed that a piece of paper that said 'Ten Dollars' had value of 10 dollars. That value can exactly as accurately be handled in digital money systems, but with numerous improvements.

First, with cash, you have to have 'the right amount of cash' on hand to handle any given payment. We do not walk around with all of our money in our wallets. We put our money in a bank. So then we have to try to guess how much cash we need on a given moment in time, and carry that amount in our wallet, and keep replacing that money by going to the cash machine/ATM every few days of the week. With digital payment methods, we can always pay the correct amount, provided that our account has that much as a balance or line of credit.

Then we have fraud in the form of counterfeit money. Banknotes have become progressively more complex to manufacture, because clever money-forgery criminals have gotten ever better at creating fake money. For many currencies there are also forged coins in the largest denominations, like the British Pound for example, that has been rather widely forged. There is crime in any system, but fraud in a digital money system is far more difficult to achieve, and as there theoretically is a digital footprint to every digital money transaction, even if some clever criminal figures out a novel way to steal money from the digital monetary system, the system can learn far faster and block such crime far more efficiently than attempting to discover, recover and eliminate forged money.

Cash gets worn, especially banknotes wear out rather rapidly, so the money needs to be replaced. And cash gets dirty - coins and banknotes carry all sorts of bacteria and can carry diseases. Cash is heavy to move around, in particular coins. Cash can easily be lost. And kind of worst problem of all, cash can be destroyed with its value lost - imagine a burning house and the cash that happened to be in the desk drawer, that is burned. The money is simply destroyed with no value recovered for the owner. Digital money will retain its value theoretically forever [subject to a given bank going bankrupt, but that would affect any bank transaction, cash included] and even if you lose or break your mobile phone, the money in your mobile wallet can be saved usually automatically - where the value is kept in the network, not on the phone handset.

DO YOU ACCEPT PAYMENT BY CHECK?
The early solution to the unforeseen need for cash, and to handle many larger payments, was the bank check [also known as cashier's check]. We have a bank account with money in it. Then we write a check to someone, on a formal bank authorized piece of paper. We write the amount, and when that shopkeeper takes our check to the bank and deposits it, the money is deducted from my account. Good. An easy way to handle many payments, including the handling of payments via the post. So paying for your rent or electricity bill or telephone bill in America for example, you typically do it via check through the post. In pre-wire era, money was [and still is] sent via mail, hence the phrase "the check is in the mail."

Today, we have many electronic money systems to help handle the issue, in the forms of credit cards, debit cards and increasingly also contactless payment systems like Oyster in the UK, Octopus in Hong Kong, SuiCa in Japan etc. With these we have a far more instant handling of the payment - with checks it took days for the transaction to be completed, and there have been tons of crime related to writing "bad checks" [someone writes a check for a payment, while his account is empty. The shopkeeper trusts the value, and then finds out the check has 'bounced' and will have to try to collect the payment that is now missing…]

Plastic card payment systems such as credit and debit cards replaced part of the problem of bad checks by allowing instant electronic verification of the account. If the credit card limit had been passed or the debit card bank account balance was less than what you tried to pay, the system told the merchant that this card cannot accept this payment. A convenient instant-check to verify that the merchant will be paid. The plastic cards have since been adding various security measures to remain trusted and relevant in the modern age, from the 'security code' printed to the back of the card, to 'Chip and PIN' type of security [embedding a microchip into the plastic card, and also requiring a PIN code to be entered in certain types of transactions]. Ever more advanced plastic cards are now emerging such as cards with a small screen and a numeric keypad to allow security codes to be used.

Meanwhile the contactless payment systems [Oyster, Octopus, SuiCa etc] have brought great convenience in handling small payments without any pin codes or waiting. You see what the payment is going to be for your groceries at the supermarket, or how much the train fare is for the subway train, and you just touch your contactless card to the reader, and the payment is immediately deducted from your card. You keep adding value to the card when necessary, and use a reasonable amount of money on your contactless card, of how much 'risk' you are comfortable handling, in case of that card being stolen or lost, etc.

The internet brought us electronic cash, most famously PayPal. PayPal has moved past the point where more than 10% of all internet users now have a PayPal account. This service allows us to move money essentially for free from one internet user to another. The costs that used to be involved in international money transfers have been greatly reduced or eliminated. Many goods that are sold on the internet accept payments by PayPal. This service will let you withdraw money from to your regular banking account as well, for a small fee... that is still smaller than for instance, taking the debit or credit card into an ATM [Automated Teller Machine] from some other bank, because your home bank does not have an ATM in that city/country/continent.

These payment methods are all good steps in the right direction. Checks introduced the idea that we can manage our money beyond the actual cash we carry. Credit and debit cards brought us electronic payments. Contactless payments and PayPal have given us greater convenience and speed. All are good steps in moving beyond the limitations of cash. But mobile can handle all those issues easily, and be far better.