Censored Lecture: The Death of Money is Inevitable

EVERY PHONE IS ALSO PAYMENT TERMINAL
Here is the really 'big idea' about why mobile payments are far more potent than traditional electronic payments. Every mobile phone can become a payment terminal! Imagine two people at a market. One is a seller, one is a buyer. The seller has a nice piece of antique furniture. The buyer wants to buy it, but doesn't have enough cash. The buyer does have plenty of credit on his credit card. The seller also has a credit card of the same type - let's say both have the same credit card. Why can't I just move money from my credit card to yours? With us just touching our wallets, or something?

That is how cash works. I have cash, I give it to you. Now the crazy part is, that you have a credit card, and I have a credit card, and I have enough credit on my card to buy that piece of furniture. But you cannot use your card to receive money from me, at that point in the market. You need to go and get a 'payment terminal' to connect to card owner's system, to verify my card and that there is enough money, etc. That system is expensive.

But every mobile phone can make payments without any further changes today. And every mobile phone can accept payments, without any further changes today. It is only up to the mobile operators/carriers to enable such systems. The device can already do it today. So let's go back to Kenya.

In Kenya, if you are the merchant, you just take out your mobile phone, give your number to me, and I send the money to you. Ten seconds later you have received the notification on your mobile phone that your account has been added by X dollars paid by so-and-so, and you know I have paid you. I know my account has been deducted. The monetary transaction has been completed, that easily.

M-PESA
So while the industrialized world moved slowly to mobile money, in countries of the Emerging World, mobile money could spread very rapidly. They tend not to have a strongly entrenched legacy banking industry to try to block monetary innovations. A perfect example is M-Pesa of Kenya where Susie Lonie of Vodafone has been involved setting it up for the Vodafone Kenya affiliate Safaricom. M-Pesa launched in 2006 and as the real banking use in Kenya was very modest, M-Pesa brought considerable payment benefits to 'the unbanked' which was by far the majority of the Kenyan population.

M-Pesa was actually not a full mobile banking solution. It was more a deposit and payment system. An M-Pesa user could deposit money to M-Pesa, could withdraw money from it as cash, and could move money from one M-Pesa user to another i.e. make a payment.

Imagine the benefits just in terms of daily economic activity in a poor African country. If you had to go to the neighboring village to pay the teacher where your kids went to school, it might take you several hours by walking or perhaps by bicycle to go there, make the payment, and return back home. And you risked being robbed along the way. But now, with M-Pesa, you could pay just by pressing a few buttons on your phone. The teacher in the other village would receive the money on his or her phone, and could go to any M-Pesa authorized retail merchant, and withdraw the money as cash if needed, and obviously, as the teacher could use M-Pesa to pay as well, the teacher would not even need to withdraw the money as cash.

TELECOM OPERATORS - BANKS OF THE FUTURE?
Which brings us to the SIM card merchants. That is a one-directional money situation. in almost all countries where prepaid phone accounts are popular, there is a large eco-system of prepaid top-up services, where you go to a local merchant, like a news stand, and buy some balance to add to your account. You may deposit more minutes/messages to your current SIM card, or you can buy a new SIM card, depending on your situation and need.

Now, what happens. In a village, there are many who need top-ups, and the SIM card vendor keeps collecting cash from the villagers. He is soon in the situation, where he has too much cash in his shop, he has to go to the bank to get rid of some of it. Wouldn't it be nice to have the same customers come in and 'withdraw' the cash?

This is why M-Pesa merchants [and G-Gash and Smart Money merchants in the Philippines etc] will act as the cash dispensers. So you decide that your SIM card which currently contains 25 dollars in value, is too much, and you want to 'withdraw' 10 dollars, like going to a cash machine/ATM. You go to the merchant, you authorize your account to withdraw 10 dollars. The merchant receives that money digitally from your account [into his merchant account] and he gives you the cash [minus a handling fee]. So now, we have in effect a virtual cash machine/ATM network that covers tens of thousands of merchants nationwide. All who regularly take in cash when topping up SIM cards and selling new SIM cards, but now can get rid of some of that accumulated cash, by paying out the cash to their customers. And in effect, the merchant then was able to 'move' money from his cash in his store, to his merchant account as digital money. Brilliant, simple, elegant.

And the point - every single mobile phone becomes a payment terminal! This is something no other digital technology can hope to match. Your credit card cannot handle my payment. Your debit card, your contactless card can't do it. Your internet payment, even PayPal - can't do it unless you have cellular connectivity - in essence forcing your iPad or netbook or notebook PC to behave like a mobile phone. And how many of the hundreds of millions of portable PCs actually have a cellular 3G connection? Most rely on Wi-Fi, and that means it's not everywhere at any time. Mobile phones can act as the payment processing devices anywhere, anytime, for anyone. Even for a 13 year old young entrepreneur who is years away from qualifying for a credit card..

Then another magical thing happens. The pre-paid SIM card you have, which has some balance on it, say 5 dollars worth, becomes convertible as cash. You can make a payment to someone else, by handing over a prepaid SIM card with 5 dollars in value, and the other person just inserts the SIM card into his or her phone, verifies there is that balance, and accepts the SIM card as your payment. Magical. We are now witnessing this happening in many markets.

DO YOU WANT PLASTIC, WITH YOUR CREDIT?
So what happens when the existing digital payment systems migrate to the phone? We can see that future existing already today, in one country, South Korea. Of all advanced industrialized world countries, South Korea is now the most advanced in mobile money. They have already gone through the full integration and coordination with the telecoms industry, the banking industry, the payments industry and the credit cards industry, with full government support and approval, including the necessary legislation etc.

So today all major banking services can be deployed on one SIM card on your phone. The SIM card is particularly secure and unique to one South Korean citizen. And upon that SIM card, you can then have various banking and credit card entities - 'authorize' payment solutions. So if for example Visa has approved your credit card application - it will be enabled on that SIM card on your phone. But on the same SIM card you may also have VISA, MasterCard or American Express, etc. and your various banking solutions. All independently approved, separated so that rival services cannot access your info, but why would we need to carry ten different plastic cards, when one digital identity is all we need?

So now they have that funky question that South Korean credit card companies will ask you on the phone. When they approve you as a first-time credit card customer, and obviously they have instantly approved your credit card within seconds, onto your phone, so it now acts as a valid credit card in any point of purchase in South Korea - the customer service representative will ask you on the phone - 'do you want plastic, with your credit?' by which the person means, do you want an old-fashioned plastic format credit card, to be mailed free of charge, in about two weeks, to your home address? You don't need that in South Korea where essentially any merchant who accepts credit cards can take the payment via the phone - but if you happen to travel abroad to an 'old fashioned country' like say Germany or the USA or France or Britain, where they 'still use plastic  credit cards' - then the Korean company will happily send you the free plastic credit card to your home.

This is so advanced, that by 2007, one quarter of all Visa card holders in South Korea had no plastic card at all. I am sure it's well past half of all Visa card users in Korea today. But think about it - the time of plastic cards is coming to an end too. Why not? If your phone can truly do everything your plastic card can [and more], why bother with the plastic. Soon we will not need the wallet anymore!

TIME VALUE OF MONEY
Everyone has a payment authorization device in their pocket. Everyone also has a payment processing device in that same phone. Payments can be done instantly between any two people on the planet [soon, obviously we are still in early steps on this level of integration but giant companies such as Vodafone, Nokia, NTT DoCoMo, etc are already deploying such solutions]. The whole economy benefits, payments get processed far faster, allowing for more rapid 'velocity' of money in the economy. You get paid faster, your wealth increases, you can process payments faster, and the economic drain of handling payments diminishes.

M-Pesa has become a total transformational change to the Kenyan economy. Rival m-banking systems were of course soon released by the rival mobile operators also in Kenya. In three years, half of all banking accounts in Kenya were now mobile banking accounts. By May of this year, 10% of the total economy was moved through mobile phones, and the early projection was that 20% of the Kenyan economy would transit a mobile phone by the end of this year. Last week I heard that this has now been upgraded to 25% before the end of this year, 2010. That is what M-Pesa has done for Kenya in less than four years. No wonder Susie Lonie and the team at M-Pesa won the Economist award for this innovation.

Now while so far M-Pesa has been only a very stripped down mobile payment system, they are now in the process of upgrading the system to a full bank which means acquiring a banking license in Kenya etc. So if you think this was somehow enormous change, do bear in mind, that was when M-Pesa did not even offer full banking services. Now that they will upgrade the service to full banking - and many of their M-Pesa users will no doubt also apply for future 'real banking' services such as loans, credit cards, etc, imagine how much more significant M-Pesa will become to the local economy.

CRIME AND CASH
So then lets fast-forward to today. Now we have mobile payments enabled in various countries across various businesses and industries, on various technologies. And we will see interesting developments. I think the most fascinating is the one with crime.

Cash always attracts criminals. In Estonia the government observed that the parking meters were particularly prone to crime, anything from vandalizing parking meters to robbing those who collected coins from the meters, to more sophisticated parking crime by the mafia, such as the scams suggesting that the parking meters on one street are broken [when they weren't?] and a criminal, dressed up like a policeman, would then collect cash payments from car owners and issue official-looking receipts for supposedly legitimate parking. Then the criminals vanished, the car owners returned at the end of the day to find parking fines for all cars on that street - and obviously the 'receipts' for parking turned out to be fakes.

Well, the Estonian government noticed that all Estonians had a mobile phone and they had long since deployed mobile parking solution. So they simply terminated coins as acceptable payment for parking. And overnight, this one form of crime vanished, and the government got more of the real payments relating to parking, and eliminated some of the costs that were involved in collecting the coins from the parking meters nightly.

I should point out that not all parking payments in Estonia are done by mobile. You can also pay by credit cards, debit cards, etc. But about 75% of all parking payments are now done by mobile - and none by cash. It became very literally the first country, where one small industry [parking] has now abandoned cash as a valid payment mechanism - in favor of mobile payments. We see this moment as the 'beginning of the end' for cash. Now it is only a matter of time.

Then we had a similar instance of a crime wave hitting Sweden, with bus drivers targeted for the cash they carried to give change to those who paid bus fares by cash. And again, since all Swedes already have mobile phones, and since Sweden had already deployed mobile payments, the government decided to look into the Estonian parking example. It was an easy decision. Rather than the very expensive technological solutions of building bullet-proof glass encasements around bus drivers, simply eliminate cash as a payment method, and allow mobile payment in the busses, and that removes this opportunity for crime. Simple, elegant, obvious.

STAR TREK IS NOT FICTION: THE END OF CASH
So, now we can see that there is the beginning of a trend. We will see ever more of this, in various little industries worldwide. But it is only a one-way street - nobody is abandoning mobile payments in favor of cash. So we will see the gradual transition away from cash. And then this August saw a significant point in time. The Swedish Parliament became the first formal government entity in the world, to commence discussions about the timing of the ending of cash. Led by various Swedish activists who feel that manufacturing cash is a wasteful effort [i.e. there are green values in not killing trees for banknotes and the manufacturing of various metals to create our coins], and there are various bacteria that we transmit in our cash - so there is a health dimension to the problem. Led by a member of the Swedish pop band ABBA, there is a movement now in Sweden to end the manufacturing of cash, so they have started the discussions of when shall Sweden do it. Not if, but when.

I have since heard that there are several African nations who are considering similar initiatives. And if I know my Nordic Europeans, if Sweden thinks about it now, very soon we'll hear the Finnish Parliament get into those discussions soon, and perhaps the Estonians actually accomplish it before the Finns, and no doubt the Norwegians and Danes will get into the act very fast as well. It may end up being a race, of who ends cash first..

But there is no doubt that the time of minting coins and printing paper money is coming to an end. It won't end in the next few years, it will take probably decades for the end to come, but it is inevitable. This process has a simple name: evolution.