The Future Of Money - Are We Headed For A Cashless Economy?
Some say that art reflects life. But can a classic board game reflect
life? That’s what seems to be going on with the Monopoly® Electronic
Banker Edition, which replaces the colorful play money we all know
and love, with electronic card readers and plastic debit cards.
We should hardly be surprised by this update. Real life has been
moving in this direction for decades, leaving some to believe that
paper money is on its way to being replaced by digital dollars.
Consider all of the ways that you can manage money without ever
touching currency or coins: online banking, direct deposits, automatic
teller machines, debit cards, smart cards, PayPalTM, e-filing of
tax payments and online portfolio management, to name a few.
For years, prognosticators have been saying that these technologies
will lead to the demise of the dollar bill. To them, cash is inconvenient,
bulky, cumbersome, and expensive to make and use.
But rumors of the death of cash are greatly exaggerated. Cash is
not disappearing from the day-to-day economy of most people. Granted,
it’s getting some pretty tough competition, but cash is still the
preferred medium of exchange for millions of transactions every
In a speech titled “The Long-Term Future of Cash,” Mike Lee, CEO
of the ATM Industry Association, said that the vast majority of
payment transactions in the United States are cash. About 75 percent
of these transactions are retail payments and 25 percent are bill
payments. Based on his analysis, Lee said, “The cashless society
is about as real a possibility as a paperless office. At this stage,
it belongs in the realms of science fiction.”
What is Money, Anyway?
Before addressing the future of money, it’s important to first
Generally, anything that is accepted as payment for goods and services,
and repayment of debts, can be considered money. Through history,
this has included salt, beads, shells, gold, coins and many other
tangible items. Paper money came along as a way of carrying around
the value of another commodity (gold for example), without having
to actually lug it around in your pocket.
Each of these items has been accepted as payment, because people
were confident they could in turn offer it in exchange for things
from others. If enough people believe that the thing they are accepting
as payment today will still have value in the future, you have the
basis for a system of money.
In the United States, confidence in the value of money comes from
the government, which has declared coins and currency to be legal
tender. We trust the government, so we accept dollars (or coins)
as payment for goods and services, and as payment for debts. If
that confidence is lost, money may also lose its value.
As the first decade of the 21st Century ends, here is a look at
some of the technologies that are making inroads into the domain
of the dollar bill.
Steps Toward Eliminating Cash
Paper checks were among the first substitutes for cash. Credit
cards showed up just over 50 years ago. Then along came computers,
electronic data storage, interconnected networks of financial institutions
and wireless technology. Across the country and around the world,
money traded a part of its tangible life for a digital existence.
Today, rather than physically carrying cash from Bank A to Bank
B, funds are transferred electronically. Bank B has confidence that
the money actually exists, so it can loan the funds, pay interest
to depositors and pay its own expenses. Transactions are faster
and more secure than ever before.
Electronic transactions have boomed as the world has become increasingly
more interconnected and mobile. But most transactions are simply
variations on the same idea. For example:
Debit Cards — Debit cards are accepted almost
as readily as cash by most retailers, and consumers continue to
embrace their convenience. The swipe of a debit card at the cash
register creates an almost instant debit from the cardholder’s checking
account, and a credit to the seller’s account. The seller gets paid
sooner (checks and credit purchases can take days to process), and
consumers are more likely to spend within their means. For the first
time in 2009, Americans made more debit purchases than credit card
purchases, a sign that the economy is weighing on consumers’ desire
to reduce their credit burden.
Smart Cards — Smart cards are similar to debit
cards, but there is one major difference: value is stored on a microchip
imbedded in the card, so there is no network connectivity needed
to use it. This frees the card to be used for virtually any transaction,
from mass transit fares and a cup of coffee, to major purchases
and bill payments. Some cards must be inserted in a reader; others
are “contactless” and can simply be held in proximity to the reader.
As long as there are compatible readers where you wish to use a
smart card (at a toll booth, the gas station and vending machines),
you need never have change in your pocket for small, routine purchases.
Some cards can also store personal information to help authenticate
the identity of the user, and can be “recharged” when funds run
low. Smart cards have achieved limited penetration in the United
States, but are experiencing tremendous growth in Europe and Asia.
Prepaid Cards — Millions of prepaid “gift cards”
are sold each year, providing gift givers a convenient way to give
money for a specific purpose, like a fast food chain or a specialty
retailer. Other cards look and work much like credit cards, with
a certain amount pre-loaded on them. When those funds are used,
the card can be reloaded and used again.
Mobile Payment Devices — As more of our daily
lives get carried around with us in a single electronic device,
the mobile phone is becoming a new frontier for cashless payment.
An entire handset is passed by a reader, and the cost of a cup of
coffee, a newspaper or bus fare is debited from a bank account.
Instead of carrying a debit card, a transit card and a purse full
of coins, all that is needed is the mobile device. Unlike a smart
card, a mobile device has a screen where balances and other account
information can be displayed and managed. If the device is lost
or stolen, it can be contacted and deactivated remotely.
Online Payments — Some early forays into cashless
payment were on the Internet. How was an auction site seller in
Oregon going to collect payment from a buyer in Massachusetts? Forcing
that buyer to pay by check or money order would have worked against
some of the fundamental advantages of Internet commerce, namely,
speed and convenience. With online payment services like PayPal,
a store of funds is deposited and made available for payment to
member businesses. PayPal currently has more than 78 million active
accounts in 190 markets and 19 currencies around the world.
Automatic Direct Withdrawals — All that businesses
like a utility, an insurance company or a credit card issuer need
to make automatic withdrawals from a checking account is a routing
number — which is used by check processors to identify your financial
institution — and an account number. As long as there is sufficient
money in the account, it’s hands-off convenience from there on.
Reward Points — In a traditional sense, reward
points are not money, but in a transaction between the holder of
the points and another party that has agreed to accept them, they
carry value. Everyone from airlines and banks, to gasoline retailers
and credit card companies, offers points redeemable for real merchandise
or service. Most have no redeemable cash value, but can be spent
on certain goods and services as if they were “real” money.
IRS E-File — The federal tax service continues
to expand its online filing options, while migrating some business
filings from optional to mandatory. Funds can be transferred directly
for payments, and refunds can be transferred directly to personal
bank accounts and retirement accounts. Taxpayers save time, receiving
refunds in as little as 10 days.
Is It Time to Cash In?
As with the acceptance of any technology, there is a chicken and
egg proposition: People won’t use smart cards or adapt mobile phone
payments until there are enough retailers or vending machines that
accept them. Likewise, sellers will hesitate to invest in the technology
to accept cashless payments until they are sure there is sufficient
The growth of cashless payment options is a classic question of
blazing a trail or playing it safe. Ultimately, today’s decisions
create both leaders and followers.
In the meantime, checking accounts will be phased out in the United
Kingdom by 2018, cashiers are finding fewer occasions to count out
change, and “playing with Monopoly money” has a whole new meaning.