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 day.

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 define money.

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 demand.

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.