As I read about mobile payments, it always entertains me when relatively green journalists make references to using mobile phones rather than payment cards to make purchases. Typically, they are confusing the instrument (the phone, the plastic) and the system: after all, most mobile payments are made using card systems.
I think there is an analogy here to how many of us think of cash. We are confusing the instrument (the bill or coins) with the system. And what, you may ask, do I mean by “the system”? I think that cash as we know it today should be thought of as a non-account-based payments system. Cards (debit, or credit), checks, and ACH are all account-based payments systems. So are many online or wallet systems, like PayPal. (These systems, like prepaid card systems, record the transactions on a notional basis, rather than passing them through individual bank accounts, but it is essentially the same thing.)
Cash, on the other hand, is used for transactions that have no equivalent accounting. New systems of “digital cash” (an old term, with much complicated history!) share this non-account based attribute – most notably BitCoin, but also the Royal Mint of Canada’s “concept coin”, the MintChip. (Read Glenbrook’s Jacqueline Chilton on MintChip.)
I thought of this when reading, recently, David Wolman’s The End of Money. An enjoyable book, which shows, yet again, that a payments industry outsider can have refreshing perspectives on our business.
Amusingly, he is quite focused on the physical attributes of cash: he clearly has a visceral reaction to the dirt and germs that may be carried on a bill or the coins one uses. But he also makes interesting points about privacy and anonymity. “People”, he claims, “say anonymity is an advantage of cash, but what they really want is privacy.”
My observation is that those of us in the payments industry tend to jump to the conclusion that anonymity is the valued attribute of cash. This is undoubtedly true for criminal users (including tax-avoiders). But people are quick to assume it is also the major value for non-criminal users. I doubt this: I tend to agree with Wolman about the importance of privacy vis-à-vis anonymity. But I think we are still discounting the many other reasons why people like cash. Here’s my list:
- Intuitively obvious how much you have
- Easily separable
- Easily demonstrates to others how much you have
I also think that non-account based money simply makes sense to a lot of people. If I have an apple, and want to give it to you, I simply hand it to you. Why can’t I do that with a piece of money I have? There is a quality of simplicity and directness that has nothing to do with either anonymity or privacy.
But the truth is we really don’t know why non-criminals use cash. We all have ideas, but there is precious little research. What research there is tends to focus on patterns of use (diary studies, etc.), rather than on the “why” of use. I was frustrated a couple of years ago, when I tried to raise funds for a study on the psychology of cash usage: I got no interest from our payments industry clients and colleagues.
Why? Well, our entire industry has been obsessed with killing cash for a long time. “Cash replacement” is a core value of the card networks, most banks, and many other solution providers in the industry. (There are only a few cash advocates: the ATM folk, of course, but also other companies, like PayNearMe, who are trying to serve the “cash-preferred” customer base.)
I certainly understand where the cash-critics are coming from. In addition to the issues around criminal use of cash, cash, as Wolman is so quick to point out, is “dirty”. And physical cash is expensive for merchants, banks, and others who handle it. (But keep in mind that wherever there is expense, there is a business providing solutions: banks make money on cash handling for merchants, and some even have some real innovations around it – such as Fifth Third’s Remote Currency Manager.)
But cash is still a preferred method of payment for a great number of people. And whether you like cash or not, it’s not going away any time soon. John Williams, CEO of the San Francisco Fed (which has national “product management” responsibility for cash in the Fed system) just published an essay – “Cash is Dead! Long Live Cash!” with some fascinating statistics. And some estimates show that cash accounts for about 35% of all consumer payments transactions in the U.S. economy.
It seems to me that we need to know more than we do about the psychology of why people like using cash. In particular, I’d like to understand the extent to which the appeal of cash is its physical form, and to what extent it is the non-account nature of it. It might help us understand which of the various forms of mobile payments and/or digital currencies will or will not succeed in the future – and why. If you are interested too, let me know – I’ll dust off that proposed study!
And yes, if we move forward into a new world of non-account-based digital currencies, we will still have to deal with the issue of criminal use of non-account-based payments. I don’t know what the right solutions for this problem are. But if, as I suspect, there will be an enduring role for non-account-based payments, it does seems to me that there may be more opportunity for solutions with a digital form factor than with a physical one.
There is, of course, one other attribute of non-account-based payments. It’s hard for anyone to make money on a transaction if it doesn’t pass through an intermediary. That’s something that all of us in the industry will need to think about!