Show Me the Money
Everyone in the financial services industry is very excited about the digitization of money. How exciting it would be to forego cash (and those annoying checks), in favor of a more efficient world of commerce and assets. At the hand of Bitcoin, the argument goes, or Apple Pay, or what-not – our money would be more secure, more liquid, more flexible, and wield more control. And while all that is true – and then some – we’re also still a long ways away, because currency made with atoms is incredibly persistent.
A few weeks ago, I had the chance to meet with the director of the US Treasury, Jack Lew. He noted shock at how much more currency his shop is printing today than when he came to the job – on an absolute basis. There is about $1.2 trillion of US physical currency in circulation today. How come?
Half of small transactions (less than $50) are made in cash. At the current rate of decline, cash will be a major form of payment for 200 years! So, anyone who says this year is the year is out to lunch. For fun, approximate daily circulation:
- 38 million bank notes
- 42 million coins
- $2776 per US resident
- 6% of US GDP (vs 3% in Canada)
Who are the perpetrators? Everyone. But, as you might expect, low and moderate income people use cash the most. 57% of payments for those who earn less than $25k per year (vs still a whopping 33% of those who earn more than $200k per year). But you might be more surprised to hear that young people prefer cash more (18-24 year olds prefer cash by 40% vs 25% of old farts).
But the big driver really comes from business. Merchants don’t fancy paying 3% for credit card transactions – and that’s why half of small businesses don’t accept credit cards. Particularly those who have many small charges (66% of $0-10 transactions are cash, vs <15% of >$50 transactions).
The San Francisco Fed sourced lots of these stats and I was pleased to have their Barbara Bennett in the audience when I spoke at Payments 2015 earlier this week. Barbara and her team at the “Cash Product Office” (who knew?) found that 30% of US consumers prefer cash (22% prefer credit card and 43% prefer debit card). I think people like cash for the following reasons:
- Universal acceptance
- Free
- Liquid
- Control
- Anonymity
No rocket science, and you could quibble the details. But consider these factors, as you consider some potential cash challengers: Bitcoin, Venmo and Apple Pay. There are many more, of course, but these are en vogue and represent important categories of presumed cash-killers.
Bitcoin. Last year was clearly quite exciting for the Bitcoin world, and I believe crypto-currency technology remains incredibly important to the current financial services revolution. Bitcoin also offers most of the cash advantages: it’s free, it offers control and anonymity. It is not universally accepted – and never will be, in my opinion. And because of that, it’s not effectively liquid. So, no chance.
Venmo. The social payment protocol Venmo is todays PayPal (and it is, in fact owned by PayPal). It’s free and offers control and is incredibly easy for consumers and developers to use. Both are important boons, but a replacement to cash it is not.
Apple Pay. I imagine the lines are already forming outside Apple stores for Apple Watch. And I would guess that millions will wonder how they ever lived without one a year from now. The Apple Watch will also give an important boost to Apple Pay by making that oh so onerous reach into the pocket obsolete. But the only cash-like quality it offers is control. So this – and its imminent Android equivalents are no threat to cash.
So, if cash is going to stay and these modern technologies won’t make a meaningful dent, then what are we to do? The question reminds me of a long-standing challenge in the artificial intelligence community: if 50 years of our brightest minds can’t make a machine do what a one month old human can, then what’s in store this discipline? The month old baby is a poor parallel for cash, but perhaps not so bad, either. Both are deceivingly complex. My alma mater, the MIT Media Lab, generally fell into a new camp: let’s focus on machines augmenting and enhancing human intelligence, rather than trying to replicate it, poorly. I think the same is probably in store for cash. Let’s find ways to augment and enhance the use of cash, rather than wishing it away, poorly.
As it turns out, a number of startups agree: PayNearMe does this famously. Basically, they enhance cash by letting people use it, but give it some of the benefits of digital money. You can order a Greyhound bus ticket, for example, online, and elect to pay by cash. Then, at a local 7-Eleven, you can pay by cash and get a custom receipt/boarding pass and reserve a seat, which would otherwise only happen when you stand in line (if you were paying by cash). TIO Networks (full disclosure: my fund has invested in this company) allows “cash preferred” customers to pay 100s of their bills at a kiosk, with a teller and by mobile phone, interchangeably. Wal-Mart has been an important player in bringing a diversity of “cash enhancing” financial products to its customers, including low-cost check cashing, bill pay, remittances, prepaid cards and bank accounts of many shapes and flavors – in spite of being thwarted to get a bank license itself.
These companies are just scraping the surface of what is possible. For all the cash we spend, why shouldn’t we be able to invest it, save it, build credit with it, and be protected and informed how to use it most efficiently as we are able to with digital money?
