By Ryan Rommann
President Obama recently said he supports efforts to abolish the American penny. But the penny is not alone in its uselessness. All physical coins and dollars will soon be rendered obsolete by the security and convenience of mobile phones and thumbprints.
Just as the magnetic strip revolutionized payment by plastic credit card, near-field communication and other fast-evolving technologies will facilitate the move to payment using mobile technologies. NFC chips inside most mobile phones can transmit banking and payment data when placed near readers. Unlike a debit card, a mobile phone can display interactive payment details. And, instead of the credit card application process of filling out paperwork and waiting for the mail, using a mobile phone to pay requires only the download of an app and linking to bank details. PayPal president, David Marcus, calls it Money 3.0.
Given that 6 billion people have access to a mobile phone, the Money 3.0 opportunity is enormous. Studies by Visa show that Americans are twice as likely to carry a phone as cash; those between 18 and 34 are four times more likely. Mobile payments doubled between 2012 and 2013 to $1 billion. eMarketer predicts mobile payments will top $58 billion by 2017, and phones are just the beginning of e-cash.
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NFC chips could also be placed inside wearable smart technology. A smart watch, ring, or Google Glass would be easier than a phone as you would not have to pull it from a purse or pocket—simply tap, swipe, or blink an eye. Some analysts question NFC’s payment dominance, however, as tapping a device may not be significantly more convenient than swiping a card. Other technology, like PayPal’s Beacon and Apple’s iBeacon, uses proximity-based Bluetooth connections instead. A small vibration alerts customers’ phones upon crossing a store’s “digital fence” and syncing with apps to provide inventory, floor plans, discounts, and preordered items. Payment would occur online, with the cashier simply confirming your registered picture for purchase security. Eventually, unique biometric information might also suffice for payment. Voice recognition or scans of fingerprints, retinas, or DNA could replace cold, hard cash.
Ridding ourselves of cash will require new thinking on customer interaction, crime, value, and even cars. Take, for instance, E-ZPass, the electronic toll-collection system that enables automated payment on bridges, tunnels, and turnpikes across 14 states in the U.S.. Cars with dashboard-mounted tags pass radio antennas that register the car and process payment on prepaid accounts. Some fast food restaurants are already employing similar technology to collect payments from drive-thru customers, suggesting cars could be like credit cards, giving new meaning to the term mobile payment. Gas stations could automatically deduct payments from windshields, and, along with facial recognition, similar technology will likely increasingly be used to expedite border crossings, issue traffic tickets, and clock employees in for work.
Money 3.0 will quicken checkout lines, reduce transaction costs, and let clerks focus on customer service instead of handling cash. Human errors are minimized when point-of-sale work is limited to scanning, bagging, and tapping the customer’s watch or finger, and there’s no need to calculate change. In addition, merchants can use smart technology to analyze customer spending habits to offer incentives and personalized shopping information. As Square founder Jack Dorsey puts it, “It’s not about killing cash. It’s about being able to account for your entire business.” And when consumers pay with cards or mobile technology they tend to spend more—even twice as much as when making cash purchases, according to a 2001 MIT study.
Mobile payment systems also promise to help governments run smarter, especially if they result in less use of cash. Cash currently floats around pockets, registers, and mattresses unaccounted for. If economists and statisticians could analyze the movement of money in real time, underlying patterns might help show the causes of poverty, bubbles, or inefficiencies. Could the next downtick in national grocery spending be identified within hours, and warn quickly of potential economic trouble?
Monetary policy may be more flexible too. M0, the economic term used to identify total notes and coins in circulation, will disappear. There will be no need to print money; governments will instead add zeroes to the non-M0 money supply via central bank buying and eased interest rates. This flexibility may scare the Ron Pauls of the world, but is already a reality. Only 7% of the world’s total money supply exists in M0 bank notes and will be even less. Governments would save money.
Each year, the U.S. Bureau of Engraving and Printing spends $660 million producing new notes. The cost of mining and minting coins is $2.9 billion. An additional $260 million is lost to counterfeiting. Cash no longer needs replacing if it is just ones and zeros in cyberspace. Convenience will expand and crime may shrink.
No cash registers may mean no robberies. Banks will be safer as the incentive to rob them will decrease as does the cash on hand. Pickpocketing has already dropped significantly, particularly in countries with easy access to cashless payment and security cameras. There is no incentive for thieves to steal wallets if they only contain family photos. New York City, for example, had 23,000 reported pickpocketing incidents in 1990. Today, occurrences are so rare that the police department no longer keeps track of the antiquated crime—it allocates resources to increasing thefts of iPhones and cybercrime instead.
Virtual payments, ironically, leave more physical records. Tracking digital funds leaves less room for things like anonymous drug trafficking, tax evasion, and terrorism financing. Why would the criminals accept brief cases of cash when those notes won’t be welcome elsewhere? Depositing such large sums in accounts immediately raises red flags for authorities.
Of course criminals have adopted innovative ways to counter the enhanced scrutiny of cloud-based payments. The cryptocurrency Bitcoin has thus far avoided government tracking and regulation. Combined with anonymous networks like Tor, Bitcoin’s secrecy has facilitated online gambling and the now defunct Silk Road, a black market for drug purchases. Bitcoin may or may not move beyond illicit transactions and speculation, but it is evidence of the increasing acceptance of digital, non-traditional money.
Like all forms of payment, digital money has weaknesses. Computer records are vulnerable to hacking and NFC has glaring security holes according to a study by Ernst Haselsteiner and Klemens Breitfuss of Philips. Digital wallets—cell phones, wearable technology, and biometrics—may still be lost or stolen, just as purses are today. In this event, technology could be locked remotely to protect accounts linked to it. Security will be enhanced at point of purchase by using graduated systems of verification. Small purchases might require just a finger tap, while larger ones might require retinal scan, PIN identification, and text message verification.
But not everyone has smart technology. And ten percent of Americans and 50 percent of the world do not even have bank accounts. Homeless people depending on the “spare change” of strangers will struggle to tap into digital donations. Same goes for charities like the Salvation Army, whose Santas seek out holiday shoppers’ pocket change.