Like predictions about the paperless office, forecasts about a cashless society have been around for a while. For example, AC Nielsen research says that only 10% of transactions in the US will be cash by the year 2020. Logically this makes sense because e-commerce is at it’s most powerful in information processing industries like financial services.

The idea is essentially that notes, coins and cheques are all hugely inefficient and will be replaced by digital money, which is easier to process. Governments love the idea of getting rid of cash because up to 25% of all cash in circulation globally is used for illegal purposes (in the US a staggering 25-30% of people don’t have bank accounts). Companies also love the idea because e-payments are faster and much cheaper.And as far as multi-nationals are concerned the sooner there’s a single global currency the better.

From a technological point of view the cashless society is certainly getting closer. PayPal already has 150 million accounts, which makes it bigger than most national banks. In South Korea 4 million banking transactions were carried out via cellphones in June of last year and 300,000 people have bought cellphones into which you can plug a memory card securely encrypted with financial data. In Finland and Japan you can pay for train journeys and restaurant meals by simply waving your phone in front of a payment terminal. Meanwhile in Australia and Austria you can buy car-parking spaces using your phone. Hello mobile micro-payments and bye-bye cash.

Back in South Korea more people own cellphones than computers so it’s pretty easy to see why phone companies could be the banks of the future. Or, as Bill Joy has pointed out, your phone will become your wallet and a bank or credit card company will give it to you for free. And don’t forget that in the future all phones will be GPS equipped so products like motor or holiday insurance could be sold by the minute on a pay as you go basis. Why? – because your insurance company would know where you are in real time and could calculate risk and payments accordingly. Thus the scene with Tom Cruise in Minority Report suddenly becomes very real with the prospect of retailers (including banks) knowing who you are and what you’re worth (or at least what you spent last time) the second you step into their store.

Could the cashless society really happen? Yes. Early signs include the fact that 14% of Britons regularly throw away coins because they can’t be bothered to carry them around.In the US electronic payments (including debit and credit cards) surpassed cheque payments in December 2004 for the first time in history, while in Australia cheque usage has fallen from 50 per person in 1998 to 30 per person in 2003.

Other signals include the fact that Air Miles are now the world’s second largest currency according to The Economist. Better still, Everquest currency is now more valuable than the Japanese Yen and is regularly traded for real US Dollars according to Edward Castronova, Associate Professor of Economics at California State University(see gamingopenmarket.com).

Indeed it sometimes seems that the only people who like ‘real’ money are older change averse people and they won’t be around forever. Nevertheless, all but the most geekish members of Generation Y would have to admit that there is something inherently substantial and emotionally reassuring about paper (and metal) money that’s difficult to replicate in cyberspace. Logically paper books and newspapers should have been replaced by e-books and e-news a long time ago. But they haven’t. Thousands of years of tradition, human nature and practicality have put he brakes on these innovations.

Then there’s the issue of trust. There are lots of trends that can be used to support a scenario where banks become extinct — acceleration of technology, product convergence, convenience, new channels and brand promiscuity to name just a few. But remember most people don’t just dislike banks. They hate them. They hate the queues, the fees and the lack of any meaningful choice. In the UK there’s even a web-based service that allows customers to record conversations with their bank to provide evidence of poor service or misleading advice.

So if Toyota or Yahoo branch out into financial services (as they’ve done in Japan) the banks could be in for a pretty rough ride. And that’s before Microsoft, Apple or Vodafone start to offer banking services based on emerging technologies like digital signatures. Hello hyper-competition. Bye-bye margins.

So is it the beginning of the end for physical banks? Not necessarily. In the US branch expansion is a major trend. In Australia local community banks (and conversely private banks) are all the rage.100 years ago the bigger a bank was the better. Now the opposite is increasingly true. As globalisation and virtual worlds take hold people are being drawn back to local businesses and physical contact. People are also craving simplicity, which is why banks like HBOS (UK) offer a limited choice of easy to understand products. This is good for customers, staff and profits.

Equally most markets are polarising between low cost providers and premium suppliers offering personalised solutions. So cheap Internet banking via a cellphone can happily exist next to branches with people offering advice on big-ticket items like home loans.
If you’re rich you can have the best of both worlds — phone banking with instant access to a personal assistant and swipe card entry to flagship branches offering legendary customer service. And somewhere in the middle you currently have 7-Eleven’s Vcom
24-hour bill pay kiosks.

But we’re back to trust again. UK supermarket Tesco has been successful in offering basic products like ‘cash back’ and car loans but supermarket credibility is strained when you start talking about more complex matters such as wealth management. Or take the fact that whilst we regularly take money out of ATMs only 5-10% of us are happy to deposit money back in. Then there’s the issue of identity theft — a $56 billion problem in the US and up 600% in the past 5 years in the UK.

ID theft is a problem that could bring the cashless society to its knees, but it’s also spawning a number of innovations like identitytheft911.com (Citibank) and ID theft insurance (progeny/AIG).

We started with some predictions so let’s finish with a few more. Nobody can be really sure what will happen in the future although it’s a fair bet that change will happen.
Here are a few ideas you can bank on.

1. We’re on the verge of a technological explosion that will benefit new entrants.
2. Mobile micropayments will revolutionise the shopping experience.
3. Physical banks and customer service are not going away any time soon.
4. If cash disappears private currencies and barter schemes will flourish.
5. Digitised money will eventually be embedded in everything from clothes to people.