Like predictions about the paperless office, forecasts about a cashless society have been around for a while. For example, six years ago AC Nielsen said that only 10% of transactions in the US would be cash by the year 2020. Logically this makes perfect sense because electronic commerce is at it’s most powerful in data processing industries like financial services.
The idea is obviously that notes and coins (let’s not forget bills and cheques) are hugely inefficient and will be replaced by digital money, which is easier to process. Governments love the idea of eliminating cash because up to 25% of cash in circulation globally is used for illegal purposes (in the US, a staggering 20-25% of people still don’t use bank accounts).
Companies also love the idea of digital money because electronic payments are faster and much cheaper, although this doesn’t necessarily mean that they, or the retail banks, will pass on any time or cost savings to their customers. And as far as multinationals are concerned, the sooner there’s a single global e-currency the better, because volatility in currency markets is yet another uncertainty to contend with.
From a technological point of view, the cashless society is already here. PayPal has 150 million accounts, which makes it bigger than most national banks. In South Korea, four million banking transactions were carried out via cell phone way back in June of 2004, and hundreds of thousands of people have now bought cell phones 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 and in other countries you can pay for a parking space using your phone. In fact you can find a car parking space with your phone or even the location of rental cars that can be unlocked and paid for with a phone. No paperwork required.
Hello mobile retail, micro-payments, peer-to-peer lending, stored value cards, micro-philanthropy and private currencies. Bye-bye coins, notes, paper statements, paper bills and perhaps even the banks themselves.
Back in South Korea, more people own cell phones than computers and globally smart phones will outsell PCs by mid-2012. 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 nothing.
There are already 4 billion phones worldwide, 80% of them in developing economies and companies are starting to wake up to the thought that they can pay their employees wages straight into mobile phone accounts, from which money can be instantly transferred elsewhere. But it won’t necessarily stop there. If a job can be advertised, applied for and then completed using nothing more than a mobile phone, why bother with offices or fixed employment contracts at all? This is already happening in parts of Africa.
Another implication is that many phones are GPS equipped, so this opens up a whole host of other profitable opportunities.
For example, products like motor or holiday insurance could soon be sold by the minute on a pay-as-you-go basis. How? Because the insurance company – or holiday company – will know where you are in real time and will calculate risk and payments accordingly.
As for retail, the scene with Tom Cruise in Minority Report suddenly becomes very real with the prospect of retailers (including retail 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.
Add analysis of social networks embedded in your phone, records of digital payments and analysis of voice or text conversations and the future is very open and transparent, with organizations able to predict the wants of individual customers. DM or CRM heaven. Or hell, depending on your point of view.
So could a totally cashless society really happen? Yes, if the fact that 14% of Britons regularly throw away coins because they can’t be bothered to carry them around is anything to go by. In the U.S., electronic payments (including debit and credit cards) surpassed check payments seven years ago, while back in the UK many people aged under-twenty-five have never even seen a cheque let alone written one.
Recently there were rumblings in the UK about some retailers refusing to accept cheques. How long, I wonder, before some retailers start to refuse cash?
However, 1/3 of payments in the UK are still made in cash and it is the older generations that have all the money. Therefore, things may stay the same for quite a while yet.
Moreover, all but the most geeky of Generation Y and i would, I suspect, have to admit that there is something inherently substantial and emotionally reassuring about paper money that’s difficult to replicate in cyberspace. Logically, paper money, paper books and paper newspapers should all be extinct year by now but they’re not. And they won’t disappear any time soon either. Not entirely.
Years of tradition, human nature, and practicality mean that when it comes to the impact of things like social media on financial services the hand brake will be left slightly on. And this is the inconvenient truth that many futurists and technologists forget. Yes, technology is a powerful force for change, but so too are history and psychology.
Then there’s the issue of trust.
There are lots of trends that can be used to support a scenario where retail banks become extinct – product convergence, convenience, new channels to name just a few. And remember: Most people don’t just dislike banks. They hate them. They hate waiting in line, they hate paying fees, and they hate the lack of any meaningful choice.
If Toyota branched out into financial services (as they’ve done in Japan), the UK retail banks could be in for a pretty rough ride. And that’s before Apple, Google, Facebook or Vodafone offer banking services based on emerging technologies like digital signatures. But would you trust a phone company or a supermarket with your pension?
In the U.S., there were more physical bank branches in 2008 than there had been a decade earlier. Meanwhile, in the UK, pure online banking plays are struggling because all of the major physical banks now offer online channels. The big banks are consolidating too. They are getting bigger and they are getting richer, so they have the ability to crush small, technologically driven, competitors.
Meanwhile, local community banks (and, conversely, private banks) have been booming. Seems that when it comes to money, especially decisions relating to large amounts of money, many people still prefer the physical to the virtual.
So what does the future of financial services look like in the UK? The Market itself will almost certainly polarize between low-cost providers and premium suppliers offering personalized solutions.
Cheap Internet banking via a phone will happily co-exist next to physical branches that feature people who offer 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 great customer service. And somewhere in the middle you’ll probably find 7-Eleven or McDonald’s with 24-hour bill pay kiosks.
But let’s go back to trust.
Tesco has successfully offered basic transactional services like cash back, car loans and pet insurance, but its credibility is somewhat strained when it comes to more complex matters like wealth management. This may change, but it may not.
The ATM has been around in the UK since 1967 and people now think nothing of using them. However, whilst we happily take money out of ATMs, only 5-10% of us are happy to deposit any money back in.
There’s also the issue of identity theft, a multi-billion dollar problem in the U.S. and a growing problem in the UK too. ID theft is a problem so big that could bring the cashless society to its knees, but even ID theft is also spawning a number of innovations like identitytheft911.com (Citibank) and ID theft insurance (progeny/AIG).
None of us can be really sure what will happen to financial services in the future. Indeed, the only thing we can say about the future with any degree of certainty is that it will be different. However, it’s a fair bet that some significant change will happen, so here are a few ideas you can bank on:
1. The technological explosion will benefit new entrants.
2. Mobile micro-payments will revolutionize retail.
3. Physical banks are not going away any time soon.
4. If cash did disappear, barter would flourish.
5. Money will eventually be embedded in everything.
The use of cheques fell by 50% in Australia between 1998 and 2003. At this rate the humble cheque book will disappear sometime early in 2020.
According to AC Nielsen, 90% of transactions in the US will be cashless by the year 2020. PayPal had 63 million accounts last time I looked, which makes it larger than most national banks,while in Korea during the month of June 2004, 300,000 people purchased cellphones into which you can insert a memory card containing all your financial data. So will physical money soon be a thing of the past? Most observers say yes, but don’t underestimate the power of human nature and tradition.