[From Technology Review, Business Impact section, 1 March 2012]
Technology has yet to fundamentally change how we think about money. As the mobile Internet begins to take financial control out of the hands of bank tellers and regulators, innovators are connecting us to our money in new ways.
Money is a common language we all agree to use to convey the of value of things. Since the Chinese starting using cowrie shells as an early form of currency more than 3,000 years ago, societies everywhere have been looking for forms of money that are portable, divisible, durable, and reasonably stable in supply. Over time, money has become less physical and more symbolic: tangible commodities such as gold have given way to tokenized paper and now to ephemeral digits in a computer.
The proliferation of digital communication technologies means we can now marshal our money with remarkable speed and ease—checking balances from a mobile phone, making a payment pretty much anywhere merely by showing a thin slab of plastic, buying and selling stock over the Internet. Yet beyond the transactional speed and convenience, our concept of money and the ways we handle it have not been radically transformed.
Personal Internet banking is convenient, for example, but the services you find online are the same ones that were available when you used to walk over to the branch. You still have to choose among prepackaged accounts. If you move money from your checking to your savings account, the bank remains oblivious to whether you are doing so to put aside money for your kids' schooling or for the family holiday. You can buy a certificate of deposit, but you can't choose the maturity date: why can't you set it to come due the same day you plan to leave on an expensive trip? The banks' failure of imagination is exposing them to disruptive entry by players specializing in customer management and user interface design. Examples include Mint.com, which consolidates all of a user's financial accounts and information in one place, and Simple, an alternative banking service that promises fewer fees and better customer service.
Mobile payments, meanwhile, still seem to many an unnecessary complication. But the appeal of being in constant contact with your money—and information about your money—will prove irresistible. Back in the days when electronic devices were expensive, someone had the clever idea of giving dumb plastic cards to all of us and the more expensive card readers only to merchants. Now that we have a virtual card and card reader right in our pocket in the form of a smart phone, who will be content to carry a credit card we cannot ourselves read?
Banks and card issuers profit from the status quo; Non-banks have stolen an early march on mobile payments in the United States. Google sees mobile payments as a rich new source of customer insight. For Apple, they have been central to building a vibrant developer ecosystem—you can buy an app with the press of a button. PayPal sees the opportunity to attach an account not only to every e-mail account but to every mobile number. The largest mobile payment program in the United States is currently run by Starbucks coffee shops.
Credit scoring is still largely based on personal information, with no social-networking element built into it. That's a missed opportunity to bring to bear what people who know me think about my character and financial habits. Lenddo is seeking to complement traditional credit scores with scores based on people's "social graph"—rewarding borrowers who disclose more about themselves through social networks like Facebook, tapping friends who can vouch for them (without requiring them to guarantee their credit), and creating peer pressure by being ready to disclose delinquencies through the borrower's social network.
On a larger scale, we can imagine monitoring the creditworthiness of the entire financial system. Currently, financial institutions are supervised individually, but there is very little capacity to understand things systemically. This came through loud and clear during the recent global financial crisis. We were caught unaware of the extent to which the risks of various institutions were correlated. The financial system has no "brain" to process systemic risks. But there could be one. I believe it is possible to create a transparent Google-like system for pulling together information about such problems.
For all their desire to take a slice of the banking and payment market, what the new-breed players do not wish to do is to handle customers' cash. They are more than happy to delegate the function of cashing in and out to traditional banks, which operate an extensive infrastructure of ATMs and branches for this purpose. The need for this expensive infrastructure has limited the reach of financial services, principally in developing countries, as there simply is no business case for banks to open branches and ATMs in rural areas or urban slums. The result: about 2.5 billion people in the world do not have access to a bank account—they are trapped in cash, without safe ways to store and transfer their money.
Banks in Brazil were the first to take deposit and withdrawal transactions out of banking halls and into retail shops that exist in every village and neighborhood. If you can find rice and soap and Coca-Cola at these shops, why shouldn't you also find basic financial services there? With the right technology, exchanging money between physical and electronic forms can be done securely, and as naturally as exchanging notes for coins. More disruptively, in Kenya, the mobile-phone operator Safaricom has developed a network of 30,000 stores through which its customers can cash in and out of their M-PESA mobile wallet accounts. That's 200 times the number of branches operated by the largest bank in the country. Five years after launch, 17 million Kenyans—about three-quarters of the adult population—can send or receive money via cell phone.
And what about banknotes themselves—how are they dealing with the technological onslaught? In the arms race against counterfeiters, banknotes have been stuffed with special inks, strips, polymers, and holograms, but still no electronics. I have proposed a new kind of smart banknote that would allow you to do a cash deposit by transferring money from banknote to bank account, directly from your mobile phone. Cash withdrawals would entail the reverse: transferring money from your bank account to a banknote. The banknotes would go on and off as a result, and the on/off status would be immediately visible—say, through digital ink that appears and disappears. You could then transport cash around cheaply in its deactivated form (sorry, Brinks!), and your mobile phone would become an ATM (sorry, NCR!).
I think there will always be some role for cash—a mode of value that has a fixed denomination (do you really want to be exposing your full bank account every time you make a payment?) and always works, even without an acceptance device. Rather than cheering for digital technology to put an end to cash, as some do, it seems smarter to reconcile the benefits of both and find ways to integrate physical cash into the electronic world.Technology has made it faster and easier to move money around, but it hasn't fundamentally changed how we think of it or use it. Because money and banking are highly regulated, they may be the last of the information-based sectors to be thoroughly shaken by the Internet. The intricacies of regulation make it difficult for banks to be truly customer-centric. But the direction of technological innovation is clear: in the end, nothing will stand between me, my money, and my devices.