[From World Bank's All About Finance blog, 22 October 2013]
Hard cash certainly has its drawbacks. Poor people mired in a cash economy find it difficult, in times of need, to support or seek support from distant relatives and friends. The size of the market they can sell their products and wares into or source their inputs from is limited by how far they can easily and securely transport cash. They are captive to local financial organizations and moneylenders, because more distant financial institutions don’t find it cost effective to go collect their saved-up cash and have no visibility of their prior cash-based financial histories on which they might otherwise grant credit.
All of these are good reasons to expect that people everywhere will embrace digital money, if only it is served up to them in a convenient, understandable, reliable and secure way. Money is just information –how much I have, how much I owe—and the short history of the internet shows us that information wants to become free of physical impedances.
So will cash go the way of the compact disk, in a gradual wind-down towards oblivion? Must we or even can we go for an accelerated eradication of cash? Many hope so, but I don’t think so.
The CD is simply digital information bottled up for convenient transport. But once devices became ubiquitously connected, there was no longer any reason for musical information to be delivered through a physical distribution network rather than online.
But cash is more than just bottled-up information on financial value: it is value that is readily and universally recognized and accepted on mere visual inspection. The physicality of banknotes makes it easy for people to make snap judgments on how much value it embodies and whether it’s a real banknote or not. Cash is a visual acceptance instrument, in contrast to electronic money which requires electronic acceptance (an ATM, a point-of-sale terminal, a mobile phone) in order to be recognized and exchanged.
Electronic acceptance introduces risks that when you want to pay with electronic money there may not be a device available, that it may not work properly, that it will delay you in some way, or that the information on that payment will reach someone you’d rather didn’t know about it (including the taxman). It takes a long time to overcome these fears, which is why the shift to electronic money is so slow and gradual, even in the most developed countries.
So here you have the basic trade-off: electronic money is superior to physical cash in transport and storage (lower transaction costs), but cash has advantages over digital money in acceptance (immediacy, universality and privacy).
Digital music, in contrast, requires electronic acceptance (i.e. translation of stored digital signals into sounds) whether it is delivered as a compact disk or online. So the compact disk involves much transport pain and no acceptance gain. That is why it’ll end up going away, as have done the specialist stores that sell them.
While digital money will tend to expand inexorably over time, both forms of cash will find their sweet-spot uses and will co-exist. That presents a major problem, because the interface between the two is the most expensive and operationally complex component of mobile money systems. The lack of interworking between these two forms of money creates a last centimeter problem (you can get the bill so close to the phone, but not quite into it) which we only know how to solve by turning into a last mile infrastructure problem (building networks of ATMs and cash in/out agents). That’s a drag for everyone.
I predict a long future for banknotes, but with the difference that they will come to be accepted both visually and electronically, indistinctly. Future smart banknotes will retain the physicality that allows them to circulate and be traded like normal banknotes, on mere visual inspection, but also the smarts to allow their value to be transferred at will from the paper note to your digital bank account (and vice versa) using an appropriate acceptance device like a mobile phone. Smart banknotes may be turned on and off through encrypted messages sent to a chip embedded within them, and their state can be checked both digitally (e.g. reading the chip with a mobile phone with near-field communication) and visually (e.g. by means of digital ink or other visual displays). Thus the last centimeter will vanish.
Far fetched? For sure, but maybe not quite as far-fetched as imagining that stores everywhere will become ubiquitous and reliable cash in/out points for banks and mobile operators.