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Time to Cash Out?

Bills and coins have gotten cumbersome. Their critics say digital money will make everything from buying a latte to climbing out of poverty easier.

William Duke

By Kara Platoni

When author David Wolman set out to research The End of Money, he took a year off from using cash. He wasn't too sold on it to begin with: The bills are grimy; the coins are clunky. Cash is, as he once wrote in an essay for Wired, "irritatingly analog."

But he was surprised by how easy it was to live without, so easy that he pretty much forgot he was doing it. "Days or weeks would go by when it just wasn't that big of a deal," he says, provided he skipped the farmers' markets or neighborhood lemonade stands. He really only had to bend the rules a few times, cadging bus fare off his wife for sudden trips downtown and when traveling in India, where cash transactions remain prevalent. "Looking back on my year, I now see that it would have been exponentially harder for me to only use cash," he writes.

Along the way, Wolman, MA '00, explored the problems cash creates, ones he believes augur the end of money as a physical object. "Cash feels quick and easy and cost-free at the individual level when you are just taking a $10 bill out of your wallet at the coffee shop. But it has this hidden world of costs," he says. "Those costs are unevenly distributed and fall most heavily on the poor."

In his book about the "coming cashless society" (DaCapo Press), Wolman deftly and humorously picks his way through the fascinating world of those hidden costs. There is the government's Sisyphean task of outsmarting an endless parade of high-tech counterfeiters. There is the fact that it costs more to mint coins than they are worth. (Eleven cents to make a nickel.) And there is the opportunity cost to the world's poor who—without access to electronic savings methods—are left behind in a volatile cash economy.

"That was the most eye-opening part of the project for me," Wolman says, "not just seeing that cash is most punitive for the poor, but also understanding that getting past cash is essential to fighting global poverty."

Cash was once a revolutionary idea. In the early days of world trade, Wolman notes, the development of metal coins and standardized currency got rid of the problems that had plagued localized systems based on the exchange of, say, shells or livestock. Coins don't rot or die, they're less vulnerable to shortages or gluts, and they're fungible, which means you can trade them for just about anything. "Although a chest full of silver coins sounds inconvenient, transactions had never known such clarity and compactness," he writes.

Today, exchanging value by moving information, rather than grubby bills, presents an opportunity to make another giant leap in clarity and efficiency. Most of us already use credit or debit cards and online payments. "We've already said yes to electronic money across the board—it's just really the last mile or the last one percent of money in the world," Wolman says of finally scrubbing out cash. "Are we going to keep using this anachronistic medium of ex-change or are we going to wake up the digital future?"

But if the future of money is no longer in your wallet, where might it be? Students at Stanford's d.school (formally the Hasso Plattner Institute of Design) are brainstorming mobile phone apps for developing nations, where the lack of traditional banking infrastructure in poor or rural areas makes cell phone payments a popular alternative to cash. Across campus, students in the computer science department are imagining apps more as something to speed transactions at America's coffee shops. And Wolman researched even more bizarre cash replacements—what if you could just scan your fingertips, or invent a totally new currency?

In fact, money's malleability led Wolman to the biggest question of all: What exactly is it?

Could money, ultimately, be anything?

GETTING AHEAD

One night in June, d. school students in a class called Designing Liberation Technologies gathered to present their final team projects: ideas useful to residents of the informal settlements in Nairobi, Kenya. Two teams focused on phone apps that move money reliably where there is little access to traditional banks.

A project now dubbed Akiba Ya Shule proposed letting parents make small mobile phone prepayments toward their children's secondary school tuitions, rather than delivering lump sums in cash. That might sound like a small problem to Americans, team members said, but in areas with erratic employment, a large bill—10,000 Kenyan shillings, about $120—can be crushing. Failure to pay means children must leave school. "If [parents] are able to break it down and pay the fees whenever they actually have an income, then it will make it easier for them to actually build it up to that full payment," said graduate student Asha Sitaram.

A project called SupaSave took its inspiration from a Kenyan tomato seller named Maggie, who had told students that she had no way to monitor her money, often couldn't accumulate enough cash to stock her shop and didn't even know if she was making a profit. "She had great relationships with her customers, but there was no sense of 'Am I actually making progress?' versus 'Am I just doing an activity because I know that's what you're supposed to do?'" said graduate student Matthew Grollnek. The group envisioned a phone app that would help sellers like Maggie track and gradually save profits.

Both of the groups' ideas piggyback on the surging popularity of M-PESA, a prepaid money transfer service launched in 2007 by Safaricom, Kenya's dominant mobile phone service provider. M-PESA users buy credits at a kiosk. Then they can instantly text money by phone, no bank account required. While the service was intended to help city dwellers send money to rural relatives, education doctoral candidate Daniel Stringer, '06, said, "It blew up and people started using it for everything from paying restaurant bills to paying cab drivers."

As of March, Safaricom counted 14.6 million active M-PESA users. In 2010 it spun off a version of the service for grocers to use in place of the cash register. As the company put it in a press release, this service leads "the way towards a cash-less society where most payments will be made via the telephone or online, hence reducing the risks involved in carrying cash."

Kenyans told the students that cash could be dangerous; for example, Maggie said, women on their way to market feared getting mugged. Mark Feldman, a law student in the class, says that on the economic fringes, "People can lose everything in an instant, either through natural disaster or through someone coming to your house to rob you or to arrest you and seize everything you have. If you're keeping money in cash, then you lose everything."

Wolman
Courtesy DaCapo Press
NO BILLS: Wolman went without cash.

Wolman couldn't agree more. "If you live a cash-only financial life, then it is extremely hard to save because that cash gets spent, because cash gets stolen, because cash is more easily extorted. A drunk cousin will put pressure on you. Or a spouse will take it."

Not having to deal in cash, he notes, is a class luxury. "Herein lies physical money's hidden cruelty: The privileged don't want it and can easily avoid it; the poor can't avoid it, and are most penalized by it," he writes. "When your only option is cash, your assets are stuck in the material world. Without the ability to convert the cash into electronic money, you are completely out—excluded from banking, and thus denied a safe and reliable way to save."

While phones entail some costs—you have to buy them and pay for service—they're already widely used in Kenya. Class co-instructor, computer science professor Terry Winograd recalls Willie Sutton's famous line about why he robbed banks: because that's where the money is. When it comes to money transfer, "Why do people use mobile phones? Because that's what they have."

"Kenya is way ahead of everybody on this," says co-instructor Joshua Cohen, a law, political science and philosophy professor. Their students surveyed informal settlements in Nairobi, and "in 11 of the 13 villages, more than 90 percent of the households had a mobile phone." On a national level, Cohen adds, while most Kenyans don't have bank accounts or credit cards, "about 75 percent of the unbanked have M-PESA accounts and 75 percent of people who live on less than $1.25 a day have M-PESA accounts."

As Wolman points out, cash is expensive and cumbersome in its own way. He writes that while some 2.7 billion people make only $2 a day, the average cost of a traditional banking transaction—accounting for travel and fees—is $1. Plus, he says, imagine needing to send money to your sick grandmother, and how much faster M-PESA would be than delivering it by foot, two days into the countryside and two days back. "Now you can just text that money. That is life-changing, lifesaving stuff."

When transferring money becomes as easy as texting, he writes, carrying cash will seem "as unreasonable as toting around a chest full of silver coins."

CUTTING OUT MIDDLEMEN

Computer science graduate students Kanak Biscuitwala and Steve Fan don't even like toting a wallet.

"Right now you have to carry your phone and your wallet when you go out," Fan says. "What if you could only carry your phone?" As they point out, the devices have already assumed roles once played by cameras and iPods.

As part of Stanford's MobiSocial Computing Laboratory, they have been studying mobile phone payments, but for a different clientele—the average American spender. They're working on a protocol that would allow people to exchange money without involving players other than their banks. Most other American pay-by-phone mechanisms involve the customer's credit card or PayPal account.

Cutting out the middlemen could mean fewer fees and security risks, they say. "The more efficient we make the system, the less likely it is that your information is going to be compromised," Biscuitwala says.

To demonstrate how their protocol—which doesn't yet have a name—would work, Biscuitwala opens his laptop while getting out his phone. "Let's say Steve owes me some money." A short set of commands appears on his phone. A similar box appears on his laptop, which, for this demo, is standing in for Fan's phone.

Biscuitwala selects "request a payment" and the system prompts him to choose an email address to bill. (That's an email address, not a bank account number or financially sensitive information.) So long as the person you're exchanging money with is also part of the system, Biscuitwala says, "You only have to know what your bank is and that's it."

Through his phone, he bills $5 to Fan. The computer receives the encrypted request for payment that is being made by Biscuitwala's bank and passes it along to Fan's bank, which approves the transaction and sends a notification that the payment is good.

Biscuitwala's phone buzzes. "Success! $5," pops up on the screen.

This protocol, they say, could combine the social networking aspects of a phone app with the convenience of a debit card. Biscuitwala says a retailer could track how often loyal customers have paid by phone and offer them discounts. It could be tied into a student's campus ID, so they'd no longer need a card. "It would be nice if you want to get something to eat at the dining hall and you just kind of show them your phone," he says.

Their idea is one of several competing efforts to replace Americans' billfolds with phones. The best known may be Google Wallet, which stores your credit card information on your phone and lets you make transactions online or by tapping your phone on a participating store's checkout stand reader. A similar app called the Isis Mobile Wallet is launching this year in a few pilot cities. PayPal, co-founded by Peter Thiel, BA '89, JD '92, now offers a mobile app that lets customers transfer money to friends, drawing against their bank or PayPal accounts.

But so far these services don't work with every kind of phone, carrier, credit card or retail outlet, and all of them require the user to have a traditional bank or credit card. (Isis was developed by AT&T Mobility, T-Mobile and Verizon Wireless; the Google Wallet partners include Sprint, Citibank and MasterCard.)

M-PESA Kiosk
Courtesy Matthew Grollnek
CELL AND BUY: Kenyan colleagues show Grollnek, top center, the ropes at an M-PESA kiosk. Credits, tracked on cell phones, are readily accepted at the Nairobi storefront.

Wolman says that while zapping a friend $20 after a shared dinner won't be as life-changing for Americans as M-PESA is for Kenyans, this will likely be how we first substitute phones for wallets. As he writes: "By 2014, transactions conducted via wireless connections from our phones are expected to total $1.13 trillion. Initially, most of these new technologies will only provide alternative ways to make a credit card charge, but that too is changing, as users turn to person-to-person methods that cut out the middlemen, the cumulative effect of which is fewer tack-on fees and less friction in our economic lives."

Nevertheless, Wolman hails these kinds of technologies for their potential to deal a deathblow to what he calls cash's "final mile"—quotidian transactions too low-value to be worth whipping out the plastic. He cites an Indian company called Eko that lets phone users make transactions through the State Bank of India. Its CEO dubs himself "the assassin of cash" because the service is useful for modest retail purchases like cigarettes, gum and toiletries.

And that final mile doesn't necessarily have to be crossed by phone. The Japanese company Hitachi has developed an ATM scanner that reads the 3-D pattern of veins in your finger. In 2004, a resort in Barcelona let VIP members pay their bar tabs with microchips implanted in their arms. The alternative currency Bitcoin will let you pay with totally digital money—if you can find a seller that will take it. (See sidebar.)

There might even be a cash assassin lurking in your grocery store. While he was a Stanford student, Jens Molbak, MBA '90, came up with the concept for Coinstar, whose vending machines gobble up spare change and emit folding money or gift cards. Molbak left the company in 2001, but Coinstar has continued to evolve, acquiring the movie rental service Redbox in 2009 and rolling out Rubi automated coffee kiosks this year. Selling sundries by credit-card-operated vending machines leaves the small change—and the shop clerk—out of the final-mile transaction. "Consumers are increasingly comfortable with self-service," Coinstar spokesperson Marci Maule says. "This is why self-service transactions are expected to grow to over $1 trillion by 2015, up from $715 billion in 2010."

The company expects to launch its coffee machines in areas that don't have competing businesses, just as mobile phone payments first took off in areas not served by banks and ATMs. (Maybe someday, Wolman muses, small shops in the middle of nowhere will be replaced by solar-powered kiosks.) Another Coinstar pilot project is looking into a way for users to deposit cash into kiosks to fund their PayPal accounts—your spare pennies instantly digitized.

But whether microchip or mobile phone, Wolman writes, the technology that delivers the knockout punch to the final mile will do so by being widely accepted and easy to use. It must, he writes, "beat cash at its own game."

BELIEVING MAKES IT SO

Cash still can be hard to beat. Some people remain uncomfortable with storing their wealth as ones and zeros, and others see cash-only shopping as a defense against debt. Wolman breaks down research showing that people overspend when they don't experience the loss of physically handing over money. "Walk into a casino with three C-notes and you know you could lose, at most, $300. Walk into a casino with a credit card, and you could lose your house," he writes. "Cash is clear."

But Wolman thinks smartphones could be enlisted to combat profligacy. Smartphone apps could be designed that would make phone purchases as emotionally resonant as cash exchanges, perhaps sending an alert when you're about to do something ill-advised. ("You could make it your own—like a voice recording from your grandma or Ben Franklin's underpants on fire.")

He notes that overspending by plastic seems to be a problem particular to industrialized nations with credit-based economies. "In the developing world, it's the physical money that gets spent, not the electronic money," he says, because low-income people face pressures to use cash on hand. As the SupaSave group proposed, a digital option might encourage saving by making people's money less available. And as Winograd points out, M-PESA is prepaid, not credit. "You can't spend it till you have it," he says.

Certainly there are people who don't like the idea of exchanging financial data by phone—what if it's lost or stolen? Biscuitwala and Wolman say the process would be similar to dealing with a stolen credit card; you'd remotely turn off access to your account by logging in from another computer, just as you'd have your bank freeze a missing card. Wolman says, "I'm sure that's the exact same question that was asked in the 1950s and '60s about credit cards, like 'What if you lose this thing?'"

Historically, Wolman says, people worry whenever technology gives us a new machine-mediated way of managing our wealth. It took ATMs, online banking and PayPal a few years to take off. The root of this discomfort, he thinks, is that money is moving from a tactile experience to an increasingly abstract one. Measuring one's worth in dollar bills—or gold, or shells, or livestock—may be arbitrary, but at least you can touch those things. Not so, ones and zeros.

Moving to a digital economy, he says, "forces you to think hard about the very nature of money and value itself. People don't want to think too closely about what gives their money value, because it can be a little hairy to look so closely at the fact that the only thing that makes a dollar a dollar is our belief that it's worth a dollar."

If the U.S. government wanted to, he says, it could print a $1 value on just about anything and call it our national currency—when Wolman gives talks on college campuses, he sometimes uses cafeteria tables as an example because they happen to be handy. It sounds ridiculous, but as he points out, past civilizations have traded in all kinds of unwieldy objects: the giant stone money on the island of Yap, whale teeth, dried fish. "The greenback isn't the be-all, end-all, " he says.

Indeed, one of the reasons Wolman is eager to get rid of cash is because he doesn't really consider it money. He considers it the primitive physical vessel through which the broader concept of money has been expressed, a skin we can shed now that we've stepped into the virtual age. "Cash does not have any intrinsic value, except if you are trying to light a fire or melt it down and make fillings," Wolman says. But money's value is something different—in his book he calls our faith in it "a trust in each other—a belief in a shared purpose, or at least a shared hallucination."

"Money is an idea, and you have to have faith in the idea," he says. "And in that sense, what is money? Money is anything we believe it to be."


Kara Platoni is a frequent contributor to Stanford.

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