There’s No Stopping the Rise of E-Money: The economic and psychological underpinnings of hard money are weakening while the flexibility of e-money increases
July 23, 2012
Science-fiction writers once imagined a galactic currency that would grease the wheels of commerce from here to Alpha Centauri. In fact, however, we are tending in precisely the other direction, toward a burgeoning number of ever more specialized currencies. These will circulate electronically, by means of the mobile phones that are increasingly part of the dress of every person on the planet.
Seemingly everywhere you look, you can see the emergence of this pattern in what futurologists call the weak signals [PDF] of change. These are the changes that will be seen, a generation from now, to have foreshadowed a technological revolution.
That money is a technology is obvious, once you look at it. It is not a feature of the natural world but rather a constructed tool, one that defines a way of doing things. It is a clearly specified standard, like the Internet Protocol, the gauges used in rail transport, or the octane specifications of gasoline. And it can change.
What’s more, like all technologies, money exhibits the law of unintended consequences. The historian David Edgerton wrote in The Shock of the Old: Technology and Global History Since 1900 (Profile Books, 2006) that as a technology moves through a culture, its downstream uses are often very different from what its inventors had imagined. This fact stands squarely in the way of anyone who would claim to see just where a new technology will take us.
Today, the technology of money is racing to catch up to social changes that have radically altered how people interact and therefore how, why, and when they use money. It’s impossible to say what the unintended consequences of these innovations in financial technology will be; we can only note that they will come, and make some intelligent guesses. I believe, though, that in the end, money as we know it will be turned on its head, and this revolution will be at least as profound as the introduction of paper money a millennium ago.
Of course, society has been through times of innovation in monetary technology before. Consider the “split tally,” a wooden stick used to record royal taxes in England. Tallies came into use shortly after the Norman invasion of 1066 and were not withdrawn until 1826 (we Brits are a conservative bunch). The sheriff would collect the taxes based on tax assessments and then remit the collected cash to the king. To ensure that both the sheriff and the king knew where they stood, the tax assessment was recorded by cutting notches in a wooden twig. The twig was then split, so that the king and the sheriff each had a durable record of the assessment. When it was time to “tally up,” the sheriff would show up with the cash and his half of the tally to be reckoned against the king’s half.
The technology worked well. The sticks were small and long-lasting (very long—some of them still exist), they were easy to store and transport, and they were easily understood by those who couldn’t read (which was almost everyone, in the early days). They were also secure: Neither the sheriff nor even the king could forge one half of the stick without having the other half.
The tally was soon finding unforeseen uses. The king often couldn’t wait until taxes fell due; he wanted his cash as soon as possible (generally for wars with the French or the Scots). So he would sell his half of the stick at a discount. The buyer could then get the cash when the taxes fell due. This made that half of the tally stick, in effect, a fixed-term government bond. The market for tallies evolved quickly. Say someone in Bristol held a tally for taxes due in York; to collect the payment, he’d either have to travel to York or find someone else who would do the job for him, for an appropriate discount. Thus a money technology intended only for record keeping evolved into a thriving market.
The mobile phone is the new tally stick. It will evolve in unforeseen ways, and both the push exerted by the new technology and the pull exerted by society’s changing needs will shape the outcome. And the result, I believe, will be revolutionary change.
In Japan and Korea [PDF], mobile phones have been used for payments for a decade, and the technology is now a standard feature there in handsets. In March, one out of six Japanese users bought something in a shop using a mobile. People also use the system to pay bills and transit fares; businesses use it to funnel loyalty rewards to customers. At first, the number of retailers accepting the new technology remained flat; once about a third of consumers were using it, though, things started to take off, producing the “hockey stick” adoption curve that we technologists love.
What’s happening in Africa is even more astonishing. Kenya is now home to the world’s most expansive mobile payments scheme, M-Pesa [PDF]. (I should disclose that my employer, Consult Hyperion, provided paid professional services for the M-Pesa project.) It was launched in 2007—not by a bank but by the country’s biggest mobile operator, Safaricom, with support from the United Kingdom’s Department for International Development. The system’s nearly 15 million users can use their mobile phones to deposit cash into their accounts, using as a point of deposit any of the 28 000 shops around the country that participate. Users can then move their deposited money about with an application built on top of the text-messaging function of their phones. When they want to buy something, they just text the money to another person, shop, or bank that is also in the system; money is then debited from the payer’s account and credited to that entity’s account.
A third of Kenya’s gross domestic product now flows through M-Pesa, and an amazing range of new businesses have sprung up to use it, none of which were envisaged by its founders. Farmers buying insurance to take animals to market, bars that operate cash free (and therefore robbery free), shops that use it as a kind of “night safe,” savings accounts that can be accessed only from online—all these have been made possible by the new tally stick.
One reason it has taken off so splendidly is that so many people in Kenya lack credit cards and bank accounts. To send cash to a relative in a far-off village, you might have to pay a courier to take it there—for a tremendously high transaction cost. The proof was in the service’s growth: Within a year of its launch in 2007 it had 5 million subscribers, more than all 43 of Kenya’s commercial banks put together. The M-Pesa network is now being replicated in Tanzania, Uganda, and other countries…