Coined: The Rich Life of Money and How Its History Has Shaped Us

by Kabir Sehgal

  But it’s not available everywhere. While the United States is saturated with credit cards, penetration levels are low in other parts of the world, and still 85 percent of global retail transactions are conducted in cash.62 For example, China, with a population of 1.3 billion, has only 67 million cards. The Chinese have high savings and have been reluctant to take on debts. That is likely because, according to the IMF, the Chinese government hasn’t historically provided an ample social safety net for its citizens.63 Economists have even found that high saving rates may be the result of households trying to make men appear more attractive in a skewed marriage market, with more males than females reaching adulthood. In one study, the savings of households with sons exceeded that of households with daughters in China. The researchers also found that the saving rate increased in regions that had a higher imbalance between men and women, in other words, a more competitive marriage market.64 Credit card penetration levels are even low in more developed countries like Germany, which has a population of 82 million but only 10 million cards. Like the Chinese, Germans have been historically averse to debt. Even the German word for debt, schuld, translates to “guilt.”65 Credit card companies have taken notice and beefed up their international efforts. If a handful of developed countries reached penetration levels like those found in the United States, it would mean an estimated $2 trillion more in volume for Visa and MasterCard.66 The future of money for hundreds of millions of people around the world is simply to use credit cards and their payment networks.

  There are many economic reasons for governments and businesses to encourage credit card adoption. There are positive correlations among credit card penetration, growth, and exports. Moody’s found that electronic transactions added almost $1 trillion in global growth across fifty-six countries from 2008 to 2012.67 Scott Schmith of the US Department of Commerce contends that more credit card users means a larger consumer market. He found that consumer spending grows 0.5 percent when the share of credit card payments increases 10 percent. In 2008, he estimated that if China grew its credit card penetration from 20 percent to 22 percent, based on 2005 levels, that would generate $4.3 billion in new consumer spending.68 Already, consumer spending in China and India is growing faster than in the United States, and developing countries are rapidly coming to represent a larger percentage of global consumption.69 Credit cards also reduce costs. Economists found that electronic transactions cost 30 to 50 percent less than paper transactions (for example, there’s less physical labor involved in an electronic transaction). They estimate that a country could save 1 percent of its annual GDP especially if its banks used credit and electronic payments instead of paper payments.70

  But getting all vendors to accept credit card payments has proven difficult. In the United States there are more than 30 million merchants that don’t accept credit cards, usually because of fees and the lag of a few days that it takes for the vendor to receive the money. Even those that accept cards may prefer cash to avoid fees, like taxi drivers in New York City who grunt disapprovingly when customers swipe their cards. Yet small merchants stand to benefit from accepting credit card payments because nearly 30 percent of consumers say that convenience is the most important attribute of a transaction, and 70 percent of consumers ages eighteen to thirty-four say they will shop only at stores that accept multiple types of payments.71 Fortunately, convincing small merchants to accept cards is getting easier.72

  In the bull case, the future of money will involve mobile phones and other mobile devices, like tablets, in developed and developing nations alike. That’s because mobile phones have far greater penetration than credit cards. The International Telecommunication Union observes that there are almost as many mobile phone subscriptions, 6.8 billion, as there are folks in the world, 7.0 billion, with 128 percent penetration (many own more than one phone) in developed countries and 89 percent in developing nations.73

  Recognizing the pervasiveness of mobile devices, entrepreneurs are building mobile payment systems to get a piece of the $900 billion in revenue that the payment industry generated in 2011, or even to grow this number substantially. Already research company Gartner has found that there are more than 140 million mobile payment users globally.74 Though mobile payment volume is less than 5 percent of that which is physically swiped on cards, McKinsey estimates brisk growth rates ranging from 62 to more than 100 percent in the coming years.75 The future for mobile payments is bright.

  The growth of these systems won’t initially come at the expense of the major credit card companies. Just as Facebook and Twitter rely on an existing network, the Internet, so, too, will mobile technologies like Square, PayPal, and Apple Pay depend on the established credit card (or debit card) payment networks administered by Visa, MasterCard, and American Express. Card networks route transactions between banks and help with authorization and settlements. Merchants, even those who don’t accept cards, rarely complain about the reliability, effectiveness, and security of payment networks. To replace a credit card network means building a new network and convincing customers to provide sensitive personal information and bank account details—a tall order.

  Instead, new mobile systems will likely facilitate and improve the point of transaction, when the customer buys the product. To better understand the mobile payment space, it’s helpful to divide the technologies among three groups: (1) mobile readers; (2) mobile wallets; and (3) mobile commerce.76

  Mobile readers enable mobile devices to accept credit cards. Every day for lunch in New York, several food trucks line up outside my office. While they offer a range of delectable foods, from spicy burritos to tangy meatballs, I rarely frequent them because they don’t accept credit cards, and I seldom have cash. In contrast, whenever I’m in Austin, Texas, a town that is known for its tech savviness, I order lunch from one of many food trucks because they accept credit cards, using a card reader that plugs into any mobile device. The food is tasty and the payment process is painless.

  Like Diners Club founder Frank McNamara, who was annoyed by not having enough cash, Square cofounder Jim McKelvey’s frustration was the genesis of the Square reader. A software engineer and glassblower, he lost a $2,500 order for a handblown glass faucet because he was unable to accept credit cards. He turned his disappointment into a company that adds 100,000 merchants per month and completes $15 billion in purchase volume annually.77 Millions of merchants use Square because of its simplicity, transparent pricing, and quick settlement times.78 While Square is the most widely used reader, PayPal’s Here and Intuit’s GoPayment have also made inroads into this market.

  Mobile wallets allow customers to use their phone like a payment device. At Blue Bottle Coffee, my friend used the now-defunct Square Wallet to buy our coffees.79 When my friend walked into the coffee shop, the barista’s Square terminal detected my friend’s mobile phone and a picture of him appeared on the register screen. The barista identified my friend based on his picture, confirmed the transaction, billed his credit card, and emailed him the receipt. However, this method of identification is non-anonymous and isn’t as ubiquitous as other technologies, like waving your phone next to a merchant’s payment reader. That technology is known as near-field communication (NFC), and it’s used by Google Wallet. Another type of payment system is text message–based and is widely used in Europe and developing nations. Each mobile wallet is different, but they all replace the need to carry a bunch of cards, and they all rely on the payment networks.

  Already the competition is fierce. Apple Pay leverages NFC technology and Apple’s enormous customer base with its Passbook application for iPhones, which stores coupons, gift cards, and credit card details. PayPal’s mobile wallet enables users to order ahead, skip the line, and pick up goods in person from retailers like Radio Shack and Foot Locker.80 Starbucks’ mobile application also helps users to order ahead their Americanos and Macchiatos.81 Even the major credit card companies Visa and MasterCard are leveraging their trusted brands with the creation of their own m
obile wallets, V.me and PayPass. Many merchants and banks already count on these credit card companies for their networks and other services. Competition is global as companies in countries with low Internet penetration are building their own mobile payment systems. In Japan, already 20 million people use mobile wallets. Japanese company NTT DoCoMo has partnered with MasterCard to make its mobile wallet technology available in more than forty countries.82 Whichever mobile wallet becomes the industry standard, consumers and merchants stand to win because mobile wallets shave seconds from transaction times, which means shorter lines, increased worker productivity, and potentially more customers. But most of these companies are discovering that consumer behavior is difficult to shift. For example, many folks still swipe their credit cards, even though their mobile phones have NFC chips that enable them to wave their devices and “tap and pay.” But maybe because of the prevalence of the iPhone, Apple Pay will change consumer behavior.

  Mobile commerce encompasses a broad range of transactions that happen on a mobile device, from mobile banking to mobile shopping. Though mobile commerce accounts for only about 10 percent of all e-commerce sales, US consumers spend more time shopping (but not yet buying) on their mobile devices than on desktop computers. The gap between time spent and sales is due to the fact that consumers use their mobile phones to locate stores, research products, and find deals. Mobile sales among top merchants are growing quickly, more than 60 percent, to $34.2 billion in 2013.83 Leading online retailers like Wal-Mart, Target, and Amazon have optimized their mobile websites, streamlining the payment process for the surge of mobile users.

  Most exciting is how mobile commerce and payments are positively impacting citizens in developing nations. The Economist observes that “paying for a taxi ride using your mobile phone is easier in Nairobi than it is in New York.”84 Kenya has M-Pesa, a mobile payment transfer system started by Safaricom. People deposit and collect money at Safaricom outlets found at shops or gas stations, and their M-Pesa accounts are updated. More than 60 percent of adults in Kenya, 17 million people, use the system. People transfer money to friends, family members, and vendors using SMS messages. That a developing nation has leapfrogged developed ones, in terms of mobile payments, shows that lasting and meaningful monetary innovation doesn’t require the most sophisticated technology but needs only to make easier the most basic of transactions—like paying for a taxi.

  “I don’t need to go to the bank when I have the bank in my phone,” says a Kenyan businessman who runs a transportation company.85 Rather than trekking to a bank that might be many miles away, he can instantly pay his employees with a tap on his phone.

  In the bull case, money disappears, and everyone, from Nairobi to New York, is connected in the global marketplace. Thanks to technologies like M-Pesa, PayPal, Apple Pay, and Square, which transform mobile devices into payment systems, money will become increasingly digital, intangible, and invisible. People can exchange money without touching or seeing it. Money becomes more abstract from its evolutionary purpose of helping us procure resources to survive. In so doing, the transaction seems more pure, like a familial exchange without the formality of a monetary instrument found in the marketplace. The mobile phone can remove the friction of payments and optimize cooperation. It encourages faster transactions and more exchanges, and helps grow a larger, global consumer base.

  New payment systems will lead to new goods and services. Just as coins altered the agora in ancient Greece, turning more people into buyers and sellers, new mobile payment systems will transform the agora of the future.

  However, there are some impediments and risks in the bull scenario. Before a mobile payment technology can be adopted universally, it helps if there is standardization. Right now, various mobile wallets are being used in the United States. It may be easy to access whatever emerges as an industry standard, since one can simply download that app. Yet a new industry standard mobile reader or wallet may require one to buy a new mobile device with a special chip or technology. What’s more, there is also the risk that governments and banks will try to block these technologies if they see them as a threat to their interests.

  Most worrying are the security implications. Mobile security company Lookout analyzed data from 50 million customers and found that chargeware, adware, and malware were significant threats. Chargeware is an application that charges customers who haven’t given consent, a mobile pickpocket. In 2011, for example, GGTracker, a chargeware app, signed up people for fake services and made fraudulent charges. Lookout calculates a 0.22 percent probability that a user in the United States will encounter a chargeware app during a one-week period. There is a 1.6 percent probability of experiencing adware—obtrusive and unexpected ads.86 These threats are only growing in terms of frequency and potential impact. Also of concern are malware apps that collect a victim’s personal information. In one study, 56 percent of US consumers were concerned about identity theft when using mobile payments.87 The bull case presents great promise, but it also affords new ways for criminals to take financial advantage of others.

  The Dream Case

  Now for some fun. It’s time to dream about money. No, not what life would be like with more of it, but what money will look like many years, say hundreds of years, from now. To spark the imagination, consider how money is depicted in science fiction. There’s no better place to start than…

  A long time ago, in a galaxy far, far away. In Star Wars, a currency known as the “Galactic Credit Standard” or “credit” functioned as money.88 According to Wookieepedia, a website devoted to all things Star Wars, credit was created on Sojourn, a moon on which the InterGalactic Business Clan (IGBC) vacationed. The IGBC was a business group of bankers and lawyers that controlled many assets—yes, even in this distant galaxy, bankers were integral to the monetary system. Credits came in bills, coins, and chips. They were backed by copious minerals found on Muunilinst, also known as “Moneylend,” a planet that was the headquarters of the IGBC.89

  Different galaxy, same problems. In Star Wars, there was monetary confusion and competition. Despite being backed by metals, credits were refused by planets during periods of uncertainty, such as the Clone Wars. The credit was later known as the “Imperial Credit” and was used by Luke Skywalker to pay Han Solo for transport to the planet Alderaan. Yet smugglers avoided using state-sanctioned money and opted for precious metals like platinum. Those in the Ferengi Alliance traded gold-pressed latinum, a material that could not be reproduced.90

  Even though Star Wars is set in a galaxy “a long time ago,” the idea of a “space currency” is futuristic, and it may be achieved sooner than you think. Virgin Galactic is booking space tourists for its commercial space journeys, and a Russian company is planning on launching a space hotel in the coming years.91 Keen to be part of the conversation, PayPal and the Search for Extraterrestrial Intelligence (SETI) Institute have launched PayPal Galactic—an initiative to create a space currency. It’s mostly an effort to spark dialogue regarding how commerce will happen in space. Perhaps yen or dollars could be put into orbit pods so that space tourists could withdraw money. But a researcher from the University of Leicester says that money we use on earth wouldn’t work in space. Cosmic radiation would damage the magnetic strips on credit cards, and coins or anything sharp would be a risk to the safety of space tourists. Instead, scientists at the United Kingdom’s National Space Centre and other researchers have proposed and built prototypes of “Quasi Universal Intergalactic Denomination,” or “Quid,” to function as a space currency. Quids are spherical in shape, made from polymers, and won’t cut anything while they float in space.92

  These proposals may be hype, but space writer Brian Dodson raises a real concern: time. On earth, we are used to quick transactions that are facilitated by a global communications network. In space, there would be a delay in transactions because the distances are far greater. For example, it took six years for the orbiter Galileo to reach Jupiter. Transmission also takes significant time
: It would take too long for information to be relayed to earth for each transaction, and such a delay could even be exploited by criminals. A distributed “peer-to-peer” network might have to be built throughout the galaxy, and it’s unclear who would pay for this.93

  In 1978, Paul Krugman, who besides being an economist and New York Times columnist is also a science-fiction lover, published “The Theory of Interstellar Trade,” which highlights the same problem. He realized that the theory of relativity would be in effect, as time would be experienced differently by those on different planets and those transporting goods between the planets. Because the time and distance would be great, any space trade would require a heavy amount of investment.94 The Economist summarizes his two theorems of space trade: