Money is having a moment. According to Forbes, investments in financial technology firms, or fintechs, added up to nearly $100 billion in the first ten months of 2021 alone. By the end of last year, there were over 200 fintech “unicorns,” (i.e. startups) worth more than one billion dollars. Forty-two of these were “born” in the three-month period ending in September.
The two largest fintechs in the world are still Mastercard and Visa, whose game-changing innovation dates back to the 1950s, when Bank of America mailed thousands of unsolicited plastic “charge cards” to customers in Fresno, California. But Ant Financial, the owner of China’s popular Alipay mobile app, Tencent (WePay), Paypal, Stripe, and Square are also in the top ten. Slightly farther down the list are elite members of fintech’s newest and hottest space: buy now/pay later, aka BNPL.
What all of these companies share is a mission to digitize cash, one way or another, and at dizzying speed. The recent flood of new innovations, from payroll apps that allow employees to be paid whenever they choose, to tabletop payment devices that allow diners to generate, split and pay the check themselves, feels like a race to make up for lost time; and for good reason. The credit card is nearly seven decades old now and the printing press, which was invented to mass-produce bibles but proved far more popular as a cash machine, is going on six centuries of service.
Old habits may die hard, but there has been a marked acceleration away from paper money lately, partly due to the Covid pandemic, though mostly to the ubiquity of smartphones. Even traditionally cash- or check-only businesses, such as car valets and property renters, are now accepting digital cash in some form. They don’t have much of a choice. For the first time ever, a majority of baby boomers prefer contactless forms of payment. Which is rather important, since they control a majority of the wealth.
Indeed, the use of e-commerce and mobile payment apps continues to grow so fast that cash as we know it may soon become obsolete. China, which invented paper money, recently introduced the world’s first sovereign digital currency, the e-yuan; and this month, President Biden signed an executive order instructing the United States government to explore the creation of a digital dollar. Meanwhile, the market value of so-called cryptocurrencies has risen above $2 trillion for the first time this year.
Net-net: the market for paperless cash is very big and getting much, much bigger. Of course, businesses large and small want to reap the benefits of an increasingly digital world, but they also want to keep their costs as low as possible. Doing business digitally is far from free (Mastercard and Visa both just raised the rates they charge their customers), but neither is paper. Processing checks costs banks and merchants hundreds of billions of dollars a year, while accepting cash creates challenges, too—from bank charges for handling bills and coins to theft. Plus, most digital payment apps can do the accounting themselves, lowering (if not eliminating) a major human cost.
The holy grail of the payments biz is a “frictionless” currency (or cash proxy) that travels at the speed of data, but with the stickiness of the tried and true. Traditionally, gold and the U.S. dollar have been the strongest currencies, which is why crypto “stable coin” creators promise that their digital tokens are backed by dollars, rather than merely strings of software code. This also explains why “paperless” will never mean “cashless.” Cash will always be associated with a sovereign currency backed by the full faith and credit of a central bank. Although, in order to be universally accepted, it must also be considered both a means of exchange and a store of value—whether printed on a piece of paper, minted in a foundry, or created with the click of a button. Like Rome, new currencies aren’t created in a day, but technologies like e-currencies and payment systems can effectively piggyback on their broad shoulders.
Net-net: any means of payment must reach a critical mass of acceptance, but in order to do so, it must first gain the trust and confidence of its users.
Speaking of clicks, most Americans — and many people in many other countries — now expect to complete financial transactions with a single tap of their index finger. You can thank Amazon (or ApplePay or Alipay) for this, but the reality is that consumers can no longer be made to wait while a check or credit card is validated. According to the latest studies, it now takes an average of one to two seconds to process a contactless transaction, compared to six to seven seconds to tender cash. New technology like 5G and satellite Internet will make digital transactions even faster; seamless, even. Meanwhile, the time it takes to pull cash out of a wallet or purse, and hand it over to a cashier for counting and making change, will stay precisely the same: far too long.
Net-net: One of the major reasons that fintechs have exploded is that digital technology is so well-suited to financial tasks, which, of course, are transacted in digits. The major caveat is that digital transactions, while convenient, do not exist in a vacuum; digital wallets and blockchain ledgers, which are the backbone of cryptocurrencies, require sophisticated encryption and constant vigilance in order to remain safe.
While few of us need worry about the possibility of being pickpocketed in our daily lives, having our digital cash swiped by a nefarious techie or even a state-sponsored hacking army is a danger we all face in our daily lives, whether we acknowledge it or not.
On the other hand, digital money has made our lives less dangerous in some respects, particularly during times of crisis like a pandemic or even a war. As the non-partisan Pew Research Center noted in a recent study:
Payments innovation is important not only to ensure the expediency and safety of everyday transactions, but also to speed the delivery of government benefits or funds to those in need, especially during emergencies, such as natural disasters and the COVID-19 pandemic and resulting recession.
We rarely stop to think about change, but innovation, globalization and monetization have all evolved in sync with one another. For example, if world trade necessitated the physical transfer of pallets of paper cash, or stacks of gold bars, the speed of commerce would grind to a halt and the global economy would freeze up. Nearly everything that we do today has a monetization component, from side gigs like Uber and AirBnB to social media fame, to the way that we share experiences (and their cost) with friends and family, to how we help our fellow global citizens in times of crisis. Monetizing our charitable instincts, or our second car, or that guest room over the garage, would either be impossible or far more complex using traditional means of payment. The convenience of digital cash has not only altered how we live, but transformed our expectations of what cash can do. For most of us, going back to wads of paper and pockets of change is simply not an option.
The big question is how far we go from here. Printing one’s own currency — what banks used to call “scrip” — has been illegal for a very long time. Since the 1910s, the Federal Reserve has been granted the sole right to create cash in dollar form and the standardization of money is largely responsible for the steady growth of the American economy over the last century. Yet, technologists have lately been given free reign to create digital currencies—for the most part. Last year, China outlawed bitcoin and other cryptocurrencies, and Facebook (now “Meta”) abandoned Libra, its attempt at creating a stablecoin that could be used to transact seamlessly and frictionlessly over both its social media apps and the nascent Metaverse, where avatars will live exclusively in digital form. Most recently, the Bank of England warned that unregulated currencies pose a threat to financial stability, and even crypto entrepreneurs are warning that there is a limit to what can be done digitally.
In other words, the death of cash has been greatly exaggerated, and the ascendance of what is collectively known as decentralized finance — or DeFi — has been postponed, maybe indefinitely. While new technologies like crypto and non-fungible tokens (NFTs) have sometimes hinted at replacing cash, these virtual “currencies,” which are usually recorded on a shared ledger, have a habit of converting themselves to dollars at the end of the day. Moreover, their value tends to fluctuate wildly, sometimes during the time it takes to complete a transaction, making their broader acceptance as a means of exchange seem highly unlikely, at least any time soon. The net-net: even in its digital form, cash is imperfect but essential. New technologies will probably not replace cash, but they will continue to increase its efficiency while decreasing its transaction costs. Where we are headed, then, is not a cashless society, but a paperless one. To this, I say: it’s about time.