Why cash isn’t dead

30th August 2012

This "digital wallet" using NFC or Near Field Communications technology lets phone users tap their mobile on a terminal to authorise small payments. The limit will probably be £15 but is expected to rise as more retailers start to adopt the system.

The media loves the cash is dead story – and has done for the past two decades. It ticks boxes – youth, mobile phones, progress, science, spending rather than saving. But before early adopters get too excited, there are some big numbers thrown around and there are some hurdles to jump.

Consumers have to be convinced that the system is easy to use, and, universal. Currently, there are a number of potentially conflicting systems

Safety is paramount

They need to know that their money is safe – it may be more secure than cash in a wallet but everyone everywhere has a story of mobile phone theft. 

They have to be convinced they are not paying for this – and that retailers will save money over plastic cards or cash, passing that on to consumers.

And they have to change culturally with many groups who are wedded to cash altering their behaviour. Many feel that only "physical cash" (coins and notes) are "real" even if they are only symbols of the fiat money banks and governments have created. Inflation is easier when "real" money is absent.

The problem faced by banks, many of which are still expanding ATM networks that dish out cash, and payment systems is that cash is not dead until the last cash user shuffles off their mortal coil or converts to cashless payments.

Rival systems have, in the past, put paid to many cashless projects. Even if they are happy to use several cards, few will want to carry more than one phone so retailers will have to ensure that their systems are compatible with all mobiles. Will the Mastercard project work in Starbucks which has announced its own cashless concept in the United States? Users will have to register in Starbucks the first time they use their phones. Will they have to re-register in every rival coffee outlet?

And what about the cost? Starbucks technology supplier Square, a US technology start-up, says it charges 2.75 per cent, undercutting others who impose up to 3.5 per cent plus 15 cents fixed fee. This cost level, applied across the retail arena, would be inflationary. Cash is cheaper, far cheaper.

Skimming a few pence from everyone, everywhere

Cash is never secure but thieves need a physical presence. The fear with mobile payments is that someone many thousands of miles away will develop the technology to skim a few pennies from many phones.

There are several other security issues which need addressing:

"Before America starts paying for everything via their mobile phones, there are some bugs that need to get ironed out, says Jim Van Dyke, founder and president of Javelin Strategy & Research. "The biggest one is security, people think about safety and identity theft and all that all the time."

He says: "Right now, there are major vulnerabilities in some mobile payments systems that could make customers reluctant to use them. That's particularly true of the mobile apps that retailers such as Starbucks have created. When you have a phone with a Starbucks payment app, generally speaking that thing is in the 'on' position all the time," he says. "It's like walking through a parking lot and that car's engine is running all the time and it is open. So if you leave your phone around and, assuming it is not password-protected, that app is ready for you to just charge away."

Mobile payments were slow to take off but advances in technology have removed the brake. As it always does until proven wrong, the payments industry believes it offers security. 

Listing the risks

This research looks more closely at the issue, stating the "future is promising and seductive but uncertain." Risks include:

Most security problems can be overcome – and are probably no more severe than present day attacks on personal money.

Convincing sceptics

Proponents of a cashless society have to convince sceptics that they will be able to pay for everything, everywhere with their phone. While most accept that large ticket items are not suitable for cash, there are countless retail outlets where notes and coins are currently the only convenient way of paying for relatively small transactions.

They will have to sell the idea
to every baker's shop, every convenience store, and every magazine vendor – otherwise there could be consumer resistance to carrying both electronic and non-electronic money at the same time. The counter-argument is that outlets that take mobile phone payments are more likely to attract customers.

Finally, there are cultural reasons for keeping cash. Many groups prefer notes and coins, knowing that when they spend it, that's it. They fear inflation – it is harder to put up a price from £1 to £1.05 if customers use coins but very easy with electronic money. With cashless wallets – whether phones or cards –  known price points with consumer resistance evaporate.

Will payday lenders take over?

And while there might be loads of clever apps, one of those could come from a payday lender charging astronomic percentage rates. It could even be automatically triggered so that anyone whose payment of £20 was rejected due to lack of funds would be redirected to a loan site which would top up the account so the payment would go through – all in a few milliseconds and unknown to anyone else in that coffee queue.


More on Mindful Money:

PayPal goes plastic

How free is your bank account?

Will Amazon Lockers change the face of the high street? 

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