Counting the cost of currency
Here is a question for you to consider. When you withdraw some of your own money out of your bank account to top up the notes in your wallet, how much do you expect to pay the bank for letting you do that? And if we abandoned that expensive messy stuff called cash in favour of electronic currency, would you expect to pay more or pay less for moving your own money around?
For at least 20 years I've been reading stories in the computer press about electronic wallets and the demise of cash. The first concept cards were produced in 1986, the first working cards were issued in 1992, and the first large scale trial of an e-wallet was carried out in Swindon back in 1995 by Mondex (then a part of NatWest Bank), which issued 10,000 cards to residents of the Wiltshire town, and conducted further trials at several UK university campuses over the next few years. Whilst all these trials received positive feedback, we never saw the paradigm shift to the cashless society. True we have used more and more plastic over the years, and most people regularly use a credit card or debit card to pay for all sorts of everyday shopping such as clothes, food or books, but you still wouldn't expect the corner shop to take kindly to you if you tried to use your debit card to by a can of cola, and you might get puzzled looks from the bus driver if you offered your Visa card as payment for a one pound bus fare. There are still an awful lot of transactions where we need coins and notes.
But it is slowly changing, as is our attitude to electronic money. TV charity appeals realised early on that you can ask people to donate by calling a premium rate number and effect a relatively painless cash transfer. Many parking areas now let you pay for your parking by calling a number from your mobile phone rather than hunt for coins for the Pay and Display meter. And in London, the Oyster card, an e-wallet that can be used to pay for travel across Greater London, has been a big success. The Oyster card is a pre-payment card where you load credit onto it, much like you would with a pre-pay mobile phone. It is also a "Near Field Communications" (NFC) device which means all you need to do to use it is wave it across the top of the Oyster reader at the ticket barrier which, in rush hour, is significantly quicker than inserting a card into a slot and tapping in a PIN code.
With mobile phone ownership becoming more and more common, the next significant step on the road to electronic money is almost certainly going to be phones with built-in NFC. Expect to see such products from all the major manufacturers during 2012. Many people already carry their lives around in their mobile. Add NFC hardware to that and software to make it secure and painless, and it can be their purse as well. That greatly increases the numbers of people able to use NFC wallets for small value transactions, which in turn gives a big incentive for a much wider range of retailers to install NFC terminals and accept this as a form of payment.
That brings us back to the question of the cost of electronic money. One obstacle to the uptake of plastic for small transactions has been the cost that the retailer incurs. Credit cards regularly charge the merchant around 3% commission on every transaction. That can be a sizeable chunk of the profits for shops that operate on small margins. Added to that, the banks take their time paying the money into the merchant's account, so they get the benefit of an interest free loan whilst the retailer struggles with cash flow. If e-wallets are to become widespread, this cost obstacle needs to be overcome, but then who pays the cost of e-money?
The results of a recent study published by Simon Kucher and Partners showed that people are becoming more much accepting of the concept of e-wallets, with a staggering 92% of smartphone users saying they would like to use their phone that way. Even more surprising, the research suggests that people would typically be willing to pay a fee of around £3 every time they topped up their e-wallet, (and just like today's cash machines and paper money, most of us would probably need to top up about once per week). I find that very surprising and makes me wonder if the survey contained loaded questions, but it must surely be music to the banks' ears and will no doubt become dogma in the months to come.
The market is evolving rapidly, with interest in various areas not only from the banks themselves, but also by contenders such as Paypal and Google Wallet. It is going to benefit no-one if we end up with two or more competing money standards but equally we should be wary of one institution becoming an electronic money monopoly, and even more so if that company is headquartered outside the UK. Whoever emerges as the dominant players in this new economy, they'll have a license to print money, without the overheads of paper and ink.
28th October 2011
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