by John C. Beck and
Mitchell Wade
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PDF Help For years there has been talk about electrons replacing the
metal coins and paper that long ago replaced shells and cattle. It has not
happened yet—leading some to ridicule “the end of cash” as another of those
predicted futures—like personal jetpacks and robot housekeepers—that just never
materialized.
But because a need exists and the technology is rapidly
emerging, a nearly cash-free society—or, more accurately, an essentially digital cash only-society—will come. The government of Singapore certainly
believes this is the future: Singapore’s Board of Commissioners of Currency has set a target to establish an electronic legal tender system by the year 2008.
The question is: Who will dominate and how? Banks, credit card companies, providers of smart cards and eMoney and mobile device makers are all contenders—but by no means sure winners.
Initial Uses for Currency Substitute In an economy already reliant on credit cards and electronic transfers of money, is there a real business opportunity in replacing pocket change? In a word: Yes.
The opportunity to replace cash is driven by the need to increase convenience at very low transaction costs. Examples of this need include:
- Internet purchases, including services and information, where the amount charged is not a good fit for traditional credit card transactions.
- Adolescents and other groups who have purchasing power but
are not yet using credit cards.
- Vending machines, an extremely convenient and low-cost
distribution mechanism that would be even more widely used if not for the
limitations of physical cash.
A currency substitute could offer considerable value just meeting those needs. The real prize, though, is much more exciting.
Being at the Center of Transactions Whatever system or systems replace cash, it could, because of its convenience and ubiquity, replace credit cards and checks as well. The owners of digital transactions could then levy a “toll” (almost invisible to the consumer) on billions of transactions, and could build even more lucrative businesses related to the transaction—exactly as credit card companies have
done.
What is more, companies at the center of multiple transactions will be in an extraordinary position—extraordinary because owning retail transactions, for instance, would provide insight into the flow of
transactions. And that information can be leveraged with sellers and suppliers in the areas of customer insight and supply chain management.
Meet the Probable Digital Cash Competitors So who is—or should be—competing for this prize? The main contenders are:
- Credit card issuers. Card issuers have the advantage of an enormous installed base, consumer understanding, the built-in ability to combine financing with transaction processing and the trust of all those involved.
- Banks old and new. Banks compete as part of the credit card market but in other ways as well. Business-to-business transactions are often direct-debit or electronic funds transfers, as are consumer buys in Europe and Japan. And, person-to-person electronic payment is growing: according to a TowerGroup report the number of person-to-person
ePayments is expected to exceed four billion by 2005.¹
- Smart card issuers. While smart card takeoff in the United States has been very slow, smart cards have found greater acceptance in Europe. Companies issuing smart cards have the advantages of experience with merchants, financial institutions and the technologies needed to electronically process relatively small amounts of cash, as well as their existing marketing channels and user base.
- Cell phone companies. Mobile phones are obviously larger and more expensive than smart cards, but also more prevalent. There are a number of ways phone companies may well be the likely winners: by offering their own payment solutions, leveraging their billing capabilities or going into partnerships with banks or credit card companies.
- Device manufacturers. This may seem a bit far-fetched, but do not overlook manufacturers of moble phones and personal digital assistants—these companies have direct control over features and interfaces. This means makers of mobile devices potentially could reposition themselves in the business value chain by implementing their own payment system
and using a technology standard to connect networks outside the telecommunications framework.
Both Consumers and Merchants Must “Play
Ball” Customers are being asked to choose a new solution to an age-old need. To give up their reliance on cash and credit cards, they will have to see real value in the new approach. Looking from the customer’s perspective, we can find clues to eventual success.
Customers probably will not be lured from cash by a price advantage. The price of non-cash transactions typically is charged to the
retailer and hidden from the consumer. Offering rebates or incentives such as air miles probably will not succeed either, since customers already have these
advantages for major purchases through credit card programs, and the value for
minor purchases, such as vending machine buys, would be insignificant.
Similarly, value added services probably will not entice customers to give up cash. Years of competition among various credit card loyalty programs have reduced the perceived value of extended warranties,
buying clubs and similar add-ons. Such services may still lure customers from one known product to another, but their attraction may not be enough to overcome the risk of trying a wholly new payment system.
Convenience, though, may be the key. Technology can increase the convenience of what would otherwise be cash transactions.
Another powerful lure may be security, since consumers worry about the loss or theft of cash and the risks of stolen credit card information. Privacy is equally important. Privacy was a key issue with earlier
failed digital cash efforts, which voided the anonymity associated with paying
for things with cash.
For the merchants, there is the potential that digital cash solutions may charge a lower usage percentage than the two percent to three percent of credit cards.
And the Winner Might be… None of the current contenders and their various technological solutions is fully positioned to offer complete convenience and security, though some have initial advantages:
- The smart card is only a portable record, an interactive identity that still requires another machine to interface with the network. Wireless devices, in contrast, can combine those functions with input, output
and their own network connection.
- When the concern is security, credit cards are most vulnerable. Smart cards can be made to be difficult to compromise by, for instance, requiring a PIN or other built-in controls that do not exist for credit cards. However, until smart cards are in wider use, it is hard to claim
definitively they are more secure than credit cards.
- In the longer-term, mobile devices seem to have the
potential to be the most secure. Biometric devices in a phone could scan
fingerprints or retinas; built-in geo-location capabilities could "find" stolen
phones. But those security measures are still in the experimental stages.
Overall, mobile devices, with their widespread use and
built-in network connections, seem to have the competitive edge—but the battle is not over, and the "best" technology does not always prevail.
For a would-be digital cash winner, the challenge is to improve the convenience and security offered by the technological solution—then be sure customers know of and value these advantages. Do not confuse the customer by fighting too aggressively against companies within your industry.
Instead, focus on owning the transaction and making your technological solution the one that customers choose to replace the coins in their pocket.
John C. Beck, is the director of research—Accenture Institute for High Performance Business, Palo Alto, California;
john.c.beck@accenture.com.
Mitchell Wade, research fellow—Accenture Institute for High Performance Business, is based in Los Angeles, California; mitchell.wade@accenture.com.
¹ ”Internet Opportunity? The
Potential of the Evolving Person-to-Person Payment Market”, January 2001, Beth
Robertson © Tower Group
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