the big reason

It was never about the rich using phones to buy caffe macchiatos. Reengineering money is about fighting poverty.

Here is an interview I just did with NextBillion that at least touches on the idea of why defending the cash-suffused status quo is almost criminal.

MATTER

This just in: I've signed on to write a handful of stories for an awesome new publication called MATTER. If you aren't reading their stuff, but you do like to read inquisitive longform journalism, I urge you to log on and dive in. Like, now.

I'm cooking up some cool stuff for them, including one that's set in New Zealand--shhh. Here is the announcement. (Blush.)

cost of cash part 2: businesses

I recently spoke with Tufts researcher Ben Mazzotta about the section of his new study looking at costs of cash for businesses. What findings surprised you or do you think are the most important?

Cash theft costs business far more than I would have anticipated. Businesses spend a lot on security; but cash-specific security expenses are not the biggest of the bunch. The total size of the armored car industry in the United States is less than the value of cash thefts from retail business, according to survey evidence.

It probably is not news to business owners that the retailers lose more from cash theft than the whole country spends on cash logistics, or that retailers lose more from cash theft than banks do. From where I sit as a researcher, though, it makes me search for explanations. Do retailers view cash theft simply as a cost of doing business? Is it a risk you cannot control, like the risk of a traffic accident on the way to work, just an unavoidable part of your day that you do your best to mitigate? Do they have a sense of control that leads them to expect it's someone else's problem? According to an American survey of drivers, 90 percent of people rate themselves above average safety. Maybe everyone just thinks they can control the risk. Or, perhaps it's that the costs of cash (security, accounting, logistics) are lumpy, and it's very hard to whittle the line items down without getting rid of cash entirely.

The most common thing business owners said they would do differently if more customers paid cash was to invest in counterfeit detection. That surprised me. I expected theft prevention to trump counterfeit as a problem. Perhaps I'm too trusting of the official numbers on counterfeit detection, but nationwide figures on counterfeit bills passed total less than two hundred million dollars, versus billions of dollars in cash theft from business every year. It might indicate that cash theft is more of an insider problem, where the employees are stealing from the business, and therefore smart safes and armored cars might not fix the problem. And there was not much consensus about how far cash use would have to fall before associated costs would also drop, but the median was about 20 percent.

The survey proved to me that large and small businesses see the world differently. A trip to the bank is a very different thing if you own a business in a small town, compared to running a global corporation with billions of dollars in retail revenues. Big businesses can realize meaningful gains from optimizing cash processes. When electronic payments replace cash, they can leverage transaction data for predictive analytics and process automation. Small business owners were very frank with us about how overhead can eat into their time, and what that time is worth. Still, they may not see armored cars or the latest smart safes as the solution to their problems. Choosing to accept only certain payments may not be realistic for everyone. Small town businesses may not be in a position to dictate to their customers to please use a card or prepay your account instead of paying in cash.

the forgotten money suck

Despite provocative claims to the contrary, paper money is awesome, right? It’s crisp, fast, and anonymous. It’s saturated with patriotic hurrah and practically essential for making music videos, shopping on Canal Street, or folding origami.

It ain’t cheap, though. Especially if you’re poor. A study just published by the Institute for Business in the Global Context at Tufts University takes a closer looks at the costs of cash in the United States. I posted a short piece over at NewYorker.com summarizing a few major findings, but this tweet from a reader makes clear that some elaboration is warranted.

"So 56 cents + 9 minutes per month? Not a great example of crushing oppression."

Let’s be clear: My post wasn’t framed as an example of crushing oppression. Another stealth tax incurred by the poor? Yeah, something like that. But let's step back a moment and spell things out a little. The Tufts group estimates that cash’s price tag is about $200 billion a year. That’s $1,739 per household, or 240 hours of work at the federal minimum wage of $7.25. More than $156 billion of that is cost to government, mainly due to tax evasion, and to businesses, mainly due to cash management. (Here’s a great post, by the way, on why Starbucks should ditch cash.)

The remaining $43 billion is on us consumers, but that cost is unevenly distributed. In fees alone, someone who doesn't have basic financial services—shorthand for not having a bank account—is more than four times as likely to pay fees every month to convert paychecks into cash, compared with a neighbor who has a bank account. As if that wasn't galling enough, African Americans are more than twice as likely as white Americans to pay the same fees.

Drilling down a bit, the study looks at consumers’ cash costs in four broad categories: ATM and check-cashing fees, time, cash theft, and theft risk mitigation. The latter two are less revelatory, in part because the risk of losing cash due to theft is actually quite low—6 crimes per 10,000 people, according to the Bureau of Justice Statistics. On the risk mitigation front, Americans who have the option of securing funds somewhere other than under a mattress will, not surprisingly, do so.

They are people with bank accounts. You, me, and about two-thirds of US households. Yet roughly 40 million Americans don’t have checking or savings accounts, and nearly 20 million Americans have no access to formal financial services whatsoever. For these individuals and families, the costs of cash are most punitive, especially when it comes to time and fees.

The average amount of time spent per month traveling somewhere to get cash is 28 minutes. (This excludes waiting in line.) For people who are “unbanked,” unemployed, or receive their pay for work in cash, that time spent jumps by 5, 9, and 12 minutes respectively. The Tufts team points out that it would be incorrect to assume time spent accessing cash is necessarily time spent away from earning money. Still, it’s worth noting that based on that average of 28 minutes, working Americans spend 5.6 hours per year “fetching cash,” which is equivalent to $31 billion in mean wage earnings.

Then come the fees. Interestingly, the study found that wealthy Americans don’t automatically eschew cash in favor of perks-suffused credit cards or slick new cellphone-based payment apps. People in the highest income bracket (over $100,000) reported the highest number of instances per month when they access cash: usually two or more times, and many respondents said they get cash more than 5 times in a month. (Life is passing you by, people!)

But these frequent cash-getters don’t have to pay much in the way of fees. Although 80 percent of A.T.M pit stops in the US are to get cash, the lion’s share of those visits are to machines connected to the consumer’s “home” bank, which means no charge. The same goes for cashing checks.

Still, cash access fees nationwide stack up to $8 billion annually, and this is where the poor really eat it. Americans who don’t have a bank account pay on average about $3.66 per month more for such fees than people who have bank accounts. Then they head over to the supermarket, where they get nailed again. Because credit card companies charge merchants hefty fees to process transactions, merchants bump up their prices. Card users get rewards to help offset this invisible surcharge. Cash users, in contrast, subsidize the rewards of card users. A 2010 study from the Federal Reserve Bank of Boston estimated that while the average cardholder enrolled in a perks program receives about $750 worth of rewards every year, the average cash user pays about $20 a year so that someone he or she doesn’t know can inch a little closer to a free airline ticket.

It would be a mistake to dismiss these findings merely as unfortunate but inevitable ways that the poor get nickeled and dimed. A few extra dollars here and there, a few extra minutes now and then—not exactly crushing. The reality is that the added costs of dealing with cash have the perverse effect of keeping people trapped using only cash. That makes it harder to climb the economic ladder. Without access to money in electronic form, it’s difficult to connect with the formal economy. In a word: saving. In a few more words: saving is key for building financial stability, getting a loan, opening a business, and more.

The uneven costs of cash make a bad situation worse. Poor people do not need paper money. They need liquid assets in a bank account.

mobile money reality check

If you're seriously interested in mobile technology and what it could mean for financial inclusion and the fight against poverty, you are crazy not to be reading and following Ignacio Mas. When I recently checked in for an update on his work since publication of The End of Money, he dashed off this sobering and seriously smart missive. Techno-utopians, brace yourselves.

Hi David

I wish I could give you an upbeat follow-up, but I don't think I can, at least for emerging markets. After the developing world took the lead on mobile payments on the back of the spectacular growth of M-PESA in Kenya and the ridiculously large number of copycats that popped up seemingly everywhere, I think the action is now firmly back in the developed world, particularly the US. That's because mobile payments there are at the intersection of two ballooning trends: the spread of smartphones, which let third parties develop good customer experiences affordably and in a telco-independent way, and the sweeping belief in Big Data analytics. The Big Data craze has led many people to believe that payments embody a treasure-trove of actionable customer information, and a battle of the titans is brewing. It's not banks vs. telcos as it was a few years ago, but Google vs. Amazon vs. Facebook vs. Visa (part owner of Square).

In emerging markets, there has been precious little service innovation on mobile money. Most of the schemes we see are still struggling to put some legs on a basic M-PESA-like service based on remote payments and/or bill payments. That isn't generating enough volume of transactions to sustain the service in most countries. I would say it's still only a handful of countries where mobile money has legs, which is to say has gained critical mass to sustain the big ecosystem it requires. (Tanzania and Uganda are top of mind; Bangladesh and Pakistan to some extent, but I tend to discount them because the majority of payments are for cash over the counter, akin to Western Union, rather than account-based; Somalia and Zimbabwe are supposed to be experiencing substantial growth in mobile money, but I haven't been there, and I tend to discount all stories of success until I've seen evidence with mine own eyes.)

To garner many more transactions, there is now a lot of attention on electronic payment for goods at stores. This will mean underwhelming results for some time to come. M-PESA-like services are still too expensive and too fiddly or time consuming to be convenient at everyday shops where poor people live. More fundamental still, people will not have an inherent preference for paying electronically for their daily stuff as long as their money is not held electronically. The problem, or a problem, is that not many people are taken by the store-of-value function of mobile money. One of my recent mantras is "you can't go cash-lite on empty accounts." 

The prevailing implicit assumption is that people don't save money electronically. Or worse, they immediately withdraw whatever electronic money they receive because of a lack of financial literacy. That is an incredibly facile and incorrect assumption. People don't want to keep any money in their mobile money wallet for exactly the same reason they don't want to keep many banknotes in their wallet: It's hard to hang onto that money. What they do instead is separate out their money in jars, or in various savings instruments, based on how they plan to spend the money. As long as mobile money fails to deliver a convenient form of money separation with enough self-discipline nudges and hooks, it will not serve a useful store-of-value function for consumers. And without store-of-value there will be limited use of mobile money as a means of payment.

You'll recall that my deferred payments idea --being able to send money to yourself on some future date--was one early example of how we might achieve this digital earmarking simply and intuitively. While most people I've talked to in the business like the idea, I have not been able to get anyone--bank, telco or third party-- to try it. They are all too busy sorting out their basic operational issues and copying each others' services to have any energy left for innovation.

To put it kindly, we are going through a 'consolidation' phase where mobile money providers are ironing out their programs, learning how to mitigate fraud, and digging in for the long run.

Over in the world of banking, meanwhile, zzzz. I know only a few banks in this big world of ours that are pursuing agency banking (getting closer to people by letting them do basic things like cash in/out at local shops) with any sense of urgency. The only exception seems to be in Kenya.

Ignacio

the preacher

Glenn Guest, deep in prayer. Or blinking.

In a recent email, Pastor Glenn Guest wrote: “Your book continues to prime the pump for many interesting conversations at Jim’s Grill and many other places as well.”

Despite our differing beliefs about pretty much everything, I enjoy hearing from Guest and thinking back on my visit to Danielsville. Our communications follow a fairly predictable pattern: Guest forwards some Armageddon-themed clip from God-knows-where about RFID, drones, privacy invasions, or electronic money, followed by some variation on the same ominous conclusion--the end is nigh. At least he resists the exclamation points or caps-lock warnings that I need to get my s**t together in advance of the Rapture. I then write back to say thanks and, on occasion, CHEER UP!

From financial crises in Europe to NSA snooping, digital payment tools to handgun regulations, all of it, in one way or another, is about laying the groundwork for the Beast's arrival.

Yet it would be wrong to suggest that Guest's worldview is shaped only by fringy corners of the Internet. He also sends me stuff pulled from CNBC, TheAtlantic.com, and Forbes. A piece titled “Everything Changes with the Internet of Everything" about digital interconnectivity not just of computers but also cars, blood pressure monitors, houses, cereal boxes, satellites, forests, etc., prompted this assessment from my End Times theologian: “It seems like things might be accelerating a bit.” After sending a link to an article about a handgun safety bill that would require identification technology on the handle of every firearm, he wrote: “While this will probably get nowhere (for now), just remember that today’s outrageous proposals are tomorrow’s common sense solutions.”

Amen to that.