Tuesday, January 31, 2006

Is It Time To Say Goodbye to Paper Money?

- Top Tech News
January 30, 2006 7:00AM

Creating a cashless society in the U.S. with either mobile phones or smart cards would require enormous effort by players in several industries, said the Yankee Group's Joe Levine, including credit-card companies, mobile-phone service providers, manufacturers, and retailers.


Since the late 1990s, when the expansion and adoption of the Internet created a bona fide Mecca for retailers and shoppers, people have looked forward to the day when physical cash would no longer be the mainstay of payment transactions.

When the Internet boom came to a screeching halt in 2000, some experts believed that it also marked the end of efforts to establish digital currencies.

But the continuing success of the online payment service PayPal, as well as the recent adoption of so-called e-cash by 15 million people in Japan, has bought the electronic-money movement new momentum.

Money from Nothing

The push for electronic money became an integral part of the digital revolution during the mid to late '90s. It was based on the premise that consumers would balk when asked to submit their credit-card numbers when making a purchase.

Giving online customers a way to convert physical cash into digital coin seemed like the solution. This "e-money" would be stored offline on cards embedded with a chip -- smart cards -- or within a computer's hard drive, and it could be used to make any kind of purchase.

A bevy of private digital currency start-ups hit the Web. But these currencies amounted to little more than digital Green Stamps. Designed for use online only, the currencies that were created by companies such as Beenz.com, Flooz.com, Goldmoney.com, and others were not connected to any government or central bank.

While some promoters and consumers found the lack of government involvement a plus, most shoppers and merchants were hesitant to jump in to these online money schemes. Many companies folded as the dot-com boom began its downturn in 2000.

Konichiwa, E-Money

Today, however, for 15 million Japanese, paper money is a thing of the past, according to the Japan Research Institute. No longer solely used for online purchases, e-money, accessed via a smart card or mobile phone, has become a way of life for many consumers in Japan.

The e-money trend began there roughly four years ago as a service for busy, on-the-go train commuters. Today, specially equipped mobile phones and smart cards are used to purchase items from convenience stores, department stores, restaurants, newsstands, supermarkets, and other retailers. The Japan Research Institute estimated that by 2008 some 40 million Japanese, roughly one-third of the country, will be using electronic money.

Technologies such as FeliCa, from Sony, use integrated chips that enable devices to receive and emit electronic signals. These "contactless" or near-field communication (NFC) devices include mobile phones, transit cards, and prepaid e-money cards.

Japanese Economic Monthly reported last year that NTT DoCoMo, the country's leading mobile-communications company, had sold some 3.34 million handsets equipped with the FeliCa technology through April 2005. In 2005, the number of digital-money transactions more than doubled, averaging around 15.8 million each month, according to statistics from the two largest electronic-money providers in Japan. Some Japanese supermarkets have reported that up to 40 percent of all purchases now are made with e-cash.

Other countries, notably Hong Kong and Canada, also have implemented electronic-cash systems that have seen some adoption. But if you are waiting for similar technology to become the norm in the United States, you might want to hang on to those greenbacks.

Coming to America

Joe Levine, a senior analyst at Yankee Group, is skeptical that U.S. paper money or coins will fall by the wayside anytime soon. Creating a cashless society in the U.S. with either mobile phones or smart cards would require enormous effort by players in several industries, he said, including credit-card companies, mobile-phone service providers, manufacturers, and retailers.

Japan is so far along because companies like DoCoMo are the heavy hitters in their industries, Levine said, and have made significant investments to develop e-cash technologies. DoCoMo, for instance, invested some $900 million to acquire a 34 percent stake in Sumitomo Mitsui Cards, Japan's second-largest credit-card company.

After that deal, announced last April, the credit provider started developing point-of-sale terminals and ATMs for use with DoCoMo's mobile-wallet handsets. Levine said he has not seen anything like that type of commitment in the U.S., as American service providers do not seem as focused on e-money as an opportunity.

"We're more fragmented here [than in Japan], with a larger number of tier one [mobile companies] and a portion of the country that is served by tier-twos," Levine said. "There isn't the same sort of dominant player [like DoCoMo]. There isn't a single wireless company that if they got behind a standard, it would become the standard. And that's a significant difference, that we have a larger, less-consolidated market."

Charles Goldfinger, a consultant who has advised the European Commission on e-finance and smart-card-based financial applications, agreed that DoCoMo's relative dominance in its industry and its base of some 50 million subscribers helped digital money become successful in Japan.

"In the U.S., the telcom situation is very different," Goldfinger said. "The fact that the U.S. has several major mobile services providers as well as several leading financial institutions will hinder the effort to achieve a digital-money standard."

Adapting Dinosaurs

Some technology prognosticators, including Microsoft Chairman Bill Gates in 1994, have gone so far as to say that banks are "dinosaurs." When cash disappears, the argument goes, banks become extinct.

But banks as well as credit-card companies are already involved in developing contactless cards and other electronic-cash technologies. In Japan, for instance, said Goldfinger, the Central Bank in Japan was pushing for e-money, in particular through DoCoMo.

"Banks," said Goldfinger, "are adaptive dinosaurs and anyone who writes them off is crazy. I say that because they will still continue to run the payment business and ultimately [digital money] is a payment business."

According to Levine, the digital-money movement will be driven by credit-card companies, not mobile-service providers, which will have to find a way to work with the credit-card companies that already have hundreds of thousands, if not millions, of merchant relationships in the U.S.

"Credit-card companies are already involved in digital money," said Levine. "Credit-card companies have been pushing hard to increase their share of small-value transactions. It's one of the last areas where credit cards are not used that widely."

Technological Baby Steps

Although Levine and Goldfinger both said that the U.S. is likely to be one of the last countries to make the shift to digital funds, they also said that some change has begun already.

Cingular, for example, is currently conducting a trial e-money system at Phillips Arena in Atlanta, home of that city's Hawks and Thrashers sports teams. The service, which uses Nokia mobile phones equipped with Phillips NFC chips, currently is available only to 250 season-ticket holders who have a Visa account with Chase bank. The fans use the phones to purchase concessions inside the arena.

Credit-card companies also are rolling out contactless credit cards. Blink by Chase, PayPass by Mastercard, Contactless by Visa, and Express Pay by American Express are the newest frontier for credit issuers. The NFC-based cards do away with swiping and signatures. Instead, consumers simply hold their card up to the reader and the transaction is complete.

The push in the last six months to launch the contactless cards is the second such effort by credit-card companies, and should be much more successful, Levine said.

"One of the keys this time around is that [the credit providers] have actually succeeded in getting a few major merchants to sign on," Levine said. "[Contactless cards] are supported more and more by major merchants and that's one of the big keys -- merchant acceptance."

Upgrading the point-of-sale payment system will cost merchants a significant sum, Levine said. It is a chicken-and-egg problem. Merchants are reluctant to make a significant investment in a technology that is not in the hands of consumers, and those same consumers are reticent to use a new technology that is only narrowly accepted.

One selling point of the new contactless cards, however, is that they still have the familiar magnetic stripe, so people can use them at any store.

"You're not going to have a person using something that is not accepted by a number of stores," Levine said. "That advantage here is that [for] the merchants that are enabled to do the contactless payment, you can wave [the card] and for those who are not, you can swipe it."

The Correct Change

So, what would get the U.S. to the day when cash becomes obsolete? According to Levine, we are still far enough away that trying to foresee a turning point is difficult.

In the same way that cash was still on the scene after the introduction of checks, so will it eventually coexist following any adoption of digital money, Goldfinger said. Nor will e-cash eliminate credit cards and debt, he said. People still will be reluctant, he pointed out, to use a prepaid card to buy something like a computer.

The move by wireless-communications companies to deploy third-generation (3G) broadband wireless technology could push the U.S. closer toward digital money, said Goldfinger, because then the country would at least have the necessary infrastructure Relevant Products/Services from MessageLabs to support widespread mobile-phone payment transactions.

"There is a lot of talk about digital money, but, in terms of what is actually happening on the ground, the U.S. is way behind," Goldfinger said. "This may change because the U.S. is jumping ahead of the queue with 3G and [other next-generation] technologies."

Another potential catalyst: the behavior of 20-somethings.

For those born after 1985, credit- and debit-card usage is much higher for day-to-day purchases than for older Americans. Many college students, Levine said, lead an essentially cashless lifestyle, carrying very little money and relying heavily on their debit cards in conjunction with a few credit cards.

There is little reason, Levine said, to believe that those college students will shift back to using cash in the same way that their parents' generation uses cash today. These young adults, he said, are the first generation over the last 10 to 15 years that has grown up with easy access to electronic payment.

"It will be interesting to see how those people mature in terms of their payment behavior," Levine said. "It is logical to expect that the people who [use debit and credit cards almost exclusively] today will continue that in their 30s and 40s."

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