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Cash: Killing It, or Building Bridges to It?

posted by Bill Maurer & Stephen Rea

Much has been written about the inherent riskiness of cash. It is dangerous because it can be lost, stolen, eaten, destroyed, etc. It is dangerous because it is difficult to track, thereby helping to facilitate crime. Many a potboiler plot hinges on a cache of unmarked bills. Anyone remember Trixie Belden? “‘That governess of yours won’t argue when I tell her to leave a fat roll of unmarked bills under a stone at the Autoville entrance tonight. She won’t notify the police either.’ He reached up a grimy hand and touched one of Honey’s shoulder-length curls. ‘Not when I send her a lock of your pretty hair with the note, eh?’” (Julie Campbell, Trixie Belden and the Red Trailer Mystery, New York: Random House Children’s Books, 1950, p.180).

In the comments on our last post, we can clearly see two poles of the cash debate: cash is for criminals, but digital payment will welcome Big Brother into our wallets. Why so stark a choice? Last year, the Fletcher School held a conference titled, “Killing Cash.” It was framed explicitly in terms of the possibility that “mobile money”—mobile phone enabled payment and money transfer services, like Safaricom Kenya’s much vaunted M-PESA—heralds the possible end of cash and coin. Most of these services work on a prepaid model via the mobile telecommunications network – basically like prepaid airtime minutes for a top-up (not subscription) phone (nice article here on e-money in Central Africa by Andrew Zerzan; short piece here on mobile money regulation). I put cash into the system by visiting an agent. The agent sells me “e-money” in exchange for my cash, and gets a commission. I can now send e-money to another client on the network, who goes to another agent to cash it out (usually without a commission). Or, I leave the value in my mobile wallet, for a little while or for a long time. This is not an “end of cash” scenario, however. It’s an addition of e-money to what had been—for the poor, without access to financial services and digital financial platforms—a cash-only world.

Some of the debate at Fletcher: 1) The advantages of e-money over cash: “Cash is addictive and easy to spend; e-money controls temptation. Cash bill payments and transfers over long distances are time-consuming and costly. Electronic budgeting is extremely useful. Cash offers no payment tracking. Cash is easily lost and stolen... There is no privacy with cash—children, neighbors, and relatives can see it. Cash limits choice in financial management.” “Cash is NOT free—it is an expensive instrument for which the social cost is often in excess of the cost of electronic payments. Even worse, cash is opaque—its costs are concealed.” 2) In defense of cash: “Studies show that people actually perceive a greater loss when using cash over electronic forms of payment. Most transactions actually occur within villages, for which paying a flat fee for M-PESA is needlessly expensive. E-budgeting requires financial literacy. Cash offers anonymity—something valued by many, not just criminals. At least the security of cash rests with the owner as opposed to third parties. … Cash is a public good free and open to all. Alternatives to cash are run by the private sector and carry transaction costs and fees. Cash is reliable—it will always work, even when the mobile towers go down. E-money may not be as sustainable as we think. If it were, why would we so often have to fund it with public sector resources?”

The anti-cash folks say that cash is risky, costly, cannot be tracked (and therefore facilitates crime, corruption, terrorism, etc.), and limits financial choices. The pro-cash position argues that cash is a public good and transactions can be done without having to pay fees, that it has an intrinsic affective value, that its anonymity is a benefit (not only to criminals), that alternatives are unproven, potentially unsustainable and require technological and financial literacies. The audience felt that the pro-cash position won the debate.

Public, private; tangible, intangible: These are core concerns over the purportedly inevitable disappearance of cash.

Between the date of the Fletcher conference and the USAID pronouncement, we’ve see the rise of experiments like Bitcoin (an anonymous “cryptographic currency” online that seeks to provide an alternative both to PayPal and to “fractional reserve banking”), the rapid uptake of some new payment technologies like Square, and a proliferation of mobile money transfer and payment schemes especially in emerging markets (see the Mobile Money Deployment Tracker). But our question is: why are these seen as supplanting cash, rather than adding to the portfolio of payment options? One argument made by USAID is that electronic means of payment permit “oversight.” Yet this is precisely what adherents of Bitcoin seek to avoid. Both mobile money and Bitcoin are technological fixes to a particular payment problem—but what, exactly, is that problem imagined to be? Why all the fuss, really? Mobile money does not kill cash – it builds bridges to it. This then raises a next question: what kind of technological platform is cash itself? And how is that platform interfacing with new digital platforms in actually existing mobile payment systems today? We turn to the first part of this question in our next post.

Comments

Bill and Stephen,
Very thought-provoking piece here. I must disagree with the anti-cash school at Fletcher that posits cash fosters crime. I can't help but think of all the petty crime associated with digital payments. Identity theft is such an obscure crime where suspects aren't easily pinpointed.

Your closing questions and argument are exactly what I was thinking throughout the piece. I look forward to the follow up piece!

-Christian L.

Interesting post. Can you point me towards what studies in particular show that people perceive greater losses when paying in cash? I did a Google Scholar search but didn't turn anything up. Thanks!

Ben,
Check out this study from the Journal of Consumer Research: http://www.jcr-admin.org/files/pressPDFs/111411131134_chatterjee--article.pdf

It doesn't examine the idea that people perceive greater losses when they use cash, but that the cost is obscured or overlooked when they use a card.

-Christian L.

@Ben: Here is one widely cited study. As an anthropologist, I can't vouch for the approach or research design, but take a look -- http://www-psych.stanford.edu/~span/Publications/bk07n.pdf.
This is one of a family of such studies all relating to perceptions of pain or loss associated with various forms of payment. Another person to look up is Kathleen Vohs (people who handle cash before putting their hands in near-boiling water feel less pain than people who handle slips of paper...).

Awesome, thanks Christian and Bill!

Ben,
You're welcome! Here an article about a fascinating study from the University of Miami. It discovered the effect of signing your name for a purchase and how you'll spend right after doing so: http://articles.sun-sentinel.com/2011-11-30/business/fl-um-study-credit-card-20111130_1_shoppers-credit-card-study

-Christian L.

Indeed, these days credit-card fraud and other forms of electronic theft probably dwarf cash-related crime. It's true that card companies offer some protection to the consumer in the event of demonstrable fraud (and woe to you if they decide otherwise--it's totally the banks' call), but that doesn't mean the crime didn't happen. Sure, drug crime and such is still largely a cash business, but do we really need to sacrifice everything for the already-failed war on drugs?

Put me on the side of reliable, untrackable cash, one of the last shreds of actual privacy we have left in the world.

Some of the commenters here seem to think that tax fraud is not a crime.

Sure, tax fraud is a crime, but does the existence of crime mean we have to be subject to constant surveillance? For whose benefit would this be, then, really? Ours or the tax man? Does tax fraud mean that every transaction needs to be reported to the IRS? I mean, if we're willing to put up with that, we might as well let them put the chips in our heads now and get it over with.

There is a huge population of older people who do not use technology for banking and never will. So unless you want them to stop buying we will need to offer user friendly payment methods for a long time yet. I visit a housebound elderly person who shops by mail order. There a companies specialising in this elder market, with easy returns at no cost, helpful telephone staff trained to support older folk. They must do so well.

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