Money and the Internet: A Strange New Relationship
This visionary sees the e-money revolution as inevitable, with "e-mail for money" becoming as ubiquitous in the future as e-mail messages are already today
Electronic wallets. Internet-driven mail and electronic cash. Credit cards that are debit cards capable of being refilled with electronic money spendable like pocket change. Banks that not only have no branches but exist solely in cyberspace. Indeed, we are entering a strange new world. Discount brokers want you to power up your computer, access your portfolio, and trade your stocks--all electronically. Brokerage houses want to be your banker, and banks want to be your broker.
What is electronic money?
It is value, in electronic form. In the old days, silver certificates--pieces of paper--promised the bearer that the "bill " could be redeemed for real silver. Electronic money takes that IOU and reduces it to an electronic form. It will evolve from existing technology: from the credit cards that most middle-class people carry now.
Then this is really not a big deal--just a more efficient way of doing what we have done for a long time?
No: e-money will threaten every major bank, upsetting the balance of power between financial institutions, retailers, and consumers. It will hobble governments as it undercuts their ability to control the flow of money with monetary policy.
To begin with, "money" and "information" are one and the same thing. If we can store, forward, and manipulate information--and we do every day--we can do the same thing with money. Combine that ability with the awesome future power of the Internet, which in a few years will be available to 30 percent of U.S. homes, and computers, networks, and money will begin to converge, starting the process of undermining the financial status quo.
Example: It's Feb. 1, 2003. You are sitting at your personal computer, which is attached to the Internet, scanning vacation spots for a summer holiday. After you find a likely resort, you take a video tour through its rooms, and then immediately transfer US $500 (previously downloaded into your computer from a bank or a bank-substitute) from your computer to the resort's account to hold your place. Or you are shopping for a new car and by jumping on a chat line find out what other buyers think about a certain model. Then you put your requirements up for bid with two dozen local dealers--buying it from the least expensive of them--without leaving your living room.
Will this really happen? What will the effect be on banks?
It is happening already. Some 40 million U.S. homes have personal computers and 25 percent of them are connected to an on-line service that gives them Internet access. Banks as we know them have been obsolete for years, rivaling even the U.S. Postal Service as an antiquated remnant of an older world. Both banks and post offices centralized distribution, information, and credibility. Thanks to networks and computers, e-money makes it possible to decentralize and distribute those functions. At first, it will look like an extension of today's technology; in reality, it will be a revolution. Think about what a "home ATM" would be like. One could get "money" in an electronic form, make "deposits," and transfer or receive funds and e-mail at any time from anyone.
Will everyone benefit?
Of course not. The Yankee Group categorizes 16 million households in the United States as "Technologically Advanced Families." They will be the early adopters for this time- and labor-saving service. No doubt there will be the usual glitches, some level of fraud, and the occasional horror story--but right behind those 16 million households are another 32 million that will also begin to use electronic money. Certainly there will be the usual pitfalls and obstacles, the obligatory security nightmares, but the logic of electronic money will stomp over these impediments.
The brain trusts at major banks, even now, suspect that the existing bank model is 30 years out of date and obsolete. A bank today needs no branches, no employees, and perhaps no ATMs--just a series of computers with connections to the world. Such a bank would not issue checks, but it would dispense information, lend money, and move data. Banking lifecycles are only 30 years long. It is time to reinvent the bank.
Who's building such banks--is it traditional companies or start-ups? Is capital available for cyberbanks?
Bill Gates's Microsoft Network is doing just that. Citicorp, NationsBank, and Bank of America, as well as Fidelity and Charles Schwab, are conducting embryonic tests right now. Such new companies as CyberCash, Digicash, and Mondex are attempting to align themselves with brand names like Visa and American Express to build credibility. This year, the venture capital industry will raise $4.8 billion in new funds and 60 percent of this will go into computer, software, and Internet start-ups.
How will developments like these threaten governments?
Every government wants the ability to control the national economy through monetary policy--by restricting credit when the economy is overheated, and loosening credit when the economy is sluggish. But what will happen when someone wants a construction or car loan, posts a request on the Internet, and receives a response from 150 banks, near-banks, and quasi-banks around the world?
Today, countries have central banks that lend money to private banks and regulate monetary policy by fiat; but tomorrow, that monopoly power is stripped if quasi-banks around the world can perform the same financial function.
The treasurer's offices of large companies sweep all their accounts of excess money every morning and reinvests that by the end of the day. With the right software, it will be possible to do the same thing at home. If an overseas bank is paying interest rates that are 3 percent higher than those of its domestic competitors tonight, the intelligent agent program, tied to an on-line account, may lend money to the foreign institution. Tying networks to home software and to money will be the catalyst.
Won't the usual impediments arise, such as lack of management skills and high regulatory barriers?
This e-money revolution doesn't have to be ubiquitous to have serious reverberations. Remember, it's not just banks and governments; whole industries, notably, telecommunications, have communications lines, customer files, and a desire to utilize those networks to create new value. Regulatory barriers are going to fall because technology itself makes them obsolete. Just as the Internet and fax machines make it much harder for even dictatorial governments to embargo the news, governments will be powerless to stop flows of electronic money.
If raw communications should become a profitless commodity, the owners will move higher up on the "food chain" where they can make money on the value added. If communications companies can issue credit cards as they do now, they can issue debit cards. Other major non-banking companies would also like to move into this business. Will consumers accept them? Will they forego checkbooks to move funds over the Internet? What's in it for the consumer?
Let's face it: although e-money will require changes in consumer behavior, the whole transition is going to be a lot less risky than it looks new. The best brains in America are on the problem. The infrastructure is almost in place. The Internet is uniquely capable of handling both the volume and the data transfer. The applications do not need a vast amount of bandwidth. Three years from now 100 million people in the United States will have direct Internet access. Security problems will never be totally solved, but they will be relegated to the "annoyance" category, like cellular phone fraud.
Won't the government force banks to be banks, carriers to be carriers?
As much as governments would like to do so, they will essentially be powerless. Everyone needs banking, but not everyone needs banks. Each consumer will have multiple options. If cyberbankers merely lend out money they have on electronic deposit, the regulatory issue will be moot. But the U.S. Federal Reserve System allows banks to lend out several times what they actually have on hand. Once near-banks, quasi-banks, or non-bank banks are joined to the network, new forms will emerge. Only 15 years ago Merrill Lynch got together with Bank One and found a loophole in the arcane banking laws. Sears Roebuck issued the Discover Card and created Sears Bank and Trust. If a retailer can own a bank, why can't a telephone company or a software company do so? Today's banks underwrite counter-party risks that are compensated by high fees for late credit card payments. That issue has yet to be addressed in cyberland. Perhaps some sort of limited liability, like a high-deductible insurance cooperative, will emerge.
It sounds both easy and inevitable.
Inevitable yes, easy no. There are major problems transferring funds and making sure that people are really who they claim to be. Cryptographers are going to have a field day. Companies like First Virtual and CyberCash will have to show that their technologies work before anyone will trust them.
Where does it start?
With credit cards. Today many people carry enough plastic in their wallets to build a small boat. Banks and credit card companies will begin to convince, indeed, "bribe" us, to give up our credit cards (with their "free" float) for debit cards. That will be the easy part. These institutions will begin by making float available--for a while--on debit cards, and making it harder to obtain on credit cards.
The most technologically sophisticated U.S. households--about 16 percent--will migrate to smartcards, which will carry both information and "money." Theoretically, one might be able to plug a smartcard into a computer, replenish one's money supply, and use it to pay tolls on the highway.
Won't all this require some form of standardization to deal with varying formats?
Sure. The whole issue of digital signatures and public-key encryption will take three years to resolve. Whenever there are too many solutions, too many standards, innovative companies wait and see. It's a lot easier to put the industry's full weight behind a generally accepted standard solution--and that is coming.
How does it work now?
If your 16-year-old wants to buy software today, she has to go to a store. Soon, your kid will send a code from her PC to a bank that will take the money out of her account and authenticate the message. Then the bank will send the money directly to an electronic software retailer via a private key. The electronic software store will know that "good funds" are on hand because this will be confirmed through the bank's public key, which the store will resubmit electronically to the bank, simultaneously sending the new software to your kid over the Internet.
Sounds complicated. But your point is that it need not be a Bank of America--it could be just about any kind of business, like AT&T or Microsoft.
Exactly! But let's go one step further. Why involve a middleman at all? Already, we have about US $45 billion moving through electronic commerce. What is to prevent companies from dealing directly with each other--or with consumers? We will have to build bulletproof verification and validation procedures, but the gears are already in motion. Remember the consumer has a number of relationships with a wide variety of companies--such as Bank of Boston, Visa, and Bell Atlantic, but also Netscape, Intuit, WalMart, Fidelity, and Merrill Lynch. Who is to say that the loyalty of one is higher than another?
When is all this going to happen?
In 10 years perhaps 1215 percent of all transactions will take place electronically. Then the pace will speed up. It takes about five years to get 1 percent of households to adopt a new technology, but only about another year to get the second 1 percent. From then on, the pace of adoption grows geometrically. Today, 80 percent of U.S. households have VCRs and a large percentage of the population uses ATM machines. These technologies took years to get that first 1 percent of penetration.
Today, 70 percent of Internet users see e-mail as its primary benefit, and 30 percent view the World Wide Web as the chief reason to go on-line. By the year 2000, 50 percent will see e-mail as the primary driver and 40 percent will regard WWW access as the critical advantage, but that last 10 percent will be undertaking commercial transactions using e-money. At this point the revolution will already have a strong foothold. Remember that emoney is just e-mail for money.
E- mail for money?
You got it.
About the Author
Howard Anderson is managing director of the Yankee Group, a Primark company (with offices in Boston, London, Tokyo, and Sydney) that analyzes the intersection of technology and consumer behavior. He can be reached at