Thursday, September 12, 2013

The Cost of Money

A recent report from the Institute for Business in the Global Context looks at how cash stacks up (lol) against other forms of money. A snippet from the introduction.

"Money is an abstraction built on trust. As such, alternatives to the most tangible form of money—currency or cash—and its replacement with cashless payments have become possible. Such an ecosystem is one where no transaction requires money in the form of notes and coins, and where value can be exchanged through the transfer of information between transacting parties. There have been multiple waves of such alternatives. Established alternatives to cash include checks, credit cards, debit cards, and prepaid debit cards. More recently, innovative options have sprung up that not only threaten to imperil the ubiquity of cash but also upend the traditional payment ecosystem. These include smartphone-enabled credit card acquirers, such as Square, and Automated Clearing House or ACH acquirers, such as PayPal and Dwolla. And then there are even more ambitious alternatives to cash that have been proposed, such as Bitcoin, a web-based cryptocurrency. Unlike traditional money, such alternatives do not derive their value from government fiat. Each of these alternatives have evolved networks within which they are uniformly accepted as a means of payment; the more established alternatives, of course, have the widest networks.

This study starts from a simple observation: cash derives its value from the information it contains and is a classic information good, which can be replaced by a digital substitute [...] Today most information goods with a sufficiently developed digital substitute have been disrupted and displaced. Cash, however, is different from the usual examples that spring to mind: communication, music, movies, and, increasingly, books. Money in the form of cash is a tangible embodiment of value. Cash is itself nothing more than a promise to pay: a completely interchangeable, transferable promise to pay the bearer. The purpose of money is to have stored wealth on hand for purchases today and tomorrow. Individuals derive a certain utility from holding cash that stems from many factors combining rational, behavioral, institutional and emotional drivers. That said, cash must be held in physical form, counted, guarded, and accounted for. It can be difficult to transport and send. Being possibly the last thing you can expect to recover from a stolen wallet, acceptable everywhere, and anonymous, it is inherently insecure. In any serious quantity, most legitimate businesses prefer some other party, such as a bank, to handle cash on their behalf. In other words, cash satisfies two of the most significant criteria of digital disruption: there are viable digital alternatives with wide networks of adopters and cash presents the carrier with multiple forms of disutility or costs.

This begs the questions: why has cash not been completely displaced, what are the costs and benefits of its continued use, and what are the implications for innovation in the use of cash and its alternatives?"

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