Smaller Faster Lighter Denser Cheaper

by Robert Bryce

  Consider, for example, the farmer rich in chickens or apples. He could, of course, transport his birds and fruit to town and barter them for something he really needs, like horseshoes or butter. But if the farmer can instead sell his products, collect some currency, and then use it to pay the farrier or the dairyman, the entire process happens Faster, with less friction for both parties. That’s the point of money.

  As James Surowiecki of the New Yorker points out in a clever 2012 article published in IEEE Spectrum magazine, “What matters most about money is not what it is, but what it does.” Successful currencies “lubricate commerce, allow people to exchange goods and services, and thus encourage people to work and create. The German sociologist Georg Simmel described money as ‘pure interaction,’ and that description seems apt—when money is working as it should, it is not so much a thing as it is a process.”8

  That’s an essential point: Money isn’t a thing, it’s a process. Money is only worthwhile because it allows us to engage in “pure interaction.” We want to network. It’s in our nature to do so. We want to sell, buy, haggle, argue, travel. We want to do more, of everything. We don’t give a darn about the form of our money; we only care that it allows us to buy and to do, whether that means buying a bale of toilet paper at Costco or securing passage to Panama City. Having an easy method of exchanging value greases the wheels of commerce. And the slicker the lubricant, the better.

  The idea of digital money is not entirely new. For decades, financial institutions, corporations, and individuals have relied on wire transfers to exchange money. In 2012, according to the Fedwire Funds Service, the wire-payments network operated by the US Federal Reserve, nearly $2.4 trillion per day was moved by wire transfer. (For reference, that amount of money is approximately equal to the GDP of the United Kingdom.)9 Furthermore, the volumes of money being moved electronically continues to grow. Between 1987 and 2012, the amount of money moved through the Fedwire system has nearly quadrupled.10 For banks and big companies, digital money has long been a fact of life. That hasn’t been the case for consumers. Sure, lots of people forgo cash by carrying credit cards and debit cards, which are a form of electronic payment. But those methods are not truly digital.

  Perhaps the most remarkable thing about the move toward digital money and mobile payments is that the trend shows its strongest growth in Africa, a continent that has long been seen as a laggard in nearly every other type of development. In countries like Kenya and South Africa, pure interactions are happening with currency that weighs nothing at all. Instead, it exists only as digits on phones. Currency is being exchanged on the simplest cell phones using the simplest technology: text messaging, or SMS, for short message service. And that in itself is amazing.

  In 2011, some 5.9 trillion text messages were sent. By 2016, that number is expected to rise to 9.4 trillion. As the savvy South African journalist Toby Shapshak has noted, mobile phones have “become the most-used devices in the world.” While teenagers and college students in the United States are mesmerized by Instagram, Snapchat, and other iPhone flotsam and jetsam, Shapshak points out that in the developing world, “the vast majority of people still use them [their phones] for their primary functions: voice calls and text messaging. SMS is still the king of communication. Long may it reign.”11

  SMS is the perfect communication system for Africa, where the majority of consumers can’t afford high-dollar devices like the iPhone or an Android-powered device. Instead, as Shapshak points out, they use older Nokia phones or the decade-old Samsung E250, a phone that has been dubbed the AK-47 of African telecom because it is cheap and nearly indestructible. While the majority of African consumers lack flashy phones, they are getting lots of leverage from them. Most people living in sub-Saharan Africa are “unbanked,” meaning they don’t have bank accounts or credit cards. But nearly all of them have a phone. And those phones are giving millions of Africans access to a trustworthy, secure, money ecosystem. Cellular phone companies and banks are providing digital cash to millions of people who’ve never stepped inside a bank or managed a cash register. It’s almost as though Kublai Khan gave millions of Africans a single currency and told them to start trading.

  Khan was a clever ruler, but he understood that making and managing cash costs money. That’s still true today. Hiring the British company De La Rue or one of the other specialty firms who print currencies is expensive. Producing a single banknote costs about four cents.12 That adds up if you need tens of millions of them. Banknotes are vulnerable to counterfeiters and worse yet, they wear out after a few years. Even if a poverty-stricken country like Democratic Republic of the Congo or Niger wanted to print a big batch of currency to help their economies, doing so would create other costs. Large quantities of cash require heavy trucks, armed guards, and safes.

  Paper money may be more convenient than carrying bags of gold or silver, but that paper is only valuable if people believe in it. These banknotes were printed by the Confederate States of America between 1861 and 1864. Each note was hand signed and numbered. During the Civil War, in an effort to upset the economy of the Southern states, the Union began counterfeiting Confederate currency and distributing it in the South. The flood of money fueled inflation and helped undermine confidence in the currency, which had become worthless by the time the war ended in 1865.13 For the first few decades of the twentieth century, all of the world’s biggest economies were on the gold standard. If you wanted to trade your paper money for gold, you could be assured of a set amount of gold in return.14 Today, no country backs its currency with gold. Instead, the value of each country’s currency “floats” in relation to other currencies. There has been a decades-long argument as to whether this “fiat” money system—that is, a system in which the currency is not linked to any specific asset—can last for the long haul. Gold may be heavy and difficult to move around, but people have been believing in it for 2,500 years.15 Source: Library of Congress, LC-USZ62–110272.

  The physical costs of managing currency go far beyond Africa. During the early months of the Second Iraq War, about 150 tons of US currency worth some $12 billion was sent in several air shipments to military bases near Baghdad. In 2004, in the largest single shipment, the US Federal Reserve sent $2.4 billion in $100 bills (weighing 30 tons) to the ancient city. The greenbacks were needed so that the US military and the new Iraqi government could contract for services, hire personnel, and get the war-torn economy up and running again.16

  Or consider the challenge of managing currency in China. The Chinese government refuses to print any bills larger than the 100-renminbi note, which carries the portrait of Mao Zedong. But the 100-renminbi note (the renminbi is also known as the yuan) is only worth about $16. In the United States, the largest bill is the $100 note. In the European Union, it’s the 500-Euro note, which is worth about $650. Relatively few Chinese use credit cards or checks. Thanks to Chinese citizens’ distrust of their government—and the government’s distrust of its citizens—many Chinese deal strictly in cash. But because China’s currency holds relatively little value, consumers have to carry lots of bills, particularly when making large transactions, such as buying a car. That means that the Chinese government has to spend a lot of money keeping the Chinese economy stocked with paper currency. In fact, the business of currency in China requires a vast industrial enterprise.

  In 2013, David Barboza, a reporter for the New York Times, reported that the China Banknote Printing and Minting Corporation “runs 80 production lines with 30,000 workers, six bank note companies, two paper mills, a printmaking company, a plate-making corporation, and a firm that produces special anticounterfeiting security lines.”17 Barboza estimated that when adjusted for the size of its economy, China has about five times as much currency in circulation as does the United States. In all, about 40 percent of all the paper money on the planet is in China, even though China’s GDP of about $8.2 trillion accounts for only about 11 percent of global GDP, which totaled about $72 trillion in 2012.18
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br />   Cash will certainly persist for years to come in markets all over the globe. But when money lives inside your phone, there’s no need for printers, paper mills, or safes. Just as Africa leapfrogged the idea of landline telephones and went straight to digital mobile phones, so, too, is Africa vaulting over the idea of currencies and going straight to digital money.

  In the span of 70 years, we’ve gone from shipping silver on a coal-fired steamship to M-PESA, a company that is transacting millions of dollars in commerce every day on a device that weighs as little as 85 grams (3 ounces).19 The most important part of that phone—the SIM card that stores the personal data—weighs less than half a gram.20 Money has gotten Smaller Faster Lighter Denser Cheaper, astoundingly so. And it’s done so in a blindingly short amount of time. After millennia—or what seems like it—of fumbling around for nickels and dimes amid the couch cushions, we now have virtual money. For lots of transactions, that digital dough’s far superior to coins and banknotes.

  This qualifies as a Big Idea. The world’s biggest companies are jumping into the digita-money/mobile-payments game. Chase, Walmart, Google, AT&T, American Express, MasterCard, and dozens of other companies are getting into mobile payments, all trying to, in effect, coin their own money. They are chasing, as Fortune magazine put it, “millions of merchants, billions of transactions, and trillions of dollars in commerce.”21

  In early 2013, the coffee giant Starbucks said it was handling more than three million mobile payment transactions per week, all of them in the United States.22 By 2016, the consulting firm Gartner Inc. expects that about 450 million people around the world will be using mobile payments to conduct more than $600 billion worth of transactions. If that occurs, it will be a nearly fourfold increase over the $171 billion in mobile transactions that occurred in 2012.23 Consumers in India, Bangladesh, Pakistan, Japan, China, Canada, Australia, and other countries are rapidly adapting to mobile payments.24 But for now, Africa remains the dominant player.25 By 2013, about 80 percent of the world’s mobile payment transactions were happening in East Africa.26 And the biggest player in East Africa is M-PESA.

  SMALLER FASTER INC.

  SAFARICOM

  Official Name Safaricom, Ltd.

  Website http://www.safaricom.co.ke/ (English)

  Ownership Public (Ticker: SAFCOM, Nairobi Stock Exchange)

  Headquarters Nairobi, Kenya

  Finances Market capitalization: $4.3 billion 27

  Annual Revenue $1.25 billion 28 (2012)

  M-PESA was launched in March 2007 by Safaricom, a Kenyan mobile phone provider that is 40 percent owned by mobile giant Vodafone.29 Within 16 months, M-PESA—the “m” stands for mobile, while “pesa” is the Swahili word for money—had 3.6 million customers, and the system was adding 10,000 new registrations every day. By July 2008, the system was handling 21 billion Kenyan shillings ($245 million) of transactions per month, with an average value of 2,800 Kenyan shillings, (about $33) each.30 The system is simple: customers who have cash in their pockets can go to any of M-PESA’s agents and have that paper money converted into mobile money. They can also reverse that process.

  M-PESA has grown rapidly thanks to Safaricom’s dominance of the Kenyan mobile phone sector. By 2013, Safaricom had nearly as many subscribers, about 19 million, as Kenya has adults. And of those 19 million phone subscribers, about 15 million were using M-PESA.31 (Kenya’s population is about 43 million.) Those 15 million have been using M-PESA to pay for everything from utilities and insurance to school fees and health care. They can also transfer money directly to another person. The system is easy to use: when an M-PESA user wants to buy something from a vendor, he uses his phone to transfer the required amount via text message.

  While mobile payments and digital money have many advantages over coins and currency, we must also acknowledge the risks. Cash has been king for a long time, and that royal status brings with it a measure of privacy. Cash buys anonymity. For illicit transactions—drugs and prostitution to name just two—cash helps assure that the buyer and seller can’t be easily tracked. Cash deals can also help sellers avoid the tax man. Cash is also handy for perfectly legitimate transactions. A plumber, Web designer, or doctor may prefer to be paid in cash because it’s Faster and easier than dealing with checks or credit cards. Cash talks to the cabbie, the waiter, and the maître d’hôtel in a way that a promised payment via mobile phone cannot. A $100 bill might be cumbersome, but it cannot be “declined” because a computer network is down or because of a faulty credit score.

  The potential loss of anonymity that could accompany the phaseout of cash has political overtones. In 2012, Jerry Brito, a research fellow at the Mercatus Center at George Mason University, wrote that in a cashless world, it would be “easier for governments and corporations to spy on our transactions” and they could “gain greater control over which transactions to allow at all.” Brito points to the case of WikiLeaks. After the renegade media group released a trove of embarrassing documents, payment processors like PayPal and Visa were pressured to quit doing business with it. Rather than fight the US government, the companies agreed and WikiLeaks has been struggling to stay afloat ever since. “Imagine if the only way to support unpopular causes was with easily controlled e-money. Certain transactions could be disallowed by law, political pressure or corporate fiat, and anonymous giving would be impossible,” says Brito. “One could not make a purchase at a gay bookstore or a pregnancy clinic without knowing that somewhere there’s a permanent record of the transaction. And there might not be any transaction that couldn’t be subpoenaed in a divorce or other legal proceeding.”32

  While cash provides anonymity, some online payment outfits are already providing the capability to move money across international borders with little governmental oversight. That became apparent in mid-2013, when the operators of Liberty Reserve, an online payment company, were indicted by the US attorney in Manhattan. The indictment claimed that Liberty Reserve was a front for international money laundering and that the company had laundered some $6 billion. But other online payment systems like Russia-based WebMoney and Panama-based Perfect Money are, as of this writing, still operating. Law enforcement officials claim that the sites have become havens for criminals who are laundering money from child pornography, the drug trade, weapons trafficking, and human trafficking.33

  Although digital money can be used by criminals, it can also be used to fight corruption. In 2012, Jessica Leber wrote an article for MIT Technology Review in which she told about a group of Afghan policemen in Wardak province who began getting their wages paid through their cell phones. The payments came through M-Paisa, a mobile payment system run by Afghanistan’s biggest telecom company, Roshan, which was modeled on Kenya’s M-PESA. In 2009, immediately after the first pay period in which they got paid through their phones, the policemen assumed they’d gotten a raise. The reality was that for the first time, their wages weren’t paid in cash, and therefore, weren’t subject to skimming by their superior officers, who had been stealing about 30 percent of the money.34

  Leber pointed out that about half of the 700,000 government employees in Afghanistan don’t have bank accounts. And getting cash to those employees is fraught with danger because of the country’s security problems. Paying them with digital cash on their phones could help alleviate both security and corruption issues. The scale of the latter problem is both staggering and depressing. In 2012, Afghans paid nearly $4 billion in bribes, an amount that’s roughly double the country’s domestic tax revenue.35 The corrosive effect of corruption is common in other developing countries as well. In India, the consulting firm McKinsey has estimated that tens of billions of dollars are “leaking” out of the Indian economy every year due to the pilfering of welfare and government payments by insiders.36 In late 2013, Michael Joseph, the former CEO of Safaricom, told the New York Times that India is “probably the most exciting market for mobile money in the world.” By 2015, some analysts are expecting mobile payments in India could
total $350 billion per year.37

  Mobile payments are not going to cure the world’s corruption problems or bring all of the people who are living in poverty into prosperity. But what has happened with M-PESA and other mobile payment schemes provides a window into what can happen if people who don’t have access to paper money or formal banking systems are allowed to engage in commerce with digital currency. Back in 1976, the economist Fredrich Hayek argued for the deployment of lots of currencies: “We have always had bad money because private enterprise was not permitted to give us a better one.”38

  It remains to be seen what will happen with multinational currency schemes like Bitcoin, a “cryptocurrency” that can be transferred through a computer or smart phone without relying on a financial institution. Bitcoin calls itself the world’s first decentralized digital currency, and it has launched a flurry of financial speculation as investors have piled into Bitcoins with the hope that they will gain in value in the years ahead. It’s far too soon to predict what will happen with Bitcoins. It’s also too soon to know whether emerging “peer-to-peer” payment applications like Venmo, which allows friends to pay each other small sums of money, will endure over the long haul.39

  Nevertheless, it’s obvious that M-PESA and the other modes of digital payment are here to stay, and that is a positive development. Money—whether it lives on your phone or in your wallet—is the oxygen that allows the economy to breathe. Money allows us pure interaction. By making money Smaller Faster Lighter Cheaper, Safaricom and its many competitors in the mobile payments business are showing the way toward a brighter future, one that Kublai Khan would surely understand.