The future of money, and how houses will be bought in a cashless society.

The Future of Money: The Cashless Economy

By Brenna Roth

How much cash is in your wallet? In today’s economy, the answer is practically irrelevant. You probably pay for your purchases with PayPal, bank transfer, debit card, gift card or one of a plethora of credit cards (that offer perks like free gas, airline credits and the like). This wasn’t so a generation ago, when the options consisted of cash, personal check, Visa, MasterCard and American Express. Back then, purchasing power was roughly equivalent to cash on hand, while today you probably purchase using a myriad of payment methods.

This article, the first in a two part series, seeks to describe the different ways we pay for goods and services in a contemporary economy, most of which do not involve cash transactions. Our economy is in flux, defined and redefined by rapidly developing technologies and innovative strategies to transfer funds from your office or living room to places, either around the corner or halfway around the world, where you spend your money. The second article in this series will focus on how the internet has revolutionized payment, through new products and services such as PayPal and online banking. First however, the following paragraphs will show what payment looks like in a place where a cashless economy could become a very real possibility in the near future: Japan.

The root of the Japanese cashless economy originates not in Japan, but rather in Hong Kong. In 1997 the MTR Corporation, operator of the city’s rapid transit railway, introduced the Octopus card to streamline fare collection; the Octopus card was the world’s first “smartcard”. Unlike previous cards that transmitted data by swiping a magnetic strip (the way we swipe most credit cards in the United States) this new smartcard utilized radio frequency identification (RFID) technology. A microchip on the card would transmit information when activated by a wireless receiver located at transit system entry and exit points. Customers would deposit money onto their cards at kiosks, which would then be deducted in an amount equal to the cost of the trip.

In 2001, smartcards were introduced to Japan in the form of SUICa, or Super Urban Intelligent Card, for use on the JR East Railway. Like the Octopus card, SUICa relied upon FeliCa—a RFID system developed by Sony. FeliCa was soon adopted by other mass transit systems, in Nagasaki and Matsuyama for example, eventually becoming the de facto standard throughout Japan. In the coming years, this technology—the FeliCa system—would become the backbone of the emerging Japanese cashless economy.

Also in 2001, retailers began issuing their own smartcards and provided incentives, like free gifts and cash back, to entice their customers to begin using them. The first such card, the Edy (which stands for Euro Dollar Yen, although customers could only load yen onto the card) was released as a collaborative effort by eleven prominent Japanese companies, including DoCoMo, Sony, Toyota and the Japan Research Institute. The Edy card, like the public fare smartcards that came before, contained a FeliCa microchip, which could be scanned by wireless card readers at the point of purchase. Also like the SUICa, Edy acted as a debit card: the customer had to add money to the card at special terminals, often located inside grocery or convenience stores. When making a purchase the customer would scan the Edy, and the cost of the merchandise would be deducted from the card’s balance.

At the same time smartcards were being introduced in Japanese retail stores and on Japan’s public transit systems, the country was also undergoing another technological transformation: the rise of mobile phone, or keitai, culture. Cellphones are ubiquitous in Japan, and their use has generated a subculture complete with its own customs, expressions and mores. The popularity of mobile phones cannot be understated: by 2004, CBS News was reporting that the country’s 127 million people owned 81.5 million phones.

Maiko Nakai, a master’s candidate in communications studies at the University of Oregon and native of Osaka, describes Japan as the “cellphone kingdom.” In her Harpham Award-winning paper titled “Mobile Kingdom, Japan”, she explains that keitai are essential for communication and entertainment and serve as a status symbol. She also analyzes the relationship between the costs associated with keitai and its benefits; she writes, “In Japan, people spend less money on cars because of their well-appointed transportation system and its convenience…More money is spent on technology than cars or real estate, which leads to having the better technological devices.”

Keitai culture and smart phone technology collided in 2004. In that year DoCoMo, the largest cellular provider in Japan, announced that it would incorporate FeliCa technology into its cellphones, thereby creating the osaifu keitai or “mobile wallet”. Instead of carrying multiple smartcards, such as SUICa for transit and Edy for purchasing, owners of FeliCa-equipped phones could instead scan these devices at the wireless card readers. Osaifu keitai could also be used as an airline or event ticket, keycard to public lockers and as a membership card to receive special offers from select businesses. This technology was immediately popular, and DoCoMo sold over 3 million units in the first year alone.

The popularity of osaifu keitai is easy to understand when placed in the context of contemporary Japanese culture. Put simply, Japan is home to a fast-paced society. Strong work ethic, lengthy commutes and advanced technology combine to produce a society where time and efficiency have become core values. The osaifu keitai replaces the variety of smartcards that one must carry; instead of searching for a particular smartcard at the time of each transaction, thekeitai owner can use one device to pay fare on the subway, purchase a beverage at 7-Eleven and even board an airliner. The seconds saved by this technology are incredibly valuable to the Japanese commuter: it could mean the difference between catching the train, and therefore arriving at work on time, and missing it.

The flip side of osaifu keitai’s incredible convenience is a heightened security risk. If a phone is lost or stolen, cellular providers like DoCoMo can only shut down phone service; thekeitai owner must contact the providers of each function to which he or she has activated, such as SUICa or Edy, and cancel service. This can be incredibly inconvenient and time-consuming. To get an idea, first imagine having to call the companies that issued every credit, debit, membership or gift card you carry if your wallet went missing. Now imagine having to contact all of those companies when your phone, which is also likely your primary means of accessing the internet, is also missing.

In June 2009, The Times reported that some Japanese government officials were floating the idea of abolishing cash in order to counteract deflation caused by the global recession. To understand the logic of this strategy it is important to note that it is impossible to lower inflation rate of cash assets below the nominal rate of zero. Although farfetched, removing cash from the economy would allow the Japanese government to fight deflation by lowering interest rates below zero. The prevalence of osaifu keitai and FeliCa-powered smartcards raises the intriguing possibility that this idea could work. However cash is still popular in Japan, especially amongst the older generation, and the government officials dismissed the cashless option before it could be seriously considered.

The idea of the mobile wallet has not yet caught on in the United States for a variety of reasons. Many Americans prefer to pay in cash because they believe it prevents the government and large corporations from monitoring their purchases. The United States is also more geographically expansive, and most American workers spend more on transportation and less on technology than their Japanese counterparts. Finally, many Americans are skeptical of keeping so much sensitive information and purchasing power in one handheld device that could be easily stolen or misplaced.

In sum, the Japanese cashless system was created by a confluence of factors: FeliCa smartcard technology—originally applied to public transit in Hong Kong—was appropriated as a popular payment option by retailers. Simultaneously, long commute times and other aspects of fast-paced life in Japan gave rise to a subculture surrounding mobile phones: the keitai culture. The juxtaposition of these two factors resulted in osaifu keitai, or mobile wallet; this development streamlined the payment process by replacing multiple smartcards with a single device that could be used to pay for a variety of goods and services.

The trend towards the cashless is not an exclusively Japanese phenomenon. In the next installment, I will examine the cashless impact of e-commerce in the United States, focusing on topics such as internet billing, Paypal, iTunes and the future of money in an online economy.

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