December 13, 2013

Remember subway tokens? To ride the New York City subway, you needed to use a unique payment format. When the token system was eliminated in 2003, tokens became items of nostalgia. But in terms of everyday use—patrons rummaging through their pockets, and transit employees emptying turnstiles, transporting heavy bags, and counting them out for sale — nobody missed them.

Could coins and bills be headed for the same fate?

Today, digital disruption is fostering the death of cash. New payment technologies can replace cash the same way the MetroCard replaced the token. But the global economy has no equivalent of New York City Transit, a central authority to dictate and manage a smooth transformation. Thus banks need to prepare now, to move toward one or more of several cash alternatives that could become tomorrow’s standards. These paths to victory are outlined in a study called The Future of Payments by a team of my European colleagues led by Andreas Pratz.

Today’s big celebrity in cash alternatives is bitcoin. Its price curve makes bitcoin a darling of speculators and media commentators alike. But when Austin Craig and Beccy Bingham-Craig traveled around the world for three months living on bitcoin alone, they demonstrated one vision of a future cashless society.

Other, less celebrated innovations center on mobile (m-) transactions. With near-field communication (NFC), you could pay for a parking meter or a movie ticket by touching or waving your smartphone. Indeed, the smartphone could replace your wallet, holding payment cards, identifications, and licenses—everything but the now-irrelevant cash.

Globally, non-cash transactions are growing. They take many forms, but contactless, NFC-based m-payments are poised for particular growth in retail settings. And plenty of non-financial companies are taking advantage of banks’ traditionally slow innovation cycles to jump in with m-payment offerings. At Starbucks, for example, you can already pay for a coffee using a proprietary app. Other solutions come from other retailers (such as Walmart and Carrefour), e-commerce companies (such as Square and Google Wallet), and mobile operators (such as T-Mobile and Vodafone). In each case, the innovator’s goal is not merely efficiency in transactions but creating a technology that gets them closer to the customer than anyone else in the ecosystem. However, one of the biggest hurdles these other companies face is that consumers—at least for now—would prefer to use m-payment solutions offered by banks.

Regardless of who eventually wins the m-payment space, note the effects of digital disruption. Although cash won’t entirely go away, the importance of cash-handling in banks will decrease dramatically. Revenues from automated teller machines (ATMs) and wire transfers will decline. And on the flip-side, banks — like New York City Transit — won’t need to exert so much effort emptying machines and securely hauling around and counting out these quaint old-fashioned physical tokens of commerce.

The new currencies will be space-less and formless. Transactions will be easy to consummate, and technology will make the system’s costs easy to see and manage. But they will require banks to change their infrastructures. And to do that, of course, banks must first figure out where the market is headed, and which new forms of transaction will become the heirs to cash.

Arjun Sethi is a partner with A.T. Kearney, where he leads the Strategic IT Practice for the Americas.