PayPal's Scott Thompson caused a bit of stir earlier this month by predicting the death of his competitors. Well, sort of. Thompson, both in a blog post and a video to his employees (see below), said that PayPal believes wallets will no longer be needed in the US by 2015. The prediction followed on the heels of an announcement that the alternative payment company had reached more than 10 million active accounts. PayPal's users currently complete up to $10 million in transactions each day, with more than $300 billion expected to travel through their hands in 2011. They're hoping to reach $7.5 billion via mobile apps by the end of 2013. Along with competition from Google, major credit card companies, and independent smart phone apps, PayPal's growth is a sure sign that digital payments are going to play a major role in the future of money, but will we really ditch our wallets by 2015?
"...We believe that by 2015 digital currency will be accepted everywhere in the U.S. - from your local corner store to Walmart. We will no longer need to carry a wallet."
---Scott Thompson on the PayPal Blog
Can you really live on digital payments alone? Five San Francisco Bay Area PayPal employees are already giving it a try this summer, looking to buy everything with only PayPal for a solid week. At a recent event in San Jose, Thompson sent the following video discussing the prediction of a wallet-less America in 2015, and the five employee test trial. I'm sure we'll hear more, and probably see a few more videos in the near future:
Okay, in the Bay Area it may be possible to live without a wallet, but that's definitely not the case elsewhere in the US and the world. Even if it were, would we want to give up on plastic credit cards and cash? If we're talking about online sales, the answer is a firm 'maybe'. A recent report from Javelin highlighted some of the trends in digital payments. Online alternative transactions (those not using credit card numbers) rose from approximately $34 billion in 2009 to almost $43 billion in 2010, and is predicted to reach $86.6 billion by 2015. 46% of online consumers have used an alternative payment within the past year, with 36% giving “greater protection from fraud or other misuse of my information" as a primary reason. Most telling for PayPal, 91% of online consumers have used their service, while just 24% have used Checkout by Amazon and 9% Google Checkout. There's little doubt that PayPal has made massive inroads for online purchases and is a force to be reckoned with.
The real issue isn't online, however, it's the real world. There, the battle is likely to focus around mobile phones. Current mobile payment platforms are limited, and sometimes awkward to use correctly, but they are still gaining in popularity (for instance, StarBucks will take mobile payments via a barcode on your smart phone at nearly 7000 of their locations). PayPal mobile (see the video below) is already aimed to improve the methods for transactions, with similar competition coming from Google Wallet, Visa, and a few others.
The big innovation is likely to be NFC. Near field communication will allow you to send information quickly to any reading device simply by tapping your phone against it. This could turn your mobile into a one-touch payment center. While NFC tech is still very limited in the US, it's big in Europe, and we've seen it successfully used in a range of applications, including replacing hotel keys. As NFC filters into the US, digital payments will undoubtedly follow, and there's bound to be tons of money to be made. The following amazing infographic from GPlus.com gives some of the key figures in the discussion on NFC transactions, predicting that 2015 will see $670 billion in mobile payments:
I've little doubt that online and mobile payments are eventually going to claim a majority of transactions in the US, and probably the world. What I doubt about Thompson's prediction, however, is that such digital currency will be universally accepted. Credit card companies, PayPal, and everyone else that facilitates transactions, charge fees for their service. Often that fee is imposed on the vendor, who inevitably has to pass the cost on to the consumer. I live in the Bay Area, Thompson's digital payment utopia, and I go to many venues that hate receiving credit card payments. Most will have minimum purchases or a transaction fee to help offset the money they have to share with credit card companies. Some businesses will give consumers a discount when they pay in cash. The next time you buy something from a small vendor, ask about their fees, I'm sure they'll share their woes about digital payments. These transactions may make life quicker and easier for consumers, and in extension, better for some retailers, but the associated costs will always guarantee that there will be some people who simply don't want to have to deal with them. We are not going to be able to drop our wallets by 2015.
The true future of money is going to be mixed, and thankfully so. Cash perhaps will never die, there's simply too many people that enjoy the ease (and discretion) of a physical currency. Plastic credit cards may be passé, but they work well, are relatively quick to use, and give us a physical object to associate with our wealth (don't ignore the psychological importance of being able to hold your money.) New companies like Square are breathing new life into plastic credit cards by allowing them to be used almost anywhere (Square is currently valued around $1.6 billion, btw). NFC and mobile may push these traditional forms of payments down to lower levels than they've ever been before, but they'll still be around. Just ask cheques - they account for a very small number of transactions these days, but billions of dollars still passes around via these hand written notes on paper.
What's more exciting than predicting the death of physical currency is contemplating what changes may arise with the prominence of digital payments. Visa, Amex, and Mastercard all charge varying rates with their vendors, but I know that Square has a flat level of 2.75%. That's pretty high. What happens when PayPal, Google Wallet, and other digital pioneers come in and offer vendors a discount to switch to their payment method? Hopefully much lower rates across the board. More money may stay in the hands of retailers (and thus their consumers) and many more small companies will be able to handle the lower overhead of digital payments, helping them sell their wares more easily (and perhaps globally as well).
Another big possible innovation that is already upon us is non-government currency. I mean, if the majority of your transactions are just ones and zeros, does it matter if you call the money 'dollars' or 'euros' or something else entirely? Video games have been doing this for a while - Second Life has its Lindens, Entropia has PED, and World of Warcraft has gold and numerous other commodities. Facebook has a point system that can translate into goods, and I'm sure we'll see the same in other social networks. Now, with the rise of digital payments we could see some of the disasters and lessons learned from video game currencies make an impact on the true global economy. We've discussed Bitcoin, which is an entirely new digital currency that can be exchanged into other traditional government backed currencies. As we move more of our payments out of the physical world it may allow us to experiment with who 'prints' money, and that's an exciting (if risky) prospect.
When 2015 comes around, I'm still going to be holding on to my wallet, but I do think Scott Thompson got something right: money is evolving, and digital payments are going to speed up that process. Four years is too soon for us to give up on cash, credit cards, and the rest, but it may happen farther down the line. In the meantime, as new forms of payments arise their advantages will change the way we spend money. It might improve our lives...or who knows, maybe even save them: