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John O’Malley

FIN 320 – Klingenhagen

05/28/15

Current Issues ro!e"t

For as long as the "on"e#t o$ %oney has e&iste'( #eo#le ha)e use' #hysi"al $or%s o$ #ay%ent( su"h as gol' "oins( sil)er #ie"es( or #a#er %oney( to "o%#lete transa"tions an'e&"hanges *ith one another+ ,hese an' all other $or%s o$ "ash -e"a%e essential to -artering( a #ro"ess that #re'ates e)en the "on"e#t o$ %oney itsel$+ .o*e)er( in re"ent 'e"a'es( *e ha)e -egun to see a shi$t $ro% tra'itional $or%s o$ #ay%ent( na%ely "ash an' "he"s( to*ar'ele"troni" $or%s o$ #ay%ent( su"h as 'e-it "ar's( ##le ay( or ayal+ ,his shi$t has -een 'uelargely -e"ause o$ the ra#i' te"hnologi"al 'e)elo#%ent that has taen #la"e in re"ent years an'the "onstant intro'u"tion o$ ne* an' e)eri%#ro)ing #ay%ent te"hnologies+

es#ite this shi$t to*ar' ele"troni" $or%s o$ #ay%ent( *e *ill #ro-a-ly not -e"o%e a"o%#letely "ashless "i)iliation at any #oint in the $oreseea-le $uture si%#ly -e"ause o$ the $a"t

that "ash a""ounts $or a high #er"entage o$ the a)erage %eri"an’s retail #ay%ents+ ""or'ing toa stu'y "on'u"te' -y the Fe'eral 4eser)e( "ash a""ounts $or $orty #er"ent o$ the number  o$ #ay%ents the a)erage %eri"an "onsu%er %aes( the largest o$ any #ay%ent instru%entMarous( 20167+ ,his is true $or se)eral reasons( ho*e)er( the three %ain $a"tors that "oul'elain this tren' are that "ash is the lea'ing instru%ent o$ #ay%ent $or lo*)alue transa"tions(*ith hal$ o$ all transa"tions un'er 950 -eing 'one in "ash :ennett ; Cono)er( 20167( "ash is the #re$erre' -a"u# $or% o$ #ay%ent to all other %etho's( an' $inally that "ash is the lea'ing #ay%ent instru%ent $or a %yria' o$ 'i$$erent een'iture "ategories( in"lu'ing< entertain%ent(trans#ortation( gi$ts an' trans$ers -et*een #eo#le( an' $oo' an' #ersonal "are eenses :ennett; Cono)er( 20167( although it shoul' -e note' that %any o$ these een'itures are "onsi'ere'lo*)alue #ur"hases+

t the sa%e ti%e( another )ery "o%#elling reason *hy *e *ill #ro-a-ly ne)er see a"o%#letely "ashless so"iety is that a signi$i"ant #ortion o$ the #o#ulation 'oes not use -ans( oris at least un'er-ane'( lea)ing these #eo#le *ithout a""ess to alternati)es to "ash+ ""or'ing toa sur)ey 'one -y the Fe'eral e#osit Insuran"e Cor#oration FIC7( as o$ 2013( 20+0= o$%eri"an househol's 26+8 %illion7 *ere un'er-ane'( %eaning they ha' so%e in' o$ -ana""ount -ut also use' alternati)e $inan"ial ser)i"es outsi'e o$ the -aning syste%( *hile >+>= o$househol's ?+@ %illion7 *ere "o%#letely un-ane' FIC( 20137+ ,hese nu%-ers are e)en*orse $or %inority grou#s( *ith %ore than 20= o$ Aatinos an' $ri"an %eri"ans essentially le$tout o$ the -aning syste% Bulli)an( 20137+ ,he notion o$ a "ashless so"iety al%ost see%s $ar$et"he' *hen there are %illions o$ #eo#le *ithin the %eri"an #o#ulation that are "o%#letelyreliant on "ash an' la" e)en the %ost si%#listi" o$ -an a""ounts+

hile it is true that( in all lielihoo'( *e *ill not -e"o%e an entirely "ashless so"iety atany #oint in our li$eti%es( in the years an' 'e"a'es to "o%e( *e *ill "ontinue to see a gro*th inthe nu%-er o$ ele"troni" transa"tions 'one -y %eri"ans *ho are #art o$ the -aning syste%+,his is true $or a nu%-er o$ reasons+ ,he $irst reason( an' #erha#s the greatest $a"tor( is thatele"troni" $or%s o$ #ay%ent are -e"o%ing in"reasingly %ore "on)enient $or %o'ern %eri"an"onsu%ers+ e-it an' "re'it "ar's are alrea'y a""e#te' in the %a!ority o$ stores( an' ne* $or%s

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o$ ele"troni" #ay%ent "an -e $oun' in an in"reasing nu%-er o$ stores as *ell( %eaning that #eo#le no longer ha)e to "onstantly %ae tri#s to the ,M -e$ore going sho##ing+

,he ne&t reason *e *ill "ontinue to see a shi$t to*ar' ele"troni" %etho's o$ #ay%ent isthat( as these ne* te"hnologies "ontinue to 'e)elo#( ne* inno)ations an' %etho's o$ #ay%entare -eing "onstantly intro'u"e' an' i%#ro)e' u#on+ ,hese ne* #ay%ent te"hnologies in"lu'e

a##li"ations that 'ue a*ay *ith the nee' $or a "re'it "ar' *hile %aing instore #ur"hases( su"has ##le ay( as *ell as te"hnologies that ee'ite the online #ur"hasing #ro"ess su"h as ayal+nother e&a%#le o$ ne* #ay%ent te"hnologies is Chase :an’s Dui"ay( *hi"h allo*s Chase"usto%ers to sen' %oney online to other Chase "usto%ers using only their "ell #hone nu%-eran' e%ail a''ress+ Bo%e o$ the largest "o%#anies in the *orl' are e)en "o%#eting against ea"hother in this %aret( as Eoogle is set to un)eil n'roi' ay to "o%#ete *ith ##le ay( as *ellas the Eoogle allet( *hi"h *ill "o%#ete *ith ser)i"es su"h as Dui"ay an' other online *alletser)i"es ill%an( 20157+ ,hans to these ne* #ay%ent te"hnologies( #eo#le no longer e)enreGuire a 'e-it "ar' in or'er to %ae ,M *ith'ra*als+ :MO .arris :an( the Chi"ago-ase'su-si'iary o$ Cana'a’s :an o$ Montreal( re"ently intro'u"e' their ne* %o-ile a##li"ation*hi"h allo*s users to %ae ,M *ith'ra*als *ithout ha)ing a 'e-it "ar' on han'+ ,o 'o this(

"usto%ers log into the :MO .arris %o-ile-aning a## on their s%art#hones( enter the s#e"i$i"a%ount they *oul' lie to *ith'ra* an' a D4 "o'e *ill a##ear on the s"reen+ ,hey then *al u#to an ena-le' ,M an' #ress the %o-ile "ash -utton+ ,he "usto%er then hol's u# their D4 "o'eon their s%art#hone to a rea'er an' the ,M 'is#enses the reGueste' a%ount o$ "ash ,ri"hur(20157+ Fro% these $a"ts( *e "an 'eter%ine that *e are %o)ing to*ar's an age in *hi"h thes%art#hone is -e"o%ing an essential #art o$ the transa"tion #ro"ess+

nother reason *e *ill "ontinue to see a shi$t to*ar's a "ashless so"iety is that youngergenerations ha)e sho*n an in"reasing #re$eren"e to*ar' ele"troni" $or%s o$ #ay%ent o)er "ash+""or'ing to a stu'y 'one -y Citi Erou#( !ust thirty #er"ent o$ #eo#le un'er the age o$ thirtystate' that "ash *as their #re$erre' %etho' o$ #ay%ent $or s%aller #ur"hases( "o%#are' to !ust

un'er $i$ty #er"ent o$ #eo#le $i$ty years or ol'er+ Instea'( 'e-it "ar's *ere the #ay%ent %etho'o$ "hoi"e( *ith a-out 60= o$ %illennials stating it *as their #re$erre' #ay%ent o#tion+ In"ontrast( a %ere 25= o$ #eo#le o)er the age o$ @0 sai' 'e-it "ar's *ere their #ay%ent %etho' o$"hoi"e arlin( 20167+ ,his #re$eren"e $or "urrent ele"troni" $or%s o$ #ay%ent( "ou#le' *ith the"onstant intro'u"tion o$ ne* an' e)eri%#ro)ing #ay%ent te"hnologies %eans that as theseyounger generations get ol'er( *e *ill "ontinue to see an in"rease in the nu%-er o$ ele"troni" #ay%ents %a'e+

,he $inal reason *e *ill "ontinue to see a shi$t in #re$eren"e to*ar's ele"troni" $or%s o$ #ay%ent is that( lie *ith younger generations o$ %eri"ans( these ne* #ay%ent te"hnologiesare -e"o%ing in"reasingly a##ealing in 'e)elo#e' $oreign e"ono%ies( #arti"ularly Nor'i""ountries+ B*e'en( is the lea'er in the Huro#ean nion *hen it "o%es to "ar' #ay%ents( *ith

230 transa"tions #er inha-itant( although en%ar an' Finlan'( as *ell as nonHuro#ean nion"ounties Nor*ay an' I"elan' also rane' high on this list 4oos ; oyle( 20157+ In these"ountries( se)eral 'i$$erent %etho's o$ ele"troni" #ay%ent ha)e -e"o%e #o#ular+ In B*e'en(iettle is an a## that allo*s "onsu%ers to use their s%art#hones to %ae #ay%ents in stores an'restaurants+ ,he B*e'ish National :an has also intro'u"e' a !ointly'e)elo#e' s%art#hone a##"alle' B*ish( $or %aing #ay%ents -et*een $rien's( *hile in en%ar( the Mo-ileay a## has1+8 %illion users in a nation o$ 5+@ %illion #eo#le 4oos ; oyle( 20157+ ,ruly( this shi$t

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to*ar's ele"troni" #ay%ent %etho's has ean'e' -eyon' the nite' Btates an' -e"o%e aglo-al tren'+

Bo *hat 'oes this shi$t to*ar's ele"troni" instru%ents o$ #ay%ent %ean $or the -aningan' $inan"ial syste%s *ithin %eri"aL For :ans( it %eans greater #otential to "olle"t $eein"o%e+ ,o -ans( "ash is the least #ro$ita-le sour"e o$ in"o%e( an' $ee in"o%e has a"tually

sur#asse' interest in"o%e on "re'it "ar's+ lthough 'o*n $ro% re"ent years( o)er'ra$t $eestotale' 931+@ -illion in re)enue in 2011 harton( 20127( a su-stantial a%ount+ nother a''e' -ene$it to -ans is that re"ei)ing ea"h ele"troni" #ay%ent "o%es *ith #ri"eless "usto%er 'ata(allo*ing $or the #otential to ee# a re"or' o$ "usto%er s#en'ing ha-its they "oul' use to theira')antage harton( 20127+ In "ontrast( $or "onsu%ers( these ne* te"hnologies raise a nu%-er o$ "on"erns+ lthough these te"hnologies ha)e an a')antage in that they are "on)enient( "onsu%ersare in turn( %ore liely to o)ers#en' -e"ause o$ the -uy no*( #ay later %entality that "o%es*hen %aing these #ur"hases an' the use o$ these #ay%ent %etho's o$ten "o%es *ith %onthlyor yearly %aintenan"e $ees harton( 20127+ Most i%#ortantly( it is %u"h easier $or thie)es tosteal "re'it or 'e-it "ar' in$or%ation than "ash+ On the other han'( as these te"hnologies "ontinueto a')an"e( it also %eans less $rau' an' $aster transa"tions $or -ans an' "onsu%ers alie+ For

e&a%#le( *ith the ne* :MO .arris Mo-ile :aning a##( $rau' -e"o%es a %u"h har'er "ri%e to"o%%it *ithout the "usto%er’s in$or%ation store' on the %agneti" stri# on the 'e-it "ar'+ t thesa%e ti%e( a %o-ile transa"tion only taes an a)erage o$ 15 se"on's( "o%#are' to an a)erage o$65 se"on's #er 'e-it "ar' transa"tion ,ri"hur( 20157+

In "on"lusion( *hile the i'ea o$ a "ashless so"iety %ay ha)e gaine' so%e transa"tion inre"ent years( in reality( *e *ill #ro-a-ly ne)er -e"o%e an entirely "ashless so"iety at any #ointin the $oreseea-le $uture $or a %ultitu'e o$ reasons+ ,he t*o %ost signi$i"ant reasons $or this arethat "ash a""ounts $or a high #er"entage o$ the a)erage %eri"an’s retail #ay%ents 60=7( an'that a )ery high #er"entage o$ the %eri"an #o#ulation is either un'er-ane' 20+0=7 or"o%#letely un-ane' >+>=7+ Cash *ill al*ays ha)e a #la"e in our so"iety( *hether it -e $or

ti##ing at restaurants( a %ore "on)enient $or% o$ #ay%ent $or s%aller #ur"hases( or e)en therelati)e sense o$ "o%$ort that "o%es *ith -eing a-le to #hysi"ally hol' your %oney+ .o*e)er( !ust -e"ause there *ill al*ays -e a )alue $or "ash *ithin our so"iety 'oes not %ean *e *ill notsee a shi$t to*ar's ele"troni" $or%s o$ #ay%ent+ ,hese ne* #ay%ents are the *ay o$ the $uturean' o)er ti%e( *e *ill "ontinue to see an in"rease in -oth the number  o$ ele"troni" transa"tionsthat o""ur as *ell as the total value o$ ele"troni" #ay%ent transa"tions+ ,his is 'ue $or a nu%-ero$ reasons( in"lu'ing that ele"troni" instru%ents o$ #ay%ent are %ore "on)enient $or "onsu%ersne* #ay%ent te"hnologies are "onstantly -eing 'e)elo#e' an' i%#ro)e' u#on( as *ell asin)este' in -y so%e o$ the largest an' %ost #ro$ita-le "or#orations in the *orl' these ne*instru%ents o$ #ay%ent are -e"o%ing in"reasingly %ore #o#ular a%ongst younger generationsan' $inally these a')an"e%ents are -e"o%ing %ore an' %ore #o#ular in 'e)elo#e' e"ono%ies

aroun' the *orl'( na%ely B*e'en an' other Nor'i" "ountries lie en%ar+ hile thesete"hnologies *ill not 'ue entirely a*ay *ith "ash( they *ill #lay a great role in sha#ing the$uture o$ the $inan"ial *orl'+

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ors Cite'

:ennett( :ar-ara( an' ouglas Cono)er+ Cash Continues to lay a Key 4ole in Consu%er   B#en'ing< H)i'en"e $ro% the iary o$ Consu%er ay%ent Choi"e+ Federal Reserve  Bank of San Francisco+ Fr-s$+org( 2? #r+ 2016+ e-+ 28 May 2015+

arlin( a%on+ Cashless Bo"ietyL It’s lrea'y Co%ing+ The New York Times+ N+#+( 28 No)+  2016+ e-+ 2@ May 2015+

Marous( Ji%+ @ 4easons hy Cash is Btill the King o$ ay%ents+ The Financial Brand + N+#+(  05 May 2016+ e-+ 25 May 2015+

4oos( 4e-e"a( an' lister oyle+ Nor'i" Countries oint the ay to Cashless Bo"ieties+   Reuters.com+ ,ho%son 4euters( 0? Jan+ 2015+ e-+ 2> May 2015+

Bulli)an( :o-+ For Many B .ousehol's( :an ""ount Is a Au&ury+ CNBC + N+#+( 22 #r+  2013+ e-+ 2@ May 2015+

,ri"hur( 4ita+ ith'ra* Cash ithout a Car'L ,here’s an ## $or ,hat+ The Wall Street 

  Journal Ne* orP 15 Mar+ 2015+

ill%an( Claire+ Eoogle Is re#aring a .uge Onslaught gainst ##le ay+ Fortune.com+  Fortune Magaine( 28 May 2015+ e-+ 28 May 2015+

2013 FIC National Bur)ey o$ n-ane' an' n'er-ane' .ousehol's+ Fdic.ov+ Fe'eral  e#osit Insuran"e Cor#oration( June 2013+ e-+ 2@ May 2015+

Eoing Cashless< hatQs Eoo' $or :ans May Not :e :est $or ou+   !nowlede.Wharton."#enn.edu+ ni)ersity o$ ennsyl)ania( 0@ June 2012+ e-+ 2>  May 2015+